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 DECEMBER 31, 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 Identification Number)
of incorporation)
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 February 17, 2006 there were 71,952,617 shares of Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format Yes |_| NO |X|
Manaris
Corporation
(Formerly A Development Stage Company)
Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
December 31, 2005
Index
Interim Consolidated Balance Sheets..........................................F-2
Interim Consolidated Statements of Operations................................F-3
Interim Consolidated Statements of Cash Flows................................F-4
Notes to Interim Consolidated Financial Statements...........................F-6
F-1
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Balance Sheets
Unaudited
(Expressed in U.S. dollars)
December 31, June 30,
2005 2005
$ $
ASSETS
Current Assets
Cash and cash equivalents 362,001 287,147
Accounts receivable, net of allowance for doubtful accounts of
$177,638 and $141,093 respectively 1,954,082 2,171,737
Other receivables 732,313 859,108
Inventories 1,328,175 1,002,874
Prepaid expenses 77,734 81,761
Restricted held to maturity securities 85,771 81,606
Current assets of discontinued operations (Note 5) 804,816 869,630
- ------------------------------------------------------------------------------------------------------
Total Current Assets 5,344,892 5,353,863
Property and Equipment 548,223 540,404
Intangible Assets (Note 7) 3,883,165 2,958,628
Goodwill 5,291,767 6,722,834
Deferred Financing Costs 211,499 436,685
Prepaid expenses 14,615 13,906
Assets of discontinued operations (Note 5 ) 3,813,698 4,089,435
- ------------------------------------------------------------------------------------------------------
Total Assets 19,107,859 20,115,755
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Not Subject to Compromise
Current Liabilities
Accounts payable 1,360,164 1,300,023
Accrued liabilities 1,100,187 1,722,739
Loans payable (Note 11) 1,733,706 1,641,330
Current portion of long-term debt 141,410 143,727
Current portion of convertible debentures 310,983 557,284
Due to related parties (Note 10) 40,000 268,435
Current liabilities of discontinued operations (Note 5 ) 643,510 724,144
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 5,329,960 6,357,682
Long-term Debt, less current portion 248,533 272,598
Convertible Debentures (Note 9) 2,147,535 2,023,456
Long term liabilities of discontinued operations (Note 5) 14,571 214,127
- ------------------------------------------------------------------------------------------------------
Total Liabilities Not Subject to Compromise 7,740,599 8,867,863
======================================================================================================
Liabilities Subject to Compromise (Note 12) 660,017 --
- ------------------------------------------------------------------------------------------------------
Non-controlling Interest 18,413 18,033
- ------------------------------------------------------------------------------------------------------
Contingencies (Note 15)
Stockholders' Equity
Common Stock, 500,000,000 (June 30, 2005: 100,000,000) shares
authorized with a par value of $0.00001; 69,303,179 and 54,782,802
issued and outstanding, respectively 692 548
Additional Paid-in Capital 31,378,162 24,142,078
Accumulated Other Comprehensive Loss (381,854) (364,415)
Deficit (20,308,170) (12,548,352)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,688,830 11,229,859
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 19,107,859 20,115,755
======================================================================================================
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-2
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Statements of Operations
Unaudited
(Expressed in U.S. dollars)
For the Three Months Ended For the Six Months Ended
December 31 December 31
2005 2004 2005 2004
$ $ $ $
Revenue
Product 2,153,289 43,305 4,141,184 195,342
Service 88,385 505,556 499,627 993,549
------------------------------------------------------------------
Total Revenue 2,241,674 548,861 4,640,811 1,188,891
------------------------------------------------------------------
Cost of Revenue
Product 1,503,478 24,736 2,772,322 104,599
Service 8,796 339,481 526,783 716,218
------------------------------------------------------------------
Total Cost of Revenue 1,512,274 364,217 3,299,105 820,817
------------------------------------------------------------------
Gross Margin 729,400 184,644 1,341,706 368,074
------------------------------------------------------------------
Operating Expenses
Depreciation and amortization 283,457 46,604 486,022 93,038
Selling, general and administrative 1,516,605 387,444 3,136,591 837,354
(Gain) or loss on disposal of long-lived assets (2,992) 29,323
Research and development 214,159 159,881 440,853 195,625
Stock based compensation(1) 48,960 183,850 473,860 511,559
------------------------------------------------------------------
Total Operating Expenses 2,060,189 777,779 4,566,649 1,637,576
------------------------------------------------------------------
Loss from continuing operations (1,330,789) (593,135) (3,224,943) (1,269,502)
Other Expenses
Other expense (income) 14,259 -- (1,893) --
Interest expense 208,115 5,428 463,609 10,581
Debenture accretion 885,313 -- 2,425,600 --
------------------------------------------------------------------
Net Loss from continuing operations before Income Tax
Benefit (2,438,476) (598,563) (6,112,259) (1,280,083)
Income Tax Benefit - Refundable tax credits 184,214 405,514
==================================================================
Net Loss from continuing operations Before (2,254,192) (598,563) (5,706,745) (1,280,083)
Non-controlling interest
Non-controlling interest 246 530
==================================================================
Net Loss from continuing operations (2,253,946) (5,706,215)
Results of discontinued operations (Note 5) 5,586 143,693
==================================================================
Net loss (2,248,360) (598,563) (5,562,522) (1,280,083)
==================================================================
Foreign currency translation adjustment (5,350) (150,989) (17,439) (290,820)
==================================================================
Comprehensive Loss (2,253,710) (749,553) (5,579,961) (1,570,904)
==================================================================
Net Loss per share - Basic and Diluted (Note 3) (0.04) (0.01) (0.13) (0.03)
==================================================================
Weighted Average Shares Outstanding 62,369,000 40,282,000 57,957,000 40,020,000
==================================================================
(1) Stock based compensation is excluded from the following:
Selling, general and administration 48,960 183,850 473,860 511,559
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-3
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Statements of Cash Flows
Unaudited
(Expressed in U.S. dollars)
For the Six Months Ended
December 31
2005 2004
$ $
Operating Activities
Net loss (5,562,522) (1,280,083)
Adjustments to reconcile net loss to cash used in operating
activities
Results of discontinued operations (143,693) --
Stock based compensation 473,860 511,559
Expenses settled with issuance of common shares 5,400 --
Depreciation and amortization 486,022 93,038
Interest payment on debt (13,419)
Loss on settlement of accounts payable 31,359
Non-controlling interest 380
Accretion of debenture 2,425,600
Deferred financing costs related to senior convertible
