UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
COMMISSION FILE NUMBER 000-33199
MANARIS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0467848
(State of other jurisdiction (IRS Employer
of incorporation) Identification Number)
1155 boul. Rene-Levesque, suite 2720
Montreal, Quebec
Canada H3B 2K8
(Address of principal executive offices)
(514) 337-2447
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 18, 2005 there were 68,993,661 shares of Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Financial Statements
September 30, 2005
Index
Consolidated Balance Sheets................................................F-2
Consolidated Statements of Operations......................................F-3
Consolidated Statements of Cash Flows......................................F-4
Notes to the Consolidated Financial Statements.............................F-6
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)
(Unaudited)
September 30, June 30,
2005 2005
$ $
(unaudited) (audited)
ASSETS
Current Assets
Cash 1,352,322 287,147
Accounts receivable, net of allowance for doubtful accounts of $146,633 and $141,093
respectively 2,796,686 2,858,275
Other receivables (Note 6) 817,190 899,248
Inventories (Note 6) 1,452,105 1,097,776
Prepaid expenses 147,137 143,717
Restricted marketable securities 86,125 81,606
----------- -----------
Total Current Assets 6,651,565 5,367,769
Property and Equipment (Note 7) 734,458 731,075
Intangible Assets (Note 5) 3,635,198 3,852,772
Goodwill (Notes 3 and 5) 9,684,228 9,727,454
Deferred Financing Costs 293,808 436,685
----------- -----------
Total Assets 20,999,257 20,115,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 2,353,730 1,507,959
Accrued liabilities (Note 6) 1,429,439 2,021,127
Loans payable (Note 9) 1,476,693 1,598,273
Current portion of long-term debt 198,140 199,878
Current portion of convertible debentures 172,572 893,436
Due to related parties (Note 8) 172,284 476,646
----------- -----------
Total Current Liabilities 5,802,858 6,697,319
Long-term Debt, less current portion (Note 10) 489,843 483,240
Convertible Debentures (Note 11) 2,145,963 1,687,304
----------- -----------
Total Liabilities 8,438,664 8,867,863
----------- -----------
Non-controlling Interest 18,738 18,033
----------- -----------
Commitments and Contingencies (Notes 1 and 15)
Stockholders' Equity
Common Stock, 500,000,000 (June 30, 2005: 100,000,000) shares authorized with a par value
of $0.00001; 67,350,818 and 54,782,802 issued and outstanding, respectively 673 548
Additional Paid-in Capital 28,780,200 24,142,078
Accumulated Other Comprehensive Loss (376,504) (364,415)
Deficit (15,862,514) (12,548,352)
----------- -----------
Total Stockholders' Equity 12,541,855 11,229,859
----------- -----------
Total Liabilities and Stockholders' Equity 20,999,257 20,115,755
=========== ===========
(The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements)
F-2
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars)
(Unaudited)
For the Three Months Ended
September 30,
2005 2004
$ $
Revenue
Product 1,987,895 152,037
Service 1,737,742 487,993
---------- -----------
Total Revenue 3,725,637 640,030
---------- -----------
Cost of Revenue
Product 1,268,844 79,863
Service 1,320,887 376,737
---------- -----------
Total Cost of Revenue 2,589,731 456,600
---------- -----------
Gross Margin 1,135,906 183,430
---------- -----------
Operating Expenses
Depreciation and amortization 223,328 46,434
Selling, general and administrative 1,930,742 449,910
Impairment of long-lived assets
35,822 --
Research and development 226,694 35,744
Stock based compensation(1) 424,900 327,709
---------- -----------
Total Operating Expenses 2,841,486 859,797
---------- -----------
Loss from Operations (1,705,580) (676,367)
Other Expenses
Interest expense 235,267 5,153
Debenture accretion 1,540,287 --
---------- -----------
Net Loss Before Income Tax Benefit (3,481,134) (681,520)
Income Tax Benefit 167,256 --
========== ===========
Net Loss Before Non-controlling interest (3,313,878) (681,520)
Non-controlling interest 284 --
========== ===========
Net loss (3,314,162) (681,520)
========== ===========
Comprehensive Loss (Note 14) (3,326,251) (821,371)
========== ===========
Net Loss Per Share - Basic and Diluted (0.06) (0.02)
========== ===========
Weighted Average Shares Outstanding 53,545,000 39,758,000
========== ===========
(1) Stock based compensation is excluded from the following:
Selling, general and administration 424,900 327,709
========== ===========
(The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements)
F-3
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
(Unaudited)
For the Three Months Ended
September 30,
2005 2004
$ $
Operating Activities
Net loss (3,314,162) (681,520)
Adjustments to reconcile net loss to cash used in operating activities
Contingent consideration paid in shares -- 148,000
Stock based compensation 424,900 179,709
Expenses settled with issuance of common shares 5,400 --
Depreciation and amortization 223,328 46,434
Loss on settlement of accounts payable 31,359 --
Non-controlling interest 705 --
Accretion of debenture 1,540,287 --
Deferred financing costs related to senior convertible debenture 142,877 --
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 61,589 (188,860)
(Increase) in inventory (354,329) (71,099)
Decrease in other receivable 125,284 --
Decrease (increase) in prepaid and other assets 23,224 (3,165)
(Decrease) in short term debt (47,059) --
(Decrease) in long term debt - current portion (32,545) --
Increase in long term debt 146,498 --
(Decrease) Increase in due to related parties (22,944) --
Increase in accounts payable and accrued liabilities 331,083 29,157
--------- ----------
Net Cash Used In Operating Activities (714,505) (541,344)
--------- ----------
Investing Activities
Purchase of property and equipment (35,781) (10,330)
Payment received on note receivable -- 44,895
--------- ----------
Net Cash Provided by (Used) in Investing Activities (35,781) 34,565
--------- ----------
Financing Activities
Borrowing (Repayments) on bank credit line (404,712) 89,536
Payment of senior convertible debt (226,733) --
Repayment of related party advances (80,694) (9,814)
Proceeds from loans 408,373 --
Proceeds from exercise of stock options and warrants 2,127,591 16,001
--------- ----------
Net Cash Provided By Financing Activities 1,823,825 95,723
--------- ----------
Effect of Exchange Rate Changes on Cash (8,364) (115,586)
--------- ----------
Increase (Decrease) in Cash 1,065,175 (526,642)
Cash - Beginning of period 287,147 1,561,020
--------- ----------
Cash - End of period 1,352,322 1,034,378
========= ==========
(The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements)
F-4
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
(expressed in U.S. dollars)
(Unaudited)
For the Three Months Ended
September 30,
2005 2004
$ $
Non-Cash Financing and Investing Activities
Issuance of common shares for services 54,000 --
Issuance of common shares for interest payment 143,863 --
Issuance of common shares for repayment of senior
convertible note, series A 724,999 --
Issuance of common shares for conversion of senior
convertible note, series A 815,985 --
Issuance of stock options for debt settlement -- 64,608
Issuance of common shares to settle outstanding
payables 105,501 --
Issuance of common share warrants to settle related
party and short term payables 181,649 --
------- -------
Supplemental Disclosures
Interest paid 50,570 5,153
Income taxes paid -- --
------- -------
(The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements)
F-5
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
1. Nature of Operations and Continuance of Business
Manaris Corporation (the "Company") was incorporated in the State of Nevada
on June 26, 2000 as Keystone Mines Limited.
On January 7, 2003 the Company acquired assets and intellectual property.
It then changed its business focus to the development of security
technology and changed its name to C-Chip Technologies Corporation. In July
2005, the Company changed it's name to Manaris Corporation.
On February 17, 2004, the Company acquired Canadian Security Agency (2004)
Inc., ("CSA") a company providing guard and security services. (Refer to
Note 3(c)).
The Company was previously a development stage company as defined by
Statement of Financial Accounting Standard No. 7, "Development Stage
Companies". The Company has achieved significant revenue from acquired
companies as described below. The companies acquired during the year ended
June 30, 2005 have significant operations which involve security services
and products. The Company is no longer considered a development stage
company.
On February 28, 2005, the Company acquired, through its wholly owned
subsidiary corporation, 6327915 Canada, Inc., 100% of the outstanding
shares of 9151-3929 Quebec Inc., ("Quebec") and 3826961 Canada Inc.
("Canada"). Quebec and Canada collectively own 100% of 3428249 Canada Inc.
3428249 Canada Inc. owns 100% of Chartrand Laframboise Inc., a company
specializing in the security field, and 100% of 9126-7641 Quebec Inc., a
company specializing in the credit management and verification. On June 30,
2005, 3428249 Canada Inc. and 6327915 Canada Inc. completed a merger
transaction. The merged company continues to be 6327915 Canada Inc.
Following the merger 3826961 Canada Inc. and 9151-3929 Quebec Inc. were
each dissolved on June 9, 2005 and September 26, 2005, respectively.
Collectively, Quebec, Canada, 3428249 Canada Inc., Chartrand Laframboise
Inc., and 9126-7641 Quebec Inc. are hereinafter collectively referred to as
"CLI". (Refer to Note 3(a)).
On February 28, 2005 the Company acquired Avensys Inc. ("Avensys"), a
company incorporated under Part IA of the Companies Act (Quebec) in Canada.
Avensys is a leader in risk management monitoring solutions for commercial
and industrial buildings, infrastructures and various environments. (Refer
to Note 3(b)).
On September 22, 2005, the Company ceased operations of CSA and entered
into an agreement with Securite Kolossal Inc. to sell its customer list for
CDN $100,000. As at September 30, 2005, the Company has received CDN
$50,000 with the remaining balance to be received in November 2005. The
outstanding portion has been recorded as other receivable as at September
30, 2005.
The Company's assets and operations at September 30, 2005 are located
largely in Quebec and in Ontario, Canada. In April, 2005, the Company
transferred the production, marketing and sales of its C-Chip product
technology to its wholly-owned subsidiary, C-Chip Technologies Corporation
("North America").
The Company's shares trade on the NASD OTC Bulletin Board under the symbol
MANS.
The Company has experienced significant operating losses since inception
and has a working capital of $848,707. These factors raise substantial
doubt regarding the Company's ability to continue as a going concern. These
consolidated financial statements do not include any adjustments to the
recoverability and classification of recorded assets amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has funded itself
through issuance of shares or by loans from shareholders and/or directors.
During the next twelve months the Company plans to fund its operations
through cash on hand, the sale of security services, the sale of products
and sale of assets. If profitable operations are not achieved, additional
financing will be required to pursue the Company's business plan.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal year-end is June 30.
Basis of Accounting
These consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States and are
presented in US dollars.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its subsidiaries. Consolidated companies include: a) 100% of Avensys
and its subsidiary, Fizians Inc. of which Avensys owns 70% of its
outstanding shares and the accounts of Avensys Labs Inc., a company in
which Avensys holds variable interests and is the primary beneficiary; b)
100% of 6327915 Canada, Inc., 9151-3929 Quebec Inc., 3826961 Canada Inc.,
3428249 Canada Inc., Chartrand Laframboise Inc. and 9126-7641 Quebec Inc.,
(collectively the "CLI Group"); c) 100% of CSA; and d) 100% of North
America. Operating results for the CLI Group and Avensys are included from
the date of acquisition of February 28, 2005. All inter-company accounts
and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three
months or less at the time of issuance to be cash equivalents.
