As filed with the Securities and Exchange Commission on October 12, 2006
Registration No. 333-136608
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
(Amendment No. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MANARIS CORPORATION
(Name of small business issuer in its charter)
Nevada 3576 88-0467845
(State or Other (Primary Standard Industrial (IRS Employer
Jurisdiction of Organization) Classification Code) Identification #)
1155 Rene-Levesque Blvd. West
Suite 2720
Montreal, Quebec
Canada H3B 2K8
(514) 337-2447
(Address and telephone number of principal executive offices)
John G. Fraser, President and Chief Executive Officer
1155 Rene-Levesque Blvd. West
Suite 2720
Montreal, Quebec
Canada H3B 2K8
(514) 337-2447
(Name, address and telephone number of agent for service)
Copies to:
Darrin Ocasio Esq.
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
(212) 930-9700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Amount To Offering Price Aggregate Registration
Securities to be Registered Be Registered Per Unit (1) Offering Price Fee
0.000107
Common stock (1) 2,805,874 $ 0.31 $ 869,820.94 $ 93.07
Common stock issuable upon exercise of Series 22,692 $ 0.00001 $ 0.23 $ 0
IB1 Warrants (2)
Common stock issuable upon exercise of Series 215,385 $ 0.59 $ 127,077 $ 13.60
IB2 Warrants (2)
Common stock issuable upon exercise of Series 323,076 $ 0.67 $ 216,461 $ 23.16
IB3 Warrants (2)
Common stock issuable upon exercise of Series Y 291,739 $ 0.65 $ 189,630 $ 20.29
Warrants (2)
Common stock issuable upon exercise of Series Z 4,376,082 $ 0.45 $ 1,969,237 $ 210.70
Warrants (2)
Shares underlying Debenture (3) 1,654,394 $ 0.31 $ 512,862 $ 54.87
Common stock issuable upon conversion of 10,780,187 $ 0.42 $ 4,527,679 $ 484.46
Subordinated Convertible Promissory Notes (3)
Common stock issuable upon conversion of 3,850,067 $ 0.42 $ 1,617,028 $ 173.02
Original Issue Discount B Subordinated
Convertible Promissory Notes (3)
Total 24,319,497 $ 1,012.90
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over the Counter
Bulletin Board on August 3, 2006.
(2) Includes a good faith estimate of shares of common stock issuable upon the
exercise of common stock purchase warrants.
(3) Includes a good faith estimate of shares of common stock issuable upon
conversion of the convertible debentures based on a conversion price of $0.42.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON DATES
AS THE COMMISSION, ACTING UNDER SAID SECTION 8(a), MAY DETERMINE.
2
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED
OCTOBER 12, 2006
MANARIS CORPORATION
UP TO 24,319,497 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
24,319,497 shares of our common stock. The selling stockholders may sell common
stock from time to time in the principal market on which the stock is traded at
the prevailing market price or in negotiated transactions that are not in the
public market as set forth in "Plan of Distribution".
We will pay the expenses of registering these shares. We will not receive any
proceeds from the sale of shares of common stock in this offering. The net
proceeds from the sale of our common stock will go to the selling stockholders.
However, we may receive proceeds from the exercise of the warrants.
Our common stock is traded on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc. under the symbol "MANS." On October 10,
2006, the closing price of our common stock was $0.23.
Investing in these securities involves significant risks. Investors should not
buy these securities unless they can afford to lose their entire investment.
The total number of shares sold herewith includes the following shares owned by
or to be issued to the selling stockholders upon the exercise of warrants:
* 22,692 shares of common stock underlying our Series IB1 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB1 Warrant and $0.00001, entitles a Series IB1 Warrant
holder to acquire one share of our common stock. The Series IB1 Warrants have a
5 year term;
* 215,385 shares of common stock underlying our Series IB2 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB2 Warrant and $0.59, subject to adjustment, will entitle
a Series IB2 Warrant holder to acquire one share of common stock. The Series IB2
Warrants have a 5 year term;
* 323,076 shares of common stock underlying our Series IB3 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB3 Warrant and $0.71, subject to adjustment, will entitle
a Series IB3 Warrant holder to acquire one share of common stock. The Series IB3
Warrants have a 5 year term;
* 1,654,394 shares of common stock issuable in satisfaction of debentures issued
by our wholly-owned subsidiary, Avensys, Inc., in February 2005;
* 2,805,874 shares of common stock issued to shareholders of ITF Optical
Technologies, Inc. pursuant to an Asset Purchase Agreement finalized in April
2006 whereby Manaris Corporation, through its wholly-owned subsidiary, Avensys,
Inc., acquired the assets of ITF Optical Technologies;
* 10,780,187 shares of common stock issuable upon conversion of Series B
Subordinated Convertible Promissory Notes, which were issued pursuant to our
August 2006 private placement. The Convertible Notes have an outstanding balance
of $3,622,143 and are currently convertible at $0.42 per share. We are
registering 125% of the shares underlying the convertible notes based on a
conversion price of $0.42;
* 3,850,067 shares of common stock issuable upon conversion of Original Issue
Discount B Subordinated Convertible Promissory Notes, which were issued pursuant
to our August 2006 private placement. The Convertible Notes have an outstanding
balance of $1,293,622 and are currently convertible at $0.42 per share. We are
registering 125% of the shares underlying the convertible notes based on a
conversion price of $0.42.
* 291,739 shares of common stock underlying our Series Y Warrants which were
issued pursuant to our August 2006 private placement. One Series Y Warrant and
$0.65, subject to adjustment, will entitle a Series Y Warrant holder to acquire
one share of common stock. The Series Y Warrants have a 4 year term. We are
registering 125% of the shares underlying the warrants.
* 4,376,082 shares of common stock underlying our Series Z Warrants which were
issued pursuant to our August 2006 private placement. One Series Z Warrant and
$0.45, subject to adjustment, will entitle a Series Z Warrant holder to acquire
one share of common stock. The Series Z Warrants have a 4 year term. We are
registering 125% of the shares underlying the warrants.
3
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
The date of this prospectus is ___________, 2006.
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
The information in this prospectus is not complete and may be changed. This
prospectus is included in the registration statement that has been filed by
Manaris Corporation with the Securities and Exchange Commission. The Selling
Stockholders may not sell these securities until the registration statement
becomes effective. This prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
4
TABLE OF CONTENTS
SUMMARY OF OUR OFFERING....................................................p. 6
RECENT DEVELOPMENTS........................................................P. 7
RISK FACTORS...............................................................p. 10
USE OF PROCEEDS............................................................p. 16
MARKET FOR OUR COMMON EQUITY...............................................p. 16
PLAN OF DISTRIBUTION.......................................................p. 17
BUSINESS...................................................................p. 19
LEGAL PROCEEDINGS..........................................................p. 23
DESCRIPTION OF PROPERTY....................................................p. 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................p. 24
MANAGEMENT.................................................................p. 33
EXECUTIVE COMPENSATION.....................................................p. 36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................p. 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............p. 39
SELLING SHAREHOLDERS.......................................................p. 40
DESCRIPTION OF SECURITIES..................................................p. 45
CHANGES AND DISAGREEEMENTS WITH ACCOUNTANTS................................p. 46
REPORTS....................................................................p. 46
STOCK TRANSFER AGENT.......................................................p. 46
EXPERTS....................................................................p. 46
LEGAL MATTERS..............................................................p. 46
FINANCIAL STATEMENTS.......................................................p. 47
5
SUMMARY OF OUR OFFERING
This summary highlights selected information about us. It may not contain all of
the information that you find important. You should carefully read this entire
document, including the "Risk Factors" our financial statements and their
related notes and the other documents incorporated by reference.
Manaris Corporation's primary business is risk mitigation. Manaris offers
corporations and institutions security management solutions and services
enabling them to acquire market intelligence, lower business risks and improve
customer service. Our security solutions and services are geared towards
increasing customer revenues and profits.
Manaris operates the following wholly-owned subsidiaries:
o Avensys Inc, which provides risk management monitoring solutions;
o C-Chip Technologies Corporation (North America), which specializes in
high-tech security.
Manaris Corporation was incorporated in the State of Nevada on June 26, 2000 as
Keystone Mines Limited and maintains its principal executive offices at 1155
Boulevard Rene-Levesque, Suite 2720, Montreal, Quebec, Canada H3B 2K8.
In June 2000, we purchased four mineral claims, situated in the Greenwood Mining
Division in the Province of British Columbia, Canada. At that time, our
principal business plan was to acquire, explore and develop mineral properties
and to ultimately seek earnings by exploiting the mineral claims. In December
2002, we were advised that the mineral properties held were not economically
viable. Our board of directors approved the termination of our exploration
activity.
In March 2003, we changed our company name to C-Chip Technologies Corporation in
order to better reflect our new business activities, and began trading on the
OTC Bulletin Board (OTC-BB) under the symbol "CCHI."
In July 2005, our shareholders approved a name change for the Company to Manaris
Corporation to reflect C-Chip Technologies expanded scope of business. As a
result, the new trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."
The Offering
Common stock offered by selling stockholders .... 24,319,497 shares, including
5,228,974 shares issuable
upon the exercise of common
stock purchase warrants,
assuming full exercise of the
warrants. This number
represents 23.% of the total
number of shares to be
outstanding following this
offering assuming the
conversion of the convertible
notes and exercise of the
warrants by the selling
stockholders
Common stock to be outstanding after the
offering ........................................ 103,606,349 shares
Use of proceeds.................................. We will not receive any
proceeds from the sale of the
common stock. However, we
will receive the exercise
price of any common stock we
issue to the selling
stockholders upon exercise of
the warrants. We expect to
use the proceeds received
from the exercise of their
warrants, if any, for general
working capital purposes.
OTC-BB Symbol ................................... MANS
The above information regarding common stock to be outstanding after the
offering is based on 79,286,852 shares of common stock outstanding as of October
10, 2006 and assumes the subsequent issuance of common stock to the selling
stockholders and exercise of warrants by our selling stockholders.
The number of shares being registered represents approximately 30% of our
current outstanding stock.
6
RECENT DEVELOPMENTS
Resignation of Chief Financial Officer
On September 13, 2006, Andre Monette resigned as Chief Financial Officer of
Manaris Corporation (the "Company"), effective immediately. Mr. Monette has
served as Chief Financial Officer since February 2005.
On September 14 2006, the Company's Board of Directors appointed the Company's
President and Chief Executive Officer, John G. Fraser, to serve as interim Chief
Financial Officer to fill the vacancy created by Mr. Monette's resignation.
August 2006 Private Placement
On August 11, 2006, Manaris Corporation ("Manaris" or the "Company") entered
into a Note and Warrant Purchase Agreement (the "Purchase Agreement") providing
for the sale by the Company of Series B Subordinated Secured Convertible Notes
(the "Series B Notes") in an aggregate principal amount of approximately $3.6
million and Original Issue Discount Subordinated Secured Convertible Notes equal
to fifteen percent (15%) of the aggregate principal amount of Series B Notes
(the "OID Notes") (collectively, the "Notes") to certain institutional and
accredited investors (the "Investors"). Pursuant to the Purchase Agreement, the
Company also issued four year warrants to purchase shares of the Company's
common stock in an amount equal to 37.5% of the number of common shares
underlying the Series B Notes at $.45 per share (the "Series Z Warrants") and
2.5% of the number of common shares underlying the Series B Notes at $.65 per
share (the "Series Y Warrants") (collectively, the "Warrants").
Gross proceeds of approximately $2.1 million were disbursed initially. The
remaining $1.5 million will be disbursed upon effectiveness of the Company's
registration statement. However, there is no certainty the Company's
registration statement will become effective, and no assurance that the
remaining amount will be received.
The Notes mature thirty (30) months from the date of issuance (the "Maturity
Date") and are convertible at any time into shares of the Company's common stock
at a fixed conversion price of $.42, subject to a conversion price reset of
$.35. The conversion price of the Notes is subject to adjustment for certain
events, including dividends, distributions or split of the Company's Common
Stock, or in the event of the Company's consolidation, merger or reorganization.
Beginning nine months from the issuance date, the Company is required to make
principal payments equal to one-eighth of the aggregate principal amount of the
Notes on a quarterly basis. The Company may pay the principal payment in either
cash plus a premium of 7% of each principal payment or in shares of registered
common stock at a 15% discount to the market price of the Company's common
stock.
The Company's obligations under the Purchase Agreement and the Notes are secured
by a subordinated lien on substantially all of the assets of the Company,
pursuant to a Pledge and Security Agreement.
In connection with the Purchase Agreement, the Company also entered into
registration rights agreements (the "Registration Rights Agreements") providing
for the filing of a registration statement (the "Registration Statement") with
the Securities and Exchange Commission registering the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants. The Company is
obligated to file the Registration Statement no later than 45 days from the date
of closing and to use its best efforts to cause the Registration Statement to be
declared effective no later than 120 days after filing and to insure that the
registration statement remains in effect until all of the shares of common stock
issuable upon conversion of the Notes and exercise of the Warrants have been
sold. In the event of a default of its obligations under the Registration Rights
Agreements, including its agreement to file the Registration Statement with the
Securities and Exchange Commission no later than 45 days from the date of
closing, or if the Registration Statement is not declared effective within 120
days of filing, it is required to pay to the Investors, as liquidated damages,
for each month that the registration statement has not been filed or declared
effective, as the case may be, an amount or shares of our common stock equal to
1.5% of the amount invested, subject to a maximum of 12%.
We did not file a registration statement within 45 days from the closing date of
our August 2006 private placement, which is the filing date specified in the
financing documents. As a result, until such time as the registration statement
is filed, the investors can demand repayment in an amount equal to one hundred
ten percent (110%) of the aggregate principal amount of the notes. However, we
have not received a notice of default from the investors. In addition, as a
result of our failure to file the registration statement by the filing date, we
have begun to accrue liquidated damages equal to 1.5%, for each calendar month
(prorated for shorter periods), of the initial investment in the notes. The
liquidated damages accrue until the registration statement is filed.
In connection with the private placement, the Company has agreed to pay legal
and due diligence expenses of the investors in an amount not to exceed $43,000.
The Company has also agreed to pay an additional due diligence fee equal to the
lesser of 1.25% of the net financing proceeds or $75,000. In addition, Midtown
Partners LLC will receive aggregate placement agent fees of $349,771. Midtown
Partners and individuals affiliated with Midtown Partners will also receive the
following warrants to purchase shares of the Company's common stock in the
following aggregate amounts: 711,492 warrants exercisable at $.42 per share;
17,787 Series Y warrants, and; 266,810 Series Z warrants.
7
The Company claims an exemption from the registration requirements of the Act
for the private placement of these securities pursuant to Section 4(2) of the
Act and/or Regulation D promulgated thereunder since, among other things, the
transaction did not involve a public offering, the investors are accredited
investors and/or qualified institutional buyers, the investors had access to
information about the Company and their investment, the investors took the
securities for investment and not resale, and the Company took appropriate
measures to restrict the transfer of the securities.
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.
The purchase price paid for the manufacturing assets pursuant to the ITF
Agreement is approximately USD $1,526,651 (CAD $1,750,000), comprised of USD
$654,279 (CAD $750,000) in cash and 2,550,795 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 USD $1,793,722 (CAD $2,000,000), or (ii) exchange the
Avensys Laboratories Shares for 3,826,531 freely tradable shares of
Manaris common stock equal its proportionate share of approximately
USD $1,345,291 (CAD $1,500,000) divided by USD $0.35 (CAD $0.39) per
share.
Transaction costs for both the manufacturing assets and R&D assets acquisition
amounted to USD $139,493 (CAD $159,901).
The above acquisition has been accounted for as a single acquisition using the
purchase method and the results of ITF have been included in the consolidated
Statement of Operations since the date of acquisition, being April 18, 2006.
Avensys Laboratories continues to be considered a variable interest entity which
the Company will continue to consolidate, since Avensys is the primary
beneficiary.
Pursuant to the ITF transaction, the Company did not file the required
registration statement within the time period required by the Asset Purchase
Agreement. As a result, the Company issued 255,079 restricted common shares on
September 12, 2006 to the ITF Preferred Shareholders. The fair value of the
shares on that date was approximately $74,000 and was expensed in the first
quarter of Fiscal 2007.
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).
8
Summary Selected financial data
The following financial information summarizes the more complete historical
financial information at the end of this prospectus. The following selected
financial information has been derived from the audited financial statements of
Manaris Corporation for the years ended June 30, 2006 and 2005, and should be
read in conjunction with those financial statements.
As of As of
June 30, 2006 June 30, 2005
$ $
Balance Sheet
Total Assets 17,143,434 20,115,755
Total Liabilities 9,913,507 8,867,863
Stockholders Equity 7,205,987 11,229,859
Year ended Year ended
June 30, 2006 June 30, 2005
$ $
Statement of Operations
Revenue 10,498,505 3,580,619
Cost of revenues and other operating expenses 22,897,850 9,393,141
Results of Discontinued Operations 149,637 (459,251)
Net Loss (11,902,443) (6,207,802)
Statement of Cash Flows
Net Cash Used in Continuing Operating Activities (4,262,551) (2,558,945)
9
RISK FACTORS
The risks and uncertainties described below are not the only ones facing our
Company. Additional risks not presently known or that we currently consider
insignificant may also impair our business operations in the future. Our
business, financial condition and plan of operations could be materially
adversely affected by any of the following risks. The trading price of our
common shares could decline due to any of these risks.
RISKS ASSOCIATED WITH OUR BUSINESS:
1. There exists substantial doubt about our ability to continue as a going
concern
Our financial statements for the year ended June 30, 2006 disclose that there
exists substantial doubt that the company will be able to continue as a going
concern. The inclusion of this note to our financial statements for the
nine-month period ended March 31, 2006 included similar disclosure. The
inclusion of this note in the financial statements underscores the fact that the
company needs to either raise additional financing or become profitable in the
short-term in order to continue operations. As further discussed below, if the
company is not able to achieve its objectives or raise additional capital, it
may be forced to suspend or cease operations.
2. If we do not begin to generate a profit we may have to suspend or cease
operations
We have experienced a history of losses. Our losses have resulted principally
from costs incurred in research and development activities related to our
efforts to develop our technologies and from the associated marketing and
administrative costs and from stock based compensation. At June 30, 2006 we had
a working capital deficiency of $1,657,699 and an accumulated deficit of
$26,648,091. Included in current liabilities are amounts due to related parties
of $40,000 that carry no interest or fixed terms of repayment. Funds on hand
together with relatively low revenues will not sustain operations for the next
year. As a result, we will need to raise additional capital to sustain our
operations. In order to become profitable, we will need to generate significant
revenues to offset our cost of revenues, sales and marketing, research and
development and general and administrative expenses. We may not achieve or
sustain our revenue or profit objectives and our losses may continue or increase
in the future in which case you might lose your investment. If we are not able
to fund our operations through product sales and investments by third parties,
we will have to cease operations.
3. We may not be able to obtain additional financing when needed or on
acceptable terms.
We will need to raise additional capital to sustain our operations or to pursue
our acquisition strategy. We cannot assure you that any required additional
financing will be available or, if it is, whether it will be on acceptable
terms. Our inability to obtain any needed financing, or the terms on which it
may be available, could have a material adverse effect on our business. As a
result, we could have to suspend or cease our operations and you could lose your
entire investment.
4. We have incurred substantial debt which could affect our ability to obtain
additional funds and may increase our vulnerability to economic or
business downturns.
On February 16, 2005, we entered into a Purchase Agreement with eighteen
institutional and accredited investors under the terms of which we agreed to
issue Units consisting of (i) an aggregate of $4,675,000 of our Company's 9.0%
Senior Secured Convertible Notes, Series A ("Series A Notes"), which are
convertible into shares of our common stock at a conversion price of $0.35 per
share,. Under the terms of the 9.0% Senior Secured Convertible Note, Series A,
the Principal on the Note 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 shall be made at our option in cash or, with 10 business day prior
notice, in our common stock valued at 85% of the average closing bid price of
our stock in the most recent five Trading Days prior to a Valuation Date. As of
June 30, 2006 the outstanding debt remaining on the principal payment of the
9.0% Senior Secured Convertible Note, Series A is $1,015,843.