debenture 225,186
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 217,655 (24,153)
(Increase) decrease in inventory (325,301) 2,137
(Increase) decrease in other receivable 126,795 (62,315)
(Increase) decrease in prepaid and other assets 3,318
(Decrease) in due to related parties (20,738)
Increase in accounts payable and accrued liabilities 174,606 27,348
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used) In Operating Activities from (1,895,492) (732,469)
continuing operations
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used) In Operating Activities from 204,054
discontinued operations
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used) In Operating Activities (1,691,438) (732,469)
- ----------------------------------------------------------------------------------------------
Investing Activities
Purchase of property and equipment (57,180) (12,506)
Goodwill & intangible 69,869
Payment received on note receivable 71,090
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used) in Investing Activities from 12,689 58,584
continuing operations
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used) in Investing Activities 12,689 58,584
- ----------------------------------------------------------------------------------------------
Financing Activities
Borrowing (Repayments) on bank credit line (427,474) (96,151)
Payment of senior convertible debt (621,924)
Increase (decrease) short term debt (47,059)
Increase (decrease) long term-current portion (2,317)
Repayment of related party advances (49) (124,889)
Proceeds from loans 638,874
Proceeds from exercise of stock options and warrants 2,127,603 147,293
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (used) in Financing Activities 1,667,652 (73,747)
- ----------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 85,952 (283,308)
- ----------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 74,854 (1,030,940)
Cash - Beginning of period 287,147 1,561,020
- ----------------------------------------------------------------------------------------------
Cash - End of period 362,001 530,080
==============================================================================================
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-4
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Statements of Cash Flows (continued)
Unaudited
(Expressed in U.S. dollars)
For the Six Months Ended
December 31
2005 2004
$ $
Non-Cash Financing and Investing Activities
Issuance of common shares for services 5,400 --
Issuance of common shares for interest payment 143,863 --
Issuance of common shares for repayment of senior
convertible note, series A 708,180 --
Issuance of common shares for conversion of senior
convertible note, series A 985,985 --
Issuance of stock options for debt settlement 136,860 64,608
Issuance of common shares to settle outstanding
payables 181,649 --
Going Concern (Note 1)
(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
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
1. Going Concern
The accompanying financial statements have been prepared using generally
accepted accounting principles applicable to a going concern, which
assumes the company will be able to realize the carrying value of its
assets and discharge its liabilities in the normal course of operations.
The company has incurred significant losses since inception, has relied on
non-operational sources of financing to fund operations and has negative
working capital as of December 31, 2005. Accordingly, there exists
substantial doubt with respect to the validity of the going concern
assumption.
In order to address this situation, management has developed a plan to
focus on the core business of the company, resulting in part in the
disposal of CLI (note 5). Additional equity or debt financing may also be
required.
While management believes the use of the going concern assumption is
appropriate, there is no assurance the above actions will be successful.
These financial statements do not include any adjustments or disclosures
that may be necessary should the company not be able to continue as a
going concern. If the use of the going concern assumption is not
appropriate for these financial statements, then adjustments may be
necessary to the carrying value and classification of assets and
liabilities and reported results of operations and such adjustments could
be material.
2. Interim Financial Information
The Financial information as at December 31, 2005 and for three and six
month periods ended December 31, 2005 are unaudited. In the opinion of
management, all adjustments necessary to present fairly the results of
these periods have been included. The adjustments made were of a
normal-recurring nature. The results of operations for the three and six
month period ended December 31, 2005 are not necessarily indicative of the
operating results anticipated for the full year. The financial statements
follow the same accounting policies and methods of their application as
the financial statements for the year ended June 30, 2005.
The disclosure in these interim financial statements do not conform in all
respect to the requirements of generally accepted accounting principles
for annual financial statements: therefore, these interim financial
statements should be read in conjunction with the annual financial
statements for the year ended June 30, 2005.
3. Summary of Significant Accounting Policies
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss applicable
to common shareholders for the period by the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
share is computed by dividing the net loss applicable to common stock
shareholders for the period by the weighted average number of shares of
common stock and potential common stock outstanding during the period, if
dilutive. Since the Company is in a loss position for all periods
presented, there is no difference between basic and diluted per share
figures. In addition separate figures for loss from continuing operations
have not been presented since there is no difference between net loss per
share and loss from continuing operations per share.
Net loss per share has been calculated as follows:
Three months ended Six months ended
December 31, December 31,
2005 2004 2005 2004
$ $ $ $
Net loss - as reported (2,248,360) (598,563) (5,562,522) (1,280,083)
Adjustment to deficit on reduction in
exercise price of outstanding warrants -- -- (2,197,296) --
--------------------------------------------------------------------------------------------------------------
Net loss applicable to common (2,248,360) (598,563) (7,759,818) (1,280,083)
stockholders
--------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 62,369,000 40,282,000 57,957,000 40,200,000
--------------------------------------------------------------------------------------------------------------
Net loss per share (0.04) (0.01) (0.13) (0.03)
--------------------------------------------------------------------------------------------------------------
F-6
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
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 $85,771(CDN $100,000) was issued by Manaris Corporation to guarantee
the loan of the Company's subsidiary Avensys. A term deposit which matures
in June 2006 and with an interest rate of 1.3% per annum is pledged as
collateral for the line of credit.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current period's presentation.
4. Recent accounting pronouncements
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.
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 annual reporting period that
begins 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.