Advertising
The Company charges to operations the cost of advertising as incurred which
was $31,420 and $10,811 for the three months ended September 30, 2005 and
2004, respectively.
Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company tests long-lived assets or asset groups
for recoverability when events or changes in circumstances indicate that
their carrying amount may not be recoverable. Circumstances which could
trigger a review include, but are not limited to: significant decreases in
the market price of the asset; significant adverse changes in the business
climate or legal factors; accumulation of costs significantly in excess of
the amount originally expected for the acquisition or construction of the
asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the
asset; and current expectation that the asset will more likely than not be
sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and
its fair value which is generally determined based on the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances.
An impairment loss is recognized when the carrying amount is not
recoverable and exceeds fair value.
Foreign Currency Transactions/Balances
The Company's functional currency is the Canadian dollar. Occasional
transactions occur in U.S. dollars, and management has adopted SFAS No. 52,
"Foreign Currency Translation". Financial statements denominated in foreign
currencies are translated into US dollars at rates of exchange in effect at
the balance sheet date. Average rates for the year are used to translate
revenues and expenses. Resulting translation gains and losses are
accumulated in a separate component of stockholders' equity as accumulated
other comprehensive income or loss. Currency transaction gains and losses
are included in the Company's results of operations.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In June 2005, the Emerging Issues Task Force ("EITF") issued No. 05-6,
"Determining the Amortization Period for Leasehold Improvements "
("EITF05-6"). The pronouncement requires that leasehold improvements
acquired in a business combination or purchase subsequent to the inception
of the lease should be amortized over the lesser of the useful life of the
asset or the lease term that includes reasonably assured lease renewals as
determined on the date of the acquisition of the leasehold improvement.
This pronouncement should be applied prospectively and the Company will
adopt it during the first quarter of fiscal 2006. The Company does not have
unamortized leasehold improvements from acquisitions or business
combinations and therefore, does not believe this pronouncement will have
an impact in its financial results.
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, "Accounting Changes and Error Corrections - A Replacement of APB
Opinion No. 20 and SFAS No. 3". SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle and
applies to all voluntary changes in accounting principle. It also applies
to changes required by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition provisions.
SFAS 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the change. The provisions of SFAS No. 154 are effective for accounting
changes and correction of errors made in fiscal years beginning after
December 15, 2005. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion
No. 29, "Accounting for Nonmonetary Transactions", is based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. SFAS No. 153 amends
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the
exchange. The provisions of SFAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Early application is permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based
Payment". SFAS 123R is a revision of SFAS No. 123 "Accounting for
Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and its related implementation guidance.
SFAS 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
SFAS 123R does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in SFAS 123 as
originally issued and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services". SFAS
123R does not address the accounting for employee share ownership plans,
which are subject to AICPA Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans". SFAS 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award - the requisite service period (usually the vesting period). SFAS
123R requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments
issued. The scope of SFAS 123R includes a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share
purchase plans. Public entities (other than those filing as small business
issuers) will be required to apply SFAS 123R as of the first interim or
annual reporting period that begins after June 15, 2005. Public entities
that file as small business issuers will be required to apply SFAS 123R in
the first interim or annual reporting period that begins after December 15,
2005. For nonpublic entities, SFAS 123R must be applied as of the beginning
of the first annual reporting period beginning after December 15, 2005. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB
107") to give guidance on the implementation of SFAS No. 123R. The Company
will consider SAB 107 during the implementation of SFAS No. 123R.
Financial Instruments and Concentrations
Financial instruments include cash, accounts receivable, other receivables,
accounts payable, accrued liabilities, short and long-term debt,
convertible debenture and related party payables. The fair values
approximate their carrying values due to the immediate or short-term
maturity of these financial instruments.
The Company sells the majority of its products and services in Canada. The
Company performs periodic credit evaluations of its ongoing customers and
generally does not require collateral. Reserves are maintained for
potential credit losses, which have not been historically significant. The
Company invests its excess cash in deposits with major financial
institutions.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earning per Share" (SFAS 128). SFAS 128 requires presentation of both
basic and diluted net loss per share (EPS) on the face of the income
statement. Basic net loss per share is computed by dividing the net loss
for the year by the weighted average number of shares of common stock
outstanding during the year. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of
shares of common stock and potential common stock outstanding during the
period, if dilutive.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company has elected to apply the intrinsic value method of accounting
in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Under the intrinsic value method
of accounting, compensation expense is recognized if the exercise price of
the Company's employee stock options is less than the market price of the
underlying common stock on the date of grant. Stock-based compensation for
employees is recognized on the straight-line basis over the vesting period
of the individual options. Stock options granted to non-employees are
accounted for under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), which establishes a
fair value based method of accounting for stock-based awards, and
recognizes compensation expense based on the fair value of the stock award
or fair value of the goods and services received, whichever is more
reliably measurable. Under the provisions of SFAS 123, companies that elect
to account for stock-based awards in accordance with the provisions of APB
25 are required to disclose the pro forma net income (loss) that would have
resulted from the use of the fair value based method under SFAS 123.
The Company also complies with the provisions of FASB Emerging Issues Task
Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ("EITF 96-18") with respect to stock option
grants to non-employees who are consultants to the Company. EITF 96-18
requires variable plan accounting with respect to such non-employee stock
options, whereby compensation associated with such options is measured on
the date such options vest, and incorporates the then-current fair market
value of the Company's common stock into the option valuation model.
On June 15, 2004 the Company filed a Form S-8 Registration Statement with
the US Securities and Exchange Commission to register 5,000,000 shares of
common stock pursuant to the Company's 2004 Nonqualified Stock Option Plan
("the Plan'). The determination of those eligible to receive options under
this plan, and the amount, type, price and timing of each stock option and
the terms and conditions shall rest at the sole discretion of the Company's
Compensation Committee, subject to the provisions of this Plan. A total of
329,314 options under the Plan remain available for issuance.
During the three month period ended September 30, 2005, the Company granted
1,877,000 stock options, pursuant to a non-qualified stock option plan at
exercise prices ranging from $0.00001 to $0.38 per share. Stock options
granted to non-employees totalled 777,000 of which 642,000 have vested.
Stock options granted to the former Chief Executive Officer totalled
600,000 at an exercise price of $.00001. Stock options granted to the
Company's current Chief Executive Officer totalled 500,000 at an exercise
price of $0.38 with 250,000 stock options vesting immediately and 250,000
stock options vesting upon completion of his term as interim Chief
Executive Officer. Had the Company determined compensation cost based on
the fair value at the date of grant for its employee stock options, the net
loss would have increased by $177,613 for the three month period ended
September 30, 2005.
During the three month period ended September 30, 2005, the Company
recognized stock based compensation for non-employees in the amount of
$424,900.
The fair value of the options granted during the period was measured at the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
Three months ended
September 30,
2005 2004
Risk - free interest rate 2.97 % 1.84 %
Expected volatility 100 % 121.75 %
Expected life of stock options (in years) .83 1.16
Assumed dividends None None
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
The following table illustrates the effect on net loss per share as if the
fair value method had been applied to all grants of stock options:
Three months ended
September 30,
2005 2004
$ $
Net loss - as reported (3,314,162) (681,520)
Add: Stock-based compensation expense included in net
loss - as reported 424,900 179,709
Deduct: Stock-based compensation expense determined under
fair value method (602,513) (614,491)
---------- ----------
Net loss - pro forma (3,491,775) (1,116,302)
========== ==========
Net loss per share (basic and diluted) - as reported (0.06) (0.02)
========== ==========
Net loss per share (basic and diluted) - pro forma (0.07) (0.03)
========== ==========
Revenue Recognition
The Company's C-Chip technology has generated limited commercial sales of
products. The Company developed prototypes for testing by potential
customers, which were billed for a portion of the costs incurred.
Commercial product sales are recorded when shipped as part of a sales
agreement, usually by customer purchase order. Certain product sales
contain a small charge for after sales service for up to one year; such
amounts are deferred and recognized as revenue when earned. Products carry
a one-year replacement warranty and the level of actual warranty expense
has not been material.
The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue
Recognition in Financial Statements." Revenue is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is performed, and collectibility is reasonably assured.
Sales of security services commenced on the acquisition of CSA on February
17, 2004. Clients are provided security services with revenue recognized as
services are performed.
The CLI Group recognizes revenue for service contracts as the services are
performed using a proportional performance model. Revenues from
investigation contracts are reported on the percentage of completion method
of accounting using measurements of progress toward completion appropriate
for the work performed. Progress is generally based upon man-hours or costs
incurred based upon the appropriate method for the type of job.
Avensys recognizes revenues when goods are shipped and the risks and
rewards have transferred to customers. Revenues are recorded net of
rebates, discounts and sales returns. Avensys and Fizians Inc. specialize
in developing, manufacturing and installing control and monitoring remote
security solutions.
Allowance for Uncollectible Accounts
The Company continually monitors timely payments and assesses any
collection issues. The allowance for doubtful accounts is based on the
Company's detailed assessment of the collectibility of specific customer
accounts. Any significant customer accounts that are not expected to be
collected are excluded from revenues.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at cost. Amortization is based on the
following annual rates or period:
Computer equipment Straight-line and declining balance 30%-33 1/3%
Furniture and fixture Straight-line and declining balance 20%
Leasehold improvements Straight-line 5 to 8 years
Surveillance equipment Declining balance 30%
Communication equipment Declining balance 20%
Laboratory equipment Straight-line and declining balance 20%
Automotive equipment and software Declining balance 30%
Machinery and office equipment Declining balance 20%
Inventory
Inventory consists of finished products available for sale to customers and
components. Inventory is valued at the lower of cost and net realizable
value. Cost is determined on a weighted average cost basis.
Intangible Assets
An acquired intangible asset of a technological product or service that has
reached technological feasibility is capitalized at cost. Intangible assets
with definite lives are reported at cost, less accumulated amortization.
The Company does not have any identified intangible assets with an
indefinite life. Acquired in-process research and development is charged to
operations in the period of acquisition. The Company provides for
amortization on a straight-line basis over the following periods:
Customer lists 3-10 years
Licenses, patents and trademarks 4-6 years
Non-compete agreements 4 years
Acquired Goodwill
Goodwill represents the excess of the purchase price of acquired assets
over the fair values of the identifiable assets acquired and liabilities
assumed. Pursuant to SFAS No. 141, the Company does not amortize goodwill,
but tests for impairment of goodwill on an annual basis and at any other
time if events occur or circumstances indicate that the carrying amount of
goodwill may not be recoverable. Circumstances that could trigger an
impairment test include but are not limited to: a significant adverse
change in the business climate or legal factors; an adverse action or
assessment by a regulator; unanticipated competition; and loss of key
personnel. Goodwill is tested for impairment using present value techniques
of estimated future cash flows or using valuation techniques based on
multiples of earnings. If the carrying amount of goodwill exceeds the
implied fair value of that goodwill, an impairment loss is charged to
operations.
Deferred Financing Costs
Costs relating to long-term debt are deferred and amortized over the term
of the related debt facilities.
Research and Development Expenses and Tax Credits
Research and development expenses are expensed as they incurred. Research
and development tax credits are accounted for as a reduction of the income
tax provision during the year in which the costs are incurred, provided
that the Company is reasonably certain that the credits will be received.
