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 MARCH 31, 2006
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 May 17, 2006 there were 75,950,883 shares of Registrant's Common Stock
outstanding.
Transitional Small Business Disclosure Format Yes |_| NO |X|
ITEM 1 FINANCIAL STATEMENTS
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Index
Interim Consolidated Balance Sheet..........................................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
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Balance Sheet
Unaudited
(Expressed in U.S. dollars)
March 31, June 30,
2006 2005
$ $
ASSETS
Current Assets
Cash and cash equivalents 964,314 287,147
Accounts receivable, net of allowance for doubtful accounts of $98,788 and
$141,093 respective 2,120,590 2,171,737
Deposit in trust (Note 5) 1,323,196 --
Other receivables 598,320 859,108
Inventories (Note 8) 1,258,570 1,002,874
Prepaid expenses 144,736 81,761
Restricted marketable securities 85,682 81,606
Current assets of discontinued operations (Note 5) -- 869,630
- -------------------------------------------------------------------------------------------------------
Total Current Assets 6,495,408 5,353,863
Property and equipment 519,419 540,404
Intangible assets (Note 7) 3,694,035 2,958,628
Goodwill (Note 3) 1,014,130 6,722,834
Deferred financing costs 156,257 436,685
Deferred transactions costs 83,721 --
Prepaid expenses - long term 4,575 13,906
Assets of discontinued operations (Note 5) -- 4,089,435
- -------------------------------------------------------------------------------------------------------
Total Assets 11,967,545 20,115,755
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities 2,752,033 3,022,762
Loans payable and bank advances (Note 11) 1,944,376 1,641,330
Current portion of long-term debt 79,078 143,727
Current portion of convertible debentures 183,496 557,284
Due to related parties (Note 10) 40,000 268,435
Current liabilities of discontinued operations (Note 5) -- 724,144
- -------------------------------------------------------------------------------------------------------
Total Current Liabilities 4,998,983 6,357,682
Long-term Debt, less current portion 228,507 272,598
Convertible debentures 695,925 2,023,456
Long term liabilities of discontinued operations (Note 5) -- 214,127
- -------------------------------------------------------------------------------------------------------
Total Liabilities Not Subject to Compromise 5,923,415 8,867,863
Liabilities subject to compromise (Note 12) 683,653 --
Non-controlling Interest 23,519 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; 72,585,590 and 54,782,802 issued and
outstanding, respectively 726 548
Additional Paid-in Capital 32,437,881 24,142,078
Accumulated other comprehensive Loss (383,873) (364,415)
Deficit (26,717,776) (12,548,352)
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 5,336,958 11,229,859
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 11,967,545 20,115,755
=======================================================================================================
F-3
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 Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
$ $ $ $
Revenue
Products 2,912,833 1,417,154 7,054,017 1,612,496
Services -- 407,882 499,627 1,401,431
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue 2,912,833 1,825,036 7,553,644 3,013,927
- -----------------------------------------------------------------------------------------------------------------------
Cost of Revenue
Products 1,989,522 956,487 4,761,844 1,061,086
Services -- 336,408 540,498 1,052,626
- -----------------------------------------------------------------------------------------------------------------------
Total Cost of Revenue 1,989,522 1,292,895 5,302,342 2,113,712
- -----------------------------------------------------------------------------------------------------------------------
Gross Margin 923,311 532,141 2,251,302 900,215
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Depreciation and amortization 216,744 107,051 702,766 200,089
Selling, general and administrative 1,778,973 967,109 4,902,539 1,804,463
Acquired in-process research and development -- 386,749 -- 386,749
Loss on disposal of long-lived assets 20,084 -- 49,407 --
Loss on impairment of Goodwill (Note 3) 4,277,637 -- 4,277,637 --
Research and development 208,952 246,850 649,805 442,475
Stock based compensation (1) (Note 14) -- 479,338 473,170 990,897
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 6,502,390 2,187,097 11,055,324 3,824,673
- -----------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (5,579,079) (1,654,956) (8,804,022) (2,924,458)
Other Expenses (income)
Other income (24,297) (27,089) (26,190) (27,089)
Interest expense 225,042 62,156 688,651 72,736
Debenture accretion 674,427 8,734 3,100,027 8,734
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations Before Income Tax (6,454,251) (1,698,757) (12,566,510) (2,978,839)
Benefit
Income Tax Benefit - Refundable tax credits (109,119) (8,637) (514,633) (8,637)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations before Non- (6,345,132) (1,690,120) (12,051,877) (2,970,202)
controlling interest
Non-controlling interest 5,181 85 4,651 85
=======================================================================================================================
Net Loss from Continuing Operations (6,350,313) (1,690,205) (12,056,528) (2,970,287)
Results of Discontinued Operations (Note 5) (59,293) (17,620) 84,400 (17,620)
=======================================================================================================================
Net loss (6,409,606) (1,707,825) (11,972,128) (2,987,907)
=======================================================================================================================
Foreign currency translation adjustments (2,019) (105,561) (19,458) (396,400)
=======================================================================================================================
Comprehensive Loss (6,411,625) (1,813,386) (11,991,586) (3,384,307)
=======================================================================================================================
Net Loss from continuing operations per share - Basic (0.09) (0.04) (0.21) (0.07)
and Diluted (Note 3)
=======================================================================================================================
Weighted Average Shares Outstanding 71,098,000 44,843,000 67,219,000 41,627,000
=======================================================================================================================
(1) Stock based compensation is excluded from the following:
Selling, general and administration -- 479,338 473,170 990,897
=======================================================================================================================
F-4
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Statement of Cash Flows
Unaudited
(Expressed in U.S. dollars)
For the Nine Months Ended
March 31,
2006 2005
$ $
Operating Activities
Net loss (11,972,128) (2,987,907)
Adjustments to reconcile net loss to cash used in operating activities
Results of discontinued operations (84,400) 17,620
Stock based compensation 473,170 990,897
Expenses settled with issuance of common shares 5,400 --
Depreciation and amortization 702,766 200,089
Loss on settlement of accounts payable 31,359 --
Non-controlling interest 4,651 85
In-process research and development -- 386,749
Loss on disposal of discontinued operations 29,713 --
Loss on impairment of Goodwill 4,277,637 --
Debenture accretion 3,100,027 8,734
Amortization of deferred financing costs 280,428 (423,933)
Changes in operating assets and liabilities
Decrease (increase) in accounts receivables 51,147 (866,587)
(Increase) decrease in inventories (255,696) 166,611
Decrease (increase) in other receivable 260,788 (10,845)
(Increase) decrease in prepaid expenses and other assets (53,644) 38,795
(Increase) decrease in due to related parties (20,745) 29,353
Increase in accounts payable and accrued liabilities 474,038 87,871
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities from Continuing Operations (2,695,489) (2,362,468)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities from Discontinued Operations 305,706 4,358
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (2,389,783) (2,358,110)
- ---------------------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of companies, net of cash acquired -- (2,689,195)
Purchase of property and equipment (55,991) (32,433)
Deferred Transaction Costs (83,721) --
Goodwill & Intangible 69,870 --
Deposit in Trust (1,323,196) --
Proceeds from Discontinued Operations, net of cash 2,903,160 --
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used) in Investing Activities from Continuing Operations 1,510,122 (2,721,628)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used) Investing Activities from Discontinued Operations 165,116 (5,520)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used) in Investing Activities 1,675,238 (2,727,148)