On August 11, 2006, we entered into a Note and Warrant Purchase Agreement for
the sale by the Company of Series B Subordinated Secured Convertible Notes (the
"Series B Notes") in an aggregate principal amount of approximately $3.6 million
and Original Issue Discount Subordinated Secured Convertible Notes equal to
fifteen percent (15%) of the aggregate principal amount of Series B Notes (the
"OID Notes") to certain institutional and accredited investors (the
"Investors"). Pursuant to the Purchase Agreement, the Company also issued four
year warrants to purchase shares of the Company's common stock in an amount
equal to 37.5% of the number of common shares underlying the Series B Notes at
$0.45 per share (the "Series Z Warrants") and 2.5% of the number of common
shares underlying the Series B Notes at $0.65 per share (the "Series Y
Warrants").
10
As a result, we are subject to the risks associated with substantial
indebtedness, including:
- - we are required to dedicate a portion of our cash flows from operations to pay
debt service costs;
- - it may be more difficult and expensive to obtain additional funds through
financings, if available at all;
- - we are more vulnerable to economic downturns and fluctuations in interest
rates, less able to withstand competitive pressures and less flexible in
reacting to changes in our industry and general economic conditions; and
- - if we defaulted under any of our existing indebtedness or if our creditors
demanded payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments.
5. If we default under our financing agreements, we may have to forfeit our
rights to our assets.
We have pledged all of our assets, including the assets of our subsidiaries, as
security to holders of our convertible debentures. A default under the financing
agreement concluded with holders of our convertible debentures, if not waived or
cured, would permit the holders of the convertible debentures to foreclose on
the collateral and we could lose all our rights in the collateral, which would
have a materially adverse effect on our business. As a result, we could have to
suspend or cease our operations and you could lose your entire investment.
6. We may not be able to implement our acquisition strategy.
While our management has some experience in identifying and integrating
acquisitions, we may not be able to identify suitable acquisition candidates,
obtain the capital necessary to pursue our acquisition strategy or complete
acquisitions on satisfactory terms or at all. When companies are acquired, we
may not be able to integrate or manage these businesses to produce returns that
justify our investment. A number of our competitors have also adopted the
strategy of expanding and diversifying through acquisitions. We experience
competition in our effort to execute our acquisition strategy and expect the
level of competition to increase. As a result, we may be unable to continue to
make acquisitions or may be forced to pay more for the companies we are able to
acquire.
7. We may seek to make acquisitions that prove unsuccessful or strain or
divert our resources.
We may seek to grow our business through acquisitions of similar businesses.
Such acquisitions present risks that could materially adversely affect our
business and financial performance, including:
- - the diversion of our management's attention from our everyday business
activities;
- - the assimilation of the operations and personnel of the acquired business;
- - the contingent and latent risks associated with the past operations of, and
other unanticipated problems arising in, the acquired business; and
- - the need to expand management, administration, and operational systems.
If we make such acquisitions we cannot predict whether:
- - we will be able to successfully integrate the operations of any new businesses
into our business;
- - we will realize any anticipated benefits of completed acquisitions; or
- - there will be substantial unanticipated costs associated with acquisitions.
In addition, future acquisitions by us may result in:
- - potentially dilutive issuances of our equity securities;
- - the incurrence of additional debt; and
- - the recognition of significant charges for depreciation and amortization
related to goodwill and other intangible assets.
Although we have no present plans or intentions, we continuously evaluate
potential acquisitions of similar businesses. However, we have not reached any
agreement or arrangement with respect to any particular acquisition and we may
not be able to complete any acquisitions on favorable terms or at all.
11
8. There may be undisclosed liabilities associated with our acquisitions.
In connection with any acquisition made by us, there may be liabilities that we
fail to discover or are unable to discover including liabilities arising from
non-compliance with laws and regulations by prior owners and for which we, as
successor owner, may be responsible. Similarly, we may incur expenses to
investigate the merits of future acquisitions that may never materialize,
resulting in a potential charge.
9. We may not be able to develop or manage our internal growth.
Our growing existing businesses may strain our management, human resources and
information systems. To manage our growth successfully, we will have to add
managers and employees and update our operating, financial and other systems,
procedures and controls. In addition, issues relating to new acquisitions may
divert current management's attention from existing operations.
10. We are highly dependent on our executive management and other key
employees.
We rely heavily on our executive management and key employees to provide
services and for continued business development. We have employment agreements
which contain non-competition and non-solicitation provisions with most of our
executive managers and other key employees. Our business could be materially
adversely affected if a number of our executive managers and other key employees
were to leave us and if we were unable to enforce the non-competition and
non-solicitation agreements or to attract and retain qualified replacements.
11. Some of our products and services are in the development stage, and may
not be effective at a level sufficient to support a profitable business
venture.
If our products or services are not effective at a level sufficient to support a
profitable venture, we will be unable to create marketable products and
services, and we will have to cease some of our operations. Most of our products
and services are in the development state. Although we have begun to sell some
of our products and services and have current data which indicates the promise
of the concept and market demand, we can offer you no assurance that all of our
products and services will be effective at a level sufficient to support a
profitable business venture. If they are not, we will be unable to create
marketable products, we will not generate sufficient revenues from our key
operations, and we will have to reduce, suspend or cease key operations and you
could lose your entire investment.
12. If we cannot deliver the features and functionality our customers demand,
we will be unable to attract customers that will result in a loss of
income and eventually a termination of our operations.
As a result you could lose your investment. As a security solutions provider,
our future success depends largely upon our ability to determine the features,
functionality and services our customers demand and to design and implement
products and services that meet their needs in a cost efficient manner. We
cannot assure that we will be able to successfully determine customer
requirements or that our current or future products and services will adequately
satisfy customer demands. If we cannot meet our customers' demands, we will not
generate revenues from this business and may have to cease or suspend key
operations. As a result, you could lose your investment.
13. We are highly dependent on third party manufacturers and service
suppliers.
Because some of our security solutions depend on a limited number of third
parties to manufacture and supply critical components for our products and
services, if the third party manufacturer should cease operations or refuse to
sell components to us, we may have to suspend or cease these operations. As a
result, you may lose your investment. If our suppliers do not execute their
obligations, or if they stop manufacturing and supplying components critical for
our products and services, we may be not be capable of finding other suppliers
or operating our business. We rely on limited suppliers for a number of key
components and do not have long-term agreements with any of our suppliers. If
our agreements with these suppliers were terminated or expired, if we were
unable to obtain adequate quantities of components critical for our products and
services, if the quality of these components was inadequate, or if the terms for
supply of these components became commercially unreasonable, our search for
additional or alternate suppliers could result in significant delays, added
expense and our inability to maintain or expand key components of our business.
Any of these events could require us to take unforeseen actions or devote
additional resources to provide our products and services and could harm our
ability to compete effectively. As a result, you could lose your investment.
12
14. Some of our products and services depend on GPS technology owned and
controlled by third parties.
If access to GPS technology is terminated or withheld from us, we may have to
suspend or cease operations. Our services rely on signals from GPS satellites
built and maintained by the U.S. Department of Defense. GPS satellites and their
ground support systems are subject to electronic and mechanical failures and
sabotage. If one or more satellites malfunction, there could be a substantial
delay before they are repaired or replaced, if at all, and our services may
cease and customer satisfaction would suffer. In addition, the U.S. government
could decide not to continue to operate and maintain GPS satellites over a long
period of time or to charge for the use of satellites. If the foregoing events
occur, we may have to suspend or cease operations.
15. Some of our products and services depend on communication networks owned
and controlled by third parties.
If access to our communication networks is terminated or withheld from us, we
may have to suspend or cease operations. As a security solutions provider, our
ability to grow and achieve profitability depends on the ability of
communications carriers to provide sufficient network capacity, reliability and
security to our customers. When we use wireless communications, even where
wireless carriers provide coverage to entire metropolitan areas, there are
occasional lapses in coverage. These effects could make our services less
reliable and less useful, and customer satisfaction could suffer. Our financial
condition could be seriously harmed if our wireless and land-based carriers were
to increase the prices of their services, or to suffer operational or technical
failures.
16. Our business is subject to rapid technological change.
Our two business units develop security solutions for clients. C-Chip itself
integrates wireless communications, online transactions, software applications,
RFID technology, the Internet and, when location is required, GPS technology, to
enable business users to efficiently access, control, manage and monitor remote
assets at low costs. Our wholly-owned subsidiary, Avensys, uses leading edge
fiber optics sensor technology to offer business and corporations different
monitoring solutions related to the environment, including buildings and
infrastructure. Many of the technologies that we currently use have only
recently emerged and our future success will depend upon the ability of our
product development team to remain current with the rapid changes in the
technologies. If we fail to do this, we could be at a competitive disadvantage.
If we cannot foresee and adapt to technological changes, our business will be
materially adversely affected.
17. Our business depends on the protection of its intellectual property and
proprietary information.
We rely on a combination of trade secret and trademark laws, confidentiality
procedures, contractual provisions and patent and copyright laws to protect our
proprietary rights in our products and technology. These measures may not be
adequate to protect our trade secrets and proprietary technology. As a result,
unauthorized third parties may copy or otherwise obtain and use our products or
technology. To enforce our proprietary rights, we may have to engage in
litigation to defend and enforce our intellectual property rights, either
domestically or in other countries, and we could face substantial costs and
diversion of resources, including management's attention, regardless of the
outcome of that litigation. Any of our attempts to enforce our intellectual
property rights may not be successful, may result in royalties that are less
than the cost of such enforcement efforts or may result in the loss of the
intellectual property altogether. Further, we may not have adequate funds
available to prosecute actions to protect or defend our proprietary rights, in
which case those using our proprietary rights may continue to do so in the
future. Even if we succeeded in protecting our intellectual property, others may
independently develop similar technologies or products that do not infringe on
our intellectual property.
18. Our registered trademarks may not provide us with adequate protection.
Third parties may appropriate our trademarks that may reduce our competitive
edge and cause our revenues to decrease. We have trademarks. There is no
assurance, however, that third parties may not infringe on our trademarks. In
order to protect our trademark rights, we may have to file lawsuits and obtain
injunctions, which will likely be expensive and divert our resources. If we do
that, we will have to spend large sums of money for attorney's fees in order to
obtain the injunctions. Even if we obtain the injunctions, there is no assurance
that those infringing on our trademarks will comply with the injunctions.
Further, we may not have adequate funds available to prosecute actions to
protect or to defend our trademarks, in which case those infringing on our
trademarks could continue to do so in the future.
13
19. Third parties may claim that our current or future products or services
infringe their proprietary rights or assert other claims against us.
Any claims filed against us alleging that we infringe third-party proprietary
rights could result in significant expenses or restrictions on our ability to
provide our products and services. As the number of entrants into our market
increases, the possibility of an intellectual property or other claim against us
grows. Any intellectual property or other claim, with or without merit, would be
time-consuming and expensive to litigate or settle and could divert management
attention from focusing on our core business. As a result of such a dispute, we
may have to pay damages, incur substantial legal fees, develop costly
non-infringing technology, if possible, or enter into license agreements, which
may not be available on terms acceptable to us, if at all. As a result, our
business and operating results could be materially adversely affected. No such
claims have been filed against at this time.
20. Changes in government regulations and certification requirements could
have a material adverse effect on our business.
Our products are subject to certification by the Federal Communications
Commission in the US and by the Department of Communications in Canada. Further,
wireless carriers who supply us with airtime enabling some of our services are
also subject to regulation by the Federal Communications Commission in the
United States and the Canadian Radio-Television and Telecommunications
Commission in Canada. If any of our products could not obtain certification from
either or both the Federal Communications Commission in the US and the
Department of Communications, or if the communications carriers that we use to
provide some of our services to our customers could not obtain a renewal of
their certifications, our business would be materially adversely affected.
21. Competitive conditions could materially adversely affect our businesses.
The markets in which we do, and intend to do, business are highly competitive
with few barriers to entry. Our ability to execute our business strategy depends
in part upon our ability to develop and commercialize efficient and effective
products based on our technologies. We compete against established companies as
well as numerous independently owned small businesses. Many of our competitors
are capable of developing products based on similar technology, have developed
and are capable of continuing to develop products based on other technologies,
which are or may be competitive with our products and technologies. In all
market segments in which we operate, there are many competitors, some of which
are significantly larger, have access to much more important resources or
capital than us, or have better reputations among potential customers in the
delivery of particular services or products. Our competitors may succeed in
developing competing products and technologies that are more effective than our
products and technologies, which may render our existing and new products or
technology uncompetitive, uneconomical or obsolete.
22. We may be exposed to liability claims if products based on our
technologies are marketed and sold.
We have liability insurance coverage on our products which varies from
$1,000,000 to $3,000,000, however if a judgment is rendered against us in excess
of the amount of our coverage, we may have to cease operations. If we are sued
for any reason, we will have to rely on our liability insurance to pay any
judgment rendered against us. Although we maintain product liability insurance
of between $1,000,000 and $3,000,000, we cannot provide any assurance that:
- - our insurance will provide adequate coverage against potential liabilities if
a product or a service that we provide causes harm or fails to perform as
promised;
- - adequate product liability insurance will continue to be available in the
future; or
- - our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to obtain would increase our expenses and could greatly
reduce our assets or cause us to cease operations. If a judgment is rendered
against us for any amount of money over our coverage of $1,000,000 and, in some
cases, of $3,000,000, we may have to cease operations.
23. Fluctuations in the value of foreign currencies could result in increased
product costs and operating expenses.
We have suppliers that are located outside Canada and the U.S. Our functional
currency is Canadian dollars and we report our results in U.S. dollars.
Fluctuations in the value of Canadian and U.S. dollars are difficult to predict
and can cause us to incur currency exchange costs. Although, we cannot predict
the effect of exchange rate fluctuations on our future operating results any
material changes could cause our operating results to be materially adversely
affected.
14
RISKS ASSOCIATED WITH OUR COMMON STOCK:
24. Our failure to file a registration statement registering the shares
underlying the notes and warrants issued pursuant to our August 2006
private placement by the filing date specified in the financing documents
is an event of default.
We did not file a registration statement within 45 days from the closing date of
our August 2006 private placement, which is the filing date specified in the
financing documents. As a result, until such time as the registration statement
is filed, the investors can demand repayment in an amount equal to one hundred
ten percent (110%) of the aggregate principal amount of the notes. However, we
have not received a notice of default from the investors.
In addition, as a result of our failure to file the registration statement by
the filing date, we have begun to accrue liquidated damages equal to 1.5%, for
each calendar month (prorated for shorter periods), of the initial investment in
the notes. The liquidated damages accrue until the registration statement is
filed.
25. The market of our common stock is limited.
Because the market for our common stock is limited, you may not be able to
resell your shares of common stock. There is currently only a limited trading
market for our common stock. Our common stock trades on the Bulletin Board
operated by the National Association of Securities Dealers, Inc. under the
symbol "MANS." Trading volume of OTC Bulletin Board stocks has been historically
lower and more volatile than stocks traded on an exchange. As a result, you may
not be able to resell your securities in open market transactions.
26. Sales of substantial amounts of our common stock could cause our stock
price to fall.
As of October 10, 2006, 79,286,852 shares of our common stock were outstanding,
69,283,484 of which were freely tradable and 10,003,368 of were restricted as a
result of securities laws. Sales of a substantial number of shares of our common
stock could cause the price of our securities to fall and could impair our
ability to raise capital by selling additional securities. The terms on which we
could obtain additional capital during the life of the options and warrants may
be adversely affected, and it should be expected that the holders of the options
and warrants would exercise or convert them at a time when we would be able to
obtain equity capital on terms more favorable than those provided for by such
convertible securities. As a result, any issuance of additional shares of common
stock may cause our current shareholders to suffer significant dilution which
may adversely affect the market price of our common stock.
27. Because our common stock is subject to penny stock rules, the liquidity of
your investment may be restricted.
Our common stock is now and may continue to be in the future subject to the
penny stock rules under the Securities Exchange Act of 1934, as amended. These
rules regulate broker/dealer practices for transactions in "penny stocks." Penny
stocks are generally equity securities with a price of less than $5.00. The
penny stock rules require broker/dealers to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker/dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations and the broker/dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction, the broker and/or dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These additional penny stock disclosure requirements are burdensome and may
reduce the trading activity in the market for our common stock. As long as the
common stock is subject to the penny stock rules, holders of our common stock
may find it more difficult to sell their securities.
28. There Are a Large Number of Shares Underlying Secured Convertible Notes
and Warrants Issued in Our August 2006 Private Placement That May be
Available for Future Sale and the Sale of These Shares May Depress the
Market Price of Our Common Stock.
As of October 10, 2006 we had 79,286,852 shares of common stock issued and
outstanding, secured convertible notes outstanding that may be converted into an
estimated 13,362,754 shares of common stock based on current conversion prices
ranging between $0.35 and $0.42, and related warrants to purchase 6,810,130
shares of common stock at an exercise price ranging between $0.00001 and $0.67.
In addition, the number of shares of common stock issuable upon conversion of
the outstanding secured convertible notes may increase if the conversion price
reset of $0.35 takes effect. The sale of these shares may adversely affect the
market price of our common stock.
15
29. Our operating results in future periods may vary from quarter to quarter,
and, as a result, we may fail to meet the expectations of our investors
and analysts, which may cause our stock price to fluctuate or decline.
As a manufacturer of electronic equipment, our contract flow is not predictable.
To the extent that we do not generate new business upon completion of existing
contracts, our revenue will decline. To the extent that we expand our facilities
to meet present or anticipated increases in sales, our failure to generate
business could have the effect of significantly reducing the profitability of
our business. Because of these factors, our revenue and operating results may
fluctuate from quarter to quarter. Due to these risks, you should not rely on
period-to-period comparisons of our results of operations as an indication of
future performance.
30. Failure to achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse
effect on our business and operating results and stockholders could lose
confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial
reports and effectively prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our operating results could be harmed. We may be
required to document and test our internal control procedures in order to
satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires increased control over financial reporting requirements, including
annual management assessments of the effectiveness of such internal controls and
a report by our independent certified public accounting firm addressing these
assessments. Failure to achieve and maintain an effective internal control
environment, regardless of whether we are required to maintain such controls,
could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on our stock price.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock in this offering.
All proceeds from the sale of our common stock by the selling stockholders will
be received by the selling stockholders.
We may receive proceeds from the exercise of the warrants. If all of the
warrants held by the selling stockholders are exercised, we will receive net
proceeds of approximately $1,939,006. The holders of the warrants are not
obligated to exercise the warrants and we cannot assure that the holders of the
warrants will choose to exercise all or any of the warrants. Our Series IB1
warrants and IB3 warrants contain a cashless exercise provision. If the cashless
exercise provision is exercised, we will not receive any proceeds from the
exercise from such warrants. We intend to use the estimated net proceeds
received upon exercise of the warrants, if any, for working capital and general
corporate purposes.
MARKET FOR OUR COMMON EQUITY
Our common shares are traded on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc under the symbol "MANS." Our shares began
trading on July 2, 2001. The following table sets forth the closing high and low
bid prices of the common stock. The quotations reflect inter-dealer prices and
do not represent retail mark-ups, markdowns, commissions, and may not reflect
actual transactions..
- ----------------------------- ------------------------- ------------------------
Fiscal Quarter High Bid Low Bid
- ----------------------------- ------------------------- ------------------------
2007
- ----------------------------- ------------------------- ------------------------
7-01-06 - 9-30-06* $0.35 $0.24
- ----------------------------- ------------------------- ------------------------
- ----------------------------- ------------------------- ------------------------
2006
- ----------------------------- ------------------------- ------------------------
04-01-06 - 06-30-06 0.44 0.27
- ----------------------------- ------------------------- ------------------------
01-01-06 - 03-31-06 0.40 0.30
- ----------------------------- ------------------------- ------------------------
10-01-05 - 12-31-05 0.38 0.31
- ----------------------------- ------------------------- ------------------------
07-01-05 - 09-30-05 0.61 0.29
- ----------------------------- ------------------------- ------------------------
2005
- ----------------------------- ------------------------- ------------------------
04-01-05 - 06-30-05 0.79 0.41
- ----------------------------- ------------------------- ------------------------
01-01-05 - 03-31-05 1.02 0.65
- ----------------------------- ------------------------- ------------------------
10-01-04 - 12-31-04 0.86 0.65
- ----------------------------- ------------------------- ------------------------
07-01-04 - 09-30-04 0.90 0.62
- ----------------------------- ------------------------- ------------------------
* Through September 19, 2006
The market price of our common shares may to be the object of significant
fluctuations related to a number of events and reasons, such as variations in
our operating results, publication of technological developments or new products
or services by us or our competitors, recommendations of securities analysts on
us or our competitors, the operating and stock performance of other companies
that the market may view as related to our business, and news reports relating
to trends in our activities.