F-7
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
5. Discontinued operations
On February 8th the Company signed a Share Purchase Agreement (the
"Agreement") to sell all of the shares of its wholly-owned subsidiary,
6327915 Canada Inc., the holding company of Chartrand Laframboise Inc. and
Bureau de credit commercial Inc. (the "CLI Group") to a third party
purchaser (the "Purchaser") for a price of C$5 million comprised of $4.5
million in cash and $0.5 million in common shares of the Purchaser. A
portion of the purchase price will be used to pay back debt incurred when
the CLI Group was acquired. The closing date of the transaction was
February 15, 2006 and the effective date was February 18, 2006. The
assets, liabilities, results of operations and cash flows for the "CLI
Group" have been reported separately as discontinued operations in the
consolidated balance sheets, statements of operations and cash flows. The
total revenues of discontinued operations represent $2,550,000 for the six
months ended December 31, 2005. Comparative figures for the period 2005
have been reclassified in order to comply with this presentation. The
purchase price is subject to adjustments should certain events occur or
conditions be met. CLI had previously been included in the Security and
Investigative Services reporting segment.
The carrying values of the major classes of assets and liabilities are as
follows:
$
Accounts receivable 574,861
Other receivables 70,631
Prepaid expenses 25,334
Property and equipment 198,411
Inventory 133,990
Goodwill 2,812,343
Intangible assets 802,944
Accounts payable (142,415)
Bank loan (81,492)
Accrued liabilities (394,894)
Deferred income taxes (3,663)
Long term debt, current portion (24,709)
Long term debt, less current portion (10,908)
----------------------------------------------------
6. Business Combinations
Avensys Inc.
On February 28, 2005, the Company completed its acquisition of Avensys.The
purchase price allocation was previously preliminary and subject to
change. During the three months ended December 31, 2005 the Company
completed the purchase price allocation which resulted in certain
adjustments to goodwill and intangible assets.
The purchase price was allocated to the following assets and liabilities:
Original Final
allocation Adjustments allocation
$ $ $
Current assets 3,499,635 -- 3,499,635
Property and equipment 523,898 -- 523,898
Customer relationships 701,621 802,060 1,503,681
License agreements 2,085,357 585,781 2,671,138
In-process research and development 386,749 -- 386,749
Other assets 101,511 -- 101,511
Bank indebtedness (1,202,483) -- (1,202,483)
Other current liabilities (2,358,108) -- (2,358,108)
Long-term debt - current portion (122,829) -- (122,829)
Long-term debt (1,453,966) -- (1,453,966)
Other liabilities (16,678) -- (16,678)
Excess purchase consideration (goodwill) 6,679,608 (1,387,841) 5,291,767
-------------------------------------------------------------------------------------------
Total 8,824,315 -- 8,824,315
===========================================================================================
F-8
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
7. 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
The following table presents details of the Company's purchased intangible
assets with definite lives:
December 31, June 30,
Weighted 2005 2005
Average Accumulated Net Book Net Book
Life in Cost Amortization Value Value
Years $ $ $ $
Licenses, patents and trademarks 5.6 2,783,022 458,034 2,324,988 2,002,687
Technology 1.7 574,285 394,790 179,495 251,275
Customers lists 9.5 1,530,326 151,644 1,378,682 704,666
---------------------------------------------------------------------------------------------------------------
Total intangible assets 6.0 4,887,633 1,004,468 3,883,165 2,958,628
===============================================================================================================
Amortization expense of purchased intangible assets charged to operations
was $245,730 and $436,660 for the three and six-month periods ended
December 31, 2005, respectively, and $40,630 and $81,260 for the three and
six month periods ended December 31, 2004, respectively.
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
s2006 $ 378,260
s2007 711,395
s2008 594,000
s2009 594,000
s2010 594,000
Thereafter 1,011,510
------------------------------------------
$3,883,165
==========================================
8. Balance Sheet Details
December 31, June 30,
2005 $ 2005 $
-----------------------------------------------------------------
Inventory
Raw materials 126,896 261,445
Work in process 152,105 8,064
Finished goods 1,049,174 733,365
-----------------------------------------------------------------
1,328,175 1,002,874
=================================================================
F-9
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
9. 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 primary
beneficiary, is required to consolidate that entity. During the year ended
June 30, 2005, Avensys transferred its research activities to ALI for tax
planning purposes. 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 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 is the primary beneficiary. The impact to the consolidated balance
sheet as of December 31, 2005 includes the approximate additions to
current assets of $376,266, net property and equipment of $85,904, and
current liabilities of $67,766. The impact to the consolidated statement
of operations for the three and six months period ended December 31, 2005
was an increase in research and development expenses of $226,100 and
$439,963 respectively.
10. Related Party Transactions/Balances
The total amount due to officers and/or shareholders of the Company at
December 31, 2005 is $40,000 (June 30, 2005: $268,435). The amounts due
are non-interest bearing, unsecured, and have no fixed terms of repayment.
11. Loans Payable
Avensys has designated its accounts receivable totalling $1,931,329 and
inventories totalling $1,082,607 as guarantee for the line of credit. The
line of credit obtained from a financial institution, for an authorized
amount of $1,166,500 (CDN $1,360,000), bears interest at the Canadian bank
prime rate plus 1.5%. The outstanding balance under the line of credit as
at December 31, 2005 amounted to $642,667 which amount has been included
in loans payable on the balance sheet. According to terms of the credit
agreement, the company is subject to certain financial covenants which
were not respected as at December 31, 2005. Consequently, the financial
institution may exercise its right to demand repayment at any time.
12. CSA
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, subject to
adjustment. At December 31, 2005, the Company has received CDN $50,000.