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
(Repayment) borrowing bank credit line (302,755) 320,823
Payment of senior convertible debt (625,355) --
Long term debt payment (514,093) --
Long term debt conversion 224,397 --
Decrease short term debt (179,097) --
Decrease long term debt - current portion (64,649) --
Repayment of related party advances (49) 12,166
Common Stock issued persuant to options exercised 40,012 --
Proceeds from loans 856,863 --
Proceeds from senior convertible debenture -- 4,685,876
Proceeds from exercise of stock options and warrants 2,127,624 197,311
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities from Continuing Operations 1,562,898 5,216,176
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities from Discontinued Operations (238,008) (6,318)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 1,324,890 5,209,858
- ---------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 66,822 (354,137)
- ---------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 677,167 (229,537)
Cash - Beginning of period 287,147 1,561,020
- ---------------------------------------------------------------------------------------------------------------
Cash - End of period 964,314 1,331,483
===============================================================================================================
F-5
Manaris Corporation
(Formerly A Development Stage Company)
Interim Consolidated Statement of Cash Flows (continued)
Unaudited
(Expressed in U.S. dollars)
For the Nine Months Ended
March 31,
2006 2005
$ $
Non-Cash Financing and Investing Activities
Issuance of common shares for Avensys business acquisition -- 7,967,908
Issuance of convertible debt for CLI business acquisition -- 1,380,543
Issuance of common shares for technology acquisition -- 125,000
Issuance of common shares for services 5,400 --
Settlement of outstanding legal claims by the issuance of options 77,000 --
Issuance of common shares for interest payment 253,278 18,375
Issuance of common shares for repayment of senior convertible note, serie A 1,506,188 --
Issuance of common shares for conversion of senior convertible note, serie A 1,073,110 --
Issuance of common shares for repayment of secured convertible debentures 224,393 --
Issuance of options to pay loans payable 47,059 --
Issuance of common shares to settle related party and short term payables 181,649 --
Issuance of common shares to settle outstanding payables 136,860 119,043
==============================================================================================================
F-6
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
Unaudited
(Expressed in U.S. Dollars)
Accumulated
Additional Other Total
Common Shares Paid-In Deferred Comprehensive Stockholders'
# of Amount Capital Compensation Income Deficit Equity
Shares $ $ $ $ $ $
Balance, June 30, 2004 39,595,803 396 8,536,780 (25,974) 9,860 (6,317,409) 2,203,653
Common stock issued for
services 1,002,145 10 757,653 -- -- -- 757,663
Common stock issued for
purchase of business 10,400,002 104 7,633,484 -- -- -- 7,633,588
Common stock issued for
purchase of intangible asset 164,474 1 124,999 -- -- -- 125,000
Issuance of common shares
from exercise of stock options 2,120,501 22 204,990 -- -- -- 205,012
Stock based compensation -- -- 1,190,568 -- -- -- 1,190,568
Amortization of deferred
compensation -- -- -- 25,974 -- -- 25,974
Common stock issued to settle
outstanding account payable 176,767 2 127,325 -- -- -- 127,327
Discount on debenture -- -- 2,470,674 -- -- -- 2,470,674
Debenture conversion 1,106,667 11 829,989 -- -- -- 830,000
Warrants issued -- - 2,265,616 -- -- -- 2,265,616
Common stock issued
pursuant to warrants exercised 216,443 2 -- -- -- -- 2
Translation adjustment -- -- -- -- (374,275) -- (374,275)
Net loss for the year -- -- -- -- -- (6,230,943) (6,230,943)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 54,782,802 548 24,142,078 -- (364,415) (12,548,352 11,229,859
- -----------------------------------------------------------------------------------------------------------------------------
Common stock issued for
services 15,000 -- 5,400 -- -- -- 5,400
Issuance of common shares
upon exercise of stock options 1,458,000 14 39,998 -- -- -- 40,012
Stock based compensation -- -- 473,170 -- -- -- 473,170
Settlement of outstanding legal
claim by the issuance of options -- -- 77,000 -- -- -- 77,000
Common stock issued to settle
outstanding accounts payable 257,000 3 136,857 -- -- -- 136,860
Common stock issued in
payment of interest on Senior
Secured Convertible Notes "A" 704,761 7 253,271 -- -- -- 253,278
Common stock issued in
repayment of Senior Secured
Convertible Notes "A" 4,186,933 42 1,506,146 -- -- -- 1,506,188
Common stock issued in
repayment of Secured
convertible debentures (Note 5) 631,038 6 224,391 -- -- -- 224,397
Common stock issued upon
conversion of Senior Secured
Convertible Notes "A" 3,066,027 31 1,073,079 -- -- -- 1,073,110
Reduction in exercise price of
outstanding warrants -- -- 2,197,296 -- -- (2,197,296) --
Common stock issued
pursuant to warrants exercised 7,484,029 75 2,309,195 -- -- -- 2,309,270
Translation adjustments -- -- -- -- (19,458) -- (19,458)
Net loss for the period -- -- -- -- -- (11,972,128) (11,972,128)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2006 72,585,590 726 32,437,881 -- (383,873) (26,717,776) 5,336,958
- -----------------------------------------------------------------------------------------------------------------------------
F-7
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
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 and has relied
on non-operational sources of financing to fund operations. 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 will also be
required in the short-term and management is actively attempting to secure
such financing.
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 March 31, 2006 and for three and nine
month periods ended March 31, 2006 is 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 nine
month periods ended March 31, 2006 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 disclosures in these interim financial statements do not conform in
all respects 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
Goodwill
Goodwill represents the excess of the purchase price of an acquired
business over the fair value of the identifiable assets acquired and
liabilities assumed. Management tests for impairment of goodwill on an
annual basis and at any other time if events occur or circumstances change
that would indicate that it is more likely than not that the fair value of
the reporting unit has been reduced below its carrying amount.
Factors considered important which could trigger an impairment review
include, but are not limited to, significant underperformance relative to
expected historical or projected future operating results, significant
changes in the manner of use of the acquired assets or the strategy for
the overall business, significant negative industry or economic trends, a
significant decline in the stock price for a sustained period and the
Company's market capitalization relative to net book value.
The goodwill impairment test is a two-step process. Step one consists of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the
fair value of a reporting unit may be based on one or more fair value
measures including present value techniques of estimated future cash flows
and estimated amounts at which the unit as a whole could be bought or sold
in a current transaction between willing parties. If the carrying amount
of the reporting unit exceeds the fair value, step two requires the fair
value of the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair value of
goodwill. If the carrying amount of the goodwill of the reporting unit
exceeds the implied fair value of that goodwill, an impairment loss equal
to the excess is recorded in net earnings (loss).
The Company has completed step one of its annual goodwill impairment test
and has concluded that the estimated fair value of Avensys reporting unit
is below the carrying value. The estimated fair value has been impacted by
an increase in the timeframe for realizing growth objectives and
anticipated cash flows, among other factors. As part of step two, the
company is currently in the process of obtaining information to determine
the implied fair value of the goodwill related to the reporting unit to
determine the amount of the goodwill impairment charge. Management has not
yet finalized step two because the process has been longer than originally
anticipated. Based on the preliminary estimates of step one, the company
expects the impairment charge to fall between $3.6 million and $4.3
million, and has recognized a goodwill impairment loss of $4.3 million in
March 2006 representing management's best estimate of the impairment loss.