16
In addition, the stock market in recent years has experienced significant price
and volume fluctuations that have particularly affected the market prices of
many high technology companies that may have often been not related or
inconsistent to the operating performance of those companies. These
fluctuations, as well as general political, economic and market conditions and
other factors, may adversely affect the market price for our common stock.
PLAN OF DISTRIBUTION
The selling shareholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded or
in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The selling shareholders may use any one or more of the following methods when
disposing of shares or interests therein:
- - ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
- - block trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
- - purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;
- - an exchange distribution in accordance with the rules of the applicable
exchange;
- - privately negotiated transactions;
- - short sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;
- - through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
- - broker-dealers may agree with the selling shareholders to sell a specified
number of such shares at a stipulated price per share;
- - a combination of any such methods of sale; and
- - any other method permitted pursuant to applicable law.
The selling shareholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
shareholders to include the pledgee, transferee or other successors in interest
as selling shareholders under this prospectus. The selling shareholders also may
transfer the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In connection with the sale of our common stock or interests therein, the
selling shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
shareholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling shareholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of common stock to be made directly or
through agents. We will not receive any of the proceeds from this offering. Upon
any exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.
The selling shareholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
17
The selling shareholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling shareholders who are "underwriters" within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements of
the Securities Act.
To the extent required, the shares of our common stock to be sold, the names of
the selling shareholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
In order to comply with the securities laws of some states, if applicable, the
common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have advised the selling shareholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling shareholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling shareholders for the purpose
of satisfying the prospectus delivery requirements of the Securities Act. The
selling shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have agreed to indemnify the selling shareholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this prospectus.
We have agreed with the selling shareholders to keep the registration statement
of which this prospectus constitutes a part effective until the earlier of (1)
such time as all of the shares covered by this prospectus have been disposed of
pursuant to and in accordance with the registration statement or (2) the date on
which the shares may be sold pursuant to Rule 144(k) of the Securities Act.
Section 15(g) of the Exchange Act
Our shares are covered by section 15(g) of the Securities Exchange Act of 1934,
as amended, and Rules 15g-1 through 15g-6 promulgated there under. They impose
additional sales practice requirements on broker/dealers who sell our securities
to persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouses).
Rule 15g-1 exempts a number of specific transactions from the scope of the penny
stock rules.
Rule 15g-2 declares unlawful broker/dealer transactions in penny stocks unless
the broker/dealer has first provided to the customer a standardized disclosure
document.
Rule 15g-3 provides that it is unlawful for a broker/dealer to engage in a penny
stock transaction unless the broker/dealer first discloses and subsequently
confirms to the customer current quotation prices or similar market information
concerning the penny stock in question.
Rule 15g-4 prohibits broker/dealers from completing penny stock transactions for
a customer unless the broker/dealer first discloses to the customer the amount
of compensation or other remuneration received as a result of the penny stock
transaction.
Rule 15g-5 requires that a broker/dealer executing a penny stock transaction,
other than one exempt under Rule 15g-1, disclose to its customer, at the time of
or prior to the transaction, information about the sales persons compensation.
Rule 15g-6 requires broker/dealers selling penny stocks to provide their
customers with monthly account statements.
Rule 15g-9 requires broker/dealers to approved the transaction for the
customer's account; obtain a written agreement from the customer setting forth
the identity and quantity of the stock being purchased; obtain from the customer
information regarding his investment experience; make a determination that the
investment is suitable for the investor; deliver to the customer a written
statement for the basis for the suitability determination; notify the customer
of his rights and remedies in cases of fraud in penny stock transactions; and,
the NASD's toll free telephone number and the central number of the North
American Administrators Association, for information on the disciplinary history
of broker/dealers and their associated persons.
The application of the penny stock rules may affect your ability to resell your
shares.
18
BUSINESS
Overview
Manaris, the holding company, operates the following wholly-owned subsidiaries:
o Avensys Inc. ("Avensys"), which develops optical components &
sensors and provides environmental monitoring solutions. Avensys
sells its optical products and services primarily in Asia, Europe
and North America to the telecommunications, aerospace, and oil and
gas industries. Environmental monitoring services and solutions are
primarily targeted at public sector organizations across Canada.
o C-Chip Technologies Corporation (North America) ("C-Chip"), which
offers products and services to the credit management marketplace.
C-Chip is currently targeting the new and used car markets in North
America, since its technology allows credit providers to locate and
disable the operation of any vehicle in the event of a delinquent
payment.
Corporate History
Manaris Corporation (sometimes referred to as "we," "our," "us," or the
"Company"), was incorporated in the State of Nevada on June 26, 2000 as Keystone
Mines Limited and maintains its principal executive offices at 1155 Boulevard
Rene-Levesque, Suite 2720, Montreal, Quebec, Canada.
In June 2000, the Company purchased four mineral claims, situated in the
Greenwood Mining Division in the Province of British Columbia, Canada. At that
time, our principal business plan was to acquire, explore and develop mineral
properties and to ultimately seek earnings by exploiting the mineral claims. In
December 2002, we were advised that the mineral properties held were not
economically viable. Our board of directors approved the termination of our
exploration activity.
In March 2003, we changed our company name to C-Chip Technologies Corporation in
order to better reflect our new business activities, and began trading on the
OTC Bulletin Board (OTC-BB) under the symbol "CCHI."
In July 2005, Shareholders approved a name change for the Company to Manaris
Corporation to reflect C-Chip Technologies expanded scope of business. As a
result, the new trading symbol on the OTC Bulletin Board (OTC-BB) became "MANS."
Recent Developments
August 2006 Private Placement
In August 2006, we concluded a private placement with accredited and
institutional investors for aggregate gross proceeds of approximately $3.6
million. Of this amount, approximately $2.1 million was disbursed at closing.
The remaining $1.5 million will be disbursed upon effectiveness of the Company's
registration statement. Midtown Partners & Co., LLC a NASD registered
broker-dealer, acted as the placement agent in this transaction. However, there
is no certainty the Company's registration statement will become effective and
no assurance that the remaining amount will be received
Pursuant to the private placement, the Company entered into a Note and Warrant
Purchase Agreement providing for the sale by the Company of Series B
Subordinated Secured Convertible Notes. The notes are convertible by the
investors into shares of common stock at a fixed conversion price of $.42,
subject to a conversion price reset of $.35. The Company's obligations under the
Purchase Agreements and the Notes are secured by substantially all of the assets
of the Company. The Company also issued four year warrants to purchase shares of
the Company's common stock in an amount equal to 40% of the number of common
shares underlying the Series B Notes.
We did not file a registration statement within 45 days from the closing date of
our August 2006 private placement, which is the filing date specified in the
financing documents. As a result, until such time as the registration statement
is filed, the investors can demand repayment in an amount equal to one hundred
ten percent (110%) of the aggregate principal amount of the notes. However, we
have not received a notice of default from the investors. In addition, as a
result of our failure to file the registration statement by the filing date, we
have begun to accrue liquidated damages equal to 1.5%, for each calendar month
(prorated for shorter periods), of the initial investment in the notes. The
liquidated damages accrue until the registration statement is filed.
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.
19
The purchase price paid for the manufacturing assets pursuant to the ITF
Agreement is approximately USD $1,526,651 (CAD $1,750,000), comprised of USD
$654,279 (CAD $750,000) in cash and 2,550,795 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 USD $1,793,722 (CAD $2,000,000), or (ii) exchange the
Avensys Laboratories Shares for 3,826,531 freely tradable shares of
Manaris common stock equal its proportionate share of approximately
USD $1,345,291 (CAD $1,500,000) divided by USD $0.35 (CAD $0.39) per
share.
Transaction costs for both the manufacturing assets and R&D assets acquisition
amounted to USD $139,493 (CAD $159,901).
The above acquisition has been accounted for as a single acquisition using the
purchase method and the results of ITF have been included in the consolidated
Statement of Operations since the date of acquisition, being April 18, 2006. ITF
Labs is considered a variable interest entity which the Company will continue to
consolidate, since Avensys is the primary beneficiary.
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).
Technologies and Solutions
Our Avensys and C-Chip subsidiaries offer the following technologies and
solutions: Optical Components and Modules; Environment Monitoring; Credit
Management Solutions;
Optical Components & Modules
Optical components and modules, provided by the Avensys Technologies division of
our Avensys subsidiary, represent the most significant source of growth within
Avensys and is expected to surpass 50% of Avensys' revenue for the first time in
FY2007. The optical components that we manufacture are based on two main
technologies:
1- Fiber Bragg Grating
2- Optical coupling
We are licensed by ITF Labs as well as with external organizations including the
CRC (Communication Research Center of Canada) and UTC (United Technologies) in
addition to our own intellectual property. ITF Labs has 22 patents and 6 patents
pending.
20
The products that we have developed are targeted at three main markets:
1- Telecommunications. The majority of our optical components are
destined to the telecommunications market. After a few difficult
years, this market has sustained healthy growth again in FY2006.
2- Fiber Laser. Fiber laser is a relatively new market going through
rapid growth. Over the next few years, we believe a significant
portion of conventional lasers are destined to be replaced by fiber
lasers. The main applications include industrial, aerospace and
military.
3- Optical Sensors. The optical sensing market has been in existence
for over ten years but is still in the early stage of growth. The
main applications include aerospace, oil and gas, industrial,
medical and civil engineering.
Our distribution for optical components follows a direct distribution model. Our
revenue streams are split about evenly between Europe, Asia and North America.
Environmental Monitoring
Environmental monitoring solutions are provided by the Avensys Solutions
division of our Avensys subsidiary. Avensys has developed a distinctive
expertise in monitoring contaminants in air and water. Avensys Solutions offers
its solutions through the distribution of monitoring equipment as well as from
in house products and services. It is also involved with optical sensing
applications, namely for variables such as temperature, humidity, pressure,
strain, etc.
Avensys is considered a key player in the environment monitoring market. In
order to offer complete end to end environment monitoring solutions, Avensys
intends to leverage its existing customer base which includes over 1,000
established accounts.
The reputation of Avensys has been built on years of experience in solving
environmental monitoring problems, from micro scale in-building sensing systems
to the real-time monitoring of temperature, humidity, pressure or chemical
levels and macro-scale wireless landslide and flood warning systems in different
countries. Through integrated solutions and services branded under the name
"SenseYourWorldTM", Avensys combines skills, staff and the knowledge to
integrate multiple monitoring technologies to deliver real-time, automated,
cost-efficient data to business users requesting increased market intelligence.
To enable Avensys to offer end-to-end monitoring solutions to its customers,
proprietary technologies were designed to work with technologies from other
companies, including partners, competitors, and other third parties. Similarly,
Avensys' services were designed to operate with a variety of communications
protocols. Avensys plans to continue to develop additional proprietary
technology where feasible and to purchase or license technology where
cost-effective.
Our main geographical market for environmental solutions is Canada, and our
distribution model is direct, involving a team of qualified engineers located in
Montreal, Toronto and Vancouver.
Credit Management Solutions
Our credit management solutions are provided by our C-Chip Technologies
Corporation (North America) subsidiary ("C-Chip"). On January 7, 2003, we
acquired all assets and intellectual property related to a new wireless,
web-based set of communication tools offering users complete access, remote
control, and monitoring of a variety of equipment from Capex Investments Limited
("Capex"). The technology we acquired allows selective enabling, disabling
(on/off) of targeted equipment, and other commands at will, from anywhere to
almost anywhere in North America. Essentially, the products and solutions
derived from this technology are targeted to financial institutions and leasing
companies to mitigate risks and enforce schedule of payment of borrowers and
lessees of certain equipment. This technology is herein referred as the C-Chip
technology. We have focused our initial product and market development effort in
the automotive industry.
The basic system component of C-Chip's technology entails a chipset embedded in
target devices. This includes a cellular radio GPS technology and a
microprocessor. Other required components include access to wireless networks
and Internet access. The hardware unit is addressable through a communication
bridge based on the GSM digital network. The processor accepts an input signal
and compares the signal to a number of criteria to determine if the current
operating condition should be maintained or modified.
To process the commands of authorized users and to enable users to manage their
own database of embedded devices from a central point using the Web, C-Chip has
built a proprietary Secure Data Management Center. This eliminates the need for
users to make a substantial investment in acquiring and supporting capital
equipment, such as hardware, software and data networking equipment, in order to
use the Company's services.
C-Chip's proprietary technology is designed to work with those from other
companies, including corporate partners, competitors, and other third parties
The Company expects to continue development of additional proprietary
technology, and, where cost-effective, purchase or license technology.
21
Our first generation of the Credit Chip vehicle tracking device was based on the
AMPS (analogue) standard of communication. C-Chip chose to reengineer this
product for mass production in the first quarter of calendar 2005 to achieve
increased efficiencies and to streamline processes. In order to achieve this as
promptly as possible, C-Chip concluded an agreement in April 2005 with iMetrik
Inc, a company specializing in the development and marketing of wireless
solutions to improve management of mobile and remote assets. The Credit Chip 100
vehicle tracking device was accredited by our network supplier in December 2005
and by March 31 2006, we had shipped 1500 units of this device.
During the same period of time, our partner iMetrik was developing a GSM based
product, and in March 2006, we announced the launch of the Credit Chip 200G. The
Credit Chip 200G is C-Chip's most advanced credit management solution. It
combines remote location of vehicles with immobilization capabilities. Using the
worldwide GSM digital network for wireless communications and our Internet Web
Applications, credit grantors have the ability to go online, sound a
pre-warning, and then disable a vehicle. If suitable payment arrangement is not
made, the vehicle can be located on a map in real-time, via the Internet right
on any computer screen.
Our competitors in credit management solutions for the automotive sector include
AirIQ, OnTime, and PassTime. These competitors offer different versions of an
"egg timer" whereby a code must be manually entered using a keypad to enable a
physical device connected to the vehicle's starter. The process enables the use
of the vehicle for a certain period of time. Although the device does not rely
on wireless network coverage to function, a code must be given and manually
entered after each payment has been made. These devices work well but involve
significant management time and expense. The Credit Chip 200G offers a
significant price advantage over these manual devices and, in management's
opinion, is a more sophisticated solution as it is designed to be transparent to
users.
In each market segment where we intend to position our web-based products, we
compete primarily on the basis of functionality, ease of use, quality, price,
service availability, and effectiveness. All our target markets for all market
segments are highly competitive. As market demand for wireless communications
tools enabling management of remote assets increases, the quality, functionality
and availability of competitors' products and services is expected to progress.
And with new competitors flooding our market, further price reduction of
products and services is expected. In addition, we expect that the widespread
adoption of industry standards may make it easier for new market entrants or
existing competitors to improve their products and services or offer some or all
of the products and services we offer or may offer in the future, possibly at
lower prices than ours. This would harm the competitive advantages that our
products and services currently enjoy.
Warranties
The Company's current policy is to offer a one year warranty on all of its
web-based products. Avensys' warranty policy for manufactured products varies
between 3 months and two years, depending on the product and customer.
Insurance
Manaris currently maintains $1,000,000 of insurance coverage for its web-based
security products and $1,000,000 for general liability and coverage for fixed
assets. Avensys maintains insurance coverage of $3,000,000 for its fiber based
products and $1,000,000 for general liability and coverage of its fixed assets.
Government Regulation
The hardware components of the Company's web-based products are subject to
certification by the Federal Communications Commission in the United States and
by the Department of Communications in Canada. C-Chip's first generation of
web-based products are all in the process of obtaining such certification for
the US and Canadian markets. Certification is in the process of being obtained
in the US. We have no reason to believe it will not be granted for our products.
It is not a condition of sale that our products be certified by the FCC in the
US. Future web-based products are expected to undergo the certification process
once all pre-commercialization tests are completed. Furthermore, wireless
carriers who supply the Company with airtime enabling our services are also
subject to regulation by the Federal Communications Commission in the US and the
Canadian Radio-Television and Telecommunications Commission in Canada.
Manufactured products are subject to various industry and government
certifications, all of which need to be obtained before commercial launch.
Employees
As of September 25, 2006, we have one hundred and forty-six (146) employees; 136
(Avensys including ITF Labs), 5 (C-Chip), 5 (Manaris) employees on the payrolls
of C-Chip and Avensys and we retained some part-time consultants. Of the 136
employees at Avensys and ITF Labs, 109 are Avensys employees, and 27 are ITF
Labs employees. Our employees are not unionized. We believe relationships with
our employees and consultants are good.
22
LEGAL PROCEEDINGS
1. Canadian Security Agency Settlement
In June 2006, our Canadian Security Agency subsidiary satisfied all its
obligations under a settlement agreement reached with its creditors, and is now
free of those liabilities. The settlement proposal was ratified by the Superior
Court of Quebec on May 3, 2006. On April 4, 2006, a meeting of the creditors was
concluded with the unanimous approval of the settlement proposal brought forward
by Canadian Security Agency. The settlement was funded from CSA cash on hand of
$137,423 (CAD$153,061), and a payment of $112,265 (CAD$124,446) from Manaris.
The operations of Canadian Security Agency have been permanently discontinued.
2. Labor Tribunal Decision
In December, 2002, a former Avensys employee filed a lawsuit with the Quebec
Labour Commission alleging wrongful dismissal by Avensys Inc. and claiming an
indemnity in the amount of $143,498 (CAD $160,000). In August 2006, the Quebec
Court of Appeal ordered Avensys to follow the Quebec's Labor Tribunal's decision
and pay an indemnity of $160,731 (CAD $179,215) to the former employee.
3. Patent Notice
On September 28, 2006, our subsidiary C-Chip Technologies (North America)
(C-Chip) received a letter dated September 27, 2006 from a law firm representing
one of our competitors, placing C-Chip on notice of its potentially infringing
activities, and demanding a response within 30 days. No proceedings have been
initiated and no claim for damages has been made.
Manaris is not a party to any other pending legal proceeding, nor is its
property the subject of a pending legal proceeding, that is not in the ordinary
course of business or otherwise material to the financial condition of Manaris'
business.
DESCRIPTION OF PROPERTY
The Manaris main office is located at 1155, Rene-Levesque West, Suite 2720,
Montreal, Quebec, Canada. The base rent for the current premises is
approximately CDN$8,161 inclusive of taxes per month and is subject to annual
increases equivalent to the increase in the Consumer Price Index ("CPI"). This
lease expires on November 30, 2010.
The office of our wholly owned subsidiary, C-Chip, is located at 740 Notre-Dame
West, Suite 1320, Montreal, Quebec, Canada. They currently lease approximately
1,900 square feet for administration and development. The base rent for the
current premises is approximately CND$2,300 inclusive of taxes per month and is
subject to annual increases equivalent to the increase in the Consumer Price
Index ("CPI"). This lease expires in June 2010.
The main office of our wholly owned subsidiary, Avensys Inc., is located at 400
Montpellier, Ville Saint-Laurent, Quebec, Canada. They currently lease
approximately 41,740 square feet for administration and production. The base
rent for the current premises is approximately CND$31,357 inclusive of all
taxes. This lease expires on January 31, 2010 with an option to renew for an
additional 5 years until January 31, 2015.
Avensys has also two sales representative offices in Canada. They currently
lease approximately 3,615 square feet for administration at 1131 Derry Road
East, Mississauga, Ontario Canada. The base rent for the current premises is
approximately CAD$4,417 inclusive of all taxes per month and is subject to
annual increases equivalent to the increase in the Consumer Price Index ("CPI").
This lease expires on June 30, 2008. They currently lease approximately 400
square feet for administration at 301-1493 Johnston Road, White Rock, British
Columbia, Canada. The base rent for the current premises is approximately
CAD$843 inclusive of taxes per month and is subject to annual increases
equivalent to the increase in the Consumer Price Index ("CPI"). This lease
expires on January 31, 2007. Avensys Inc. also maintains facilities located at
247 Boulevard Thibeau, Cap-de-la-Madeleine, Quebec, Canada. They currently lease
approximately 6,500 square feet and the base rent for the current premises is
approximately CAD$3,648 inclusive of taxes per month and is subject to annual
increases equivalent to the increase in the Consumer Price Index ("CPI"). This
lease expires on October 30, 2006.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 years ended June
30, 2006 and 2005 as included in this Form SB-2.