The remaining balance of CDN $40,000 was received in January 2006 after a
CDN$10,000 adjustment by Securite Kolossal. 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, all proceedings against CSA were stayed. A notice has
been sent to all known creditors of CSA informing them that it has filed
with the court a notice to make a proposal. All assets related to CSA were
written down to their net recoverable amount or fair value as appropriate
during the three month period ended September 30, 2005, resulting in a
write-off of CDN$124,000, and all liabilities continue to be carried at
amounts expected to be allowed under the proceedings. Manaris Corporation
on behalf of CSA has incurred CDN $25,000 in reorganisation expenses,
which are professional fees payable to the Trustee, of which CDN$12,000
was paid during the three month period ended December 31, 2005.
Reorganization expenses relate to the costs incurred subsequent to the
filing of bankruptcy protection. The total current liabilities in the
condensed balance sheet presented below represent the total liabilities
subject to compromise, excluding the intercompany loan which was
eliminated upon consolidation.
December 31, 2005
$
Cash and cash equivalents 63,160
Accounts receivable, net of allowance for doubtful accounts of $90,382 42,074
Other receivables 39,521
Total Current Assets 144,755
--------------------------------------------------------------------------------------
Accounts Payable 131,513
Accrued liabilities 528,504
Intercompany loan 755,119
Total Current Liabilities 1,415,136
--------------------------------------------------------------------------------------
Stockholders' Equity (1,270,381)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 144,755
--------------------------------------------------------------------------------------
F-10
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
13. Common Stock
a) During the three months ended December 31, 2005, the Company issued
873,000 common shares for total proceeds of $8.73 from the exercise
of stock options.
b) During the three months ended December 31, 2005, the Company issued
1,069,611 common shares in connection to the Series A Notes. Of that
amount, 583,897 common shares were issued for the principal
payments, calculated using a conversion rate of 85% of the market
price of the company's stock, in the amount of $181,710. Since the
company had been accreting the debt on the same basis no gain or
loss was recorded and the $181,710 was removed from the carrying
value of the convertible debentures and credited to capital stock
and additional paid in capital. In addition, 485,714 common shares
were issued following the conversion at a rate of $0.35 of the
convertible debentures with a principal amount of $170,000. This
amount has been removed from the carrying value of the convertible
debentures and credited to capital stock and additional paid in
capital, and the unamortized accretion in the amount of $160,578 has
been charged as additional accretion expense and credited to capital
stock and additional paid in capital.
c) In December 2005, the Company issued 9,750 common shares at an
exercise price of $0.00001 for total proceeds of $0.10 following the
exercise of 9,750 Series IB1 warrants.
d) 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.
e) 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, 1,823,206 common shares were issued for the principal
payments, calculated using a conversion rate of 85% of the market
price of the company's stock, in the amount of $724,999. Since the
company had been accreting the debt on the same basis no gain or
loss was recorded and the $724,999 was removed from the carrying
value of the convertible debentures and credited to capital stock
and additional paid in capital. In addition, 2,331,384 common shares
were issued following the conversion at a rate of $0.35 of the
convertible debentures with a principal amount of $815,985. This
amount has been removed from the carrying value of the convertible
debentures and credited to capital stock and additional paid in
capital, and the unamortized accretion in the amount of $782,038 has
been charged as additional accretion expense and credited to capital
stock and additional paid in capital. Furthermore, a total of
308,230 common shares were issued for interest payments, calculated
using a conversion rate of 90% of the market price of the company's
stock, in the amount of $143,863. Since the company had been
accruing interest on the same basis, no gain or loss was recorded.
f) 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, in
connection to the special warrant offer (see note 14).
g) In September 2005, the Company issued 87,750 common shares at an
exercise price of $0.00001 for total proceeds of $0.88 following the
exercise of 87,750 Series IB1 warrants.
h) 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. The fair value of the options issued was
$136,860 resulting in a loss of $31,359, which was charged to other
expense.
i) In September the Company issued 15,000 common shares valued at
$5,400 for services.
14. Stock Options and Warrants
a) Stock Options
During the three month period ended December 31, 2005:
i) The Company granted 138,000 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. The fair value of these options
has been included in stock based compensation.
ii) The Company granted 75,000 stock options to employees pursuant
to a non-qualified stock option plan at exercise prices
ranging from $0.38 to $0.41 per share. Stock options granted
to employees vested over a period of one year.
iii) A total of 22,500 stock options were forfeited due to
termination of employees.
During the three month period ended September 30, 2005:
i) 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. The fair value of these options
has been included in stock based compensation.
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. The fair value of these options has
been included in stock base compensation.
F-11
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
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 forfeited due to termination of
employees.
v) A total of 257,000 stock options were issued for settlement of
debt of $105,501.
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 $154,714 and $332,327 for the three and six month periods
ended December 31, 2005 respectively.
During the three and six month periods ended December 31, 2005, the
Company recognized stock based compensation for non-employees in the
amount of $48,960 and 473,860 respectively.
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 Six months ended
December 31, December 31
2005 2004 2005 2004
Risk - free interest rate 3.55% 1.77% 3.03% 1.84%
Expected volatility 100% 48.03% 100% 121.75%
Expected life of stock options (in 1.06 .37 .85 1.16
years)
Assumed dividends None None None None
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 Six months ended
December 31, December 31,
2005 2004 2005 2004
$ $ $ $
Net loss (2,248,360) (598,563) (5,562,522) (1,280,083)
Add: Stock-based compensation expense
included in net loss - as reported 48,960 183,850 473,860 511,559
Deduct: Stock-based compensation expense
determined under fair value method (203,674) (413,516) (806,187) (1,028,006)
------------------------------------------------------------------------------------------------------------
Net loss - pro forma (2,403,074) (828,229) (5,894,849) (1,796,530)
============================================================================================================
Deduct: Adjustment to deficit on
reduction in exercise price of
outstanding warrants -- -- (2,197,296) --
============================================================================================================
Net loss applicable to common
stockholders - pro forma (2,403,074) (828,229) (8,092,145) (1,796,530)
============================================================================================================
Net loss per share (basic and diluted) -
as reported (0.04) (0.01) (0.13) (0.03)
============================================================================================================
Net loss per share (basic and diluted) -
pro forma (0.04) (0.02) (0.14) (0.04)
============================================================================================================
F-12
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
Stock Options and Warrants (continued)
b) Warrants
In July 2005, the company completed a special warrant offer to certain of
the company's warrant holders. Under the terms of the offer, the exercise
price of 13,604,307 of Class A, Series A, Series E and Series F warrants
held by holders participating in the offer was reduced to $0.35 from
exercise prices ranging between $0.70 and $1.10. In connection with this
offer, a total of 7,360,436 warrants were exercised for total proceeds
amounting to $2,576,168. Upon exercise of the warrants under the offer,
the holders collectively received 4,688,566 new warrants at an exercise
price of $0.35 per share and 5,579,156 warrants at an exercise price of
$0.50 per share.