The fair value of that reporting unit was estimated using the expected
present value of future cash flows. Any future adjustments to goodwill,
resulting from the completion of step two of this goodwill impairment
test, will be recognized in the period during which step two of the test
is completed.
F-8
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Summary of Significant Accounting Policies (continued)
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 Nine months ended
March 31, March 31,
2006 2005 2006 2005
$ $ $ $
Net loss - as reported (6,409,606) (1,707,825) (11,972,128) (2,987,907)
Adjustment to deficit on reduction in exercise
price of outstanding warrants -- -- (2,197,296) --
- ------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders (6,409,606) (1,707,825) (14,169,424) (2,987,907)
- ------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 71,098,000 44,843,000 67,219,000 41,627,000
- ------------------------------------------------------------------------------------------------------------
Net loss per share (0.09) (0.04) (0.21) (0.07)
- ------------------------------------------------------------------------------------------------------------
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 $85,682(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 designated as
a collateral for this amount.
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 relationships 3-10 years
Technology 4 years
Deferred transaction costs
Deferred transaction costs represent costs incurred in connection with a
business combination initiated prior to March 31, 2006 and completed on
April 18, 2006 (Note 17). These costs have been deferred as of March 31,
2006 and will be accounted for as part of the purchase consideration upon
completion of the acquisition in the fourth quarter of 2006.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current period's presentation.
F-9
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
4. Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share Based
Payments". 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 Company is in the process of
evaluating the impact of this change.
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-10
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
5. Discontinued operations
CLI
On February 8th 2006, as part of efforts to streamline operations 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 The Garda Security Group Inc. (the
"Purchaser") for a purchase price of US$4,284,123 (CDN$5,000,000)
resulting in gross cash proceeds to the Company of US$3,341,616
(CDN$3,900,000) of which US$1,285,237 has been placed in trust. The
deposit in trust partially represents a holdback in the amount of
US$214,207 which will become payable by the purchaser no later than 10
days following acceptance by the purchaser of the unaudited financial
statements of the CLI Group for the period from July 1, 2005 to February
18, 2006. The remaining amount of US$1,071,030 represents withholding tax
of 25% of the sale price which is required to be withheld under Section
116 of the Canadian Income Tax Act since the Company is not a Canadian
resident corporation. The withholding tax amount will be remitted to the
Company once Canada Revenue Agency has delivered a certificate of
compliance with respect to this transaction. In conjunction with the
Agreement, the purchaser assumed the Company's obligations to two
executives of the CLI Group for settlement of long-term notes payable
amounting to US$942,507 issued by Manaris when the CLI Group was
originally acquired in February 2005. Manaris was required to repay
advances from the CLI Group totaling US$214,206 and accrued interest on
the debt obligations of US$40,978 In addition, the Company settled the
majority of the remaining obligations to the two CLI Group executives in
the amount of US$481,444 by a payment of cash consideration totaling
US$257,047 and the issuance of 631,038 shares with a fair value of
US$224,397 or approximately US$0.3556 per share. These payments resulted
in net cash proceeds from the disposal of US$2,644,871. 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 represented $674,918 and
$3,224,008 for the three and nine months ended March 31, 2006 and $292,654
for both the three and nine-month periods ended March 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 in future
periods. CLI had previously been included in the Security and
Investigative Services reporting segment.
The loss on disposal included in the results from discontinued operations
has been computed as follows:
Proceeds: $
Cash 2,056,379
Deposit in Trust 1,285,237
-----------------------------------------------------------------------
Total proceeds: 3,341,616
-----------------------------------------------------------------------
Direct transaction costs (184,514)
-----------------------------------------------------------------------
Sub-total: 3,157,102
-----------------------------------------------------------------------
Net assets of discontinued operations (3,186,815)
-----------------------------------------------------------------------
Loss on disposal of the CLI Group (29,713)
-----------------------------------------------------------------------
Cash proceeds noted above was used as follows:
$
Total proceeds 3,341,616
Direct transaction costs (184,514)
Settlement of advances from the CLI Group (214,206)
Settlement of debt obligations for cash (257,047)
Interest paid on settlement of debt obligations (40,978)
-----------------------------------------------------------------------
Net cash proceeds 2,644,871
-----------------------------------------------------------------------
The cash proceeds from Discontinued Operations, net of cash balance
disposed of amounted to $2,903,160. The net assets of discontinued
operations in the above table are net of the obligations to the two CLI
Group executives assumed by the purchaser in amount of $942,507.
F-11
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Discontinued operations (continued)
The carrying values of the major classes of assets and liabilities are as
follows:
$
Cash 253,942
Accounts receivable 667,585
Prepaid expenses 42,448
Property and equipment 167,049
Inventory 76,947
Goodwill 2,812,293
Intangible assets 773,944
Accounts payable (228,723)
Accrued liabilities (403,893)
Deferred income taxes (3,659)
Long term debt, current portion (18,980)
Long term debt, less current portion (9,631)
-------------------------------------------------------------
Results of discontinued operations consist of:
Three months ended Nine months ended
March 31, March 31,
2006 2005 2006 2005
$ $ $ $
(Loss) earnings from Discontinued Operations (29,580) (17,620) 114,113 (17,620)
(Loss) on disposal of the CLI group (29,713) -- (29,713) --
- ---------------------------------------------------------------------------------------
Results of Discontinued Operations (59,293) (17,620) 84,400 (17,620)
- ---------------------------------------------------------------------------------------
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. During the three month
period ended March 31, 2006 the Company completed step 1 of its annual
review of goodwill (note 3).
The purchase price was allocated to the following assets and liabilities:
Original allocation Adjustments Final 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-12
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
7. Intangible Assets
The following table presents details of the Company's purchased intangible
assets with definite lives:
March 31, June 30,
Weighted 2006 2005
Average Accumulated Net Book Net Book
Life in Cost Amortization Value Value
Years $ $ $ $
Technology 1.7 574,285 430,680 143,605 251,275
Customer relationships 9.5 4,313,348 762,918 3,550,430 2,707,353
--------------------------------------------------------------------------------------------
Total intangible assets 6.0 4,887,633 1,193,598 3,694,035 2,958,628
============================================================================================
Amortization expense for purchased intangible assets charged to operations
was $189,130 and $625,790 for the three and nine-month periods ended March
31, 2006, respectively and $92,350 and $173,610 for the three and
nine-month periods ended March 31, 2005.
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
$
2006 189,130
2007 711,395
2008 594,000
2009 594,000
2010 594,000
Thereafter 1,011,510
------------------------------------
$3,694,035
------------------------------------
8. Inventories
March 31, June 30,
2006 2005
$ $
---------------------------------------------------------------------
Inventories
Raw materials 264,940 261,445
Work in process - 8,064
Finished goods 993,630 733,365
---------------------------------------------------------------------
1,258,570 1,002,874
---------------------------------------------------------------------
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. Avensys
owns 49% of ALI and the two entities have entered into an Agreement (the
"Agreement") whereby 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
Research & Development projects to ALI for tax planning purposes in return
for 500,000 preferred shares redeemable for $408,030 (CDN $500,000). ALI
provides Research & Development 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.