The investment tax credits must be examined and approved by the tax
authorities and it is possible that the amounts granted will differ from
the amounts recorded.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Contingent Consideration
In connection with the Company's acquisition of CSA, if certain future
internal performance goals are later satisfied, the aggregate consideration
for the acquisition will be increased. Such additional consideration, if
earned, will be paid in the form of additional shares of the Company's
common stock currently held in escrow. Any additional consideration paid
will be allocated between goodwill, stock-based compensation expense and
deferred compensation. The measurement, recognition and allocation of
contingent consideration are accounted for using the following principles:
Measurement and Recognition
In accordance with SFAS No. 141, Business Combinations ("SFAS 141"),
contingent consideration is recorded when a contingency is satisfied and
additional consideration is issued or becomes issuable. The Company records
the additional consideration issued or issuable in connection with the
acquisition when a specified internal performance goal is met. For
additional consideration paid in stock, the Company calculates the amount
of additional consideration using the closing price of its common stock on
the date the performance goal is satisfied.
Amount Allocated to Goodwill
In accordance with EITF No. 95-8, Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination ("EITF 95-8") and FIN 44, the portion of additional
consideration issuable to holders of unrestricted common stock and fully
vested options as of the acquisition date is recorded as additional
purchase price, as the consideration is unrelated to continuing employment
with the Company. Such portion is allocated to goodwill.
Amount Allocated to Stock-Based Compensation Expense
In accordance with EITF 95-8, the intrinsic value associated with
additional consideration related to stock or options that vest between the
acquisition date and the date at which the contingency is satisfied is
recorded as an immediate charge to stock-based compensation expense because
the consideration is related to continuing employment with the Company.
Amount Allocated to Deferred Compensation
Additional consideration related to options and restricted stock that
remain unvested when the contingency is satisfied is recorded as deferred
compensation expense under EITF 95-8 and FIN 44, as such consideration will
only be earned to the extent that the holder of such options or restricted
stock continues to be employed by the Company and meets the vesting
requirements. The amount recorded as deferred compensation is based upon
the intrinsic value of the restricted stock and unvested options at the
date at which the contingency is satisfied. The Company amortizes such
deferred compensation over the remaining vesting period of the underlying
restricted stock and unvested options. In the event that a holder does not
fully vest in the restricted stock or unvested options, the unamortized
portion of deferred compensation is eliminated.
Income Tax
Potential benefits of income tax losses are not recognized in the accounts
until realization is more likely than not. The Company has adopted SFAS No.
109 as of its inception and has incurred net operating losses. Pursuant to
SFAS 109, the Company is required to compute tax asset benefits for net
operating losses carried forward. Potential benefit of net operating losses
have not been recognized in these financial statements because the Company
cannot be assured it is more likely than not it will utilize the net
operating losses carried forward in future years.
Shipping and Handling Costs
The Company's shipping and handling costs are included in cost of sales.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Restricted Marketable Securities
The Company defines marketable securities as income yielding securities
that can be readily converted into cash. An irrevocable letter of credit
for $86,125 (CDN $100,000) was issued to an individual who personally
guaranteed a loan of Avensys Labs Inc. ("ALI"), a subsidiary of Avensys and
the Company. A term deposit which matures in June 2006 and with an interest
rate of 1.3% per annum is designated as a guarantee for this amount.
Litigation and Settlement Costs
From time to time, the Company is involved in disputes, litigation and
other legal actions in the normal course of operations. In accordance with
SFAS 5, the Company records a charge to operations equal to at least the
minimum estimated liability for a loss contingency when both of the
following conditions are met: (i) information available prior to issuance
of the financial statements indicates that it is probable that an asset had
been impaired or a liability had been incurred at the date of the financial
statements and (ii) the range of loss can be reasonably estimated.
Warranty Expense
The Company's products typically carry a one year warranty. The Company
establishes reserves for estimated product warranty costs at the time
revenue is recognized based upon its historical warranty experience, and
additionally for any known product warranty issues. The Company has not
incurred any significant warranty expense during the three month periods
ended September 30, 2005 and 2004.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current period's presentation.
3. Business Combinations
On February 28, 2005, the Company acquired two businesses. These
acquisitions have been accounted for using the purchase method and the
consolidated financial statements include the results of operations for
these businesses from the date of acquisition. In accordance with SFAS No.
141 `'Business Combinations", the Company allocated the purchase price to
the tangible and intangible assets acquired and liabilities assumed,
including in-process research and development, based on their estimated
fair values. The excess purchase price over those fair values is recorded
as goodwill. The fair values assigned to tangible and intangible assets
acquired and liabilities assumed are based on an independent valuation
analysis using estimates and assumptions provided by management, and other
information compiled by management, including valuations that utilize
established valuation techniques appropriate for the security industry. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill and purchased intangibles with indefinite lives are not amortized
but will be reviewed at least annually for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis
over their respective estimated useful lives.
a) CLI Group
In February 2005, the Company acquired the CLI Group through its
wholly-owned subsidiary corporation, 6327915 Canada, Inc. The Company
owns all of the outstanding shares of 9151-3929 Quebec Inc. ("Quebec")
and 3826961 Canada Inc. ("Canada"). Quebec and Canada collectively own
100% of 3428249 Canada Inc. 3428249 Canada Inc. owns 100% of Chartrand
Laframboise Inc. a company specializing in the security field and 100%
of 9126-7641 Quebec Inc., a company specializing in the credit
management and verification. Quebec, Canada, 3428249 Canada Inc.,
Chartrand Laframboise Inc., and 9126-7641 Quebec Inc. The CLI Group
was purchased for total consideration of $3,859,611, including
acquisition costs of $42,817 which were accounted for as a purchase
price adjustment to goodwill.
The Company paid $2,436,251 (CDN $3,000,000) in cash and issued a
$1,380,543 (CDN $1,700,000) Secured Convertible Debenture with
interest of 9% payable quarterly and maturing in five years. At the
option of the holders, but not before the sixth month following the
closing date, the debenture is convertible into 1,700,000 shares of
the Company's common stock at price of $0.82 per share. The debenture
is secured by the universality of all of the moveable property of the
wholly-owned subsidiary, 3428249 Canada Inc. As at September 30, 2005,
no amounts have been converted to the Company's common stock.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
3. Business Combinations (continued)
a) CLI (continued)
CLI's principal services include investigation, surveillance,
undercover agents, background verification, business intelligence,
security consulting and labor management conflict.
The purchase price was allocated to the following assets and
liabilities:
$
Current assets 578,224
Property and equipment 192,340
Non-compete agreement 574,133
Customer lists 380,811
Current liabilities (341,280)
Bank indebtedness (43,809)
Long-term debt - current portion (74,829)
Long-term debt (5,411)
Other liabilities (19,757)
Excess purchase consideration (goodwill) 2,576,372
------------------------------------------------------------
3,816,794
============================================================
The purchase price allocation was preliminary and subject to change if
the Company obtains additional information concerning the fair values
of certain tangible assets and liabilities of CLI. During the three
months ended March 31, 2005, the Company adjusted the net tangible
assets acquired and increased goodwill by approximately $235,000 due
to purchase price adjustments.
Net Tangible Assets
The acquisition cost has been allocated to the assets and liabilities
according to their estimated fair value at the acquisition date.
Amortizable Intangible Assets
The customer lists consist of information about customers such as
their name, contact information, order history and demographic
information. The income approach using a discounted cash flow approach
was used to estimate the fair value of the customer list, or more
specifically, the multi-period excess earnings method. This method is
predicated on the theory that the value of an asset or investment is
the present value of future cash flows discounted at a rate
commensurate with the time value of money and the underlying risks of
the subject investment. The Company is amortizing the fair value of
the customer list on a straight-line basis over the remaining
estimated useful life of ten years.
The non-compete agreements represent an agreement by the seller to
refrain from competing with the Company. The agreement normally
restricts the seller from competing in the same line of business for a
certain period of time. The comparative business valuation method was
used to estimate the fair value. This approach assumes that in the
absence of such agreement, the sellers would be free to compete and
take business away, thus reducing sales and profitability. The Company
is amortizing the fair value of the non-compete agreements on a
straight-line basis over the remaining estimated life of four years.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
3. Business Combinations (continued)
b) Avensys Inc.
On February 28, 2005, the Company completed its acquisition of
Avensys. The acquisition resulted in the issuance of 10,400,002
restricted shares of the Company's common shares having a fair value
of $0.75 per share and a total value of $7,800,000 (before discounting
as discussed below) in exchange for 15,746,369 shares of Avensys which
constituted all of the issued and outstanding common stock of Avensys.
The Company also purchased and cancelled all of the outstanding
Avensys stock options for a total of $312,652 (CDN $385,000). The
beneficiaries of the options received $187,592 (CDN $231,000) on
acquisition and will receive the balance of $124,970 (CDN $154,000) on
or before December 31, 2005. The Company issued 427,432 restricted
shares of common stock as a finder's fee to an unrelated party. The
Company incurred direct costs associated with the acquisition of
$45,000 (CDN $55,413). The total value of the cancelled stock options,
finders fee and direct costs were accounted for as purchase price
adjustments to goodwill. The 10,400,002 restricted shares are to be
released from escrow over the eighteen months after acquisition. As a
result, the value of restricted stock paid was discounted in the
amount of $166,414.
Avensys offers leading edge fiber optics sensor technology to monitor
a variety of environments, including air, water, soil as well as
buildings and infrastructures. Avensys specializes in providing
solutions to monitor different types of environments, solving
environmental monitoring problems, from micro scale in-building
sensing systems to macro scale wireless landslide and flood warning
systems in different countries, covering air, water and soil as well
as the security of materials and infrastructures, employing a wide
range of technologies including Optical Fiber Sensing Technology.
The purchase price was allocated to the following assets and
liabilities: $
Current assets 3,499,635
Property and equipment 523,898
Customer list 701,621
Other assets 101,511
Current liabilities (2,358,108)
License agreements 2,085,357
In-process research and development 386,749
Bank Indebtedness (1,202,483)
Long-term debt - current portion (122,829)
Long-term debt (1,453,966)
Other liabilities (16,678)
Excess purchase consideration (goodwill) 5,488,879
------------------------------------------------------------
7,633,586
===========================================================
The purchase price allocation is preliminary and subject to change if
the Company obtains additional information concerning the fair values
of certain tangible assets and liabilities of Avensys.
Net Tangible Assets
The acquisition cost has been allocated to the assets and liabilities
according to their estimated fair value at the acquisition date.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
3. Business Combinations (continued)
b) Avensys Inc. (continued)
Amortizable Intangible Assets
Customer list represents information about customers such as their
name, contact information, order history and demographic information.
The income approach using a discounted cash flow method was used to
estimate the fair value of the customer list, or more specifically,
the multi-period excess earnings method. This method is predicated on
the theory that the value of an asset or investment is the present
value of future cash flows discounted at a rate commensurate with the
time value of money and the underlying risks of the subject
investment. The Company is amortizing the fair value of the customer
list on a straight-line basis over the remaining estimated useful life
of ten years.
License agreements represent a combination of processes, patents, and
trade secrets that were used for existing and in-process technology.
These intangible assets were valued using the income approach method.
This method estimates fair value based on the earnings and cash flow
capacity of an asset. The Company is amortizing the fair value of the
license agreements on a straight-line basis over the remaining
estimated useful life of six years.