As a result of the above offer, the exercise price of 666,154 warrants
held by holders who did not participate in the offer was reduced by
between $0.06 and $0.08 per share to exercise prices ranging between $0.59
and $0.67 per share which is due to an anti-dilution provision.
The reduction of the exercise price of the warrants held by holders who
participated in the offer has been accounted for as an inducement.
Accordingly, an amount of $1,609,000 representing the excess of the
aggregate fair value of the new shares and warrants issued over the
carrying value of the warrants subject to the reduction less the cash
received and the fair value of the broker warrant issued has been credited
to additional paid in capital and charged to deficit. The reduction of the
exercise price of the warrants held by holders who did not participate in
the offer has been accounted for as a modification of the outstanding
warrants. Accordingly, an amount of $589,000 representing the excess of
the fair value of the warrants immediately after the reduction over the
fair value of those warrants immediately prior to the reduction, has been
credited to additional paid in capital and charged to deficit.
During the three month period ended December 31, 2005 the Company
re-evaluated its accounting treatment of this transaction and the
accounting treatment described above was adopted. This resulted in the
adjustment of the results for the three month period ended September 30,
2005. The impact of this adjustment on the results for the three month
period ended September 30, 2005 was as follows:
Three months ended
September 30, 2005
$
Net loss - as reported (3,314,162)
Adjustment to deficit on reduction in
exercise price of outstanding warrants (2,197,296)
----------------------------------------------------------
Net loss applicable to common (5,511,458)
stockholders
----------------------------------------------------------
Weighted average shares outstanding 53,545,000
----------------------------------------------------------
Net loss per share - adjusted (0.10)
----------------------------------------------------------
----------------------------------------------------------
Net loss per share - as reported (0.06)
----------------------------------------------------------
Three months ended
September 31 ,2005
$
As originally
reported Adjustment As adjusted
Additional paid incapital 28,780,200 2,197,296 30,977,496
------------------------------------------------------------------------------
Deficit (15,862,514) (2,197,296) (18,059,810)
------------------------------------------------------------------------------
The above offering also triggered an anti-dilution provision with respect
to the Senior Secured Convertible Notes issued on February 16, 2005,
pursuant to which the conversion price on such notes was reduced from
$0.65 to $0.35. Since the original accounting for the convertible notes
resulted in all of the proceeds being allocated to the warrants issued in
conjunction with the notes and to the beneficial conversion feature, no
additional accounting adjustment was required as a result of the decrease
in the conversion price.
During the three month periods ended December 31, 2005 and September 30,
2005, 818,830 and 408,182, respectively, of class A warrants at an
exercise price of $0.35 expired.
F-13
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
15. Contingencies
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 $85,770
(CND$100,000) with regards to alleged expenses incurred by the
plaintiff for the purchase of anti-theft product known as the "Hawk
200". On January 11, 2006 the Company settled out of court for an
amount of $47,174 ($55,000CAD) which amount has been accrued as at
December 31, 2005. Both parties provided full and final release of
any and all rights and claims, related directly or indirectly to the
dispute.
ii) 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 $93,404 (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 unfavourable outcome, the amount of any
damages will be charged to the earnings of the quarter during which
the outcome becomes known. On November 16, 2005, pursuant to article
69 of the Canadian Bankruptcy and Insolvency Act a notice of
suspension of procedures was filed and all pending procedures on the
file have been suspended.
iii) A motion was filed under Quebec law, in the district of Montreal,
Province of Quebec, totalling $73,204 (CDN $85,348) for an unpaid
contract of credit. The Company intends to contest the case
vigorously and, in the event of an unfavourable outcome, the amount
of any damages will charge to the earnings of the quarter during
which the outcome becomes known. On November 16, 2005, pursuant to
article 69 of the Canadian Bankruptcy and Insolvency Act a notice of
suspension of procedures was filed and all pending procedures on the
file have been suspended.
iv) A lawsuit was filed under Quebec law, in the district of Laval,
Province of Quebec, totalling $69,737 (CDN $81,306) for compensatory
damages and $12,866 (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 amounts of any
compensatory damages are expected to be covered by the Company's
insurance policy. Any punitive and exemplary damages will be charged
to the earnings of the quarter during which the outcome becomes
known.
v) Chartrand Laframboise Inc. filed a lawsuit against Monique Lussier,
on August 26, 2005 in the Court of Quebec, district of Montreal. CLI
is claiming an amount of $34,319 (CDN$40,013) owed for services
rendered by the plaintiff.
vi) A lawsuit originally filed on December 3, 2002 with the Quebec
Labour Commission alleging wrongful dismissal is currently waiting
to be heard in the Quebec court of Appeal for judicial review. The
former employee is claiming an indemnity of approximately $137,233
(CDN$160,000). The Company intends to contest the case vigorously
and, in the event of an unfavourable outcome, the amount of any will
be charged to the earnings of the quarter during which the outcome
becomes known.
F-14
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
16. Segment Disclosure
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 C-Chip North America and Avensys. The Security Investigative
Services reporting segment is comprised of the operations of CSA.
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.