F-13
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Variable Interest Entity (continued)
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 on the consolidated balance
sheet as of March 31, 2006 includes approximate additions to current
assets of $467,212, net property and equipment of $85,372, intangible
assets $2,013 and current liabilities of $140,229. The impact on the
consolidated statement of operations for the three and nine months period
ended March 31, 2006 was an increase in research and development expenses
of $236,785 and $676,748 respectively.
10. Related Party Transactions/Balances
The total amount due to officers and/or shareholders of the Company at
March 31, 2006 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, a wholly owned subsidiary of the Company maintains a line of
credit from a financial institution, for an authorized amount of
$1,165,281 (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
March 31, 2006 amounted to $767,386 which amount has been included in
loans payable on the balance sheet. Avensys has designated its accounts
receivable totalling $2,000,068 and inventories totalling $1,055,417 as
collateral for the line of credit. According to terms of the credit
agreement, the company is subject to certain financial covenants which
were not respected as at March 31, 2006. Consequently, the financial
institution may exercise its right to demand repayment at any time.
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) extended by a sub-contractor that
bears interest at 15% per annum. All receipts from sales of C-Chip
products 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 March 31, 2006 there was an outstanding
amount of $1,176,990 (June 30, 2005 $320,127).
12. CSA
On September 22, 2005, 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
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. The
Company is currently in the process of winding up all remaining activities
of CSA. 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.
On April 4, 2006, a meeting of the creditors was concluded with the
unanimous approval of the settlement proposal brought forward by CSA. The
settlement proposal was ratified by the Superior Court of Quebec on May 3,
2006. This proposal settles all the outstanding liabilities of CSA for
$240,310 (CDN$280,446) (liabilities of CSA stand at $683,653
(CDN$797,891), as of March 31, 2006). The settlement will be funded from
estimated CSA cash on hand of $133,665 (CDN$156,000), to be accumulated no
later than 15 July 2006, and an estimated payment of $106,628
(CDN$124,446) from Manaris. Any shortfalls in CSA cash on hand, will be
funded by Manaris.
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 reorganization 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, and CDN$13,000 was paid during the three month
period ended March 31, 2006. 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.
F-14
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
CSA (continued)
March 31, 2006
$
Cash and cash equivalents 101,205
Accounts receivable, net of allowance for doubtful accounts of $98,788 27,867
Other receivables 2,097
Total Current Assets 131,169
---------------------------------------------------------------------------------------
Accounts Payable 156,825
Accrued liabilities 526,828
Intercompany loan 754,343
Total Current Liabilities 1,437,996
---------------------------------------------------------------------------------------
Stockholders' Equity (1,306,827)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 131,169
---------------------------------------------------------------------------------------
13. Common Stock
a) During the three months ended March 31, 2006, the Company issued
200,000 common shares for total proceeds of $40,000 from the
exercise of stock options.
b) During the three months ended March 31, 2006, the Company issued
2,425,290 common shares in connection with the Series A Notes. Of
that amount, 1,779,830 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 $599,478. Since the
company had been accreting the debt on the same basis no gain or
loss was recorded and the $599,478 was removed from the carrying
value of the convertible debentures and credited to capital stock
and additional paid in capital. In addition, 248,929 common shares
were issued following the conversion at a rate of $0.35 of the
convertible debentures with a principal amount of $87,125. 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 $81,851 has
been charged as additional accretion expense and credited to capital
stock and additional paid in capital. Furthermore, a total of
396,531 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 $109,415. Since the company had been
accruing interest on the same basis, no gain or loss was recorded.
c) 631,038 common shares at a rate of $0.3556 were issued following the
payment of the secured convertible debentures with a principal
amount of $224,397 (Note 5).
d) In March 2006, the Company issued 26,083 common shares at an
exercise price of $0.001 for total proceeds of $26.08 following the
exercise of 26,126 Series IB7 warrants.
e) 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.
f) 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.
F-15
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Common stock (continued)
g) 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.
h) 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.
i) 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 $160,578 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.
j) 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 $266,873, in
connection to the special warrant offer (see note 14).
k) 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.
l) 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.
m) 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 March 31, 2006:
i) The Company granted 38,000 stock options to employees and
75,000 stock options to a director pursuant to a non-qualified
stock option plan at an exercise price of $0.34 and $0.35 per
share respectively. These stock options vest over a period of
one year.
During the three month period ended December 31, 2005:
ii) 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.
iii) 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.
During the three month period ended September 30, 2005:
iv) 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. As part of the
777,000 stock options granted to consultants 257,000 stock
options were issued for settlement of debt of $105,501.
F-16
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Stock Options and Warrants (continued)
v) 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 based compensation.
vi) 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 $0.38 per share, under the plan,
250,000 stock options vest immediately and 250,000 stock options
vest upon completion of his term as interim Chief Executive Officer.
Changes in the number of outstanding options as at March 31, 2006 are as
follows:
March 31, 2006
---------------------------------
Weighted
Number of Average Exercise
Options Price ($)
---------------------------------
Balance at beginning of the year 3,842,500 0.65
Granted 2,203,000 0.12
Exercised (1,715,000) (0.02)
Forfeited (118,750) (0.78)
-----------------------------------------------------------------------
Balance at end of the period 4,211,750 0.62
-----------------------------------------------------------------------
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 $40,513 and $372,840 for the three and nine month periods
ended March 31, 2006 respectively.