Acquired In-process Research and Development
Of the total purchase price, $386,749 has been allocated to in-process
research and development ("IPR&D") and was charged to operations.
Projects that qualify as IPR&D represent those that have not yet
reached technological feasibility and which have no alternative future
use. Technological feasibility is defined as being equivalent to a
beta-phase working prototype in which there is no remaining risk
relating to the development. At the time of acquisition, Avensys had
multiple IPR&D efforts under way for certain current and future
product lines. These efforts included physical sensors, interrogation
units, chemical sensors and limnimeters. In applying the discounted
cash flow method, the value of the acquired technology was estimated
by discounting to present value the free cash flows expected to be
generated by the products with which the technology is associated,
over the remaining economic life of the technology. To distinguish
between the cash flows attributable to the underlying technology and
the cash flows attributable to other assets available for generating
product revenues, adjustments were made to provide for a fair return
to property and equipment, working capital, and other assets that
provide value to the product lines.
4. Variable Interest Entity
The Financial Accounting Standards Board ("FASB") finalized FASB
Interpretation No. 46R, "Consolidation of Variable Interest
Entities--An Interpretation of ARB51" ("FIN46R") in December 2003.
FIN46R expands the scope of ARB51 and can require consolidation of
"variable interest entities" ("VIEs"). Once an entity is determined to
be a VIE, the party with the controlling financial interest, the
primary beneficiary, is required to consolidate it. During the year
ended June 30, 2005, Avensys transferred its research activities to
ALI. Avensys owns 49% of ALI and the two entities have entered an
Agreement (the "Agreement") where ALI will perform research and
development activities for Avensys. The Agreement is for a period of
five years with a two-year renewal period and calls for ALI to provide
Avensys with a commercialization license for products developed in
return for a royalty of 5% of sales generated. Avensys sold
intellectual property related to R&D projects to ALI in return for
500,000 preferred shares redeemable for $408,030 (CDN $500,000). ALI
provides R&D for Avensys only, however it may enter into agreements
with third parties in the future. ALI has no other financing other
than amounts received from Avensys.
As a result of the above, ALI has been included in the consolidated
financial statements commencing in the year ended of June 30, 2005
since Avensys holds a controlling financial interest and is the
primary beneficiary. The impact to the consolidated balance sheet as
of September 30, 2005 include the approximate additions to current
assets of $256,000, net property and equipment of $85,000, and current
liabilities of $103,000. The impact to the consolidated statement of
operations for the three month period ended September 30, 2005 was an
increase in research and development expenses of $211,000.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
5. Goodwill and Purchased Intangible Assets
The following table presents details of the Company's purchased intangible
assets with definite lives:
September 30, June 30,
2005 2005
Weighted Net Book Net Book
Average Accumulated Value Value
Life in Cost Amortization $ $
Years $ $ (unaudited) (audited)
Licenses, patents and trademarks 5.6 2,197,241 286,294 1,910,947 2,002,687
Technology 1.7 574,285 358,900 215,385 251,275
Non-compete agreements 3.7 574,133 84,000 490,133 526,133
Customers lists 9.5 1,109,077 90,344 1,018,733 1,072,677
--- --------- --------- --------- ---------
Total intangible assets 6.0 4,454,736 819,538 3,635,198 3,852,772
=== ========= ========= ========= =========
Amortization expense of purchased intangible assets charged to operations
was $190,930 and $373,180 for the three months ended September 30, 2005 and
2004 respectively.
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
2006 $ 572,791
2007 723,285
2008 601,199
2009 551,333
2010 457,200
Thereafter 729,390
------------------------------------
$3,635,198
====================================
6. Balance Sheet Details
September 30, June 30,
2005 2005
(unaudited) (audited)
$ $
Other Receivables
Grants receivable 81,271 59,110
Investment tax credits receivable 413,350 596,417
Sales tax receivable 164,604 111,545
Other 157,965 132,176
--------- ---------
817,190 899,248
Inventory
Raw materials 382,583 261,445
Work in process 202,132 102,966
Finished goods 867,390 733,365
--------- ---------
1,452,105 1,097,776
--------- ---------
Accrued Liabilities
Payroll and benefits 528,827 693,040
Sales taxes payable 426,374 323,934
Income taxes payable 80,839 98,007
Accrual for litigation costs -- 160,392
Royalties payable
-- 236,144
Other 393,399 509,610
========= =========
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
7. Property and Equipment
September 30, June 30,
2005 2005
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
(unaudited) (audited)
Automotive equipment 35,683 19,583 16,100 17,309
Computers 609,774 485,242 124,532 132,948
Communication equipment 56,513 36,098 20,415 18,248
Furniture and fixtures 417,787 340,004 77,783 77,224
Laboratory equipment 420,153 183,027 237,126 237,922
Leasehold improvements 79,590 54,081 25,509 26,569
Machinery and office equipment 310,588 164,217 146,371 136,265
Software 85,896 47,811 38,085 35,845
Surveillance equipment 134,704 108,462 26,242 26,507
-------------------------------------------------------------------------------------------------------------
2,150,688 1,438,525 712,163 708,837
Office equipment under capital leases 40,031 17,736 22,295 22,238
-------------------------------------------------------------------------------------------------------------
Total property and equipment 2,190,719 1,456,261 734,458 731,075
=============================================================================================================
Depreciation during the period 32,398 88,639
=============================================================================================================
8. Related Party Transactions/Balances
An amount of $132,585 (June 30, 2005: $125,628) is due to the beneficiaries
of Avensys stock options. The Company purchased and cancelled all
outstanding stock options upon acquisition. The amount is due on December
31, 2005 and bears interest of 12% calculated daily and payable monthly.
The total amount due to officers and/or shareholders of the Company at
September 30, 2005 is $39,699 (June 30, 2005: $351,018). The amounts due
are non-interest bearing, unsecured, and have no fixed terms of repayment.
9. Loans Payable
a) CSA held a Corporate Credit Line facility in the amount of CDN
$400,000, fluctuating with cash flow and collection of accounts
receivable. Interest was charged at Canadian bank prime rate plus 2%
per annum. The facility was secured by a movable hypothec over
accounts receivable and inventory of CSA and an unlimited personal
guarantee by the former sole owner of CSA, supported by collateral
second mortgage on his personal residence and subrogation of the
shareholder loan and salary bonus. Upon the departure of the former
sole owner of CSA in April 2005 and the withdrawing of his guarantees
with the Bank, the Bank proceeded with a demand of repayment of his
line of credit with CSA. The position of the Bank was repurchased in
July 2005 by the Company and the Company is now subrogated in all the
Bank's rights . The Bank's proceedings were therefore terminated.
b) CLI has a credit agreement for an authorized amount of $430,626 (CDN
$500,000), renewable annually. Any utilized portion bears interest at
the Canadian bank prime rate plus 1.125%, and is secured by a general
assignment of CLI's accounts receivable and adherence to certain
financial ratios. As at September 30, 2005, there was an outstanding
amount of $16,549 (CDN $19,215) and CLI is in compliance with all
financial ratios.
c) Avensys has designated the accounts receivable and inventories to
guarantee the line of credit. The line of credit, for an authorized
amount of $1,171,303 (CDN $1,360,000), bears interest at the Canadian
bank prime rate plus 1.5% and is currently in renegotiation.
d) An irrevocable letter of credit for $86,125 (CDN $100,000) has also
been issued to an individual who has personally guaranteed a loan of
the Company. A term deposit is lodged as a guarantee for this letter
of credit.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
9. Loans Payable (continued)
e) The Company's wholly-owned subsidiary, C-Chip Technologies Corporation
(North America) has an unsecured credit facility for an amount of
$1,000,000 (principal and interest) to finance service fees and
inventory that bears interest at 15% per annum. All receipts from
sales revenues will be placed into a designated bank account and be
used to reimburse any amount owed pursuant to the credit facility.
Amounts not paid within twelve months of the execution of the credit
facility will become payable in full. As at September 30, 2005 there
was an outstanding amount of $728,500 (June 30, 2005: $320,127).
10. Long-Term Debt
September 30, June 30,
2005 2005
(unaudited) (audited)
$ $
Mortgage loan secured by the universality of Avensys' tangible and
intangible movables, (CDN $406,000), interest is prime rate plus 2.75%,
payable in monthly instalments of CDN $7,000 plus interest,
maturing in May 2010 337,611 331,320
Note payable, interest is prime rate, payable in six monthly payments,
maturing in October 2005 47,197 44,720
Note payable on demand (CDN $16,382) without interest 14,109 13,369
Note payable (CDN $12,778) without interest maturing in May 2006 11,005 10,428
Note payable (CDN $60,000) without interest, payable in monthly instalments
of $5,440 (CDN $6,667), maturing in March 2006 34,450 48,964
Note payable (CDN $5,000) without interest maturing in 2006 4,306 4,080
Note payable (CDN $15,202) without interest, payable in monthly instalments
of $691, maturing in April 2007 11,307 12,406
Redeemable preferred shares, 241 Class D shares issued by CLI. Non voting,
non participating and redeemable at the holder's option with a 1% monthly
dividend on the redemption price 207,562 196,670
Obligations under capital leases, maturing at various dates until 2009,
payable in instalments totalling $7,188 (CDN $8,808) in 2006 and 2007,
$ 5,406
(CDN $6,624) in 2008 and $1,379 (CDN $5,406) in 2009 20,436 21,161
- ------------------------------------------------------------------------------------------------------
687,983 683,118
Instalments due within one year 198,140 199,878
- ------------------------------------------------------------------------------------------------------
Long-term debt 489,843 483,240
======================================================================================================
Principal payments on long-term debt for the next five years are:
September 30,
2005
$
2006 198,140
2007 289,761
2008 78,050
2009 73,801
2010 48,231
- ------------------------------------------------------------------------------------------------------
Total 687,983
======================================================================================================
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
11. Convertible Debentures
September 30, June 30,
2005 2005
(unaudited) (audited)
$ $
Senior secured convertible debentures at 7%, payments of $233,750 for 20
months beginning June 16, 2005, interest payable each June and December,
maturing January 31, 2007, principal amount of $4,675,000 (Note 11 (a)) 172,572 557,284
Secured convertible debentures at 9%, maturing February 2010, principal
amount of $1,387,302 (CDN $1,700,000) (Note 11 (b)) 1,464,128 1,387,302
Unsecured convertible debentures at 15%, maturing September 2007, principal
amount of $397,829 (CDN $487,500) (Note 11 (c)) 362,001 336,152
Unsecured convertible debentures at 12% maturing September 2007, principal
amount of $326,424 (CDN $400,000) (Note 11 (d)) 319,834 300,002
---------------------------------------------------------------------------------------------------------------
2,318,535 2,580,740
Instalments due within one year 172,572 893,436
---------------------------------------------------------------------------------------------------------------
Long-term debt 2,145,963 1,687,304
===============================================================================================================
Principal payments on the convertible debentures for the next five years
are:
September 30,
2005
$
2006 172,572
2007 -
2008 681,835
2009 -
2010 1,464,128
-------------------------------------------------------------------------------------------------------------
Total 2,318,535
=============================================================================================================
a) Senior Secured Convertible Debentures
On February 16, 2005, the Company issued Senior Secured Convertible Notes
Series A ("Series A Notes") and Series E and F Warrants (See Note 13(b))
for an aggregate principal amount of $4,675,000.