For the six months ended December 31, 2005
Security & Consolidated
Security Monitoring
Services Devices
$ $ $
Net revenues from external customers 499,627 4,141,184 4,640,811
--------------------------------------------------------------------------------------------------------
Cost of net revenues 540,498 2,758,607 3,299,105
Marketing and sales expense 1,042,584 1,042,584
Administrative expense 255,687 1,198,682 1,454,369
--------------------------------------------------------------------------------------------------------
Direct costs 796,185 4,999,873 5,796,058
--------------------------------------------------------------------------------------------------------
Direct contribution (296,558) (858,689) (1,155,247)
Operating expenses and indirect costs of net revenues -- -- (2,048,389)
--------------------------------------------------------------------------------------------------------
Loss from operations -- -- (3,203,636)
Debenture interest, accretion and conversion -- -- (2,425,600)
Other expense (income) -- -- (461,716)
--------------------------------------------------------------------------------------------------------
Reorganisation expenses -- -- (21,307)
--------------------------------------------------------------------------------------------------------
Net loss before non-controlling interest -- -- (6,112,259)
Non-controlling interest -- -- 530
--------------------------------------------------------------------------------------------------------
Net loss before income tax benefit -- -- (6,111,729)
========================================================================================================
F-15
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. Dollars)
December 31, 2005
Segment Disclosures (continued)
For the three months ended December 31, 2005
Security & Consolidated
Security Monitoring
Services Devices
$ $ $
Net revenues from external customers 88,385 2,153,289 2,241,674
--------------------------------------------------------------------------------------------------------
Cost of net revenues 22,510 1,489,764 1,512,274
Marketing and sales expense 511,074 511,074
Administrative expense 24,599 629,794 654,393
--------------------------------------------------------------------------------------------------------
Direct costs 47,109 2,630,632 2,677,741
--------------------------------------------------------------------------------------------------------
Direct contribution 41,276 (477,343) (436,067)
Operating expenses and indirect costs of net revenues -- -- (910,383)
--------------------------------------------------------------------------------------------------------
Loss from operations -- -- (1,346,450)
Debenture interest, accretion and conversion -- -- (885,313)
Other expense (income) -- -- (222,374)
--------------------------------------------------------------------------------------------------------
Reorganisation expenses (21,307)
--------------------------------------------------------------------------------------------------------
Net loss before non-controlling interest -- -- (2,475,444)
Non-controlling interest -- -- 246
--------------------------------------------------------------------------------------------------------
Net loss before income tax benefit -- -- (2,475,198)
========================================================================================================
Revenue from one customer of the Company's Security and Monitoring Devices
segment represented for the three months and six months period ended
December 31, 2005 approximately $600,000 and $1,900,000 respectively, of
which the outstanding amounts to $892,000.
F-16
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 and six month periods
ended December 31, 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, our holding company, operates the following wholly-owned subsidiaries:
o Avensys Inc, which develops optical components & sensors and
provides environmental monitoring solutions.
o C-Chip Technologies Corporation (North America), which offers
high-tech products and services to the security and risk mitigation
marketplace.
On February 15, 2006 as part of our efforts to streamline operations, we closed
a transaction to sell all of the shares of Chartrand Laframboise Investigation
("CLI") subsidiary, which is a provider of investigative services. The sale of
CLI will strengthen our balance sheet and will enable us to focus on our core
businesses, Avensys Inc. and C-Chip Technologies (North America).
The acquisition of Avensys Inc. in February 2005 has grown our asset base
significantly and expanded our sources of revenue. In addition we made a
significant investment in reengineering the C-Chip product line during 2005,
which is an indication of our confidence in the value of the product concept.
The Company has several priorities for its 2006 fiscal year ("FY2006"). Manaris,
the holding company, will reduce costs where possible, and we will further
leverage the success of Avensys. We also expect C-Chip to start realizing its
potential. Overall, corporate focus will be on continued growth, and identifying
and developing efficiencies in our operations.
1
Avensys
We acquired Avensys in February 2005. Avensys continues to improve its financial
performance and is poised to grow through consolidation in its respective
markets. A leader in fiber based sensors, Avensys enables businesses and
corporations to monitor different types of environments, including air, soil,
water as well as buildings and infrastructures. The production of fiber optic
components and sensors continues to be the highest growth area of the company,
with investments needed to maintain our lead position and improve our
manufacturing processes. The transfer of our first optical sensors from research
and development to manufacturing was realized during the past quarter, with
strain and temperature optical sensors now in production. The market for optical
sensing solutions should therefore produce tangible results, although we expect
the substantive demand for these products will start in our next fiscal year. In
addition, the telecom sector, which still accounts for a majority of our optical
components production continues to grow. This growth has allowed us to preserve
margins despite price pressure and the negative effect of a weak US dollar.
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. Spring traditionally accounts for a
considerable portion of Avensys Solutions' yearly revenue from environmental
solutions services. We anticipate that this period will be the most successful
of the year for Avensys. We have created a team that is dedicated to providing
integrated environmental solutions in FY2006, and have achieved a number of
these over the last few months. Our goal is to obtain at least one larger scale
environmental solutions project in the next few months while continuing to
exploit the opportunities presented to us as a result of more stringent
environmental rules regarding gas emissions and water quality. The Kyoto
protocol is generating significant opportunities to monitor emissions and we
have proposed solutions to our customers to help them with the measurement of
CO2 and methane. Starting in 2008, reductions in these emissions will be
eligible for tradable credits.
We also anticipate that Avensys' advanced limnimeter, launched in the summer of
2005, has the potential to become a successful product. We are currently
finalizing the delivery of the first 15 systems.
During the fiscal 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 financing other than
amounts received from Avensys.
Since Avensys is the primary beneficiary, and ALI is considered a variable
interest entity, ALI has been included in the consolidated financial statements
commencing in the year ended of June 30, 2005. The impact to the consolidated
balance sheet as of December 31, 2005 includes the approximate additions to
current assets of $376,266, net property and equipment of $85,904, and current
liabilities of $67,766. The primary impact to the consolidated statement of
operations for the three and six months period ended December 31, 2005 was an
increase in research and development expenses of $226,100 and $439,963
respectively.