During the three and nine month periods ended March 31, 2006, the Company
recognized stock based compensation for non-employees in the amount of $0
and 473,170 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 Nine months ended
March 31, March 31
2006 2005 2006 2005
Risk - free interest rate 3.86% 3.42% 3.07% 3.59%
Expected volatility 108.00% 121.75% 100.41% 143.73%
Expected life of stock options (in years) 3.00 2.77 0.35 3.39
Assumed dividends None None None None
F-17
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Stock Options and Warrants (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 Nine months ended
March 31, March 31,
2006 2005 2006 2005
$ $ $ $
Net loss (6,409,606) (1,707,825) (11,972,128) (2,987,907)
Add: Stock-based compensation expense included in net loss - as reported -- 479,338 473,170 990,897
Deduct: Stock-based compensation expense determined under fair value method (39,823) (897,934) (846,010) (1,925,940)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss - pro forma (6,449,429) (2,126,421) (12,344,968) (3,922,950)
- ------------------------------------------------------------------------------------------------------------------------------------
Deduct: Adjustment to deficit on reduction in exercise price of outstanding
warrants -- -- (2,197,296) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders - pro forma (6,449,429) (2,126,421) (14,542,264) (3,922,950)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) - as reported (0.09) (0.04) (0.21) (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) - pro forma (0.09) (0.05) (0.22) (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
b) Warrants
Warrants outstanding as at March 31, 2006
Warrant exercise
Outstanding prices
- --------------------------------------------
Series A 1,869,231 0.35
Series E 1,596,155 0.35
Series G 3,797,976 0.35
Series H 890,593 0.35
Series I 3,797,976 0.50
Series J 1,781,184 0.50
IB-01 22,692 0.00001
IB-02 215,385 0.59
IB-03 323,077 0.67
IB-06 605,676 0.35
IB-07 26,168 0.001
- --------------------------------------------
Total 14,926,113 0.42
- --------------------------------------------
F-18
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Stock Options and Warrants (continued)
Changes in the warrants outstanding as at March 31, 2006 are as follows:
Range of exercise prices 0.00001 0.001 0.35 0.50 0.59 0.63 0.67
-------------------------------------------------------------------------------------
Balance at beginning of the year 120,192 -- -- -- 215,385 107,693 343,077
Reduction in exercise price -- -- 13,604,307 -- -- -- --
Granted -- 52,251 5,294,245 5,579,160 -- -- --
Exercised (97,500) (26,083) (7,360,335) -- -- -- --
Expired -- -- (2,778,586) -- -- (107,693) (20,000)
- ----------------------------------------------------------------------------------------------------------------------------
Balance as at March 31, 2006 22,692 26,168 8,759,631 5,579,160 215,385 -- 323,077
============================================================================================================================
Weigthed Average remaining
contractual life (years) 3.9 4.3 3.2 3.9 3.9 -- 3.9
- ----------------------------------------------------------------------------------------------------------------------------
Range of exercise prices 0.70-1.10 Total
------------------------
Balance at beginning of the year 13,604,307 14,390,654
Reduction in exercise price (13,604,307) --
Granted -- 10,925,656
Exercised -- (7,483,918)
Expired -- (2,906,279)
- ----------------------------------------------------------------
Balance as at March 31, 2006 -- 14,926,113
================================================================
Weigthed Average remaining
contractual life (years) -- 3.5
- ----------------------------------------------------------------
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 warrants held by holders participating in the offer was reduced to
$0.35. In connection with this offer, a total of 7,360,335 warrants were
exercised for total proceeds amounting to $2,576,118. 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 5,579,160 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. 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 i
exercise price of outstanding warrantsn (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)
----------------------------------------------------------
F-19
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Stock Options and Warrants (continued)
Three months ended
September 31 ,2005
$
As originally reported Adjustment As adjusted
Additional paid in
capital 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. As a result,
investors holding $985,985 of Senior Secured Convertible Notes exercised their
rights to convert such notes into 2,817,098 common shares.
15. Contingencies
Litigation and Settlement Costs
i) 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 $93,308 (CDN $108,900) 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. On April 4, 2006,
the creditors unanimously approved proposal brought forward by
CSA which was thereafter ratified by the Superior Court of
Quebec on May 3, 2006.This proposal settles all the
outstanding liabilities including all litigations of CSA (Note
12).
ii) A motion was filed on August 13, 2004 under Quebec law, in the
district of Montreal, Province of Quebec, totalling $73,128
(CDN $85,348) 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. On April 4, 2006, the creditors unanimously
approved proposal brought forward by CSA which was thereafter
ratified by the Superior Court of Quebec on May 3, 2006. This
proposal settles all the outstanding liabilities including all
litigations of CSA (Note 12).
iii) 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 $137,092 (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.
iv) A lawsuit was filed on July 15, 2005, under Quebec law, in the
District of Montreal, Province of Quebec, for a total of
$85,682 (CDN$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 $43,178
(CDN$55,000) 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.
F-20
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
16. Segment Disclosure
The Company reports segment information in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information".
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 which
ceased operations in the first quarter of 2006 (Note12).
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 nine months ended March 31, 2006
Security Security & Consolidated
Services Monitoring
Devices
$ $ $
Net revenues from external customers 499,627 7,054,017 7,553,644
- -------------------------------------------------------------------------------------------------
Cost of net revenues 540,498 4,761,844 5,302,342
Marketing and sales expense -- 1,647,786 1,647,786
Administrative expense 279,148 1,749,073 2,028,221
- -------------------------------------------------------------------------------------------------
Direct costs 819,646 8,158,703 8,978,349
- -------------------------------------------------------------------------------------------------
Direct contribution (320,019) (1,104,686) (1,424,705)
Operating expenses and indirect costs of net revenues -- -- 7,379,317
- -------------------------------------------------------------------------------------------------
Loss from continuing operations -- -- (8,804,022)
Debenture interest, accretion and conversion -- -- 3,100,027
Other expenses -- -- 662,461
- -------------------------------------------------------------------------------------------------
Net loss from continuing Operations before income tax
benefits -- -- (12,566,510)
Income tax benefits (514,633)
- -------------------------------------------------------------------------------------------------
Net loss from continuing Operations before
Non-controlling interest -- -- (12,051,877)
Non-controlling interest -- -- 4,651
- -------------------------------------------------------------------------------------------------
Net loss from continuing Operations -- -- (12,056,528)
=================================================================================================
Results of Discontinued Operations (84,400)
Net loss -- -- (11,972,128)
=================================================================================================
F-21
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
March 31, 2006
Segment Disclosures (continued)
For the three months ended March 31, 2006
Security Consolidated
Services Security &
(1) Monitoring
Devices
$ $ $
Net revenues from external customers -- 2,912,833 2,912,833
- ----------------------------------------------------------------------------------------------
Cost of net revenues -- 1,989,522 1,989,522
Marketing and sales expense -- 605,202 605,202
Administrative expense 23,461 550,391 573,852
- ----------------------------------------------------------------------------------------------
Direct costs 23,461 3,145,115 3,168,576
- ----------------------------------------------------------------------------------------------
Direct contribution (23,461) (232,282) (255,743)
Operating expenses and indirect costs of net revenues -- -- 5,323,336
- ----------------------------------------------------------------------------------------------
Loss from continuing operations -- -- (5,579,079)
Debenture interest, accretion and conversion -- -- 674,427
Other expenses -- -- 200,745
- ----------------------------------------------------------------------------------------------
Net loss from continuing Operations before income tax
benefits -- -- (6,454,251)
Income tax benefits -- -- (109,119)
- ----------------------------------------------------------------------------------------------
Net loss from continuing Operations before
Non-controlling interest -- -- (6,345,132)
Non-controlling interest -- -- 5,181
- ----------------------------------------------------------------------------------------------
Net loss from continuing Operations -- -- (6,350,313)
==============================================================================================
Results of Discontinued Operations (59,293)
Net loss -- -- (6,409,606)
==============================================================================================
(1) The Company is currently in the process of winding up all remaining
activities of CSA. Administration expenses for the three month period ended
March 31, 2006 consisted solely of reorganisation expenses (Note 12).
Revenue from one customer of the Company's Security and Monitoring Devices
segment represented for the three months and nine months period ended March 31,
2006 approximately $710,000 and $2,630,000 respectively, of which the
outstanding amounts to $526,000.
17. Subsequent Events
ITF
On April 18, 2006, Manaris Corp. ("Manaris") and its wholly-owned subsidiary,
Avensys Inc. ("Avensys"), entered into an Asset Purchase Agreement (the
"Agreement") to acquire the manufacturing assets of ITF Optical Technologies,
Inc. ("ITF") which represent the acquisition of a business. The purchase price
paid for the manufacturing assets was US $1,532,533 (CDN $1,750,000), comprised
of US $656,800 (CDN $750,000) in cash and approximately 2,631,579 shares of
Manaris common stock.