With respect to forward-looking statements made in this Management's Discussion
and Analysis of Financial Condition and Results of Operations see Part I initial
paragraph concerning "forward-looking statements".
EXECUTIVE OVERVIEW
In the twelve months ending June 30, 2006, we made progress in refining our
strategic objectives, cleaning up our balance sheet, and assisting our
subsidiaries in achieving their respective goals.
First, we exited the professional services business. In September 2005, we
ceased the operations of Canadian Security Agency (CSA), a security guard
business, and in May 2006 our settlement proposal with CSA's creditors was
ratified by the Superior Court of Quebec. In addition, in February 2006, we sold
all of the shares of Chartrand Laframboise Inc. (CLI), a security consulting and
investigations business. These transactions were undertaken to strengthen
Manaris' balance sheet, streamline activities and sharpening the company's focus
on its two operating subsidiaries, C-Chip and Avensys.
Secondly, we took steps to strengthen our two remaining subsidiaries - Avensys
Inc. and C-Chip Technologies (North America) Inc. Using in part the proceeds
from the sale of CLI, Avensys acquired the manufacturing assets and business of
ITF Optical Technologies Inc. (ITF). This acquisition provides Avensys' fiber
component production division with access to ITF's 10,000 square foot clean
room, thereby providing economies of scale and the capacity for significant
future growth. It also provided office and warehouse space for the Avensys
environmental monitoring solutions business.
Concerning C-Chip, we invested in reengineering the remote locate and disable
device during 2005 and early 2006. In March 2006, we launched the Credit Chip
200G, our GSM version of the product. The initial reception by the market has
been excellent. Although we have had some supply chain issues through the summer
months of 2006, we are confident that once these have been solved, our sales
will improve significantly.
Thirdly, during the quarter ending March 31, 2006, and following an annual
review of goodwill, we determined that some amount of goodwill created when we
purchased Avensys Inc. in February 2005 should be removed from the balance
sheet. This amount was subsequently determined to be $1,529,767. The impairment
of goodwill is related to an extension of the timeline for achieving our
forecasted return on investment from Avensys, and does not reflect our
confidence in Avensys and its future.
Finally, both Avensys and C-Chip, while continuing to make progress and grow
revenues, have yet to generate sufficient cash flows to support the operations
of the Company. In order to obtain working capital, we concluded a private
placement in August 2006 for $3.6 million. The debenture we issued in February
2005 for $4.68 million have been largely repaid or converted, with approximately
$580,000 outstanding as of the date of filing.
For FY2007, our primary objective is to maintain our overall revenue growth,
both from Avensys as it integrates the business of ITF Optical, and from C-Chip
as it meets the demand for its new product Credit Chip 200G. We continue to seek
out cost reductions at the holding company while evaluating strategies for
converting the revenue growth in our businesses into enhanced shareholder value.
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. Avensys
is comprised of two divisions: (i) Avensys Technology, which produces fiber
components, optical sensors 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.
24
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 were
relocated to the ITF facilities during the spring of 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 components for telecom, fiber lasers, submarine, military
and industrial uses. This will benefit Avensys and will serve to elevate both
the Company's technological depth and production capabilities.
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.
The acquisition of the assets of ITF Optical has contributed to solidifying our
position in the optical component market. We occupy a dominant position for some
of the components that we are offering and intend to occupy an even more
important market space in the future through both organic growth and mergers &
acquisitions.
The market for fiber optics components continues to recover, with the majority
of Avensys' components still destined for the telecommunications market.
Components and modules for fiber lasers have shown significant growth in FY2006,
both for components originating from Avensys and from our acquisition of ITF
Optical assets. Optical sensors remain part of our long term strategy, although
the current growth of this market segment is still limited to the single digit
range.
Although the most drastic changes this year are associated with Avensys
Technology, the other division, Avensys Solutions, remains an important part of
Avensys. The market for environment monitoring in Canada is quite mature, with a
total growth in the 5% range. The creation of a value-added group within the
Solutions division has helped us go up the value chain throughout the year.
As of June 30, 2006 we ceased the activities related to material testing.
Material testing was a micro segment within Avensys Solutions that represented
less than 2% of the company's revenue with very low margins and no synergies
with the other activities.
The stable nature of Avensys Solutions, combined with healthy organic growth,
has significantly helped Avensys to balance the growth challenges of Avensys
Technology. We believe that our unique position in the industry of combining the
manufacturing of optical components with the offering of services through our
Solutions division has contributed to a position of strength that few of our
competitors can enjoy. We intend to continue to fully leverage this balance in
the future.
OVERVIEW OF C-CHIP TECHNOLOGIES SUBSIDIARY
It has been a very challenging year at C-Chip. At the outset, we were focused on
reengineering the first generation vehicle tracking device, the Credit Chip 100,
based on the AMPS (analogue) standard of communication. The Credit Chip was
finally accredited by the network supplier in December 2005 and we began
shipping product. By March 31, 2006, we had shipped 1500 units.
At the same time and during the first half of our fiscal year, we acknowledged
the need to shift to a GSM (digital) standard of communication, particularly as
the AMPS standard has been declared by the federal authorities in the US to have
a finite life. Work began with our business partner iMetrik Inc. in the fall of
2005 and in March we announced the launch of the Credit Chip 200G, the GSM
version of our vehicle tracking device.
The Credit Chip 200G and its related service offering has been well received in
the market place, much more so than the AMPS product. Starting in April 2006, we
began shipping at a rate of almost 1000 units per month, and in August 2006, we
shipped in excess of 2000 units. The main obstacle preventing a faster ramp up
during the summer of 2006 was related to the supply chain, primarily related
difficulty in securing and financing the parts for what was a new product. We
are working at clearing this obstacle, to allow for an increase in monthly
shipments over the next 6 months.
Nonetheless, our C-Chip revenues for the year ended June 30, 2006 were
disappointing. C-Chip was one of our priorities for the year and it has taken
longer than anticipated to realize its potential. We are however pleased with
progress over the past few months. We look forward to C-Chip helping enhance
shareholder value over the balance of our new fiscal year.
25
Results of Operations for the twelve months ended June 30, 2006 compared to the
twelve months ended June 30, 2005
The results of operations include the accounts of the Company and its
subsidiaries.
Operating results for Avensys were included from the date of acquisition of
February 28, 2005, in fiscal year 2005, and for twelve months in fiscal year
2006. The results of operations of ITF have been included in the consolidated
results of Manaris commencing from the date of acquisition - April 18, 2006.
Fiscal Year Ended June 30,
--------------------------------------------- ------------------------------------
2006 2005 Change Change
--------------------- --------------------- ------------------------------------
$ $ $ %
Revenue 10,498,505 3,580,619 6,917,886 193%
Cost of Revenue 7,464,710 2,306,458 5,158,252 224%
--------------------- --------------------- -------------------
Gross margin 3,033,795 1,274,161 1,759,634 138%
--------------------- --------------------- -------------------
Gross Margin as % of Revenue 29% 36%
Operating expenses
Depreciation and amortization 979,635 373,905 605,730 162%
Selling, general and administration 6,447,065 3,243,653 3,203,412 99%
Acquired in-process research and development - 386,749 (386,749) -100%
Loss on disposal of long-lived assets - 15,487 (15,487) -100%
Loss on impairment of Goodwill 1,529,767 - 1,529,767 100%
Loss on impairment of Intangible Assets 107,715 117,199 (9,484) -8%
Research and development 1,106,259 731,865 374,394 51%
Stock based compensation 490,795 1,216,542 (725,747) -60%
Contingency for litigation losses - 192,549 (192,549) -100%
--------------------- --------------------- -------------------
Total Operating expenses 10,661,236 6,277,949 4,383,287 70%
--------------------- --------------------- -------------------
--------------------- --------------------- -------------------
Operating gain (loss) (7,627,441) (5,003,788) (2,623,653) 52%
--------------------- --------------------- -------------------
Other income (expenses) (4,771,904) (808,734) (3,963,170) 490%
Income tax benefits - refundable tax credits 351,242 65,228 286,014 438%
Non-Controlling interest (3,977) (1,257) (2,720) 216%
Results of discontinued operations 149,637 (459,251) 608,888 -133%
--------------------- --------------------- -------------------
Net loss for the year (11,902,443) (6,207,802) (5,694,641) 92%
--------------------- --------------------- -------------------
Effect of reduction in exercise price
of outstanding warrants (2,197,296) - (2,197,296) 100%
--------------------- --------------------- -------------------
Net loss applicable to common
shareholders (14,099,739) (6,207,802) (7,891,937) 127%
--------------------- --------------------- -------------------
Revenue
Sales from the Fiber & Monitoring operating segment, represented by Avensys'
products and solutions, account for 97% of net revenues. Avensys products were
sold directly to customers throughout the world. Sales from the Credit
Management operating segment, represented by C-Chip's products and solutions,
were generated through a network of eight resellers located in North America.
Our revenues were composed of the following:
Fiscal Year Ended June 30,
------------------------------------------------
2006 2005 Change Change
----------------------- ---------------------- ---------------------------------------
$ $ $ %
Avensys 10,179,426 3,237,735 6,941,691 214%
C-Chip 319,079 342,884 (23,805) -7%
----------------------- ---------------------- ----------------------
Revenue 10,498,505 3,580,619 6,917,886 193%
----------------------- ---------------------- ----------------------
Our revenues for the twelve months ended June 30, 2006 increased 193% over the
year ended June 30, 2005. This increase is primarily due to the inclusion of
Avensys' results for the full fiscal year ended June 30, 2006, as compared to
four months for the fiscal year ended June 30, 2005.
26
Cost of revenue and gross margin
Cost of goods sold as a percentage of revenue was 71% for the year ended June
30, 2006, compared with 64% at June 30, 2005. This 7% decrease in gross margins
as a percentage of revenue was primarily due to the operations of Avensys -
sales were affected by downward pressure on prices of fiber products destined
for the telecommunications market, and costs of production increased temporarily
due to the transition of Avensys production to the newly acquired ITF facility
during the fourth quarter of the fiscal year.
Operating Expenses
Depreciation and amortization
Depreciation and amortization for the year ended June 30, 2006 increased by
$605,730 over the previous year. This increase is primarily attributed to the
inclusion of Avensys' results for the full fiscal year ended June 30, 2006, as
compared to four months for the fiscal year ended June 30, 2005. Depreciation
and amortization expenses attributable to the assets of Avensys, amounted to
$804,140 for the year ended June 30, 2006, compared to $133,201 for 2005.
Selling General and Administrative expenses
Selling, general and administrative (SG&A) expenses consist primarily of payroll
and related expenses and professional fees. Overall, SG&A expenses for the year
ended June 30, 2006 increased by $3,203,413 versus the same period in 2005. SG&A
are composed of the following:
Fiscal Year Ended June 30,
------------------------------------------------ -------------------------------
2006 2005 Change Change
---------------------- ---------------------- -------------------------------
$ $ $ %
General and administrative 1,472,256 592,778 879,478 148%
Marketing and Sales 2,309,051 807,324 1,501,727 186%
Payroll and related expenses 913,752 782,056 131,696 17%
Professional fees 1,452,983 856,047 596,936 70%
Travel 66,099 43,538 22,561 52%
Other 232,924 161,910 71,014 44%
---------------------- ---------------------- ------------------
Selling, General and Administrative
Expenses $ 6,447,065 $ 3,243,653 $ 3,203,412 99%
---------------------- ---------------------- ------------------
o General and administrative expenses for the year ended June 30, 2006
increased by 148% versus the same period in 2005 primarily due to the
addition of Avensys' operations on February 28, 2005.
o Marketing and sales expenses increased by 186% versus the same period in
2005 primarily due to the addition of Avensys' operations on February 28,
2005.
o The increase of 70% in professional fees compared with the same period in
2005 is related to increases in accounting, audit and legal services
expenses.
Research and Development
For the year ended June 30, 2006, research and development expenses primarily
consisted of salaries and related expenses for research personnel, prototype
manufacturing and testing at the Avensys Labs facility in Trois-Rivieres,
Quebec. In July 2006, Avensys Labs relocated all its research and development
activities from the Trois-Rivieres facility to ITF Labs in Montreal, Quebec.
Research and development expenses for the year ended June 30, 2006 increased by
$374,394 over the previous year. This increase is primarily attributed to the
inclusion of Avensys' results for the full fiscal year ended June 30, 2006, as
compared to four months for the fiscal year ended June 30, 2005.
Stock Based Compensation
The $725,747 decrease in stock-based compensation for the fiscal year ended June
30, 2006, as compared to the previous year is a direct result of reduction in
business and strategic development activities, which were usually paid to
consultants through the issue of stock options.
Intangible asset impairment
During the fourth quarter of fiscal 2006, Management recorded an intangible
assets impairment charge of $107,715 in the Consolidated Statement of Operations
for the year ended June 30, 2006 relating to intangible assets of Manaris which
were no longer in use.
27
Goodwill impairment
In May 2006, the Company completed its annual goodwill impairment test. In
evaluating whether there was an impairment of goodwill, management compared the
fair value of the Avensys reporting unit against its carrying amount, including
the goodwill. Measurement of the fair value was based on the reporting unit's
present value of expected future cash flows. As the carrying amount exceeded the
estimated fair value, the fair value was allocated to the reporting unit's
underlying assets and liabilities, and management then determined that the
carrying value of the goodwill exceeded the implied fair value of the goodwill.
Accordingly, the Company recorded a goodwill impairment charge (labeled "Loss on
Impairment of Goodwill") of $1,529,767. Management believes this impairment
arose primarily as a result of an extension in the timeframe for realizing
growth objectives and anticipated cash flows of the Avensys reporting unit.
Other Expenses
Other expenses for the year ended June 30, 2006 increased 490% over the previous
year, primarily due to debenture accretion, and interest expenses. During the
year ended June 30, 2006, debenture accretion increased $3,382,004 over the
previous year. This increase is directly related to the Series A Notes.
Refundable Tax Credits
Refundable tax credits for the year ended June 30, 2006 increased 438% over the
previous year, primarily due to the inclusion of Avensys' results for the full
fiscal year ended June 30, 2006, as compared to four months for the fiscal year
ended June 30, 2005.
Net Loss Applicable to common shareholders
Net loss for the year ended June 30, 2006 increased $7,891,937 over the previous
year primarily due to the impairment of goodwill, increases in marketing and
sales expenses arising out the inclusion of Avensys' operations for a full
fiscal year, professional fees related to increased use of accounting, audit and
legal services, debenture accretion, interest expenses, and the effect of the
reduction in the exercise price of outstanding warrants in July 2005.
Financial Condition, Liquidity and Capital Resources
Historically, our operations have been financed primarily from cash on hand,
from the sale of common shares or of convertible debentures and with respect to
Avensys, primarily from revenue from the sales of products and services.
As of June 30, 2006, we had working capital deficiency of $1,657,699, compared
to a working capital deficiency of $1,003,819 at June 30, 2005, excluding the
assets and liabilities of discontinued operations at June 30, 2005. Included in
these figures for net working capital:
As of June 30,
----------------------------------------- ------------------------------------
2006 2005 Change Change
------------------- ------------------- ------------------------------------
$ $ $ %
Cash, cash equivalents, and short term investments 438,708 287,147 151,561 53%
Receivables 3,480,649 2,634,844 845,805 32%
Inventory 1,563,805 1,000,507 563,298 56%
Other current assets 589,302 1,431,365 (842,063) -59%
------------------- ------------------- ------------------------------------
Current assets 6,072,464 5,353,863 718,601 13%
------------------- ------------------- ------------------------------------
Accounts payable and accrued liabilities 4,666,859 2,488,309 2,178,550 88%
Loans payable 2,331,696 1,324,999 1,006,697 76%
Other current liabilities 731,608 2,544,374 (1,812,766) -71%
------------------- ------------------- ------------------------------------
Current Liabilities 7,730,163 6,357,682 1,372,481 22%
------------------- ------------------- ------------------------------------
------------------- ------------------- ------------------------------------
Net working capital (deficiency) (1,657,699) (1,003,819) (653,880) -65%
------------------- ------------------- ------------------------------------
Currently, we are implementing the following measures to address our concerns
over the liquidity of the Company, and its ability to continue as a going
concern:
o Streamlining costs at Manaris, the holding company.
o Helping our subsidiaries obtain financing to fund revenue growth.
o Renegotiating debt at our C-Chip subsidiary, to obtain improved repayment
terms.
28
During the fiscal year ended June 30, 2006, net cash used to fund continuing
operating activities was $3,459,029, consisting primarily of the net loss for
the year of $11,902,443 adjusted for:
o A non-cash goodwill impairment charge of $1,529,767 related to Avensys.
o Debenture accretion of $3,991,229 in connection with the Series A Notes.
o Depreciation and amortization of $1,046,355,
o Stock based compensation of $490,795
o Amortization of deferred financing costs $335,004
During the year ended June 30, 2006, we mainly financed our operations and
acquisitions through the July Special Warrant Offer for total proceeds of
$2,576,118, and the sale of CLI for net cash proceeds of $2,599,606. Additional
cash of $100,013 was raised through the exercise of 1,758,000 stock options
(2005: $205,012).
Selected balance sheet information:
As of June 30,
--------------------------------------------------------- -------------------------------------
2006 2005 Change Change
--------------------------- --------------------------- -------------------------------------
$ $ $ %
Total Assets 17,143,434 20,115,755 (2,972,321) -15%
Current Liabilities 7,730,164 6,357,682 1,372,482 22%
Long-Term Liabilities 2,183,344 2,510,181 (326,837) -13%
Non-Controlling Interest 23,940 18,033 5,907 33%
Total Stockholder's Equity 7,205,986 11,229,859 (4,023,873) -36%
The decrease in total assets is primarily due to the divestiture of CLI in
February 2006 and a goodwill impairment related to the Avensys reporting unit,
offset by increases in accounts receivable and inventories, and fixed assets
added as a result of the ITF transaction. The increase in current liabilities is
primarily a result of an increase in the C-Chip credit facility during the
course of the year, incurred to bring the Credit Chip 200G credit management
solution to market.
As of June 30, 2006, the Company had 77,671,281 issued and outstanding shares
compared to 54,782,802 on June 30, 2005. The increase in common shares is mainly
due to the issuance of 7,525,124 common shares following the exercise of
warrants, 2,550,795 restricted common shares for the ITF transaction, and
10,221,522 common shares in connection with the Series A Notes.
Stock options outstanding at June 30, 2006 totaled 4,486,750 at a weighted
average exercise price of $0.60 and have a weighted average remaining
contractual life of 3.4 years.
February 2005 Convertible Note and Warrant Private Placement
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. The balance of principal relating to the Series A
Notes on June 30, 2006 stands at $1,015,843, as compared to $4,675,000 on June
30, 2005. The change is attributed to principal payments of $3,609,657 made in
3,897,695 common shares, $625,353 in cash and to notes conversion of $1,249,360
made in 3,575,008. Interest payments during the fiscal year ended June 30, 2006
amounted to $265,436, made in 748,819 shares and $15,887 in cash. The Company
has the option to make principal payments in shares of Manaris Corporation stock
if the weighted-average share price, of Manaris Corporation stock for the five
days immediately preceding the payment date, is greater than $0.35. The Company
plans to continue making payments in shares so long as it is possible.
Otherwise, the Company will make cash principle payments on the remaining
convertible notes.
July 2005 Special Warrant Offer
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.
29
Effect of reduction in exercise price of outstanding 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. Further, 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 $2,197,296 is reported as
"Effect of reduction in exercise price of outstanding warrants" in the
Consolidated Statement of Operations, and has been credited to "additional paid
in capital" and charged to "deficit" in the Consolidated Statement of
Stockholders Equity.