C-Chip Technologies
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. We have begun shipping units of our credit
management product. In the three months ending January 31, 2006, we shipped
1,500 units. While this is in excess of anything previously achieved by C-Chip,
it is still not at the level of our expectations. This delay is due, in part, to
a required network accreditation, a milestone we finally met on December 31,
2005. Without this accreditation, we could not forge forward on our sales
efforts.
Our first generation C-Chip device is based on the AMPS (analogue) standard of
communication. During the past few months, we completed the engineering of a
second mode of communication, allowing our product to function on GSM (digital)
networks. We are now in the process of obtaining network accreditation for this
new technology. Other new functionalities and a new WEB access have also been
added to our service offering.
2
Closure of Subsidiary
On September 22, 2005, Manaris Corporation ceased operations of our Canadian
Security Agency (2004) Inc. ("CSA") subsidiary. 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. CSA intends to make
a proposal to creditors in the near future.
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 at a 10% premium 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 and resulted in a reduction of the
conversion price from $0.65 to $0.35. 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 $985,985 of the Senior Secured
Convertible Note was converted. As of December 31, 2005, having made seven
principle payments, the balance remaining on the Note Agreement totals
$2,266,791.
3
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31,
2005
The results of the operations include the accounts of the Company and its
wholly-owned subsidiaries.
The results for the three and six month periods ended December 31, 2005 differ
significantly from the three and six month periods ended December 31, 2004 due
to the acquisition of our subsidiary Avensys in February 2005.
Operating results for CSA were included for the three and six month periods
ended December 31, 2005 and 2004. Operating results for CLI Group were presented
as discontinued operations. Operating results for Avensys, which we acquired in
2005 and C-Chip, which was formed in 2005, were included for the three and six
month periods ended December 31, 2005 but were not included for the three and
six month periods ended December 31, 2004.
Revenues
Our revenues for the three and six month periods ended December 31, 2005 were
$2,241,674 and $4,640,811 compared to $548,861 and $1,188,891 last year. The
increase was primarily due to the acquisition of Avensys during the year. For
the same period, our product revenue accounted for $2,153,289 and 4,141,184
compared to $43,305 and 195,342 last year. Increase in product revenue for the
three and six month periods of $2,109,984 and 3,945,842 was primarily due to the
acquisition of Avensys. Our service revenues for the three and six month periods
ended December 31, 2005 were $88,385 and $499,627 compared to $505,556 and
$993,549 in the prior year. The decrease in service revenue of $417,171 and
$493,922 was due to the results of CSA. On September 22, 2005, the Company
ceased operations of CSA. Gross margin for the three and six month periods ended
December 31, 2005 was $729,400 and $1,341,706 compared to $184,644 and $368,074
for the same periods last year. Our net loss for the three and six month periods
ended December 31, 2005 was $2,248,360 (including income from discontinued
operations of $5,586) and $5,562,522 (including income from discontinued
operations of $143,693) compared to $598,563 and $1,280,083 for the same periods
last year. The increase in net loss was largely due to debenture accretion
expenses, amortization of deferred financing costs, amortization of intangible
assets, professional fees, losses from our wholly owned subsidiary C-Chip (North
America).
Expenses
Operating expenses for the three and six month periods ended December 31, 2005
were $2,075,850 and $4,545,342 compared to $777,779 and $1,637,576 for the same
periods last year. Selling, General and Administration expenses for the three
and six month periods ended December 31, 2005, which exclude stock based
compensation of $48,960 and $473,860, were $1,495,298 and $3,115,284 compared to
$387,444 and $837,354 in the same periods last year, also excluding stock based
compensation of $183,850 and $511,559 last year. Research and development
expenses for the three and six month periods ended December 31, 2005 were
4
$214,159 and $440,853 compared to $159,881 and $195,625 for the same periods
last year. The increase of $54,278 and $245,228 was due to Avensys. Depreciation
and amortization for the three and six month periods ended December 31, 2005
were $320,425 and $486,022 compared to $46,604 and $93,038 last year. An
increase of $273,821 and $392,984 was mainly due to the amortization of
intangible assets acquired in February 2005 through our acquisition compared to
$0 last year. Loss or (Gain) on disposal of long-lived assets for the three and
six month periods ended December 31, 2005 were $(2,992) and $29,323 compared to
$0 in the prior year. CSA's reorganization expenses of $21,307 was incurred
during the three month period ended December 31, 2005. Other expenses for the
three and six month periods ended December 31, 2005 were $1,107,687 and
$2,887,316 compared to $5,428 and 10,581 last year. An amount of $79,588 and
$219,052 was due to the amortization of deferred financing costs and $885,313
and $2,425,600 to the debenture accretion, both related to the Senior
Convertible Note, Series `A' issued in February 2005. Included in the $2,425,600
is (1) the conversion of $985,985 of the Senior Convertible Note, Series 'A'
paid in shares incurred a non-cash expense of $942,615 (2) a portion of monthly
capital payments of the Senior Convertible Note, Series 'A' incurred a non-cash
expense of $708,180 (3) a portion of monthly capital payments of $621,924 paid
in cash.
On February 8, 2006, the Company signed a Share Purchase Agreement (the
"Agreement") to sell all of the shares of its wholly-owned subsidiary, 6327915
Canada Inc., the holding company of Chartrand Laframboise Inc. and Bureau de
credit commercial Inc. (the "CLI Group. The closing date of the transaction was
February 15, 2006. The results of operations for the "CLI Group" have been
reported separately as discontinued operations in the statements of operations.
For the three and six month periods ended December 31, 2005, results of
discontinued operations represent $5,586 and $143,693.
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 the collection and transmission of information, and the treatment
and analysis of the data collected, to offer the required intervention and
protection, whether it pertains to fixed and movable assets 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, primarily from revenue from the sales of
products and services.