In addition, pursuant to the Agreement, ITF's research and development assets
and intellectual property rights (the "R&D assets") was purchased by and
combined with Avensys Laboratories, Inc., Avensys' research and development
partner. Avensys currently owned 49% of the voting stock of Avensys Laboratories
Inc prior to the acquisition. The purchase price paid for the R&D assets is
580,000 shares of common stock and 2,000,000 shares of Class E preferred stock
of Avensys Laboratories Inc. prior to the acquisition. In the aggregate, the
shares of Avensys Laboratories Inc. common and preferred stock to be issued
pursuant to the Agreement represent 58% of the voting stock of Avensys
Laboratories Inc. As a result of the Agreement, Avensys' ownership of the voting
stock of Avensys Laboratories Inc. has decreased from 49% to 42%. Following this
transaction, ITF Labs continues to be a Variable Interest Entity, of which
Avensys is the primary beneficiary. Consequently the financial statements of ITF
Labs will continue to be consolidated by Avensys and Manaris following the
transaction.
F-22
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 nine month periods
ended March 31, 2006 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 include those regarding our goals, beliefs, plans or
current expectations and other statements regarding matters that are not
historical facts. For example, we use the words `believe', `expect', `estimate',
`anticipate', `intend', `project' and similar expressions, or words which, by
their nature, refer to future events, to make forward-looking statements.
You should not place undue certainty on these forward-looking statements, which
apply only as of the date of this report. 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. We are not
required to publicly release the results of any revisions to these
forward-looking statements we make to reflect future events or circumstances.
GENERAL OVERVIEW
Manaris, our holding company, operates the following wholly-owned subsidiaries:
o Avensys Inc., which develops optical components & sensors and provides
environmental monitoring solutions. The acquisition of Avensys Inc. in
February 2005 has grown our asset base significantly and expanded our
sources of revenue.
o C-Chip Technologies Corporation (North America), which offers high-tech
products and services to the credit management marketplace. C-Chip has
been Manaris' business since its inception in 2003. During the 2005
calendar year, we made a significant investment in reengineering the
C-Chip product line.
RECENT DEVELOPMENTS
DIVESTITURE OF CLI SUBSIDIARY
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 strengthened our balance sheet and enabled us to focus on our core
businesses, Avensys Inc. and C-Chip Technologies (North America).
ITF OPTICAL ASSET PURCHASE
Furthering the strategy of focusing on our core businesses, on April 18, 2006,
our wholly owned subsidiary Avensys acquired the manufacturing assets of ITF
Optical Technologies Inc. (ITF), a designer and manufacturer of advanced
photonic solutions based on proprietary all-fiber technology. The ITF
transaction adds complementary products to Avensys' current offerings and
provides access to a new potential customer base. ITF specializes in providing
sophisticated high-end applications for submarine, military, telecom and
industrial uses. This acquisition will also provide Avensys' fiber component
production division with access to ITF's 10,000 square foot clean room, thereby
providing economies of scale and facilities for future growth.
1
The purchase price paid for the manufacturing assets pursuant to the ITF
Agreement is approximately US $1,532,533 (CDN $1,750,000), comprised of US
$656,800 (CDN $750,000) in cash and approximately 2,631,579 shares of Manaris
common stock.
In addition, pursuant to the ITF Agreement, ITF's research and development
assets and intellectual property rights (the "R&D assets") were purchased by and
combined with Avensys Laboratories, Inc., Avensys' research and development
partner. Prior to this transaction, Avensys owned 49% of the voting stock of
Avensys Laboratories. The purchase price paid for the R&D assets is 580,000
shares of common stock and 2,000,000 shares of Class E preferred stock of
Avensys Laboratories (the "Avensys Laboratories Shares"), which were issued to
the preferred shareholders of ITF (the "ITF Preferred Shareholders"). In the
aggregate, the Avensys Laboratories Shares issued pursuant to the ITF Agreement
represent 58% of the voting stock of Avensys Laboratories. As a result of the
ITF Agreement, Avensys' ownership of the voting stock of Avensys Laboratories
has decreased from 49% to 42%.
In connection with the ITF Agreement, the following agreements were also
effectuated:
o A License Agreement was entered into between Avensys and Avensys
Laboratories, pursuant which Avensys was granted an exclusive license to
use Avensys Laboratories' intellectual property and patent improvements,
as defined in the License Agreement, in order to develop and sell products
incorporating Avensys Laboratories' intellectual property. As
consideration for the license, Avensys will be making royalty payments.
Pursuant to the License Agreement, Avensys Laboratories will continue to
conduct research and development for the mutual benefit of both parties.
o A Shareholder Agreement was entered into between Avensys and the ITF
Preferred Shareholders. Pursuant to the Shareholder Agreement, the ITF
Preferred Shareholders shall not transfer any Avensys Laboratories Shares,
subject to limited exceptions. Thereafter, between April 1, 2009 and
October 1, 2009 each ITF Preferred Shareholder shall have an option to (i)
sell the Avensys Laboratories Shares to Avensys for its proportionate
share of approximately US $1,713,650 (CDN $2,000,000), or (ii) exchange
the Avensys Laboratories Shares for freely tradable shares of Manaris
common stock equal its proportionate share of approximately US $1,285,237
(CDN $1,500,000) divided by US $0.3359 (CDN $0.3920) per share.
OVERVIEW OF AVENSYS SUBSIDIARY
We acquired Avensys in February 2005. Avensys continues to increase its revenues
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. Avensys is comprised of two divisions: (i) Avensys
Technology, which produces fiber components and associated instrumentation, and
(ii) Avensys Solutions, which provides environmental solutions and
instrumentation.
When we acquired Avensys in 2005, our plan was to complete a period of
approximately one year of organic growth to maximize operations and processes.
Following this first successful year of operations, our goal was to become a
participant in the consolidation of the respective markets of Avensys Solutions
and Avensys Technology.
The market for fiber optics components continues to recover, with the majority
of Avensys' components still destined for the telecommunications market. Optical
sensors remain an important part of our long term growth strategy, and the fiber
laser market is also gaining importance.
2
On April 18th, 2006 we closed the acquisition of most of the assets of ITF
Optical Technologies Inc. ("ITF"). Avensys is poised to benefit from the
acquisition of ITF. The ITF facilities, which include a 10,000 square feet clean
room located near Avensys' manufacturing facility, are state of the art and
provide ample space and equipment for growth. Avensys' Montreal operations are
scheduled to be relocated to the ITF facilities by the end of spring 2006.
ITF adds complementary products to Avensys' current offerings and provides
access to a new potential customer base. ITF specializes in providing
sophisticated high-end applications for submarine, military, telecom and
industrial uses. This will benefit Avensys and will serve to elevate both the
Company's technological depth and production capabilities. We anticipate that
the combined operations will be profitable following the initial integration
period.
Pursuant to the ITF Agreement, ITF's Research and Development unit, including
all of its intellectual property assets, was merged with that of Avensys'
partner, Avensys Laboratories Inc. and renamed ITF Laboratories to leverage the
strength of the ITF brand in the photonics industry. Avensys and ITF
Laboratories will continue to operate under exclusive licensing as was the case
with Avensys Laboratories before.
OVERVIEW OF C-CHIP TECHNOLOGIES SUBSIDIARY
C-Chip specializes in the high-tech sector of the security industry, providing
technology that allows credit grantors to efficiently access, control, manage
and monitor remote assets at low costs. C-Chip's priority for the 2006 fiscal
year 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 Chip
100 series vehicle tracking device. As of March 31, 2006, we shipped 1,500 units
of the Credit Chip 100 vehicle tracking device. On December 31, 2005, we
obtained a network accreditation, which will permit us to further expand our
sales efforts.