In accordance with EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" and with EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments", the Company allocated $1,863,870 to the Warrants
Series E, $339,456 to the Warrants Series F and recognized an embedded
beneficial conversion feature of $2,470,674 accounted for as additional
paid in capital and an equivalent discount against the Series A Notes. The
carrying amount of the Series A Notes will be increased monthly by periodic
accretion under the interest method. The Company remains obligated for the
entire contractual balance of the Notes of $4,675,000.
These Notes bear interest at 9% per annum from February 16, 2005 until the
first principal payment date on June 16, 2005 and 7% per annum after this
date. Principal payments on the Series A Notes shall be paid in twenty (20)
equal monthly instalments of $233,750. Interest on these Notes shall be
payable on the last day of June and December of each year commencing on
June 30, 2005.
All payments of interest shall be made, at the option of the Company, (a)
in cash; (b) by the issuance of additional Series A Notes in the principal
amount equal to the interest payment due; or (c) in shares of common stock
of the Company valued at 90% of the average price of such security in the
most recent five trading days ("Market Price").
All payments of principal shall be made, at the option of the Company, (a)
in cash with a premium equal to 10% of the cash amount paid; or (b) in
shares of common stock of the Company valued at 85% of the Market Price.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
11. Convertible Debentures (continued)
a) Senior Secured Convertible Debentures
All payments made by the issuance of shares will be acceptable only if
the issuance of the shares of the Company has first been registered
with the Securities and Exchange Commission.
The holders of these Series A Notes have the right, at their option at
any time, to convert some or all of the notes, including the principal
amount and the amount of any accrued but unpaid interest into a number
of common shares of the Company valued initially at $0.65 per share,
subject to certain adjustments as described in the purchase agreement.
In connection with the placement of the Series A Notes, the Company
issued Warrant Series: IB1, IB2, IB3, IB4, and IB5 granting the right
to acquire up to 881,538 shares of the Company's common stock at
prices ranging from $0.01 to $0.75 per share (see Note 13(b)) and
expiring from three months following the date of their Registration
until February 16, 2010.
The Company valued the warrants at $486,586 and recognized this amount
to additional paid in capital of Warrants Series IB1, IB2, IB3, IB4,
and IB5 and as deferred financing costs for the Series A Notes and
issue expenses for the Warrants Series E and F.
To secure payment of the principal amount of the Series A Notes and
the interest thereon, the Company hypothecated, in favour of the note
holders, the universality of all of the immovable and movable assets,
corporeal and incorporeal, present and future of the Company.
The purchase agreement of the Series A Notes contain certain covenants
(a) related to the conduct of the business of the Company and its
subsidiaries; (b) related to creation or assumption of lien other than
liens created pursuant to the Security Documents and Permitted Liens,
as defined in the purchase agreement; and (c) for so long as at least
$2,500,000 principal amount of these Notes remain outstanding, the
Company shall not, without the consent of holders representing at
least 50% of the then outstanding principal amount, create, incur,
guarantee, issue, assume or in any manner become liable in respect of
any indebtedness, other than permitted indebtedness or issue other
securities that rank senior to the Series A Notes provided however
that the Company may have outstanding bank debt.
b) Secured Convertible Debentures
On February 14, 2005, the Company issued debentures of an aggregate
principal amount of $1,380,543 related to the acquisition of the CLI
Group.
These debentures bear interest at 9% per annum from February 14, 2005.
Principal on these Notes shall be paid on February 14, 2010. Interest
on these debentures shall be payable on the first day beginning of
quarter, commencing on May 1, 2005.
The holders of these Debentures have the right, at their option at any
time, to convert in part or all of the Debentures into a total number
of 1,700,000 common stock of the Company valued initially at $0.82 per
share. As at September 30, 2005, no amounts have been converted to the
Company's common stock.
To secure payment of the principal amount of the debentures and the
interest thereon, the Company hypothecated, in favour of the debenture
holders, the universality of all of the movable assets, corporeal and
incorporeal, present and future of its wholly-owned subsidiary 3828249
Canada Inc.
The purchase agreement of these debentures contain certain covenants
related to the conduct of the business of the Company and its
subsidiaries.
c) Unsecured Convertible Debentures
With the acquisition of Avensys, the Company assumed 15% unsecured
convertible debentures having a nominal value of $918,068 (CDN
$1,125,000) and maturing on September 1, 2007. When the debentures
were originally issued, Avensys recorded an equity component of
$378,445 (CDN $463,747) and a liability component of $539,623 (CDN
$661,253), for a total of $918,068 (CDN $1,125,000). In April 2005,
the Company issued 680,000 shares in settlement of $520,238 (CDN
$637,500) of the debentures outstanding. The remainder of the
debentures, $397,829 (CDN $487,500) was replaced by a new 15%
unsecured debenture. The new debenture is convertible into shares of
the Company using the following formula: principal and interest
divided by a 17.5% discount on the 10 day weighted average price of
the Company's shares. At year-end the discount related to the
conversion feature is $61,677.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
11. Convertible Debentures (continued)
d) Unsecured Convertible Debentures
With the acquisition of Avensys, the Company also assumed 12%
unsecured convertible debentures having a nominal value of $652,848
(CDN $800,000) and maturing on September 1, 2007. When the debentures
were originally issued, Avensys recorded an equity component of
$305,857 (CDN $374,797) and a liability component of $346,991 (CDN
$425,203), for a total of $652,848 (CDN $800,000). In April 2005, the
Company issued 426,667 shares in settlement of $326,424 (CDN
$400,000), of the debentures outstanding. The remainder of the
debentures, $326,424 (CDN $400,000) was modified to be convertible
into 330,251 shares of the Company. At year-end the discount related
to the conversion feature is $26,422.
e) In order to take account for the Company's default on its principal
and interest payment that was due on June 23, 2005, the Company
offered its investors the option to receive payment of the principal
payment in freely tradable shares. The shares issued in lieu of cash
were valued at 85% of the market price (5 day volume weighted average
price). In addition, since a notice was sent under 10 business days
indicating the Company's intent to pay in shares, the Company
increased the amount of the principal to be reimbursed by ten percent.
f) In July 2005 the Company issued shares of common stock for a
consideration per share less than the conversion price in effect,
which constitutes a "Trigger Issuance" under the Senior Secured
Convertible Note of February 16, 2005. Consequently, some investors
pursuant to the Senior Secured Convertible Note exercised their right
to convert part of the Note into common shares. A total of $815,985 of
the Senior Secured Convertible Note was converted into the Company's
common shares. The balance remaining on the Note Agreement totals
$2,971,647.
12. Common Stock
a) During the three months ended September 30, 2005, the Company issued
385,000 common shares for total proceeds of $3.85 from the exercise of
stock options.
b) During the three months ended September 30, 2005, the Company issued
4,462,820 common shares in connection to the Series A Notes. Of that
amount, 308,230 common shares were issued for the interest payment in
the amount of $143,863, 1,823,206 common shares were issued for the
amortization payments in the amount of $724,999, and 2,331,384 common
shares were issued following the conversion of $815,985 of the Series
A Notes.
c) During the three months ended September 30, 2005, the Company issued
7,360,436 common shares for total proceeds of $2,576,117 from the
exercise of warrants, before offering costs of $266,882.
d) In September 2005, the Company issued 87,760 common shares at an
exercise price of $0.00001 for total proceeds of $0.88 following the
exercise of 87,760 Series IB1 warrants.
e) During the three months ended September 30, 2005, 257,000 stock
options were exercised after issuance to settle outstanding payables
in the amount of $105,501.
f) The Company issued 15,000 common shares valued at $5,400 for services.
13. Stock Options and Warrants
a) Stock Options
i) During the three month period ended September 30, 2005, the
Company granted 777,000 stock options to consultants pursuant to
a non-qualified stock option plan at an exercise price of
$0.00001 per share. Stock options granted to consultants vest
immediately.
ii) The Company granted 600,000 stock options to its former Chief
Executive Officer pursuant to a non-qualified stock option plan
at an exercise price of $0.00001 per share. Stock options granted
vest immediately.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
13. Stock Options and Warrants (continued)
iii) The Company granted 500,000 stock options to the Company's
current Chief Executive Officer pursuant to a non-qualified stock
option plan at an exercise price of $0.38 per share, Under the
plan, 250,000 stock options vest immediately and 250,000 stock
options vest upon completion of his term as interim Chief
Executive Officer.
iv) A total of 7,500 stock options were cancelled during this period.
v) A total of 257,000 stock options were issued for settlement of
debt of $105,501.
b) Warrants outstanding
Common share purchase warrants issued in July 2005 with the private
placement of the Special Warrant Offer (Refer to Note 15 e) ii))
offering and outstanding at September 30, 2005 are as follows:
i) 3,797,976 Series G Warrants exercisable at $0.35 each and
expiring in February 2010.
ii) 890,590 Series H Warrants exercisable at $0.35 each and expiring
in February 2010.
iii) 3,797,976 Series I Warrants exercisable at $0.50 each and
expiring in February 2010.
iv) 1,781,180 Series J warrants exercisable at $0.50 each and
expiring in February 2010.
v) 605,676 Series IB6 warrants exercisable at $0.35 each and
expiring in February 2010.
vi) 52,251 Series IB7 warrants exercisable at $0.001 each and
expiring in February 2010.
As a result of the Offer in July 2005, the Company, pursuant to the
Warrants in effect, adjusted the respective Warrants accordingly.
Common share purchase warrants issued in February 2005 with the private
placement of the Series A Notes (Refer to Note 15 e) ii)) and
outstanding at September 30, 2005 are as follows:
vii) 1,596,155 Series E warrants exercisable at $0.35 each (June 30,
2005: $0.75) and expiring in February 2010.
viii) 913,462 Series F warrants exercisable at $0.35 each (June 30,
2005: $0.70) and expiring in February 2006.
ix) 32,442 Series IB1 warrants exercisable at $0.00001 each and
expiring in February 2010.
x) 215,385 Series IB2 warrants exercisable at a price of $0.62 each
(June 30, 2005: $0.65) and expiring in February 2010.
xi) 323,076 Series IB3 warrants exercisable at a price of $0.71 each
(June 30, 2005: $0.75) and expiring in February 2010.
xii) 107,693 Series IB4 warrants exercisable at a price of $0.66 each
(June 30, 2005: $0.70) and expiring in February 2006. xiii)
20,000 Series IB5 warrants exercisable at a current price of
$0.71 (June 30, 2005: $0.75) each and expiring three (3) months
following the effectiveness of a Registration Statement to be
filed with the Securities and Exchange Commission and expiring in
February 2006.
Common share purchase warrants issued with the private placements of
common shares during the year ended June 30, 2004 are as follows:
xiv) 1,046,294 Class A warrants exercisable at $0.35 each, with
expiration dates ranging from October 2005 through February 2006.
xv) 1,869,231 Series A warrants exercisable at $0.35 each and
expiring in April 2006.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
13. Warrants outstanding (continued)
September 30,
2005
Common shares reserved for issuance: $
Stock options outstanding 5,070,000
Reserved for future issuance 329,314
Warrants outstanding 17,049,387
Conversion of senior secured convertible notes 11,325,370
Conversion of secured convertible debentures 4,341,760
- -------------------------------------------------------------------------
Total common shares reserved for future issuance 38,115,831
=========================================================================
14. Comprehensive Loss
The Company's accumulated other comprehensive loss consists of the
accumulated net unrealized gains or losses on foreign currency translation
adjustments. At September 30, 2005 the Company had an accumulated foreign
currency translation loss of $376,504.