As of December 31, 2005 we had a working capital of $14,932 this is mainly due
to liabilities of CSA that are subject to compromise for $660,017, compared to a
working capital deficiency of $1,003,819 at June 30, 2005. Included in these
figures, a cash balance of $362,001 compared to $287,147 at June 30, 2005,
$1,954,082 in accounts receivable compared to $2,171,737, $1,328,175 in
inventory compared to $1,002,874 at June 30, 2005, $1,360,164 in accounts
payable compared to $1,300,023 at June 30, 2005, $1,100,187 in accrued
liabilities compared to $1,722,739 at June 30, 2005 and $1,733,706 in loans
payable compared to $1,641,330 at June 30, 2005, Liabilities subject to
compromise $660,017 compared to $0 at June 30, 2005, Current assets and current
liabilities of discontinued operations of $804,816 and $643,510 at December 31,
2005, and $869,630 and $724,144 at June 30, 2005.
5
Net cash used for our continuing operations was $1,895,492 compared to $ 732,469
at December 31, 2004. We mainly financed our operations through the July Special
Warrant Offer for a total net cash proceeds of $2,127,603 and from a $638,874
loan. We used $427,476 for Bank credit line payment, $621,924 for principal
payment of Senior Convertible Note Series A, Short term debts $47,059, Current
portion of long term debt $2,317 and $49 for related party payments.
As of December 31, 2005, our Company's total assets were $19,107,859 compared to
$20,115,755 at June 30, 2005. The decrease in total assets was primarily
attributable to accounts receivable of $1,954,082 compared to $2,171,737 at June
2005, goodwill of $5,291,767 compared to $6,722,834 at June 2005 offset by an
increase in intangible assets of $3,883,165 compared to $2,958,628 at June 2005,
and inventory of $1,328,175 compared to $1,002,874.
As of December 31, 2005 the Company had 69,303,179 issued and outstanding shares
compared to 67,350,818 at September 30, 2005. The increase is primarily due to
the issuance of 1,069,611 common shares in connection to payments and
conversions pursuant to the Senior Convertible Notes Series A. Included in this
amount, a total of 583,897 common shares were issued as principal payments in
the amount of $181,710 and 485,714 common shares were issued following the
conversion of $170,000.
Stock options outstanding at December 31, 2005 totaled 4,387,500, compared to
5,070,000 at September 30, 2005.
In July 2005 the Company made a Special Warrant Offer (the "Offer") to all of
its 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.
6
On September 22, 2005, Manaris Corporation ceased operations of our Canadian
Security Agency (2004) Inc. ("CSA") subsidiary. 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. CSA intends to make
a proposal to its creditors in the near future.
During the second quarter we issued 235,000 common shares for the termination of
consulting agreements, and 600,000 common shares to the former Chief Executive
Officer. The Company has not been 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
We have 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.
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.
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.
7
EVALUATION OF DISCLOSURE CONTROLS AND INTERNAL CONTROLS
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 subsidiaries 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.
CHANGES IN DISCLOSURE CONTROLS AND INTERNAL CONTROLS
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.
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.
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., against
Canadian Security Agency (2004) under Quebec law, in the district of Montreal,
Province of Quebec, totaling $73,506 USD ($85,348 CAD) for an unpaid contract of
credit. On November 16, 2005, pursuant to article 69 of the Canadian Bankruptcy
and Insolvency Act a notice of suspension of procedures was filed and all
pending procedures on the file have been suspended
A lawsuit against Canadian Security Agency (2004) Inc. 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. On November 16, 2005, pursuant to article 69
of the Canadian Bankruptcy and Insolvency Act a notice of suspension of
procedures was filed and all pending procedures on the file have been suspended.
8
Autoland filed a lawsuit against C-Chip Technologies Corporation (North America)
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". In January 2006 Manaris settled out of court with Autoland
for an amount of $55,000CAD. Both parties granted each other full and final
release and discharge of any and all rights and claims related directly or
indirectly to the matter.
In February 3, 2005, Rothsman Bastien, filed a lawsuit against Chartrand
Laframboise Inc. 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
during which the outcome will become known and is not expected to have a
material adverse impact on our financial condition.
Chartrand Laframboise Inc. filed a lawsuit against Monique Lussier, on August
26, 2005 in the Court of Quebec, district of Montreal. CLI is claiming an amount
of $40,012.82 owed for services rendered by the plaintiff.
A lawsuit, originally filed on December 3, 2002 by Patrice Lavoix with the
Quebec Labour Commission alleging wrongful dismissal is currently being heard in
the Quebec court of Appeal for judicial review. Mr. Lavoix is alleging and
indemnity of $160,000 CAD. The Company intends to contest the case vigorously
and, in the event of an unfavorable outcome the amount will be charged to the
earnings of the quarter.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On November 8, 2005, Jos J. Wintermans was appointed as a Director of Manaris
Corp.
On December 14, 2005, Bernard Bougie was appointed as a Director and as Chairman
of the Audit Committee of Manaris Corp.
On January 9, 2006 our registration statement that was originally filed on
November 7, 2005 that relates to the resale by the selling stockholders of
36,298,305 shares of our common stock, including 20,631,175 shares issuable upon
the exercise of warrants was declared effective by the Securities and Exchange
Commission.
9
In January 2006 we selected PricewaterhouseCoopers LLP - Montreal (PwC) to
replace Manning Elliott Chartered Accountants - British Colombia, who resigned
effective January 9, 2006. The decision to change auditors was not caused by any
disagreement between Manaris and Manning Elliott on any matter of accounting
principles, practices or financial disclosure.
On February 15, 2006 we closed a transaction to sell all of the shares of our
wholly-owned subsidiary, 6327915 Canada Inc., the holding company of Chartrand
Laframboise Inc. and Bureau de credit commercial Inc. (the "CLI Group") to a
leading player in the security industry (the "Purchaser") for a price of C$5
million comprised of cash and common shares of the Purchaser. An amount of
$1,200,780 (CDN $1,400,000) comprised of cash and common shares of the Purchaser
will be used to pay back debt incurred when the CLI Group was acquired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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)
10
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 February, 2006.
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)
11