Our first generation of the Credit Chip vehicle tracking device was based on the
AMPS (analogue) standard of communication. We recently completed the engineering
of a second mode of communication, allowing our product to function on GSM
(digital) networks. This new technology, the Credit Chip 200G series, in
conjunction with new WEB application services, is enabling C-Chip to broaden its
reach in the marketplace.
As part of a production ramp-up, 400 units of the Credit Chip 200G series have
been produced in our manufacturing facility as of the end of March.
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 16, 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.
3
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 $2,576,117 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 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 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.
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 $1,073,110 of the Senior Secured
Convertible Note was converted. As of March 31, 2006, having made ten principle
payments, the balance remaining on the Note Agreement totals $1,676,665.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2006
The results of the operations include the accounts of the Company and its
wholly-owned subsidiaries.
The results for the three and nine month periods ended March 31, 2006 differ
significantly from the three and nine month periods ended March 31, 2005 due to
the acquisition of our subsidiary Avensys in February 2005.
Operating results for CSA were included for the three and nine month periods
ended March 31, 2006 and 2005. Operating results for CLI were presented as
discontinued operations. Operating results for Avensys, which we acquired in
2005 and C-Chip were included for the full three and nine month periods ended
March 31, 2006 and Avensys was included beginning in the three month period
ended March 31, 2005.
4
REVENUES
Our revenues for the three and nine month periods ended March 31, 2006 were
$2,912,833 and $7,553,644, respectively, as compared to $1,825,036 and
$3,013,927, respectively, for the comparable period last year. The increase was
primarily due to the acquisition of Avensys during the year. For the same
period, our product revenue accounted for $2,912,833 and $7,054,017 compared to
$1,417,154 and $1,612,496 last year. Increase in product revenue for the three
and nine month periods of $1,495,679 and $5,441,521 was primarily due to the
acquisition of Avensys.
The third quarter is typically the strongest of the year for Avensys Solutions,
due to a seasonal peak in environmental solutions. This peak is caused by the
end of the fiscal year for the Canadian government combined with customers
needing instrumentation for the upcoming summer season, when most exterior
measurements are made.
Our service revenues for the three and nine month periods ended March 31, 2006
were $0 and $499,627, respectively, as compared to $407,882 and $1,401,431,
respectively, in the prior year. The decrease in service revenue of $407,882 and
$901,804 is due to the Company winding up all of the remaining CSA activities.
Gross margin for the three and nine month periods ended March 31, 2006 was
$923,311 and $2,251,302, respectively, as compared to $532,141 and $900,215,
respectively, for the same periods last year. Gross margin as a percentage of
revenue for the three month period ended March 31, 2006 was 32%, compared to 29%
for the same period last year. This 3% improvement in gross margin is mainly
attributable to the increased volumes of Avensys, the elimination of service
revenues from the discontinued CLI operations and the winding up of the
remaining CSA activities.
EXPENSES
Operating expenses for the three and nine month periods ended March 31, 2006
were $6,502,390 and $11,055,324 compared to $2,187,097 and $3,824,673 for the
same periods last year. Selling, General and Administration expenses for the
three and nine month periods ended March 31, 2006, which exclude stock based
compensation of $0 and $473,170 respectively, were $1,778,973 and $4,902,539
compared to $967,109 and $1,804,463 in the same periods last year, also
excluding stock based compensation of $479,338 and $990,897 respectively, last
year. The increases in Selling, General and Administration expenses are mainly
due to professional fees and the operations of Avensys. Research and development
expenses for the three and nine month periods ended March 31, 2006 were $208,952
and $649,805 compared to $246,850 and $442,475 for the same periods last year.
The increase of $207,330 for the nine months ending 31 March 2006 was due to the
operations of Avensys. A Goodwill impairment charge of $4,277,637 was recognized
in the three month period ended March 31, 2006, compared to $0 last year. This
goodwill impairment resulted from the annual goodwill impairment test conducted
by the Company, and is related to the acquisition of Avensys in 2005.
As part of the annual review of goodwill, the Company may be required to
recognize an impairment loss on its goodwill as a result of changes in events or
circumstances related to the company's businesses. During the course of the
quarter ended March 31, 2006, the Company determined that the estimated fair
value of its Avensys reporting unit, acquired through the acquisition of Avensys
in February 2005, was below carrying value. Management has not completed all the
steps to determine the extent of the goodwill impairment and further analysis is
required. Management's best estimate of the goodwill impairment of $4,277,637
has been recorded during the current quarter. This impairment loss is a non-cash
event and does not affect cash flows. The impairment resulted from delays in
realizing the growth objectives and anticipated cash flows related to the
business, and is not the result of adverse economic or market conditions, or a
loss of competitive advantage. However, the Company continues to believe Avensys
will provide strong growth going forward, and with the acquisition of ITF, will
enhance its lead position in the optical technologies and environmental
monitoring solutions markets.
5
Depreciation and amortization for the three and nine month periods ended March
31, 2006 were $216,744 and $702,766 compared to $107,051 and $200,089 last year.
An increase of $109,693 and $502,677 was mainly due to the amortization of
intangible assets acquired in February 2005 through our acquisition.
Other expenses for the three and nine month periods ended March 31, 2006 were
$875,172 and $3,762,488, respectively, compared to $43,801 and $54,381 last
year. $225,042 and $688,651 for the three and nine month periods ending March
31, 2006 was due to the amortization of deferred financing costs and to
debenture accretion of $674,427 and $3,100,027 for the three and nine month
periods ending March 31, 2006, both related to the Senior Convertible Note,
Series `A' issued in February 2005.
The net loss for the three and nine month periods ended March 31, 2006 was
$6,409,606 (including loss from discontinued operations of $59,293 and a
goodwill impairment charge of $4,277,637) and $11,972,128 (including income from
discontinued operations of $84,400 and a goodwill impairment charge of
$4,277,637) compared to $1,707,825 and $2,987,907 for the same periods last
year. The increase in net loss was largely due to the goodwill impairment
charge, debenture accretion expenses, amortization of deferred financing costs,
amortization of intangible assets, professional fees, and losses from our wholly
owned subsidiary C-Chip (North America).
SALE OF CLI SUBSIDIARY
On February 8th 2006, as part of efforts to streamline operations 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 The Garda Security Group Inc. (the "Purchaser") for a purchase price
of US$4,284,123 (CDN$5,000,000) resulting in gross cash proceeds to the Company
of US$3,341,616 (CDN$3,900,000) of which US$1,285,237 has been placed in trust.
The deposit in trust partially represents a holdback in the amount of US$214,207
which will become payable by the purchaser no later than 10 days following
acceptance by the purchaser of the unaudited financial statements of the CLI
Group for the period from July 1, 2005 to February 18, 2006. The remaining
amount of US$1,071,030 represents withholding tax of 25% of the sale price which
is required to be withheld under Section 116 of the Canadian Income Tax Act
since the Company is not a Canadian resident corporation. The withholding tax
amount will be remitted to the Company once Canada Revenue Agency has delivered
a certificate of compliance with respect to this transaction. In conjunction
with the Agreement, the purchaser assumed the Company's obligations to two
executives of the CLI Group for settlement of long-term notes payable amounting
to US$942,507 issued by Manaris when the CLI Group was originally acquired in
February 2005. Manaris was required to repay advances from the CLI Group
totaling US$214,206 and accrued interest on the debt obligations of US$40,978 In
addition, the Company settled the majority of the remaining obligations to the
two CLI Group executives in the amount of US$481,444 by a payment of cash
consideration totaling US$257,047 and the issuance of 631,038 shares with a fair
value of US$224,397 or approximately US$0.3556 per share. These payments
resulted in net cash proceeds from the disposal of US$2,644,871. The closing
date of the transaction was February 15, 2006 and the effective date was
February 18, 2006.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
To date, 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.