The component of comprehensive loss was as follows:
For the three For the three
months ended months ended
September 30, September 30,
2005 2004
$ $
Net loss (3,314,162) (681,520)
Foreign currency translation adjustment (12,089) (139,851)
-------------------------------------------------------------------------------
Comprehensive loss (3,326,251) (821,371)
===============================================================================
15. Contingencies and Commitments
a) Vehicle lease commitments are as follows:
2006 27,395
2007 15,728
2008 4,501
---------------------------------
---------------------------------
$ 47,624
=================================
b) The Company leases premises for its various offices located across
Canada. Total rent expense for the three month period ended September
30, 2005 was $115,634 (2005 - $218,318). Minimum lease payments for
the next five years are $317,754 in 2006, $187,547 in 2007, $112,332
in 2008, $109,165 in 2009, and $94,266 in 2010.
c) Litigation and Settlement Costs
i) A lawsuit was filed on July 15, 2005, under Quebec law, in the
District of Montreal, Province of Quebec, for a total of $86,125
(CND$100,000) with regards to alleged expenses incurred by the
plaintiff for the purchase of anti-theft product known as the
"Hawk 200". The Company intends to contest the case vigorously
and, in the event of an unfavorable outcome, the amount of any
damages will be charged to the earnings of the quarter and is not
expected to have a material adverse impact on our financial
condition.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
15. Contingencies and Commitments (continued)
ii) A lawsuit was filed on July 15, 2005, under Quebec law, in the
District of Montreal, Province of Quebec, for a total of $506,000
(CND$620,000) with regards to alleged breach of employment
contract and wrongful dismissal of Charles Finkelstein. This
lawsuit was settled on September 2, 2005 for an amount of $81,600
(CND$100,000) and the transfer of 200,000 shares of the Company,
currently held in escrow. The parties exchanged, under this
agreement, a complete and final release regarding their business
and employment relationship.
iii) A lawsuit was filed on June 30, 2005 under Quebec law, in the
District of Montreal, Province of Quebec pertaining to a claim in
the amount of $93,790 (CDN $108,900) for alleged wrongful and
unnecessary use of force in the exercise of the Company's
employee security duties. The Company intends to contest the case
vigorously and, in the event of an unfavorable outcome, the
amount of any damages will be charged to the earnings of the
quarter and is not expected to have a material adverse impact on
our financial condition.
iv) A motion was filed under Quebec law, in the district of Montreal,
Province of Quebec, totalling $73,506 (CDN $85,348) for an unpaid
contract of credit. The Company intends to contest the case
vigorously and, in the event of an unfavorable outcome, the
amount of any damages is not expected to have a material adverse
impact on our financial condition.
v) A lawsuit was filed under Quebec law, in the district of Laval,
Province of Quebec, totalling $70,025 (CDN $81,306) for
compensatory damages and $12,240 (CDN $15,000) in punitive and
exemplary damages. The claim alleges that the Company submitted
erroneous evidence that was based on racial profiling which led
to the arrest of the plaintiff. The Company intends to contest
the case vigorously and, in the event of an unfavourable outcome,
the amount of any compensatory damages will be covered by the
Company's insurance policy. The punitive and exemplary damages
will be charged to the earnings of the quarter and is not
expected to have a material adverse impact on our financial
condition.
d) Other Contingencies
i) CSA has a current outstanding balance for source deductions on
payroll expenses of $74,532 (CDN $86,539), an amount of $41,990
(CDN $48,754) owed to ADP as well as $323,512 (CDN $375,629) for
GST and PST payments and $74,000 (CDN $85,921) for unpaid
penalties and interest. The Company has no knowledge of any other
pending fines or penalties that may be related hereto.
ii) In July 2005 the Company made a Special Warrant Offer (the
"Offer") to all Class A Series A, Series E, and Series F warrant
holders. A total of $2,576,168 was raised under this Offer. Under
the terms of the Offer, each holder participating in the Offer,
by exercising any Series E Warrants at $0.35 per share, received
new Series G Incentive Warrants (the "Series G Incentive
Warrants") and new Series I Incentive Warrants (the "Series I
Incentive Warrants"), each in an amount equal to one hundred
percent (100%) of the number of shares of the Company's common
stock issued upon exercise of the Series E Warrants pursuant to
the Offer. A total of 3,797,976 Series E Warrants were exercised
which prompted the issuance of 3,797,976 Series G Incentive
Warrants and 3,797,976 Series I Incentive Warrants.
Holders who participated in the Offer by the exercise of any
Class A Warrants, Series A Warrants or Series F Warrants received
new Series H Incentive Warrants (the "Series H Incentive
Warrants") and new Series J incentive warrants (the "Series J
Incentive Warrants"), each in an amount equal to twenty-five
percent (25%) and fifty percent (50%), respectively, of the
number of shares of the Company's common stock issued upon
exercise of the Class A Warrants, the Series A Warrants or the
Series F Warrants pursuant to the Offer. A total of 3,562,359
Class A Warrants, Series A Warrants and Series F Warrants were
exercised which prompted the issuance of 890,590 Series H
Warrants and 1,781,180 Series J Warrants.
As a result of the Offer, the Company, pursuant to the Warrants
in effect, adjusted the respective Warrants accordingly.
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
15. Contingencies and Commitments (continued)
iii) On August 24, 2005, following a Special Warrant Offer, ("the
Offer") the Company received notice from the United States
Securities and Exchange Commission ("SEC") inquiring about
details regarding the Offer. The Company has replied accordingly
and is waiting for a response from the SEC.
16. Segment Disclosures
The Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", during the previous year. Reporting
segments are based upon the Company's internal organization structure, the
manner in which the Company's operations are managed, the criteria used by
the Company's chief operating decision-maker to evaluate segment
performance, the availability of separate financial information, and
overall materiality considerations.
The Security and Monitoring Devices reporting segment is comprised of the
operations of North America and Avensys. The Security and Investigative
Services reporting segment is comprised of the operations of CSA and CLI.
Direct contribution consists of revenues less direct costs. Direct costs
include specific costs of net revenues, sales and marketing expenses, and
general and administrative expenses over which segment managers have direct
discretionary control, such as marketing and sales programs, customer
support expenses, bank charges and bad debt write-offs. Expenses over which
segment managers do not currently have discretionary control, such as site
operations costs, product development expenses, and general and
administrative costs, are monitored by corporate management and are not
evaluated in the measurement of segment performance.
September 30, 2005:
Security and Security and
Investigative Monitoring
Services Devices Consolidated
$ $ $
Net revenues from external customers 1,758,012 1,967,625 3,725,637
- ----------------------------------------------------------------------------------------------------
Cost of net revenues 1,320,888 1,268,843 2,589,731
Marketing and sales expense 92,403 531,510 623,913
Administrative expense 451,575 1,081,948 1,533,523
- ----------------------------------------------------------------------------------------------------
Direct costs 1,864,866 2,882,301 4,767,167
- ----------------------------------------------------------------------------------------------------
Direct contribution (106,854) (914,676) (1,021,530)
Operating expenses and indirect costs of net revenues -- -- (684,050)
- ----------------------------------------------------------------------------------------------------
Loss from operations -- -- (1,705,580)
Debenture interest, accretion and conversion -- -- (1,540,287)
Interest and penalties expense -- -- (235,267)
- ----------------------------------------------------------------------------------------------------
Net loss before non-controlling interest -- -- (3,481,134)
Non-controlling interest
-- -- (284)
- ----------------------------------------------------------------------------------------------------
Net loss before income tax benefit -- -- (3,481,418)
Income tax benefit -- -- 167,256
- ----------------------------------------------------------------------------------------------------
Net Loss -- -- (3,314,162)
====================================================================================================
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
September 30, 2005
(Expressed in U.S. Dollars)
(Unaudited)
16. Segment Disclosures (continued)
September 30, 2004:
Security and Security and
Investigative Monitoring
Services Devices Consolidated
$ $ $
Net revenues from external customers 447,993 152,037 640,030
- -------------------------------------------------------------------------
Cost of net revenues 376,737 79,863 456,600
- -------------------------------------------------------------------------
Direct contribution 111,256 72,174 183,430
- -------------------------------------------------------------------------
Operating expenses -- -- 858,540
- -------------------------------------------------------------------------
Other income and expenses -- -- 5,153
- -------------------------------------------------------------------------
Net Loss -- -- 681,520
=========================================================================
The Company's long-lived assets are allocated as follows:
September 30, June 30,
2005 2005
(unaudited) (audited)
$ $
Security and Investigative Services 192,713 202,943
Security and Monitoring Devices 541,745 528,132
--------------------------------------------------------------------------
Total long-lived assets 734,458 731,075
==========================================================================
All the Company's long-lived assets are located in Canada.
The Company has three geographic business areas: North America, Europe &
Asia. Total revenues in Canada were $2,650,700 during the three month
period ended September 30, 2005. Revenue from one customer of the Company's
Security and Monitoring Devices segment represented approximately $567,341
of consolidated revenues, of which the entire amount is outstanding and
fully collectible as at September 30, 2005.
Geographic Information
For the three For the three
months ended months ended
September 30, September 30,
2005 2004
Revenues $ $
North America 2,857,829 640,030
Europe 221,113 -
Asia 646,695 -
---------------------------------------------------------------------------
Total 3,725,637 640,030
===========================================================================
17. Subsequent Events
On September 22, 2005, the Company ceased operations of CSA. As a result,
CSA entered into an agreement with Securite Kolossal Inc. to sell its
customer list to Securite Kolossal Inc. for CDN $100,000. Proceeds of CDN
$50,000 were received and recorded prior to September 30, 2005. The
remaining balance of CDN $50,000 is to be received in November 2005 and has
been recorded as other receivables. On November 2, 2005, CSA filed for
bankruptcy protection with the Superior Court of Quebec, district of
Montreal. Pursuant to the Bankruptcy and Insolvency Act, CSA filed a notice
of intention to make a proposal, by which the Company intends to settle its
payables. A notice has been sent to all known creditors of CSA informing
them that it has filed with the court a notice to make proposal.
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Caution about Forward-Looking Statements
This management's discussion and analysis of financial condition and results of
operations of Manaris Corporation should be read in conjunction with the
financial statements and notes thereto of the Company for the year ended June
30, 2005 as included in Form 10-KSB and the three month period ended September
30, 2005 as included in Form 10-QSB. Because of the nature of a relatively new
and growing company the reported results will not necessarily reflect the
future.
This section includes a number of forward-looking statements that reflect our
current views with respect to future events and financial performance.
Forward-looking statements are often identified by words like: believe, expect,
estimate, anticipate, intend, project and similar expressions, or words which,
by their nature, refer to future events. You should not place undue certainty on
these forward-looking statements, which apply only as of the date of this
prospectus. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or our predictions.
Our Business
Manaris Corporation's primary business is risk mitigation. Manaris offers
corporations and institutions security management solutions and services
enabling them to acquire market intelligence, lower business risks and improve
customer service. The Company's security solutions and services are geared
towards increasing customer revenues and profits.