August 2006 Convertible Note and Warrant Private Placement
On August 11, 2006, we entered into a entered into a Note and Warrant Purchase
Agreement for the sale by the Company of Series B Subordinated Secured
Convertible Notes (the "Series B Notes") in an aggregate principal amount of
approximately $3.6 million and Original Issue Discount Subordinated Secured
Convertible Notes equal to fifteen percent (15%) of the aggregate principal
amount of Series B Notes (the "OID Notes") to certain institutional and
accredited investors (the "Investors"). Pursuant to the Purchase Agreement, the
Company also issued four year warrants to purchase shares of the Company's
common stock in an amount equal to 37.5% of the number of common shares
underlying the Series B Notes at $0.45 per share (the "Series Z Warrants") and
2.5% of the number of common shares underlying the Series B Notes at $0.65 per
share (the "Series Y Warrants"). Gross proceeds of approximately $2.1 million
were received by August 22, 2006, with net proceeds of approximately $1.8
million, after transaction fees. The remaining $1.5 million will be disbursed
upon effectiveness of the Company's registration statement, and is expected to
provide net cash proceeds of approximately $1.35 million after transaction fees.
However, there is no certainty the Company's registration statement will become
effective, and no assurance that the remaining amount will be received.
The Notes mature thirty (30) months from the date of issuance (the "Maturity
Date") and are convertible at any time into shares of the Company's common stock
at a fixed conversion price of $0.42, subject to a conversion price reset of
$0.35. The conversion price of the Notes is subject to adjustment for certain
events, including dividends, distributions or split of the Company's Common
Stock, or in the event of the Company's consolidation, merger or reorganization.
Beginning nine months from the issuance date, the Company is required to make
principal payments equal to one-eighth of the aggregate principal amount of the
Notes on a quarterly basis. The Company may pay the principal payment in either
cash plus a premium of 7% of each principal payment or in shares of registered
common stock at a 15% discount to the market price of the Company's common
stock. The Company's obligations under the Purchase Agreement and the Notes are
secured by a subordinated lien on substantially all of the assets of the
Company, pursuant to a Pledge and Security Agreement. According to the terms of
the Agreement, payments on the Series B Note are scheduled to commence in April
2007.
We did not file a registration statement within 45 days from the closing date of
our August 2006 private placement, which is the filing date specified in the
financing documents. As a result, until such time as the registration statement
is filed, the investors can demand repayment in an amount equal to one hundred
ten percent (110%) of the aggregate principal amount of the notes. However, we
have not received a notice of default from the investors.
In addition, as a result of our failure to file the registration statement by
the filing date, we have begun to accrue liquidated damages equal to 1.5%, for
each calendar month (prorated for shorter periods), of the initial investment in
the notes. The liquidated damages accrue until the registration statement is
filed.
Critical Accounting Policies
The Company's management makes certain assumptions and estimates that impact the
reported amounts of assets, liabilities and stockholders' equity, and revenues
and expenses. These assumptions and estimates are inherently uncertain.
Management judgments that are currently the most critical are related to revenue
recognition, inventory valuation, valuation of goodwill and long-lived assets,
stock based compensation, and contingent consideration. Below we describe these
policies as well as the estimates involved. For a more detailed discussion on
accounting policies, see the notes to the audited consolidated financial
statements.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, restricted
marketable securities, accounts payable and accrued liabilities are comparable
to the carrying amount thereof given their short-term maturity. Bank and other
loans payable, mortgage loan, capital lease obligations and due to related
parties are recorded at their carrying values which also approximate their fair
values. Other debt instruments, such as the convertible debentures, balance of
purchase price payable and the derivative financial instrument, have been
recorded at discounted values, present values or fair values depending on the
nature of the debt instrument.
30
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company tests long-lived assets or asset groups for
future recoverability when events or changes in circumstances indicate that
their carrying amount may not be recoverable. Circumstances which could trigger
a review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash
flow or operating losses combined with a history of losses or a forecast of
continuing losses associated with the use of the asset; and current expectation
that the asset will more likely than not be sold or disposed significantly
before the end of its estimated useful life. The Company's long-lived assets
consist primarily of property and equipment and intangible assets.
Recoverability of a long-lived asset is assessed by comparing the carrying
amount of the asset to the sum of the estimated undiscounted future cash flows
expected from its use and the eventual disposal of the asset.. An impairment
loss is recognized when the carrying amount of a long-lived asset is not
recoverable and the amount of such impairment loss is determined as the excess
of the carrying amount over the asset's fair value.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires
Management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used for revenues, expenses, the
allowance for doubtful accounts, impairments of long-lived assets and goodwill,
discounted liabilities and income taxes, among others. Estimates and assumptions
are reviewed periodically and the effects of revisions are reflected in the
Consolidated Financial Statements in the period they are determined to be
necessary. Management bases its estimates on historical experience, industry
standards and on various other assumptions believed to be reasonable under the
circumstances. Actual results could differ materially from those estimates.
Stock-Based Compensation
The Company has elected to apply the intrinsic value method of accounting for
stock options granted to employees in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB25). Under
the intrinsic value method of accounting, compensation expense is recognized if
the exercise price of the Company's employee stock options is less than the
market price of the underlying common stock on the date of grant. Stock-based
compensation for employees is recognized on the straight-line basis over the
vesting period of the individual options. Stock options granted to non-employees
are accounted for under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair
value based method of accounting for stock-based awards, and recognizes
compensation expense based on the fair market value of the stock award or fair
market value of the goods and services received, whichever is more reliably
measurable. Under the provisions of SFAS 123, companies that elect to account
for stock-based awards in accordance with the provisions of APB 25 are required
to disclose the pro forma net income (loss) that would have resulted from the
use of the fair value based method under SFAS 123.
Business Combinations and Goodwill
Acquisitions of businesses are accounted for using the purchase method and,
accordingly, the results of operations of the acquired businesses are included
in the Consolidated Statement of Operations effective from their respective
dates of acquisition.
Goodwill represents the excess of the purchase price of acquired businesses over
the fair values of the identifiable tangible and intangible assets acquired and
liabilities assumed. Pursuant to SFAS No. 141, the Company does not amortize
goodwill, but tests for impairment of goodwill at least annually. The Company
evaluates the carrying value of goodwill in accordance with the guidelines set
forth in Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS142). 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 tangible and intangible 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 the Consolidated Statement of Operations and Comprehensive Loss.
31
Research and Development Expenses and Investment Tax Credits
Research and development expenses are expensed as they are incurred. Investment
tax credits ("ITCs") arising from research and development activities are
accounted for as a reduction of the income tax provision for the year.
Refundable tax credits and non-refundable tax credits are recorded in the year
in which the related expenses are incurred, provided there is reasonable
assurance that the credits will be realized.
The Company is subject to examination by taxation authorities in various
jurisdictions. The determination of tax liabilities and ITCs recoverable involve
certain uncertainties in the interpretation of complex tax regulations. As a
result, the Company provides potential tax liabilities and ITCs recoverable
based on Management's best estimates. Differences between the estimates and the
ultimate amounts of taxes and ITCs are recorded in earnings at the time they can
be determined.
Income Taxes
The Company utilizes the tax liability method to account for income taxes as set
forth in SFAS No. 109, "Accounting for Income Taxes" (SFAS109). Under this
method, deferred future income tax assets and liabilities are determined based
on the differences between the carrying value and the tax bases of assets and
liabilities.
This method also requires the recognition of deferred income tax benefits and a
valuation allowance is recognized to the extent that, in the opinion of
Management, it is more likely than not that the future income tax assets will
not be realized. The Company has incurred net operating losses of $16,997,671
from its inception which expire starting in 2015. The potential benefit of net
operating losses has not been recognized in these financial statements because
the Company cannot be assured it is more likely than not it will utilize the net
operating losses carried forward in future years.
Deferred income tax assets and liabilities are measured by applying enacted or
substantively enacted tax rates and laws at the date of the financial statements
for the years in which the differences are expected to reverse.
32
MANAGEMENT
OFFICERS AND DIRECTORS
On August 24, 2006, Robert Clarke resigned as a member of, and as Chairman of,
the Board of Directors of Manaris Corporation (the "Company"), effective
immediately. There was no disagreement or dispute between Mr. Clarke and the
Company which led to his resignation. Mr. Clarke has served as the Chairman of
our Board of Directors since January 2003.
On August 24, 2006, our Board of Directors appointed John Simons as Chairman of
our Board of Directors to fill the vacancy in the chairmanship created by Mr.
Clarke's resignation. Mr. Simons has served as a member of our Board of
Directors since May 2006.
On September 13, 2006, Andre Monette resigned as Chief Financial Officer of
Manaris Corporation (the "Company"), effective immediately. Mr. Monette has
served as Chief Financial Officer since February 2005.
On September 14 2006, the Company's Board of Directors appointed the Company's
President and Chief Executive Officer, John G. Fraser, to serve as interim Chief
Financial Officer to fill the vacancy created by Mr. Monette's resignation.
The directors and officers, their ages and positions held as of October 10, 2006
are listed below. Each director serves until our next annual meeting of the
stockholders or unless they resign earlier. The Board of Directors elects
officers and their terms of office are at the discretion of the Board of
Directors.
Name Age Position Held
- ------------- --- --------------------------------------------------
John H. Simons 67 Chairman of the Board of Directors
John Fraser 60 President and Chief Executive Officer and Director
Jos J. Wintermans 59 Director
Bernard Bougie 56 Director
Marc Bouchard 48 Director
The following describes the business experience during the past five years of
our directors and executive officers, including for each director, other
directorships held in reporting companies. There are no family relationships
among any of the persons listed.
John Simons Chairman of the Board of Directors. Mr. Simons has been our Chairman
since August 2006. He is President of John H. Simons Consultants Inc, a
management consulting firm that provides management consulting services to both
public and private high-technology companies. He was also Chairman of the Board
of ITF Optical Technologies Inc. and of ISR Technologies Inc. and was a Partner
in GTI Capital Inc. Until 2002, Mr. Simons served as Chairman of the Board of Ad
Opt Technologies Inc. and was Chairman of Engenuity Technologies Inc. until
1998. Prior to June 1994, Mr. Simons was President and Chief Executive Officer
of Canadian Marconi Company. Mr. Simons has extensive experience in the
aerospace, electronics and telecommunications industries.
John Fraser, Director, President and Chief Executive Officer. Mr. Fraser has
served as a Director since January 2003, and as our Secretary and Treasurer from
January 2003 until September 16, 2005. On September 16, 2005, Mr. Fraser was
appointed as our President and Chief Executive Officer for a minimum period of
three months, replacing Stephane Solis. He was a partner for twenty years with
KPMG Canada until January 1998. For the last four years of his career with KPMG,
he was Vice Chairman of the firm and responsible for the Canadian management
consulting division. In January 1998, he started providing consulting services
to professional services and high technology start-up firms, which services he
continues to provide to this day, and since January 1999, under the name J G
Fraser & Associates Inc. In February 2004, J G Fraser & Associates became a
partner in Catalyst Consulting, a private Canadian consulting firm providing
management consulting services to law firms and law departments in Canada and
internationally. From July 1999 to August 2002, Mr. Fraser was a director of
ePhone Telecom Inc. (OTCBB: EPHO). Mr. Fraser served as a Director for Asia
Payment Systems, Inc. (OTCBB: APYM) from September 2002 to June 2006. From June
2000 to May 2003, Mr. Fraser was a director of Walters Forensic Engineering, a
public engineering firm based in Toronto, Canada. (CDNX: YWL). He is a director
of 7bridge Capital, a private venture capital group based in Hong Kong. He is
also a director and immediate past Chairman of Hincks Dellcrest, a non-profit
organization located in Toronto, Canada.
33
Jos J. Wintermans, Director. Mr. Wintermans has served as a Director since
November 2005. Mr. Wintermans has held a number of executive positions in the
financial services, retail, manufacturing and distribution sectors. From June
2001 to December 2004, Mr. Wintermans served as the President, Chief Executive
Officer and a Director of Sodisco-Howden Group. From December 1999 to June 2001
served as the President, Chief Executive Officer and a Director for Skyjack.
From June 1996 to May 1997, he was the President, Chief Executive Officer and a
Director of Rogers Cable Ltd. From 1988 to 1995, he served as Chief Executive
Officer for Canadian Tire Acceptance Ltd. In 1996, he was named Senior
Vice-President, Diversified Business for its parent company, Canadian Tire
Corporation (CTC).
Bernard Bougie, Director. Mr. Bougie has served as a Director since December
2005. A Chartered Accountant (Canada) and an expert in financial information and
corporate governance, Mr. Bougie joined Deloitte & Touche in 1975, a leading
accounting and consulting firm, and became a partner in 1982. He retired as a
senior partner from the firm in August 2004. Since that time, he has acted as a
management consultant. In August 2005, Mr. Bougie was appointed as a Director of
the Board and Chairman of the audit committee of the private Canadian company,
Capital Teamsoft Inc. Mr. Bougie is a member of the Institute of Corporate
Directors and a graduate of the Corporate Director's Governance College.
Marc Bouchard. Director. Mr. Bouchard is the founder of Toll Cross Securities
Inc., a full service institutional investment brokerage firm dedicated to
addressing the increasingly complex needs of small and mid-cap companies in
today's capital markets. Mr. Bouchard has served as Chairman of Toll Cross since
2002. From 1998 to 2002, Mr. Bouchard was a senior officer with Bell Canada
Enterprises Inc., where he was responsible for various aspects of corporate
development, finance and operations. In 1994, Mr. Bouchard joined fONOROLA as
Chief Financial Officer and became Chief Operating Officer in 1995. In 1980, Mr.
Bouchard joined Lehman Brothers, where he spent over 13 years in various
international capital markets capacities including Chief Operating Officer of
Lehman Brothers Asia.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires officers and directors of a company with securities registered
pursuant to Section 12 of the 1934 Act, and persons who own more than 10% of the
registered class of such company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the subject company with copies of all Section
16(a) forms filed. All reports required to be filed under Section 16 during the
last fiscal year have been filed. To our knowledge, the following Forms 3 and 4
required to be filed during the fiscal year ended June 30, 2006 have not been
filed timely:
Form 3 Bernard Bougie, Director, filed on January 19, 2006
Form 4 Bernard Bougie, Director filed on September 27, 2006
Form 3 Marc Bouchard, Director, filed on March 14, 2006
Form 4 Marc Bouchard, Director, filed on September 28, 2006
Form 3 Jos Wintermans, Director, filed on March 16, 2006
Form 4 Jos Wintermans, Director, filed on September 20, 2006
Form 3 John H. Simons, Director, filed on June 14, 2006
34
AUDIT COMMITTEE AND CHARTER
We have an audit committee charter. Under the charter, the committee is
comprised of our independent directors. Our audit committee is responsible for:
(1) selection and oversight of our independent accountant; (2) establishing
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls and auditing matters; (3) establishing procedures
for the confidential, anonymous submission by our employees of concerns
regarding accounting and auditing matters; (4) engaging outside advisors; and,
(5) funding for the outside auditory and any outside advisors engagement by the
audit committee.
Name Age Position Held
- ------------- --- --------------------------------------------------
Bernard Bougie 56 Director, Audit Committee Chairman
Jos J. Wintermans 59 Director
Marc Bouchard 48 Director
AUDIT COMMITTEE FINANCIAL EXPERT
On December 14, 2005, we appointed Mr. Bernard Bougie as Chairman of our audit
committee and as our audit committee financial expert. Mr. Bougie is independent
of our management.
COMPENSATION COMMITTEE
The compensation committee serves as the stock option committee for our stock
option plan, and it reviews and approves any employment agreements with
management and changes in compensation for our executive officers.
Name Age Position Held
- ------------- --- --------------------------------------------------
Jos J. Wintermans 59 Director, Compensation Committee Chairman
Bernard Bougie 56 Director
Marc Bouchard 48 Director
CODE OF ETHICS
We have adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
DISCLOSURE COMMITTEE AND CHARTER
We have a disclosure committee charter. The purpose of the committee is to
provide assistance to Senior management in fulfilling their responsibilities
regarding the identification and disclosure of material information about us and
the accuracy, completeness and timeliness of our financial reports.
35
EXECUTIVE COMPENSATION
Summary Compensation Table
The following tables set forth certain information regarding our Chief Executive
Officer and each of our most highly-compensated executive officers whose total
annual salary and bonus for the fiscal years ending June 30, 2006, 2005, 2004
and 2003 exceeded $100,000:
Long Term
Annual Compensation Compensation Awards Payouts
--------------------------- ------------------------ --------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Salary Bonus sation Award(s) Options / Payouts Compens-
Position [1] Year ($) ($) ($) ($) SARs (#) ($) ation ($)
- ---------------------- ---- ------- ------ -------- ----------- ---------- -------- ---------
Stephane Solis 2005 146,000 11,190 0 1,100,000 0 0
President and Chief 2004 67,164 0 6,644 0 0 0 0
Executive Officer 2003 18,775 0 2,086 0 500,000 0 0
(resigned Sept. 2005)
Andre Monette 2006 160,000 59,000 0 0 0 0 0
Treasurer and Chief 2005 25,112 0 0 0 150,000 0 0
Financial Officer 2004 0 0 0 0 0 0 0
(since Sept. 2005 and 2003 0 0 0 0 0 0 0
Feb 2005 respectively)
John Fraser 2006 171,000 0 0 0 500,000 0 0
President and Chief 2005 0 0 0 0 75,000 0 0
Executive Officer 2004 0 0 0 0 200,000 0 0
(appointed President 2003 0 0 0 0 0 0 0
and CEO Sept 2005)
[1] All compensation received by the officers and directors has been disclosed.
OPTION/SAR GRANTS
There are no stock option, retirement, pension, or profit sharing plans for the
benefit of our officers and directors, other than our 2006 Non Qualified Stock
Option Plan and our 2003 and 2004 Incentive Stock Option Plans. Under these
Plans, the board of directors is vested with discretionary authority to grant
options to persons furnishing services to us. There were 15,000,000 shares in
the plans. As of June 30, 2006, options to purchase 11,314,586 shares had been
granted of which 5,973,686 options had been exercised, 854,150 had been
forfeited and 4,486,750 are outstanding. Under the Plans, we have 4,539,564
options available for issuance as at June 30, 2006.
36
OPTION GRANTS TO OFFICERS AND DIRECTORS DURING THE FISCAL YEAR
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in of Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- --------------- ------------ ------------ ------------ ----------
Robert Clarke 150,000 9.38 % $ 0.68 09/14/2009
Robert Clarke 75,000 4.69 % $ 0.34 06/05/2011
Cherry Lim 75,000 4.69 % $ 0.68 09/14/2009
Cherry Lim 75,000 4.69 % $ 0.35 01/13/2011
John Fraser 75,000 4.69 % $ 0.68 09/14/2009
John Fraser 500,000 31.25 % $ 0.38 09/16/2010
John H. Simons 75,000 4.69 % $ 0.35 06/05/2011
John H. Simons 50,000 3.13 % $ 0.00001 06/05/2011
Marc Bouchard 75,000 4.69 % $ 0.35 06/05/2011
Marc Bouchard 50,000 3.13 % $ 0.00001 06/05/2011
Bernard Bougie 75,000 4.69 % $ 0.34 06/05/2011
Bernard Bougie 50,000 3.13 % $ 0.00001 06/05/2011
Jos Wintermans 75,000 4.69 % $ 0.38 06/05/2011
Jos Wintermans 50,000 3.13 % $ 0.00001 06/05/2011
Andre Monette 150,000 9.38 % $ 0.81 02/14/2010
Aggregated option/SAR Exercised by Officers and Directors in Last Fiscal
Year and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)
Acquired on Realized --------------------------- ---------------------------
Name Exercised (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- --------------- ------------- --------- ----------- ------------- ----------- -------------
Robert Clarke 250,000 $ 154,000 168,750 56,250 $ 0 $ 0
Cherry Lim 200,000 $ 131,000 150,000 0 $ 0 $ 0
John Fraser 200,000 $ 18,900 325,000 250,000 $ 0 $ 0
Benjamin Leboe 170,000 $ 49,600 380,000 0 $ 3,600 $ 0
Claude Pellerin 100,000 $ 20,235 50,000 0 $ 0 $ 0
Andre Monette 0 $ 0 150,000 0 $ 0 $ 0
Jos Wintermans 0 $ 0 68,750 56,250 $ 16,000 $ 0
Marc Bouchard 0 $ 0 68,750 56,250 $ 16,000 $ 0
John H. Simons 0 $ 0 68,750 56,250 $ 16,000 $ 0
Bernard Bougie 0 $ 0 68,750 56,250 $ 16,000 $ 0
LONG-TERM INCENTIVE PLAN AWARDS
We do not have any long-term incentive plans that provide compensation intended
to serve as incentive for performance to occur over a period longer than one
fiscal year, whether such performance is measured by reference to our financial
performance, our stock price, or any other measure other than our 2003, 2004 and
2006 Incentive/or Nonqualified Stock Option Plans.
37
COMPENSATION OF DIRECTORS
Each non-executive director is paid a base fee of CAD $15,000 per year. Fees are
payable quarterly. In addition non executive Directors will receive 50,000
options to purchase shares of the Company at $0.00001 upon their appointment to
the board, and 75,000 options per annum vested quarterly to purchase shares of
the Company at the market price prevailing at the date of appointment. Directors
may, in addition, receive a fee for devoting special attention to the business
of Manaris which is outside the scope of ordinary duties, or where any business
journey must be undertaken. Current fees are:
o CAD $25,000 per annum for acting as a chair of the Board of Directors of the
Company;
o CAD $5,000 per annum for acting as a chair of the Audit Committee or any other
Committee that may be created by the Company;
o CAD $1,000 per meeting of the Board or Committee; if special circumstances
warrant board meetings of less than 90 minute duration and are conducted by
phone, this amount will be reduced to $250.
o CAD $1,000 per day for work which is outside the scope of ordinary duties as a
board or committee member.