6
As of March 31, 2006 we had working capital of $1,496,425, compared to a working
capital deficiency of $1,003,819 at June 30, 2005. This difference is mainly due
to liabilities of CSA that are subject to compromise of $683,653 and funds of
$1,285,237 placed in trust from the sale of CLI. Included in these figures, a
cash balance of $964,314 compared to $287,147 at June 30, 2005, $2,120,590 in
accounts receivable compared to $2,171,737, $1,258,570 in inventory compared to
$1,002,874 at June 30, 2005, $2,752,033 in accounts payable and accrued
liabilities compared to $3,022,762 at June 30, 2005, $1,944,376 in loans payable
compared to $1,641,330 at June 30, 2005 and Liabilities subject to compromise of
$683,653 compared to $0 at June 30, 2005,
Net cash used for continuing operations was $2,695,489 compared to $2,362,468 at
March 31, 2005. The Company mainly financed its operations through the July
Special Warrant Offer for a total net cash proceeds of $2,127,624, proceeds from
Discontinued Operations, net of cash from the sale of CLI $2,903,160 and from a
$856,863 loan. The Company used $238,008 for debt settlement of Discontinued
Operations from the sale of CLI, $302,755 for bank credit line payment, $625,355
for principal payment of Senior Convertible Note Series A, current portion of
long term debt $64,649 and $49 for related party payments.
As of March 31, 2006, our Company's total assets were $11,967,545 compared to
$20,115,755 at June 30, 2005. The decrease in total assets was primarily
attributable to a goodwill impairment charge of $4,277,637 and the sale of CLI
during the third quarter offset by an increase in cash of $677,167 and funds of
$1,285,237 deposited in trust from the sale of CLI.
As of March 31, 2006 the Company had 72,585,590 issued and outstanding shares
compared to 69,303,179 at December 31, 2005. The increase is primarily due to
the issuance of 631,038 shares for the settlement of a long-term notes payable
to the two CLI executives and 2,425,290 common shares in connection to payments
and conversions pursuant to the Senior Convertible Notes Series A. Included in
this amount, a total of 1,779,830 common shares were issued as principal
payments in the amount of $599,478 and 248,929 common shares were issued
following the conversion of $87,125.
Stock options outstanding at March 31, 2006 totaled 4,211,750, compared to
4,387,500 at December 31, 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.
On September 22, 2005, 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 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. The Company is currently in the process of winding up all
remaining activities of CSA. 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. On April 4, 2006,
a meeting of the creditors was concluded with the unanimous approval of the
settlement proposal brought forward by CSA. The settlement proposal was ratified
by the Superior Court of Quebec on May 3, 2006. This proposal settles all the
outstanding liabilities of CSA for $240,310 (CDN$280,446) (liabilities of CSA
stand at $683,653 (CDN$797,891), as of March 31, 2006). The settlement will be
funded from estimated CSA cash on hand of $133,665 (CDN$156,000), to be
accumulated no later than 15 July 2006, and an estimated payment of $106,628
(CDN$124,446) from Manaris. Any shortfalls in CSA cash on hand, will be funded
by Manaris.
7
During the third quarter the Company issued 200,000 common shares for total
proceeds of $40,000 from the exercise of stock options. 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. We also expect to seek additional debt and equity financing to help
fund our growth objectives and operations, for the near term.
ITEM 3. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
We maintain disclosure controls and procedures that are designed to ensure that
the information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that this
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. As of the end of the period
covered by this report, we carried out an evaluation, under the supervision and
with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective in timely alerting him to material information required
to be included in our periodic reports with the Securities and Exchange
Commission.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
LIMITATIONS ON THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, including our CEO and CFO, confirm that our disclosure controls
and procedures are at the "reasonable assurance" level. However, management does
not expect that our Disclosure Controls and Procedures 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.
8
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 the
Company's 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 US$73,128 (CDN$85,348) 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. On April 4, 2006, the
creditors unanimously approved a proposal brought forward by CSA which was
thereafter ratified by the Superior Court of Quebec on May 3, 2006. This
proposal settles all the outstanding liabilities and claims against CSA.
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 US$93,308
(CDN$108,900) 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. On April 4, 2006, the creditors unanimously approved a proposal
brought forward by CSA which was thereafter ratified by the Superior Court of
Quebec on May 3, 2006. This proposal settles all the outstanding liabilities and
claims against CSA.
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 US$85,770 (CDN$100,000) with regards to alleged expenses
incurred by the plaintiff for the purchase of an anti-theft product known as the
"Hawk 200". In January 2006 Manaris settled out of court with Autoland for an
amount of CDN$55,000. 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.
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 an
indemnity of US$137,092 (CDN$160,000). 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.
9
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
As part of the transaction entered into between Avensys and ITF Optical
Technologies on April 18, 2006, the Company issued approximately 2,631,579
restricted common stock shares as part of the purchase price of US $1,532,533
(CDN$1,750,000).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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.
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.
10
On May 11, 2006, John H. Simons, 67 years old was appointed as a Director of
Manaris Corporation. John Simons has served as President of John H. Simons
Consultants Inc., a management consulting firm. He is also the Vice Chairman and
a Director of Dalsa Corporation. Mr. Simons was a Partner in GTI Capital Inc., a
venture capital management firm, from 1995 until 2005. He also served as
Chairman for ITF Optical Technologies Inc. from 1998 to 2005, of Ad Opt
Technologies Inc until 2002 and of Engenuity Technologies Inc. until 1998. Prior
to June 1994, Mr. Simons was President and Chief Executive Officer of Canadian
Marconi Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
16.1 Consent Letter from former auditors, dated January 11, 2006 (as
incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on January 17, 2006).
10.1 Share Purchase and Sale Agreement between Manaris Corporation and the
Garda Security Group Inc. dated February 8, 2006 (as incorporated by
reference to Form 8-K filed with the Securities and Exchange Commission on
February 14, 2006).
10.2 Asset Purchase Agreement between Manaris Corporation, Avensys Inc, Avensys
Laboratories Inc. and ITF Optical Technologies Inc. dated April 4, 2006
(as incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on April 10, 2006).
10.3 Shareholder Agreement between Manaris Corporation and the Shareholders of
Avensys Laboratories Inc. dated April 13, 2006 (as incorporated by
reference to Form 8-K/A filed with the Securities and Exchange Commission
on April 24, 2006).
10.4 License Agreement between Avensys Inc. and Avensys Laboratories Inc.,
dated April 13, 2006 (as incorporated by reference to Form 8-K/A filed
with the Securities and Exchange Commission on April 24, 2006).
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)
11
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 19th day of May, 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 and Treasurer
(Principal Financial and Accounting Officer)
12