Manaris, our holding company, operates the following wholly-owned subsidiaries:
o Avensys Inc, which provides risk management monitoring solutions.
o Chartrand Laframboise Investigation, which provides investigative
services.
o C-Chip Technologies Corporation (North America), which specializes
in high-tech security.
The acquisitions of Avensys Inc, and Chartrand Laframboise Inc. (CLI) in
February 2005 have grown our asset base significantly and expanded our sources
of revenue.
The major potential for revenue growth in the next 12 months for Manaris rests
with C-Chip, the subsidiary conducting the Company's original core business. We
have made a significant investment in reengineering the C-Chip product line as
we strongly believe in the product concept. C-Chip's senior management clearly
understands the need to produce results during FY2006.
The Company has several priorities for its 2006 fiscal year ("FY2006"). Manaris,
the holding company, will reduce costs where possible. We will further leverage
the success of both Avensys and CLI and expect C-Chip to start realizing its
potential. Overall, corporate focus will be on continued growth. In addition, we
will also look to streamline operations and develop efficiencies amongst
complementary activities of our subsidiaries.
On September 16, 2005 Stephane Solis resigned as the Company's Chief Executive
Officer and as a Director of the Company and its subsidiaries, effective
September 30, 2005. In addition, on September 16, 2005, the Company appointed
John G. Fraser as its President and Chief Executive Officer for a minimum period
of three months.
Our Services
Chartrand Laframboise Inc. ("CLI") offers services that include investigation,
surveillance, undercover agents, background verification, business intelligence,
security consulting and labor management conflict to over 1,000 customers. For
FY2006, CLI is seeking opportunities to broaden its service offering and expand
geographically across Canada.
Avensys is a leader in fibre based sensors and enables businesses and
corporations to monitor different types of environments, including Air, Soil,
Water as well as buildings and infrastructures. We expect that the production of
fiber optics components will continue to be the highest growth area of the
company, with some investments needed to keep our lead position and improve our
manufacturing processes. This fiscal year will also see the transfer of our
first optical sensors from the research and development group to the
manufacturing group. The market for optical sensing solutions should therefore
produce tangible results, although we expect that the real growth for that
sector will start in the next fiscal year.
With regards to environmental and geotechnical solutions, the volume of
distributed monitoring equipment should be stable, but our involvement in
customer solutions is expected to grow. It is our intention to create a team
totally dedicated to integrated solutions in FY2006, with the achievement of a
first large scale integrated customer solution during the year.
We also anticipate that Avensys' advanced limnimeter, launched in the summer of
2005, will prove to be a successful product.
C-Chip specializes in the high-tech sector of the security industry, with
technology that allows credit grantors the ability to efficiently access,
control, manage and monitor remote assets at low costs. For FY2006, C-Chip's
priority is to manufacture and deliver an increasing number of C-Chip products
into the North American marketplace.
Recent Financings
In February 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which we issued units
consisting of an aggregate of $4,675,000 of our Company's 9.0% Senior Secured
Convertible Notes, Series A, which are convertible into shares of our common
stock at a conversion price of $0.65 per share. Under the terms of the 9.0%
Senior Secured Convertible Notes, Series A, principal on the Notes shall be paid
in 20 equal monthly installments, with each payment equal to 5% of the principal
amount, commencing on June 23, 2005 and continuing on the same day of each month
thereafter to the Holder on the tenth date immediately preceding the Principal
Payment Date. All payments of principal by us shall be made at our option in
cash or, with 10 business day's prior notice, in common stock of our Company
valued at 85% of the average closing bid price of the security in the most
recent five trading days prior to a Valuation Date. The Notes contain full
ratchet anti-dilution protection.
In July 2005 the Company made a Special Warrant Offer (the "Offer") to all Class
A Series A, Series E, and Series F warrant holders. A total of $2,576,168 was
raised under the Private Placement. Under the terms of the Offer, each Holder
participating in the Offer by exercising any Series E Warrants at $0.35 per
share received new Series G Incentive Warrants (the "Series G Incentive
Warrants") and new Series I Incentive Warrants (the "Series I Incentive
Warrants"), each in an amount equal to one hundred percent (100%) of the number
of shares of the Company's common stock issued upon exercise of the Series E
Warrants pursuant to the Offer. A total of 3,797,976 Series E Warrants were
exercised which prompted the issuance of 3,797,976 of Series G Incentive
Warrants and 3,797,976 of Series I Incentive Warrants.
Holders participating in the Offer by exercising any Class A Warrants, Series A
Warrants or Series F Warrants received new Series H Incentive Warrants (the
"Series H Incentive Warrants") and new Series J Incentive warrants (the "Series
J Incentive Warrants"), each in an amount equal to twenty-five percent (25%) and
fifty percent (50%), respectively, of the number of shares of the Company's
common stock issued upon exercise of the Class A Warrants, the Series A Warrants
or the Series F Warrants pursuant to the Offer. A total of 3,562,359 of Class A
Warrants, Series A Warrants and Series F Warrants were exercised which prompted
the issuance of 890,590 Series H Warrants and 1,781,180 of Series J Warrants.
As a result of the Offer, the Company, pursuant to the Warrants in effect,
adjusted the respective Warrants accordingly.
Further, as a result of the Special Warrant Offering, the Company issued shares
of common stock for a consideration per share less than the Conversion Price in
effect, which constitutes a "Trigger Issuance" under the Senior Secured
Convertible Note of February 16, 2005. Consequently, some Investors pursuant to
the Senior Secured Convertible Note exercised their right to convert part of the
Note into Shares of Common Stock. A total of $815,985 of the Senior Secured
Convertible Note was converted. As of September 30, 2005, having made four
principle payments, the balance remaining on the Note Agreement totals
$2,971,647.
Results of Operations
The results of the operations include the accounts of the Company and its
wholly-owned subsidiaries.
The results for the three months period ended September 30, 2005 differs
significantly from the three month period ended September 30, 2004 due to the
acquisitions of our subsidiaries CLI Group and Avensys in February 2005.
Operating results for CSA were included for the three month period ended
September 30, 2005 and 2004. Operating results for CLI Group, Avensys that were
acquired in 2005 and C-Chip, that was created in 2005, were included for the
three month period ended September 30, 2005 compared to none last year.
Our revenues for the three months ended September 30, 2005 were $3,725,637
compared to $640,030 last year. The increase was primarily due to acquisition of
CLI and Avensys during the year. For the same period, our product revenue
accounted for $1,987,895 compared to $152,037 last year. An increase of
$1,835,858 was primarily due to the acquisition of Avensys. Our service revenues
were $1,737,742 for the period ended September 30, 2005 compared to $487,993 in
the prior year. An increase of $1,249,749 was due to the acquisition of CLI
during the year Gross margin for the three months ended September 30, 2005 was
$1,135,906 compared to $183,430 for the same period last year. Our net loss for
the three months ended September 30, 2005 was $3,314,162 compared to $681,520
for the same period last year. The increase in net losses was largely due to
debenture accretion expenses, amortization of deferred financing costs,
amortization of intangible assets, professional fees, increased expenses of our
wholly owned subsidiary CSA and losses from our wholly owned subsidiary C-Chip
(North America).
Operating expenses for the three months ended September 30, 2005 were $2,841,486
compared to $859,797 for the same period last year. Selling, General and
Administration expenses for the three months ended September 30 2005, which
exclude stock based compensation of $424,900, were $1,930,742 compared to
$449,910 in the same period last year, also excluding stock based compensation
of $327,709 last year. Research and development expenses for the three months
ended September 30, 2005 were $226,694 compared to $35,744 for the same period
last year, the increase of $226,108 was due to Avensys. Depreciation and
amortization for the three months ended September 30, 2005 were $223,328
compared to $46,434 last year. An increase of $150,300 was due to the
amortization of intangible assets acquired in February 2005 through our two
acquisitions compared to $0 last year. Impairment of long-lived assets for the
three months ended
September 30, 2005 was $35,822 compared to $0 in the prior year. Other expenses
for the three months ended September 30, 2005 were $1,775,554 compared to $5,153
last year. An amount of $139,464 was due to the amortization of deferred
financing costs and $1,540,287 to the debenture accretion, both related to the
Senior Convertible Note, Series `A' issued in February 2005. Included in the
$1,540,287 is (1) the conversion of $815,985 of the Senior Convertible Note,
Series `A' paid in shares incurred a non-cash expense of $782,037 (2) a portion
of monthly capital payments of the Senior Convertible Note, Series `A' incurred
a non-cash expense of $526,470 (3) a portion of monthly capital payments of
$204,733 paid in cash.
Financial Condition, Liquidity and Capital Resources
We are involved in the risk mitigation business. Through our different business
units, our aim is to provide services and solutions to our customers
encompassing aspects of the security industry, from the collection and
transmission of information, to the treatment and analysis of the data
collected, all to offer the required intervention and protection whether it
pertains to assets, persons or the environment. So far, our operations have been
financed primarily from cash on hand, from the sale of common shares, or of
convertible debentures, exercise of warrants, loans, and with respect to Avensys
and CLI primarily from revenue from the sales of products and services.
As of September 30, 2005 we had a working capital of $848,707, compared to a
working capital deficiency of $1,329,550 at June 30, 2005. Included in these
figures, a cash balance of $1,352,322 compared to $287,147 June 30, 2005,
$2,796,686 in accounts receivable compared to $2,858,275, $1,452,105 in
inventory compared to $1,097,776 June 30, 2005, $2,353,730 in accounts payable
compared to $1,507,959 June 30, 2005, $1,429,439 in accrued liabilities compared
to $2,021,127 at June 30, 2005 and $1,476,693 in loans payable compared to
$1,598,273 at June 30, 2005. The main reason for the significant change in
working capital is due to the proceeds from the July Special Warrant Offer.
Net cash used for our operations was $714,505 compared to $541,344 at September
30, 2004. We mainly financed our operations through the July Special Warrant
Offer for a total net cash proceeds of $2, 127,591 and from a $408,373 loan. We
used $404,712 for Bank credit line payment, $226,733 for principal payment of
Senior Convertible Note Series A, $80,694 for related party payments and capital
addition of $35,781.
As of September 30, 2005, our Company's total assets were $20,999,257 compared
to $20,115,755 at June 30, 2005. The increase in total assets was primarily
attributable to cash of $1,352,322 compared to $287,147 in June 2005,
inventories $1,452,105 compared to $1,097,776 June 2005 offset by a decrease in
intangible assets $3,635,198 compared to $3,852,772 in June 2005.
As of September 30, 2005, the Company had 67,350,818 issued and outstanding
shares compared to 54,782,802 at June 30, 2005. The increase in common shares is
mainly due to the issuance of 7,360,436 common shares from the July Special
Warrant Offer. The
increase is also due to the issuance of 4,462,820 common shares in connection to
payments and conversions pursuant to the Senior Convertible Notes Series A.
Included in this amount, a total of 1,823,206 common shares were issued as
principal payments in the amount of $724,999, 308,230 common shares were issued
as interest payment in the amount of $143,863 and 2,331,384 common shares were
issued following the conversion of $815,985.
Stock options outstanding at September 30 2005 totaled 5,070,000 compared to
$3,842,500 at June 30, 2005.