INDEMNIFICATION
Pursuant to the articles of incorporation and bylaws of the corporation, we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the state of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of
1933 which may be permitted to directors or officers pursuant to the foregoing
provisions, we are informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, as expressed in the
Act and is, therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of interim financing by shareholders, we purchased management services
from Capex Investments Limited during fiscal year 2003. Capex is owned and
controlled by Robert Clarke, who is a former member of our Board of Directors.
Capex and related parties also paid certain operations expenses directly and
advanced funds for working capital during fiscal year 2003. The amounts due are
non-interest bearing, unsecured, and have no fixed terms of repayment. The
amount due to related parties, including Capex, as of June 30, 2006 is $40,000.
38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of October 10, 2006 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of our directors and named
executive officers; and (iii) our directors and named executive officers as a
group. Except as otherwise indicated, each of the stockholders listed below has
sole voting and investment power over the shares beneficially owned. Except as
otherwise indicated, the address for each person is our address at 1155
Rene-Levesque Blvd. West Suite #2720, Montreal, Quebec, Canada H3B 2K8.
Direct Amount of Beneficial Percent of
Name of Beneficial Owner Ownership Position Class [2]
John H. Simons 125,000 [4] Chairman of the Board of Directors *
John Fraser 745,000 [1] President and Chief Executive Officer *
and a Director [6]
Marc Bouchard 125,000 [4] Director
Jos J. Wintermans 125,000 [4] Director *
Bernard Bougie 125,000 [4] Director *
Capex Investments Ltd 4,913,306 [3] 6.20%
315 St. James Court
St. Denis Street
Port Louis
Republic of Mauritius
All officer and Directors as a Group (5 Persons) 1,245,000 1.57%
* less than 1%
[1] Includes 170,000 shares of common stock and an unexercised option to acquire
575,000 shares.
[2] Based on 79,286,852 shares of common stock issued and outstanding as of
October 10, 2006.
[3] Capex Investments is owned and controlled by Robert Clarke, who is a former
Director of Manaris.
[4] Options to purchase an aggregate of 125,000 shares of common stock have been
granted to newly appointed Directors pursuant to the Company's 2006 Nonqualified
Stock Option Plan. Of this amount, 50,000 are exercisable upon appointment at an
exercise price of $0.0001 per share. The remaining 75,000 are vested quarterly
at the Market Price on the date of their respective appointments to the Board of
Directors. The aforementioned options have ten year terms
[5] John Fraser was appointed interim CEO and President, on September 16, 2005.
Changes in Control
To the knowledge of management, there are no present arrangements or pledges of
our securities that may result in a change in control of our Company.
39
SELLING SHAREHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
This prospectus, as it may be amended or supplemented from time to time, is
deemed to relate to 24,319,497 shares of common stock that may be sold by
certain of our existing shareholders, including:
* 22,692 shares of common stock underlying our Series IB1 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB1 Warrant and $0.00001, entitles a Series IB1 Warrant
holder to acquire one share of our common stock. The Series IB1 Warrants have a
5 year term;
* 215,385 shares of common stock underlying our Series IB2 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB2 Warrant and $0.59, subject to adjustment, will entitle
a Series IB2 Warrant holder to acquire one share of common stock. The Series IB2
Warrants have a 5 year term;
* 323,076 shares of common stock underlying our Series IB3 Warrants issued for
services rendered in connection with our February 2005 Convertible Note
financing. One Series IB3 Warrant and $0.71, subject to adjustment, will entitle
a Series IB3 Warrant holder to acquire one share of common stock. The Series IB3
Warrants have a 5 year term;
* 1,654,394 shares of common stock issuable in satisfaction of debentures issued
by our wholly-owned subsidiary, Avensys, Inc., in February 2005;
* 2,805,874 shares of common stock issued to shareholders of ITF Optical
Technologies, Inc. pursuant to an Asset Purchase Agreement finalized in April
2006 whereby Manaris Corporation, through its wholly-owned subsidiary, Avensys,
Inc., acquired the assets of ITF Optical Technologies;
* 10,780,187 shares of common stock issuable upon conversion of Series B
Subordinated Convertible Promissory Notes, which were issued as part of our
August 2006 financing. The Convertible Notes have an outstanding balance of
$3,622,143 and are currently convertible at $0.42 per share. We are registering
125% of the shares underlying the convertible notes .
* 3,850,067 shares of common stock issuable upon conversion of Original Issue
Discount B Subordinated Convertible Promissory Notes, which were issued as part
of our August 2006 financing. The Convertible Notes have an outstanding balance
of $1,293,622 and are currently convertible at $0.42 per share. We are
registering 125% of the shares underlying the convertible notes .
* 291,739 shares of common stock underlying our Series Y Warrants. One Series Y
Warrant and $0.65, subject to adjustment, will entitle a Series Y Warrant holder
to acquire one share of common stock. The Series Y Warrants have a 4 year term.
We are registering 125% of the shares underlying the Series Y Warrants.
* 4,376,082 shares of common stock underlying our Series Z Warrants. One Series
Z Warrant and $0.45, subject to adjustment, will entitle a Series Z Warrant
holder to acquire one share of common stock. The Series Z Warrants have a 4 year
term. We are registering 125% of the shares underlying the Series Z Warrants.
Midtown Partners & Co., LLC, acted as the placement agent for our 2006
Convertible Note and Warrant Private Placement, our 2005 Convertible Note
Offering, and July 2005 Warrant Offering. Midtown Partners & Co., LLC is an SEC
and NASD registered broker dealer located in Boca Raton, Florida.
40
Pursuant to the Placement Agent Agreement we entered into with Midtown in
connection with our February 2005 Convertible Note financing, Midtown Partners
received a cash fee in an amount equal to seven percent (7.0%) of the principal
amount of the financing and warrants to purchase shares of common stock equal to
ten percent (10%) of the aggregate number of shares of common stock issued and
issuable by the Company in connection with the Financing. In addition, Midtown
Partners received warrants to purchase such number of shares of the common stock
of Manaris equal to ten percent (10.0%) on Warrants that have been issued to the
Placement Agent Investors. Fifty percent (50%) of the Warrants issued to Midtown
have cashless exercise provisions while the remaining fifty percent (50%) of the
Warrants provide for cash exercise at a strike price of $0.71 subject to
adjustment.
Pursuant to the Placement Agent Agreement we entered into with Midtown in
connection with our August 2006 Convertible Note and Warrant financing, Midtown
Partners received a cash fee in an amount equal to ten percent (10%) on the
first three million dollars raised and eight percent (8%) thereafter. In
addition, Midtown Partners and individuals affiliated with Midtown Partners
received the following warrants to purchase shares of the Company's common stock
in the following aggregate amounts: 711,492 warrants exercisable at $.42 per
share; 17,787 Series Y warrants, and; 266,810 Series Z warrants.
41
Shares
Shares Beneficially Owned Beneficially Owned
Prior to the Offering(1) After the
------------------------- Offering(2)
---------------------
Total Shares of Total Beneficial Percentage
Common Stock and Percentage Ownership of Common
Name Common Stock of Before Stock Owned Total Number Percent
Issuable Common the Before the Shares
Upon Exercise Stock, Offering Offering Registered
of Warrants or Assuming
Conversion of Full
Convertible Conversion(4)
Notes(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Ontario Teachers'
Pension Plan (5) 617,292 * 617,292 * 617,292 -0- 0.00%
Investissement
Technologie (3599)
Inc. (6) 1,178,467 1.49% 1,178,467 1.49% 1,178,467 -0- 0.00%
Celtic House Venture
Partners Fund IIA LP (7) 392,822 * 392,822 * 392,822 -0- 0.00%
GTI V Limited
Partnership (8) 199,779 * 199,779 * 199,779 -0- 0.00%
GTI V (NR) Limited
Partnership (9) 80,809 * 80,809 * 80,809 -0- 0.00%
Bay Tech Venture
Capital GmbH & co. KG. (10) 336,705 * 336,705 * 336,705 -0- 0.00%
Fondaction, le Fonds
de developpement de la 1,654,394 2.09% 1,654,394 2.09% 1,654,394 -0- 0.00%
Confederation des
syndicats nationaux pour la
cooperation et l'emploi (11)
Famalom, LLC (12) 116,598 * 116,598 * 116,598 -0- 0.00%
Deecembra D. Diamond (13) 93,291 * 93,291 * 93,291 -0- 0.00%
Daedalus Consulting, Inc. (14) 23,328 * 23,328 * 23,328 -0- 0.00%
Starboard Capital Markets (15) 6,731 * 6,731 * 6,731 -0- 0.00%
Anthony J. Spatacco Jr. (16) 6,731 * 6,731 * 6,731 -0- 0.00%
Michael Hamblett (17) 13,461 * 13,461 * 13,461 -0- 0.00%
Bruce Jordan (18) 70,288 * 70,288 * 70,288 -0- 0.00%
John Rory Rohan (19) 221,702 * 221,702 * 221,702 -0- 0.00%
Richard Henri Kreger (20) 246,941 * 246,941 * 246,941 -0- 0.00%
Lowenstein Sandler, PC (21) 20,000 * 20,000 * 20,000 -0- 0.00%
Midtown Partners
& Co., LLC (22) 97,831 * 97,831 * 97,831 -0- 0.00%
Alpha Capital
Aktiengesellschaft (23) 5,229,591 6.60% 3,956,414 4.99% 5,229,591 -0- 0.00%
Harborview Master
Fund, L.P. (24) 1,307,398 1.65% 1,307,398 1.65% 1,307,398 -0- 0.00%
Monarch Capital
Fund Ltd. (25) 2,693,239 3.40% 2,693,239 3.40% 2,693,239 -0- 0.00%
Bristol Investment
Fund, Ltd. (26) 2,614,796 3.30% 2,614,796 3.30% 2,14,796 -0- 0.00%
Ellis International, L.P. (27) 1,307,398 1.65% 1,307,398 1.65% 1,307,398 -0- 0.00%
Whalehaven Capital LP (28) 4,482,508 5.65% 3,956,414 4.99% 4,482,508 -0- 0.00%
Centurion Microcap, L.P. (29) 1,307,398 1.65% 1,307,398 1.65% 1,307,398 -0- 0.00%
24,319,497 30.67% 30.67% 30.67% 24,319,497 -0- 0.00%
TOTAL
42
* Less than 1%.
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days.
(2) Assumes that all securities registered will be sold and that all shares of
common stock underlying the warrants and convertible notes will be issued.
(3) Based on 79,286,852 shares of common stock outstanding as of October 10,
2006.
(4) This column represents the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
(5) Represents 617,292 shares of common stock issued pursuant to the ITF Optical
Asset Purchase Agreement. Rosemary Zigrossi and Imtiaz Khan may be deemed the
control persons of the securities held by Ontario Teacher Pension Plan.
(6) Represents 1,178,467 shares of common stock issued pursuant to the ITF
Optical Asset Purchase Agreement. Any two of the following four individuals may
may be deemed as the control persons of the securities held by Investissement
Technologie (3599): Jean Rocheleau, Michel Sainte-Marie, Marc Paquet, Sylvana
Travaglini.
(7) Represents 392,822 shares of common stock issued pursuant to the ITF Optical
Asset Purchase Agreement. The fund acts through its general partner, Celtic
House General Partner (Fund IIA) Inc. David Adderley may be deemed the control
persons of the securities held by Celtic House Venture Partners Fund IIA LP.
(8) Represents 199,779 shares of common stock issued pursuant to the ITF Optical
Asset Purchase Agreement. The fund is acts through its general partner, GTI V
Inc.
(9) Represents 80,809 shares of common stock issued pursuant to the ITF Optical
Asset Purchase Agreement. The fund is acts through its general partner, GTI V
(NR) Inc.
(10) Represents 336,705 shares of common stock issued pursuant to the ITF
Optical Asset Purchase Agreement. Rolf Schneider-Gunther, Managing Partner, may
be deemed the control persons of the securities held by Bay Tech Venture Capital
GmbH & co. KG.
(11) Represents 1,654,394 shares issuable in satisfaction of a debenture issued
on February 28, 2005.
(12) Represents (i) 48,750 shares underlying Series IB2 warrants and (ii) 67,848
shares underlying Series IB3 warrants.
(13) Represents (i) 39,000 shares underlying Series IB2 warrants and (ii) 54,291
shares underlying Series IB3 warrants.
(14) Represents (i) 9,750 shares underlying Series IB2 warrants and (ii) 13,578
shares underlying Series IB3 warrants.
(15) Represents (i) 1,923 shares underlying Series IB1 warrants (ii) 1,923
shares underlying Series IB2 warrants and (iii) 2,885 shares underlying Series
IB3 warrants. Starboard Capital Markets is a registered broker dealer. Starboard
Capital Markets and affiliated individuals received Series IB6 warrants for
services rendered in connection with our February 2005 Convertible Note
financing. Mr. James Dotzman may be deemed the control person of the securities
registered on behalf of Starboard Capital Markets.
43
(16) Represents (i) 1,923 shares underlying Series IB1 warrants (ii) 1,923
shares underlying Series IB2 warrants and (iii) 2,885 shares underlying Series
IB3 warrants. Michael Hamblett, who is affiliated with Starboard Capital
Markets, received the warrants for services for services rendered in connection
with our February 2005 Convertible Note financing.
(17) Represents (i) 3,846 shares underlying Series IB1 warrants (ii) 3,846
shares underlying Series IB2 warrants and (iii) 8,769 shares underlying Series
IB3 warrants. Michael Hamblett, who is affiliated with Starboard Capital
Markets, received the warrants for services for services rendered in connection
with our February 2005 Convertible Note financing.
(18) Represents (i) 15,000 shares underlying Series IB1 warrants (ii) 15,000
shares underlying Series IB2 warrants (iii) 22,500 underlying Series IB3
warrants (iv) 16,676 shares underlying the Series Z Warrants and (v)1,112 shares
underlying the Series Y Warrants. Bruce Jordan is affiliated with Midtown
Partners & Co., LLC, which acted as the placement agent for our February 2005
Convertible Note financing and our August 2006 Financing.
(19) Represents (i) 51,443 shares underlying Series IB2 warrants and (ii) 72,429
shares underlying Series IB3 warrants (iv) 91,716 shares underlying the Series Z
Warrants and (v) 6,114 shares underlying the Series Y Warrants. J. Rory Rohan is
affiliated with Midtown Partners & Co., LLC, which acted as the placement agent
for our February 2005 Convertible Note financing and our August 2006 Financing.
(20) Represents (i) 43,750 shares underlying Series IB2 warrants and (ii) 60,892
shares underlying Series IB2 warrants (iv) 133,405 shares underlying the Series
Z Warrants and (v) 8,894 shares underlying the Series Y Warrants.. Richard H.
Kreger is affiliated with Midtown Partners & Co., LLC, which acted as the
placement agent for our February 2005 Convertible Note financing and our August
2006 Financing.
(21) Represents (i) 20,000 shares underlying Series IB3 warrants.
(22) Represents (i) 91,716 shares underlying the Series Z Warrants and (ii) 6114
shares underlying the Series Y Warrants. Midtown Partners & Co., LLC is an SEC
and NASD registered broker dealer in Boca Raton, Florida. Midtown acted as the
placement agent for our August 2006 Financing. Bruce Jordan may be deemed the
control person of the securities registered on behalf of Midtown Partners.
(23) Represents (i) 1,116,071 shares underlying the Series Z Warrants (ii)
74,405 shares underlying the Series Y Warrants (iii) 2,976,190 shares underlying
Series B Subordinated Convertible Promissory Note and (iv) 1,062,925 shares
underlying Original Issue Discount B Subordinated Convertible Promissory Notes.
Mr. Ari Kluger may be deemed the control person of the securities registered on
behalf of Alpha Capital Aktiengesellschaft.
(24) Represents (i) 279,018 shares underlying the Series Z Warrants (ii) 18,601
shares underlying the Series Y Warrants (iii) 744,048 shares underlying Series B
Subordinated Convertible Promissory Note and (iv) 265,731 shares underlying
Original Issue Discount B Subordinated Convertible Promissory Notes. Mr. Richard
Rosenblum and Mr. David Stefansky, may be deemed the control person of the
securities registered on behalf of Harborview Master Fund.
(25) Represents (i) 574,777 shares underlying the Series Z Warrants (ii) 38,318
shares underlying the Series Y Warrants (iii) 1,532,738 shares underlying Series
B Subordinated Convertible Promissory Note and (iv) 547,406 shares underlying
Original Issue Discount B Subordinated Convertible Promissory Notes. Monarch
Capital Fund Ltd., is a BVI Investment Fund whose Advisor is Monarch Managers
Ltd. Joseph Franck has voting and investment control with respect to the fund.
Mr. Franck disclaims beneficial ownership of the shares being registered
hereunder.
(26) Represents (i) 558,036 shares underlying the Series Z Warrants (ii) 37,702
shares underlying the Series Y Warrants (iii) 1,532,738 shares underlying Series
B Subordinated Convertible Promissory Note and (iv) 531,463 shares underlying
Original Issue Discount B Subordinated Convertible Promissory Notes. Mr. Paul
Kessler, may be deemed the control person of the securities registered on behalf
of Bristol Investment Fund, Ltd.
(27) Represents (i) 279,018 shares underlying the Series Z Warrants (ii) 18,601
shares underlying the Series Y Warrants (iii) 744,048 shares underlying Series B
Subordinated Convertible Promissory Note and (iv) 265,731 shares underlying
Original Issue Discount B Subordinated Convertible Promissory Notes. Mr. Jay
Spinner, may be deemed the control person of the securities registered on behalf
of Ellis International, L.P.
(28) Represents (i) 956,633 shares underlying the Series Z Warrants (ii) 63,776
shares underlying the Series Y Warrants (iii) 2,551,020 shares underlying Series
B Subordinated Convertible Promissory Note and (iv) 911,079 shares underlying
Original Issue Discount B Subordinated Convertible Promissory Notes. Arthur
Jones, Mr. Trevor Williams and Mr. Derek Wood, have voting control of the
securities registered on behalf of Whalehaven Capital L.P. Michael Finkelstein
has dispositive control of the registered on behalf of Whalehaven Capital L.P.
44
(29) Represents (i) 279,018 shares underlying the Series Z Warrants (ii) 18,601
shares underlying the Series Y Warrants (iii) 744,048 shares underlying Series B
Subordinated Convertible Promissory Note and (iv) 265,731 underlying Original
Issue Discount B Subordinated Convertible Promissory Notes. Mr. Abraham Schwartz
may be deemed the control person of the securities registered on behalf of
Centurion Microcap, L.P.
DESCRIPTION OF SECURITIES
COMMON STOCK
Our authorized capital stock consists of 500,000,000 shares of common stock,
$0.00001 par value per share. The holders of our common stock:
* have equal ratable rights to dividends from funds legally available if and
when declared by our board of directors;
* are entitled to share ratably in all of our assets available for distribution
to holders of common stock upon liquidation, dissolution or winding up of our
affairs;
* do not have preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions or rights; and
* are entitled to one non-cumulative vote per share on all matters on which
stockholders may vote.