In July 2005 the Company made a Special Warrant Offer (the "Offer") to all Class
A Series A, Series E, and Series F warrant holders. The Company received total
proceeds of $2,576,168 from the Offer. Under the terms of the Offer, each Holder
participating in the Offer by exercising any Series E Warrants at $0.35 per
share received new Series G Incentive Warrants (the "Series G Incentive
Warrants") and new Series I Incentive Warrants (the "Series I Incentive
Warrants"), each in an amount equal to one hundred percent (100%) of the number
of shares of the Company's common stock issued upon exercise of the Series E
Warrants pursuant to the Offer. A total of 3,797,976 Series E Warrants were
exercised which prompted the issuance of 3,797,976 of Series G Incentive
Warrants and 3,797,976 of Series I Incentive Warrants.
Holders participating in the Offer by exercising any Class A Warrants, Series A
Warrants or Series F Warrants received new Series H Incentive Warrants (the
"Series H Incentive Warrants") and new Series J incentive warrants (the "Series
J Incentive Warrants"), each in an amount equal to twenty-five percent (25%) and
fifty percent (50%), respectively, of the number of shares of the Company's
common stock issued upon exercise of the Class A Warrants, the Series A Warrants
or the Series F Warrants pursuant to the Offer. A total of 3,562,359 of Class A
Warrants, Series A Warrants and Series F Warrants were exercised which prompted
the issuance of 890,590 Series H Warrants and 1,781,180 of Series J Warrants.
On September 22, 2005, the Company ceased operations of Canadian Security Agency
(2004) Inc. ("CSA") subsidiary, which provides security services to large
corporate accounts, including courier and trucking companies. As a result, CSA
entered into an agreement with Securite Kolossal Inc. pursuant to which CSA sold
its customer list to Securite Kolossal Inc. for CDN $100,000. Of this amount,
CSA received CDN $50,000 and the balance is due in November 2005. On November 2,
2005, CSA filed for bankruptcy protection with the Superior Court of Quebec,
district of Montreal. Pursuant to the Bankruptcy and Insolvency Act, CSA filed a
notice of intention to make a proposal, by which the Company intends to settle
its payables. A notice has been sent to all known creditors of CSA informing
them that it has filed with the court a notice to make proposal.
During the first quarter we issued 400,000 common shares for services, and
257,000 common shares to settle outstanding payables in the amount of $105,501.
Until the Company is able to finance itself through profitable operations it
will continue to rely on cash on hand, exercise of warrants, debentures, loans,
equity issue or sale of assets.
ITEM 3. CONTROLS AND PROCEDURES
Quarterly evaluation of our disclosure controls and internal controls
Within the 90 days prior to the date of this quarterly report on Form 10-QSB, we
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" (Disclosure Controls), and our "internal controls and
procedures for financial reporting" (Internal Controls). This evaluation (the
Controls Evaluation) was done under the supervision and with the participation
of our management, including our chief executive officer (CEO) and chief
financial officer (CFO). Our CEO performs the same functions as a principal
executive officer and our CFO performs the same functions as a principal
financial officer. Rules adopted by the SEC require that in this section of the
quarterly report we present the conclusions of our CEO and our CFO about the
effectiveness of our Disclosure Controls and Internal Controls based on and as
of the date of the Controls Evaluation.
CEO and CFO certifications
Appearing immediately following the signatures section of this quarterly report
there are two separate forms of "Certifications" of the CEO and the CFO. The
first form of Certification is required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This section of the
quarterly report which you are currently reading is the information concerning
the Controls Evaluation referred to in the Section 302 Certifications and this
information should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
Disclosure controls and internal controls
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 (Exchange Act), such as this quarterly
report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's (SEC) rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Internal Controls are procedures which are designed with the objective of
providing reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper use;
and (3) our transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with generally accepted
accounting principles.
Limitations on the effectiveness of controls
Our management, including our CEO and CFO, confirm that the control systems are
at the "reasonable assurance" level, however, management does not expect that
our Disclosure Controls or our Internal Controls will prevent all error and all
fraud as a control system. No matter how well conceived and operated, they
cannot provide absolute assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. However, upon discovery that the controls
are inadequate, they will be changed.
Scope of the controls evaluation
Our CEO/CFO evaluation of our Disclosure Controls and our Internal Controls
included a review of the controls' objectives and design, the controls'
implementation by us and the effect of the controls on the information generated
for use in this quarterly report. In the course of the Controls Evaluation, we
sought to identify data errors, controls problems or acts of fraud and to
confirm that appropriate corrective action, including process improvements, were
being undertaken. This type of evaluation will be done on a quarterly basis so
that the conclusions concerning controls effectiveness can be reported in our
Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. Our
independent auditors in connection with their audit and review activities also
evaluate our Internal Controls on an ongoing basis. The overall goals of these
various evaluation activities are to monitor our Disclosure Controls and our
Internal Controls and to make modifications as necessary; our intent in this
regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our Internal
Controls, or whether we had identified any acts of fraud involving personnel who
have a significant role in our Internal Controls. This information was important
both for the Controls Evaluation generally and because items 5 and 6 in the
Section 302 Certifications of the CEO and CFO require that the CEO and CFO
disclose that information to our Board's Audit Committee and to our independent
auditors and to report on related matters in this section of the quarterly
report. In the professional auditing literature, "significant deficiencies" are
referred to as "reportable conditions"; these are control issues that could have
a significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, our CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective to ensure that material information relating
to us and our subsidiary is made known to management, including our CEO and CFO,
particularly during the period when our periodic reports are being prepared, and
that our Internal Controls are effective to provide reasonable assurance that
our financial statements are fairly presented in conformity with generally
accepted accounting principles.
PART II
ITEM 1. LEGAL PROCEEDINGS
In the course of normal business, the Company may be subject to threat of
litigation, claims and assessments. Management does not believe that unfavorable
decisions in any pending procedures or threat of procedures or any amount it
might be required to pay will not have a material adverse impact on our
financial condition.
On August 13, 2004, a motion was filed by Citicorp Vendor Finance Ltd., under
Quebec law, in the district of Montreal, Province of Quebec, totaling $73,506
USD ($85,348 CAD) for an unpaid contract of credit. The Company intends to
contest the case vigorously and, in the event of an unfavorable outcome, the
amount of any damages is not expected to have a material adverse impact on our
financial condition.
A lawsuit was filed on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $506,000 USD ($620,000 CAD) with
regards to alleged breach of employment contract and wrongful dismissal of
Charles Finkelstein. This lawsuit was settled on September 2, 2005 for an amount
of $81,600 USD ($100,000 CAD) and the transfer of 200,000 shares of the Company,
currently held in escrow. The parties exchanged under this agreement a complete
and final release regarding their business and employment relationship.
Autoland filed a lawsuit on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $86,125 USD ($100,000 CAD) with
regards to alleged expenses incurred by the plaintiff for the purchase of
anti-theft product known as the "Hawk 200". The Company intends to contest the
case vigorously and, in the event of an unfavorable outcome, the amount of any
damages will be charged to the earnings of the quarter and is not expected to
have a material adverse impact on our financial condition
A lawsuit was filed by Richard Larocque on June 30, 2005 under Quebec law, in
the District of Montreal, Province of Quebec pertaining to a claim in the amount
of $93,790 USD ($108,900 CAD) for alleged wrongful and unnecessary use of force
in the exercise of the Company's employee security duties. The Company intends
to contest the case vigorously and, in the event of an unfavorable outcome, the
amount of any damages will be charged to the earnings of the quarter and is not
expected to have a material adverse impact on our financial condition.
In February 3, 2005, Rothsman Bastien, filed a lawsuit under Quebec law, in the
district of Laval, Province of Quebec, totaling $70,025 USD ($81,306 CAD) for
compensatory damages and $12,240 USD ($15,000 CAD) in punitive and exemplary
damages. The claim alleges that the Company submitted erroneous evidence that
was based on racial profiling which led to the arrest of the plaintiff. The
Company intends to contest the case vigorously and, in the event of an
unfavorable outcome, the amount of any compensatory damages will be covered by
the Company's insurance policy. The punitive and exemplary damages will be
charged to the earnings of the quarter and is not expected to have a material
adverse impact on our financial condition.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
In July 2005, the Company concluded a Special Warrant Offering which raised
gross proceeds of $2,576,168. In connection with the July Special Warrant Offer,
our Company issued 7,360,436 common shares to Warrant Holders as well as issued
new warrants in the following amounts: (i) 3,797,976 Series G Warrants, (ii)
3,797,976 Series I Warrants, (iii) 890,590 Series H Warrants and (iv)1,781,180
Series J Warrants.
During the first quarter we issued 400,000 common shares for services, and
257,000 common shares to settle outstanding payables in the amount of $105,501.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Manaris Corporation or executive
officers of Manaris Corporation, and transfer was restricted by Manaris
Corporation in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 15th, 2005, the Company held a special meeting of shareholders. The
purpose of the meeting was to amend the Company's Articles of Incorporation to
reflect the name change from C-Chip Technologies Corporation to Manaris
Corporation, as well as to increase the Company's authorized common stock from
100,000,000 shares of common stock to 500,000,000 shares of common stock,
$0.00001 par value. The name change was passed by a vote of 32,715,560 For,
87,751 Against, and 33,600 Abstentions. The increase to change our authorized
common stock from 100,000,000 to 500,000,000 was passed by a vote of 32,374,847
For, 411,544 Against, and 50,520 Abstentions. The votes were solicited by proxy
and from those who were present at the meeting.
ITEM 5. OTHER INFORMATION
On September 22, 2005, the Company decided to cease operations of our Canadian
Security Agency (2004) Inc. ("CSA") subsidiary, which provides security services
to large corporate accounts, including courier and trucking companies. As a
result, CSA entered into an agreement with Securite Kolossal Inc. pursuant to
which CSA sold its customer list to Securite Kolossal for $100,000 CDN. Of this
amount, CSA received CDN $50,000 and the balance is due in November 2005. On
November 2, 2005, CSA filed for bankruptcy protection with the Superior Court of
Quebec, district of Montreal. Pursuant to the Bankruptcy and Insolvency Act, CSA
filed a notice of intention to make a proposal, by which the Company intends to
settle its payables. A notice has been sent to all known creditors of CSA
informing them that it has filed with the court a notice to make proposal.
On November 7, 2005 we filed a Registration Statement that relates to the resale
by the selling stockholders of 31,281,345 shares of our common stock, including
15,614,218 shares issuable upon the exercise of warrants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 Placement Agency Agreement between Midtown Partners LLP and Manaris
Corporation dated July 19, 2005 (as incorporated by reference to Form
SB-2 filed with the Securities and Exchange Commission on November 8,
2005).
10.2 Form of Series G Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.3 Form of Series H Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.4 Form of Series I Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.5 Form of Series J Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.6 Form of Series K Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.7 Form of Series IB6 Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
10.8 Form of Series IB7 Warrant (as incorporated by reference to Form SB-2
filed with the Securities and Exchange Commission on November 8, 2005).
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-15(e)
and Rule 15d-15(e), promulgated under the Securities Exchange Act of
1934, as amended
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-15(e)
and Rule 15d-15(e), promulgated under the Securities Exchange Act of
1934, as amended
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 21st day of November, 2005.
MANARIS CORPORATION
(Registrant)
BY: /s/ John Fraser
------------------------------------
John Fraser, President and Chief
Executive Officer
(Principal Executive Officer)
BY: /s/ Andre Monette
------------------------------------
Andre Monette, Chief Financial
Officer, Secretary and Treasurer
and (Principal Financial and
Accounting Officer)