All shares of common stock now outstanding are fully paid for and non-assessable
and all shares of common stock that are the subject of this offering, when
issued, will be fully paid for and non-assessable. We refer you to our Articles
of Incorporation, Bylaws and the applicable statutes of the state of Nevada for
a more complete description of the rights and liabilities of holders of our
securities.
NON-CUMULATIVE VOTING
Holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting
for the election of directors, can elect all of the directors to be elected, if
they so choose, and, in that event, the holders of the remaining shares will not
be able to elect any of our directors.
CASH DIVIDENDS
As of the date of this prospectus, we have not paid any cash dividends to
stockholders. The declaration of any future cash dividend will be at the
discretion of our board of directors and will depend upon our earnings, if any,
our capital requirements and financial position, our general economic
conditions, and other pertinent conditions. It is our present intention not to
pay any cash dividends in the foreseeable future, but rather to reinvest
earnings, if any, in our business operations.
ANTI-TAKEOVER PROVISIONS
There are no Nevada anti-takeover provisions that may have the affect of
delaying or preventing a change in control.
45
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On January 11, 2006, Manning Elliott LLP Chartered Accountants (the "Former
Accountant") resigned as the independent registered public accounting firm for
Manaris Corp. (the "Company"). The Company engaged PricewaterhouseCoopers LLP -
Montreal Canada (the "New Auditors"), as its new independent registered public
accounting firm. The Company's decision to engage the New Auditors was approved
by its Board of Directors on January 13, 2006.
The reports of the Former Accountant on the financial statements of the Company
for each of the two most recent fiscal years, did not contain an adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles for the two most recent fiscal years,
except that the Former Accountant's opinion in its report on the Company's
financial statements for each of the last two fiscal years expressed substantial
doubt with respect to the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years and the subsequent interim
period through the date of resignation, there were no reportable events as the
term is described in Item 304(a)(1)(iv) of Regulation S-B.
During the Company's two most recent fiscal years and the subsequent interim
period through the date of resignation, there were no disagreements with the
Former Accountant on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of the Former Accountant would have caused it to
make reference to the subject matter of the disagreements in connection with its
reports on these financial statements for those periods.
The Company did not consult with the New Auditor regarding the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements, and no written or oral advice was provided by the New Auditor that
was a factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issues.
REPORTS
After we complete this offering, we will not be required to furnish you with an
annual report. Further, we will not voluntarily send you an annual report. We
will be required to file reports with the SEC under section 15(d) of the
Securities Act. The reports will be filed electronically. The reports we will be
required to file are Forms 10-KSB, 10-QSB, and 8-K. You may read copies of any
materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet site that will contain copies of the reports we
file electronically. The address for the Internet site is www.sec.gov.
STOCK TRANSFER AGENT
Our stock transfer agent for our securities is Pacific Stock Transfer Company,
500 East Warm Springs Road, Las Vegas, Nevada 89119 and its telephone number is
(702) 361-3033.
EXPERTS
The consolidated financial statements of Manaris Corporation for the year ended
June 30, 2005 included in this Prospectus have been so included in reliance on
the report of Manning Elliott, LLP Chartered Accountants, Independent Registered
Public Accountants,, given on the authority of said firm as experts in auditing
and accounting.
The consolidated financial statements of Manaris Corporation as of June 30, 2006
and for the year ended June 30, 2006 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers, LLP Chartered
Accountants, an independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of ITF Optical Technologies Inc. as at and
for the years ended June 30, 2004 and 2005, included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed
upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
46
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Manaris Corporation Audited Consolidated Financial Statements,
fiscal year ended June 30, 2006 ..........................................F-1
Pro Forma Consolidated and Condensed Statement of Operations for the
twelve months ended June 30, 2006 .......................................F-43
ITF Optical Technologies, Inc. Consolidated Financial Statements
June 30, 2005, 2004 and nine-month period ended March 31, 2006 ..........F-49
47
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Index
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated Balance Sheet...................................................F-3
Consolidated Statements of Operations and Comprehensive Loss.................F-4
Consolidated Statement of Cash Flows.........................................F-5
Consolidated Statement of Stockholders' Equity (Deficit).....................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
PricewaterhouseCoopers [LOGO]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 Rene-Levesque Boulevard West
Suite 2800
Montreal, Quebec
Canada H3B 2G4
Telephone +1 514 205-5000
Facsimile +1 514 876-1502
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Manaris Corporation:
We have audited the accompanying consolidated balance sheet of Manaris
Corporation and its subsidiaries as of June 30, 2006, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Manaris Corporation
and its subsidiaries at June 30, 2006, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has relied on non-operational sources of financing to fund operations, had
negative working capital and had not respected certain loan covenants as of June
30, 2006 and was required to restrict use of funds under a loan arrangement with
a supplier, which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Montreal, Quebec, Canada
September 29, 2006
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers
LLP/s.r.l./s.e.n.c.r.l. and the other member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
F-2
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Balance Sheet
(Expressed in U.S. dollars)
June 30, June 30,
2006 2005
$ $
ASSETS
Current Assets
Cash and cash equivalents 438,708 287,147
Accounts receivable, net of allowance for doubtful 3,104,907 1,775,736
accounts of $115,721 and $83,354, respectively
Deposits in trust (Note 4) 79,781 -
Other receivables (Note 9) 375,742 859,108
Inventories (Note 9) 1,563,805 1,000,507
Prepaid expenses and deposits 259,552 72,786
Deferred contract costs 151,272 -
Restricted held-to-maturity security 89,686 81,606
Current assets of discontinued 9,011 1,276,973
operations (Note 4)
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 6,072,464 5,353,863
Property and equipment, net (Note 6) 3,082,402 528,134
Intangible assets (Note 7) 3,757,272 2,931,984
Goodwill (Note 8) 3,762,000 6,679,608
Deferred financing costs 101,681 436,685
Prepaid expenses and deposits 86,225 13,906
Deferred contract costs 281,390 -
Assets of discontinued operations (Note 4) - 4,171,575
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets 17,143,434 20,115,755
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities (Note 9) 4,666,859 2,488,309
Bank and other loans payable (Note 12) 2,331,696 1,324,999
Current portion of long-term debt (Note 13) 103,717 143,727
Current portion of convertible debentures (Note 14) 587,891 557,284
Due to related parties (Note 11) 40,000 268,435
Current liabilities of discontinued operations (Note 4) - 1,574,928
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 7,730,163 6,357,682
Long-term debt, less current portion (Note 13) 222,900 272,598
Deferred revenue 281,390 -
Convertible debentures (Note 14) 343,109 2,023,456
Balance of purchase price payable (Note 5) 877,675 -
Derivative financial instrument (Note 5) 458,271 -
Long-term liabilities of discontinued operations (Note 4) - 214,127
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 9,913,507 8,867,863
Non-controlling Interest 23,940 18,033
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common Stock, 500,000,000 (June 30, 2005: 100,000,000) 777 548
shares authorized with a par value of $0.00001;
77,671,281 and 54,782,802 issued and outstanding,
respectively
Additional Paid-in Capital 34,169,867 24,142,078
Accumulated other comprehensive loss (316,566) (364,415)
Deficit (26,648,091) (12,548,352)
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 7,205,987 11,229,859
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 17,143,434 20,115,755
===========================================================================================================================
Contingencies (Note 17)
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements)
F-3
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in U.S. dollars)
For the Years Ended
June 30,
2006 2005
$ $
Revenue 10,498,505 3,580,619
- -----------------------------------------------------------------------------------------------------------------------
Costs of Revenue 7,464,710 2,306,458
- -----------------------------------------------------------------------------------------------------------------------
Gross Margin 3,033,795 1,274,161
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Depreciation and amortization 979,635 373,905
Selling, general and administration 6,447,065 3,243,653
Acquired in-process research and development - 386,749
Loss on disposal of long-lived assets - 15,487
Loss on impairment of goodwill (Note 8) 1,529,767 -
Loss on impairment of intangible assets (Note 7) 107,715 117,199
Research and development 1,106,259 731,865
Stock-based compensation (A) (Note 16) 490,795 1,216,542
Contingency for litigation losses - 192,549
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 10,661,236 6,277,949
- -----------------------------------------------------------------------------------------------------------------------
Loss from Operations (7,627,441) (5,003,788)
Other Expenses
Other Expense (18,187) -
Interest expense, net (762,488) (199,509)
Debenture accretion (3,991,229) (609,225)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations (12,399,345) (5,812,522)
Before Income Tax Benefit
Income Tax Benefit - Refundable tax credits 351,242 65,228
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations before (12,048,103) (5,747,294)
Non-Controlling Interest
Non-Controlling Interest (3,977) (1,257)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations (12,052,080) (5,748,551)
Results of Discontinued Operations (Note 4) 149,637 (459,251)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss (11,902,443) (6,207,802)
- -----------------------------------------------------------------------------------------------------------------------
Effect of reduction in exercise price of (2,197,296) -
outstanding warrants
- -----------------------------------------------------------------------------------------------------------------------
Net Loss applicable to common stockholders (14,099,739) (6,207,802)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss from continuing operations per share - Basic (0.21) (0.13)
and Diluted (Note 16)
- -----------------------------------------------------------------------------------------------------------------------
Net Loss per share - Basic and Diluted (Note 16) (0.20) (0.14)
Weighted Average Shares Outstanding 69,363,000 44,791,000
- -----------------------------------------------------------------------------------------------------------------------
(A) Stock based compensation is excluded from the following:
Selling, general and administration 490,795 1,216,542
- -----------------------------------------------------------------------------------------------------------------------
Statement of Comprehensive Loss:
Net loss (11,902,443) (6,207,802)
Foreign currency translation adjustments 47,849 (397,416)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (11,854,594) (6,605,218)
- -----------------------------------------------------------------------------------------------------------------------
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements)
F-4
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statement of Cash Flows
(Expressed in U.S. dollars)
For the Years Ended
June 30,
2006 2005
$ $
Operating Activities
Net loss (11,902,443) (6,230,943)
Adjustments to reconcile net loss to cash used in operating activities
Results of discontinued operations (149,637) 459,251
Contingent consideration paid in shares - 148,000
Stock based compensation 490,795 1,068,542
Expenses settled with issuance of common shares 5,400 79,200
Depreciation and amortization 1,046,355 373,905
Interest expense (59,293) -
Gain on settlement of accounts payable 31,359 -
Non-controlling interest 3,977 1,257
In-process research and development - 386,749
Impairment of long-lived assets - 15,487
Impairment of promissory note - 383,536
Loss on impairment of goodwill 1,529,767 -
Loss on impairment of intangible assets 107,715 117,200
Debenture accretion 3,991,229 609,225
Amortization of deferred financing costs 335,004 56,525
Changes in operating assets and liabilities
Increase in accounts receivables (1,297,820) (391,333)
(Increase) decrease in inventories (87,689) 7,359
Decrease in other receivables 483,366 141,046
Increase in deferred contract costs (432,662) -
Increase in deferred revenue 432,662 -
(Increase) decrease in prepaid expenses and other assets (259,085) 126,281
(Increase) decrease in due to related parties (126,243) 23,014
Increase in accounts payable and accrued liabilities 1,594,692 66,754
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities from Continuing Operations (4,262,551) (2,558,945)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities from Discontinued Operations 803,522 (70,402)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (3,459,029) (2,629,347)
- --------------------------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of companies, net of cash acquired (654,279) (2,685,424)
Purchase of property and equipment (182,851) (16,973)
Deposits in trust (79,781) -
Proceeds from Discontinued Operations, net of cash disposed 2,857,895 -
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities from Continuing Operations 1,940,984 (2,702,397)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities from Discontinued Operations 149,673 (135,606)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 2,090,657 (2,838,003)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Borrowing (repayment) of bank credit line 169,620 (351,843)
Repayment of senior convertible debt (625,353) -
Repayment of secured convertible debt (1,225,257) -
Long term debt repayments (64,355) (84,267)
Capital leases repayments (25,353) -
Repayment of related party advances (49) -
Common stock issued pursuant to stock options exercised 100,013 -
Common stock issued pursuant to warrants exercised 2,206,022 205,014
Proceeds from other loans payable 837,077 474,359
Proceeds from senior convertible debentures - 4,675,000
Deferred financing costs related to senior convertible debenture - (413,681)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities from Continuing Operations 1,372,365 4,504,582
- --------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities from Discontinued Operations (257,162) 25,096
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 1,115,203 4,529,678
- --------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 404,730 (336,201)
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 151,561 (1,273,873)
Cash and Cash Equivalents - Beginning of year 287,147 1,561,020
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of year 438,708 287,147
====================================================================================================================
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements)
F-5
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statement of Cash Flows (continued)
(Expressed in U.S. dollars)
For the Years Ended
June 30,
2006 2005
$ $
Non-Cash Financing and Investing Activities
Issuance of common shares for Avensys business acquisition - 7,633,588
Issuance of common shares for acquisition of discontinued operations - 1,380,543
Issuance of common shares for technology acquisition - 125,000
Issuance of common shares for services 5,400 79,200
Issuance of common shares for finder's fees and acquisition
relating consulting fees - 678,463
Settlement of outstanding legal claims by the issuance of options 77,000 -
Issuance of common shares for interest payments 265,436 -
Issuance of common shares for repayment of senior convertible notes, series A 2,099,792 -
Issuance of common shares for conversion of senior convertible notes, series A 1,249,360 -
Issuance of common shares for repayment of secured convertible debentures 224,397 830,000
Issuance of common shares to settle outstanding payables 136,860 127,327
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures
Interest earned from continuing operations (18,935) (40,629)
Interest paid from discontinued operations 17,420 89,226
Income taxes paid from discontinued operations 120,647 27,441
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements)
F-6
Manaris Corporation
(Formerly A Development Stage Company)
Consolidated Statement of Stockholders' Equity (Deficit)
(Expressed in U.S. Dollars)
Additional
Common Shares Paid-In Deferred
# of Amount Capital Compensation
Shares $ $ $
Balance, June 30, 2004 39,595,803 396 8,536,780 (25,974)
Common stock issued for services 1,002,145 10 757,653 -
Common stock issued for purchase
of business 10,400,002 104 7,633,484 -
Common stock issued for purchase
of intangible asset 164,474 1 124,999 -
Issuance of common shares
from exercise of stock options 2,120,501 22 204,990 -
Stock-based compensation - - 1,190,568 -
Amortization of deferred compensation - - - 25,974
Common stock issued to settle
outstanding payables 176,767 2 127,325 -
Beneficial conversion feature relating
to senior secured convertible debentures - - 2,470,674 -
Common stock issued upon conversion of debentures 1,106,667 11 829,989 -
Warrants issued - - 2,265,616 -
Common stock issued pursuant to warrants exercised 216,443 2 - -
Translation adjustment
Net loss for the year
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 54,782,802 548 24,142,078 -
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for services 15,000 - 5,400 -
Issuance of common shares from
exercise of stock options 1,758,000 18 99,995 -
Stock-based compensation - - 490,795 -
Settlement of outstanding legal claims
by the issuance of options - - 77,000 -
Common stock issued to settle
outstanding payables 257,000 3 136,857 -
Common stock issued pursuant to
interest payments on Senior 748,819 7 265,429 -
Secured Convertible Notes "A"
Common stock issued pursuant to
repayments of Senior Secured
Convertible Notes "A" 5,897,695 59 2,099,734 -
Common stock issued pursuant
to repayment of Secured
convertible debenture 631,038 6 224,391 -
Common stock issued upon conversion of Senior Secured
Convertible Notes "A" 3,575,008 36 1,249,324 -
Reduction in exercise price of outstanding warrants - - 2,197,296 -
Common stock issued pursuant
to warrants exercised 7,525,124 75 2,309,221 -
Common stock issued for purchase
of business 2,550,795 26 872,346 -
Common Stock cancellation (70,000) (1) 1 -
Translation adjustment
Net loss for the year
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2006 77,671,281 777 34,169,867 -
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Stockholders'
Income Deficit Equity
$ $ $
Balance, June 30, 2004 33,001 (6,340,550) 2,203,653
Common stock issued for services - - 757,663
Common stock issued for purchase
of business - - 7,633,588
Common stock issued for purchase
of intangible asset - - 125,000
Issuance of common shares
from exercise of stock options - - 205,012
Stock-based compensation - - 1,190,568
Amortization of deferred compensation - - 25,974
Common stock issued to settle
outstanding payables - - 127,327
Beneficial conversion feature relating
to senior secured convertible debentures - - 2,470,674
Common stock issued upon conversion of debentures - - 830,000
Warrants issued - - 2,265,616
Common stock issued pursuant to warrants exercised - - 2
Translation adjustment (397,416) (397,416)
Net loss for the year (6,207,802) (6,207,802)
- ------------------------------------------------------------------------------------------------------------------
-
Balance, June 30, 2005 (364,415) (12,548,352) 11,229,859
- ------------------------------------------------------------------------------------------------------------------
Common stock issued for services - - 5,400
Issuance of common shares from
exercise of stock options - - 100,013
Stock-based compensation - - 490,795
Settlement of outstanding legal claims
by the issuance of options - - 77,000
Common stock issued to settle
outstanding payables - - 136,860
Common stock issued pursuant to
interest payments on Senior - - 265,436
Secured Convertible Notes "A"
Common stock issued pursuant to
repayments of Senior Secured
Convertible Notes "A" - - 2,099,793
Common stock issued pursuant
to repayment of Secured
convertible debenture - - 224,397
Common stock issued upon conversion of Senior Secured
Convertible Notes "A" - - 1,249,360
Reduction in exercise price of outstanding warrants - (2,197,296) -
Common stock issued pursuant
to warrants exercised - - 2,309,296
Common stock issued for purchase
of business - - 872,372
Common Stock cancellation - - -
Translation adjustment 47,849 47,849
Net loss for the year (11,902,443) (11,902,443)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2006 (316,566) (26,648,091) 7,205,987
- ------------------------------------------------------------------------------------------------------------------
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the
Consolidated Financial Statements)
F-7
xxx
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
1. Going Concern
The accompanying financial statements have been prepared using generally
accepted accounting principles applicable to a going concern, which
assumes Manaris Corporation (the "Company" or "Manaris") 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 and, as at June 30, 2006, had negative
working capital and had not respected certain loan covenants and was
required to restrict use of funds under a loan arrangement with a
supplier. Accordingly, there exists substantial doubt that the Company
would be able to continue as a going concern at June 30, 2006. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional cash to allow for the satisfaction of its obligations on
a timely basis.
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 and CSA (Note 4). Additional debt financing was also
obtained in August 2006 (Note 20) to fund the operations of the Company.
The Company's subsidiaries are also seeking additional debt financing to
provide short-term financing for their operations.. In addition to the
above, the ability of the company to continue as a going concern depends
on the ability of Avensys and C-Chip to realize their business plans and
generate positive cash flows.
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. Nature of Operations
Manaris operates the following wholly-owned subsidiaries:
o Avensys Inc. ("Avensys"), which develops optical components &
sensors and provides environmental monitoring solutions. Avensys
sells its optical products and services primarily in Asia, Europe
and North America to the telecommunications, aerospace, and oil and
gas industries. Environmental monitoring services and solutions are
primarily targeted at public sector organizations across Canada.
o C-Chip Technologies Corporation (North America) ("C-Chip"), which
offers products and services to the credit management marketplace.
C-Chip is currently targeting the new and used car markets in North
America, since its technology allows credit providers to locate and
disable the operation of any vehicle in the event of a delinquent
payment.
The Company was incorporated in the State of Nevada on June 26, 2000 as
Keystone Mines Limited. The Company subsequently changed its name to
C-Chip. In July 2005, the company changed its name to Manaris Corporation.
The Company was previously a development stage company as defined by
Statement of Financial Accounting Standard No. 7, "Development Stage
Companies". The Company has achieved significant revenue from acquired
companies and also has disposed of companies, as described below. The
Company's assets and operations at June 30, 2006 are located largely in
Quebec and in Ontario, Canada. The Company currently derives the
substantial portion of its revenues from its Avensys subsidiary.
3. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are prepared in conformity
with accounting principles generally accepted ("GAAP") in the United
States of America ("US") and are presented in US dollars.
Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries. Consolidated companies include: a)
100% of Avensys and its subsidiaries, Fizians Inc., of which Avensys
owns 70% of its outstanding shares, and ITF Laboratories Inc.
("ITF"), in which Avensys holds variable interests and is the
primary beneficiary. b) 100% of C-Chip. The financial statements of
the Company include the results of ITF for the year ended June 30,
2006 from April 18, 2006. All inter-company accounts and
transactions have been eliminated in the consolidation.
F-8
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a term to
maturity of three months or less at the time of acquisition to be
cash and cash equivalents. The Company invests its excess cash in
deposits with major financial institutions.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful
accounts. The Company establishes an allowance for doubtful accounts
based on a detailed assessment of the credit risk and collectibility
of specific customer accounts, as well as historical trends and
other information. The Company sells the majority of its products
and services in North America. The Company generally does not
require collateral. Credit losses have not been historically
significant.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable,
other receivable, restricted held-to-maturity securities, due to
related parties and accounts payable and accrued liabilities
approximate their carrying value given their short-term maturity.
The derivative financial instrument is carried at fair value. The
Company has estimated the fair value of its bank loans and other
loans payable, long-term debt, capital leases, convertible
debentures and balance of purchase price payable by discounting
future cash flows using interest rates which the company could
obtain for loans with similar terms conditions and maturity dates.
The fair value and carrying value of all such debt instruments, as
at June 30, 2006, amounted to approximately $5,849,000 and
$4,925,000, respectively.
Advertising
The Company's advertising costs are expensed as incurred, which
amounted to $80,499 for the year ended June 30, 2006 (2005 -
$79,436).
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company tests long-lived assets
or asset groups for future recoverability when events or changes in
circumstances indicate that their carrying amount may not be
recoverable. Circumstances which could trigger a review include, but
are not limited to: significant decreases in the market price of the
asset; significant adverse changes in the business climate or legal
factors; accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of the
asset; current period cash flow or operating losses combined with a
history of losses or a forecast of continuing losses associated with
the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed significantly before the
end of its estimated useful life. The Company's long-lived assets
consist primarily of property and equipment and intangible assets.
Recoverability of a long-lived asset is assessed by comparing the
carrying amount of the asset to the sum of the estimated
undiscounted future cash flows expected from its use and the
eventual disposal of the asset. An impairment loss is recognized
when the carrying amount of a long-lived asset is not recoverable
and the amount of such impairment loss is determined as the excess
of the carrying amount over the asset's fair value.
Foreign Currency
a) Reporting Currency
The Company's functional currency is the Canadian dollar.
Accordingly, the consolidated financial statements are converted
into the reporting currency (the US dollar) using the current rate
method. Under this method, the consolidated financial statements are
converted into US dollars as follows: assets and liabilities are
converted at the exchange rate in effect at the date of the balance
sheet, and revenue and expenses are converted using the average
exchange rate for the period. All gains and losses resulting from
the conversion of the consolidated financial statements into the
reporting currency are included in other comprehensive loss for the
period and accumulated in a separate component of stockholders'
equity as accumulated other comprehensive loss or income.
F-9
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Foreign Currency (continued)
b) Foreign Currency Transactions
Transactions denominated in currencies other than the functional
currency are converted into Canadian dollars (the functional
currency) using the exchange rate in effect at the date of the
transaction or the average rate for the period in the case of
recurring revenue and expense transactions. Monetary assets and
liabilities are revalued into the functional currency at each
balance sheet date using the exchange rate in effect at that date,
with any resulting exchange gains or losses being credited or
charged to the statement of operations. Non-monetary assets and
liabilities are recorded in the functional currency using the
exchange rate in effect at the date of the transaction and are not
revalued for subsequent changes in exchange rates.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires Management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Estimates are used for revenues, expenses, the allowance for
doubtful accounts, impairments of long-lived assets and goodwill,
discounted liabilities and income taxes, among others. Estimates and
assumptions are reviewed periodically and the effects of revisions
are reflected in the Consolidated Financial Statements in the period
they are determined to be necessary. Management bases its estimates
on historical experience, industry standards and on various other
assumptions believed to be reasonable under the circumstances.
Actual results could differ materially from those estimates.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss
applicable to common stockholders 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 stockholders for the period by the
weighted average number of shares of common stock and potential
common stock outstanding during the period, such as stock options,
warrants and conversion rights on convertible debentures, 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. The items of potential common stock noted above are
anti-dilutive and have therefore been excluded from the calculation.
Stock-Based Compensation
The Company has elected to apply the intrinsic value method of
accounting for stock options granted to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB25). Under the intrinsic value method of
accounting, compensation expense is recognized if the exercise price
of the Company's employee stock options is less than the market
price of the underlying common stock on the date of grant.
Stock-based compensation for employees is recognized on the
straight-line basis over the vesting period of the individual
options. Stock options granted to non-employees are accounted for
under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), which
establishes a fair value based method of accounting for stock-based
awards, and recognizes compensation expense based on the fair market
value of the stock award or fair market value of the goods and
services received, whichever is more reliably measurable. Under the
provisions of SFAS 123, companies that elect to account for
stock-based awards in accordance with the provisions of APB 25 are
required to disclose the pro forma net income (loss) that would have
resulted from the use of the fair value based method under SFAS 123.
F-10
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 104 (SAB104), "Revenue Recognition" issued by the
Securities and Exchange Commission
Avensys generates revenues from the sale of fibre-based sensors,
instruments and components, and environmental monitoring products.
Revenue is recognized when there exists persuasive evidence of an
arrangement, the sales price is fixed or determinable, the product
has been delivered and collectibility is reasonably assured.
C-Chip derives revenues from the sale of credit management devices
and associated services. The devices are bundled with service
agreements which provide the customer with access to C-Chip's
web-based application, thus allowing the customer to locate and
disable subject vehicles during the service period, which is
generally three years. Since the services are essential to the
functionality of the device, revenues from the sale of devices
(including services) are deferred and recognized as revenue over the
contractual service period and the related cost of revenues is
deferred and amortized to cost of revenues over the corresponding
period. Such items are described on the Consolidated Balance Sheet
as Deferred Revenue and Deferred Contract Costs. In addition to the
up-front fees charged to a customer, C-Chip may also earn other
amounts during the service period, which are charged to the customer
on a pay per use basis, for which revenue and the related costs are
recognized when the related service is provided.
Business Combinations and Goodwill
Acquisitions of businesses are accounted for using the purchase
method and, accordingly, the results of operations of the acquired
businesses are included in the Consolidated Statement of Operations
effective from their respective dates of acquisition.
Goodwill represents the excess of the purchase price of acquired
businesses over the fair values of the identifiable tangible and
intangible assets acquired and liabilities assumed. Pursuant to SFAS
No. 141, the Company does not amortize goodwill, but tests for
impairment of goodwill at least annually. The Company evaluates the
carrying value of goodwill in accordance with the guidelines set
forth in Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS142). 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
tangible and intangible 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 the Consolidated Statement of Operations and
Comprehensive Loss.
Restricted Held-to-Maturity Security
An irrevocable letter of credit for $89,686 (CAD$100,000) was issued
by Manaris to guarantee the loan of Avensys. A term deposit,
maturing on October 18, 2006 and bearing interest at 2.0% per annum,
is designated as collateral for this amount.
F-11
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Property and Equipment
The Company's property and equipment are recorded at cost. The
Company provides for depreciation and amortization using the
following methods and applying rates estimated to amortize the cost
over the useful life of the assets:
Computer equipment Straight-line and declining balance 30%-331/3%
Furniture and fixture Straight-line and declining balance 20%
Leasehold improvements Straight-line over the lease terms 5 to 8 years
Laboratory equipment Straight-line and declining balance 20%
Automotive equipment and software Declining balance 30%
Machinery and office equipment Declining balance 20%
Capital leases Straight-line over the lease terms 3 years
Capital Leases
The Company enters into leases relating to computer equipment in
which substantially all the benefits and risks of ownership
transferred are to the Company and are recorded as capital leases
and classified as property and equipment and long term borrowings.
All other leases are classified as operating leases under which
leasing costs are expensed in the period in which they are incurred.
Inventory
Inventory consists of finished products available for sale to
customers, raw materials and components. Raw materials are stated at
the lower of cost and replacement cost. Finished goods are stated at
the lower of cost and net realizable value. Cost of materials
inventory is determined on an average cost basis. The Company
evaluates ending inventories for estimated excess quantities and
obsolescence. This evaluation includes analyses of inventory
turnover by item within specific time horizons.
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 4-5 years
Trade names 7 years
Research and Development Expenses and Investment Tax Credits
Research and development expenses are expensed as they are incurred.
Investment tax credits ("ITCs") arising from research and
development activities are accounted for as a reduction of the
income tax provision for the year. Refundable tax credits and
non-refundable tax credits are recorded in the year in which the
related expenses are incurred. A valuation allowance is provided
against such tax credits to the extent that the recovery is not
considered to be more likely than not.
The Company is subject to examination by taxation authorities in
various jurisdictions. The determination of tax liabilities and ITCs
recoverable involve certain uncertainties in the interpretation of
complex tax regulations. As a result, the Company provides potential
tax liabilities and ITCs recoverable based on Management's best
estimates. Differences between the estimates and the ultimate
amounts of taxes and ITCs are recorded in earnings at the time they
can be determined.
F-12
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Income Taxes
The Company utilizes the tax liability method to account for income
taxes as set forth in SFAS No. 109, "Accounting for Income Taxes"
(SFAS109). Under this method, deferred future income tax assets and
liabilities are determined based on the differences between the
carrying value and the tax bases of assets and liabilities.
This method also requires the recognition of deferred income tax
benefits and a valuation allowance is recognized to the extent that,
in the opinion of Management, it is more likely than not that the
future income tax assets will not be realized. The Company has
incurred combined U.S. and Canadian operating losses of $16,997,671
from its inception which expire starting in 2007. The potential
benefit of net operating losses has not been recognized in these
financial statements because the Company cannot be assured it is
more likely than not it will utilize the net operating losses
carried forward in future years (refer to Note 19).
Deferred income tax assets and liabilities are measured by applying
enacted tax rates and laws at the date of the financial statements
for the years in which the differences are expected to reverse.
Shipping and Handling Costs
The Company's shipping and handling costs are included in cost of
sales.
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. In line with this reporting guideline, the Company
will implement SFAS 123R starting with the reporting period commencing
July 1, 2006. 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. The Company will adopt the provisions
of SFAS 123R effective July 1, 2006. Upon adoption of FAS123R, stock
based compensation determined under the fair value method (as disclosed
in Note 16) will be recorded as an expense in the Statement of
Operations instead of being disclosed on a pro-forma basis as has been
done in 2006 and prior years. The Company is currently evaluating the
potential impact of any additional requirements of FAS 123R.
In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3. SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of a
change in accounting principle. SFAS 154 applies to all voluntary
changes in accounting principle. It also applies to changes required by
an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS 154
provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes, unless impracticable,
retrospective application as the required method for reporting a change
in accounting principle in the absence of explicit transition
requirements specific to the newly adopted accounting principle. It also
provides guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for reporting a
change when retrospective application is impracticable. The correction
of an error in previously issued financial statements is not an
accounting change. However, the reporting of an error correction
involves adjustments to previously issued financial statements Basis of
Presentation and Significant Accounting Policies (continued)
F-13
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Recent Accounting Pronouncements (continued)
similar to those generally applicable to reporting an accounting
change retrospectively. Therefore, the reporting of a correction of
an error by restating previously issued financial statements is also
addressed by this Statement. The provisions of SFAS 154 apply for
accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years
beginning after May 2005. SFAS 154 does not change the transition
provisions of any existing accounting pronouncements. The adoption
of this standard is not expected to have a material effect on our
Company's results of operations or financial position.
In February 2006, FASB issued SFAS 155, Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No.
133 and 144. SFAS 155 amends FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, "Application
of Statement 133 to Beneficial Interests in Securitized Financial
Assets." SFAS 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation; clarifies which interest-only
strips and principal-only strips are not subject to the requirements
of SFAS 133; establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments
that contain an embedded derivative requiring bifurcation; clarifies
that concentrations of credit risk in the form of subordination are
not embedded derivatives; and amends SFAS 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS
155 will be effective for all financial instruments acquired,
issued, or subject to a re-measurement (new basis) event occurring
after the beginning of an entity's first fiscal year that begins
after September 15, 2006. The adoption of this standard is not
expected to have a material effect on our Company's results of
operations or financial position.
In March 2006, FASB issued SFAS 156. Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140. SFAS 156
amends SFAS 140 to require that all separately recognized servicing
assets and servicing liabilities be initially measured at fair
value, if practicable. It permits, but does not require, the
subsequent measurement of separately recognized servicing assets and
servicing liabilities at fair value. An entity that uses derivative
instruments to mitigate the risks inherent in servicing assets and
servicing liabilities is required to account for those derivative
instruments at fair value. Under SFAS 156, an entity can elect
subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. By electing
that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential
offsetting changes in fair value of those servicing assets and
servicing liabilities and derivative instruments in the same
accounting period. SFAS 156 must be adopted no later than the
beginning of its first fiscal year that begins after September 15,
2006. Early adoption is permitted. The adoption of this standard is
not expected to have a material effect on our Company's results of
operations or financial position.
In June 2006, FASB issued Interpretation No. 48 - an interpretation
of FASB Statement No. 109, Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in financial statements in accordance with SFAS
109. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It
also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and
transition. The evaluation of a tax position in accordance FIN 48 is
a two-step process. The first step is recognition: The enterprise
determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical
merits of the position. The second step is measurement: A tax
position that meets the more-likely-than-not recognition threshold
is measured to determine the amount of benefit to recognize in the
financial statements. Under FIN 48, differences resulting from this
evaluation of tax positions would result in either of an increase of
liabilities or decrease of assets. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is evaluating
the impact of this interpretation on the Company's results of
operations and financial position.
Comparative Financial Statements
The comparative Consolidated Financial Statements have been
reclassified from statements previously presented to conform to the
presentation adopted in the current year.
F-14
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
4. Discontinued operations
CLI
On February 8, 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
$4,284,123 (CAD$5,000,000) resulting in gross cash proceeds to the
Company of $3,341,616 (CAD$3,900,000) of which $1,285,237
(CAD$1,500,000) was placed in trust. The deposit in trust partially
represented a holdback in the amount of $214,206 which would 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 $1,071,030 represented withholding tax of 25% of
the sale price which was 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 has been remitted
to the Company as Canada Revenue Agency delivered a certificate of
compliance with respect to this transaction. At June 30, 2006, there
remains $79,781 (CAD$88,956) in trust. The Agreement stipulated a
price adjustment based on certain financial criteria which resulted
in a purchase price adjustment of $45,917 (CAD$51,538), which was
paid to the purchaser subsequent to the year end. Following the
payment of the price adjustment, Manaris received the balance of the
funds held in trust.
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 $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 $214,206 and accrued interest on the debt obligations of
$40,978. In addition, the Company settled the majority of the
remaining obligations to the two CLI Group executives in the amount
of $481,444 by a payment of cash consideration totaling $257,047 and
the issuance of 631,038 shares with a fair value of $224,397 or
approximately $0.3556 per share. These payments resulted in net cash
proceeds from the disposal of $2,644,871. The closing date of the
transaction was February 15, 2006 and the effective date was
February 18, 2006.
The loss on disposal included in the results from discontinued
operations has been computed as follows:
Proceeds: $
Cash 3,341,616
Price adjustment (45,917)
----------------------------------------------------------------
Total proceeds: 3,295,699
----------------------------------------------------------------
Direct transaction costs (183,861)
----------------------------------------------------------------
Sub-total: 3,111,838
----------------------------------------------------------------
Net assets of discontinued operations (3,186,815)
----------------------------------------------------------------
Loss on disposal of the CLI Group (74,977)
----------------------------------------------------------------
F-15
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Discontinued operations (continued)
CLI (continued)
Cash proceeds noted above was used as follows:
$
Total proceeds 3,295,699
Direct transaction costs (183,862)
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 2,599,606
------------------------------------------------------------------
The cash proceeds from Discontinued Operations net of cash balance
disposed of amounted to $2,857,895. 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.
The carrying values of the major classes of assets and liabilities
disposed of 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)
-------------------------------------------------------------------
Net assets of discontinued operations 4,129,322
-------------------------------------------------------------------
CSA
On September 22, 2005, CSA entered into an agreement with Securite
Kolossal Inc. to sell its customer list for CAD$100,000, subject to
adjustment. At December 31, 2005, the Company received CAD$50,000.
Following a CAD$10,000 adjustment, the remaining balance of
CAD$40,000 was received in January 2006. The Company has since wound
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 intended to settle its payables. All proceedings against CSA
were stayed.
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 CAD$124,477,
and all liabilities remained at their face value, being the amounts
expected to be allowed under the bankruptcy proceedings.
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 settled all outstanding
liabilities of CSA for $249,688 (CAD$277,507). The settlement was
funded from CSA cash on hand of $137,423 (CAD$153,061), and a
payment of $112,265 (CAD$124,446) from Manaris. Subsequent to the
settlement of CSA's obligations under the approved proposal, a gain
on settlement of CSA liabilities of $474,834 (CAD$532,953) was
recognized in CSA.
Manaris on behalf of CSA incurred CAD$25,000 in reorganization
expenses, which are professional fees payable to the Trustee as a
result of the bankruptcy protection filing, of which CAD$12,000 was
paid during the three month period ended December 31, 2005, and
CAD$13,000 was paid during the three month period ended March 31,
2006. These amounts have been included in the results of
discontinued operations.
F-16
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Discontinued operations (continued)
The carrying values of the major classes of assets and liabilities of
discontinued operations, which include CSA as at June 30, 2006 and CSA and
CLI as at June 30, 2005, are as follows:
June 30, 2006 June 30, 2005
---------------------- -----------------------------------------------------------
CSA CLI CSA Total
$ $ $ $
Cash and cash equivalents 42 - - -
Accounts receivable 8,969 659,349 423,190 1,082,539
Other receivables - 40,140 - 40,140
Inventories - 94,902 2,367 97,269
Prepaid Expenses - 48,050 8,975 57,025
- ------------------------------------------------------------------- -----------------------------------------------------------
Total Current Assets 9,011 842,441 434,532 1,276,973
Property and equipment - 190,671 12,270 202,941
Intangible assets - 894,144 26,644 920,788
Goodwill - 3,004,620 43,226 3,047,846
- ------------------------------------------------------------------- -----------------------------------------------------------
Total Long-Lived Assets - 4,089,435 82,140 4,171,575
- ------------------------------------------------------------------- -----------------------------------------------------------
Total Assets 9,011 4,931,876 516,672 5,448,548
- ------------------------------------------------------------------- -----------------------------------------------------------
Accounts Payable and accrued liabilities - 499,258 541,519 1,040,777
Bank and other loans payable - 82,571 316,331 398,902
Due to related parties - 82,583 - 82,583
Current portion of long term debt - 52,666 - 52,666
- ------------------------------------------------------------------- -----------------------------------------------------------
Total Current Liabilities - 717,078 857,850 1,574,928
Long Term Liabilities - 214,127 - 214,127
- ------------------------------------------------------------------- -----------------------------------------------------------
Total Liabilities of Discontinued Operations - 931,205 857,850 1,789,055
- ------------------------------------------------------------------- -----------------------------------------------------------
Summary results of discontinued operations:
Total CLI CSA
2006 2005 2006 2005 2006 2005
$ $ $ $ $ $
Revenues from Discontinued Operations 3,761,474 3,440,608 3,193,451 1,449,976 568,023 1,990,632
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax earnings (loss) from Discontinued Operations 345,261 (454,951) 234,760 9,567 110,501 (464,518)
- -----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings (loss) from Discontinued Operations (1) 224,614 (459,251) 114,113 (26,973) 110,501 (432,278)
Loss on disposal of the CLI group (74,977) - (74,977) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Results of Discontinued Operations 149,637 (459,251) 39,136 (26,973) 110,501 (432,278)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) CSA includes gain on settlement of liabilities of $474,834 for the year
ended June 30, 2006.
F-17
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
5. Business Combinations
Avensys
On February 28, 2005, the Company completed its acquisition of
Avensys Inc. ("Avensys"). The acquisition resulted in the issuance
of 10,400,002 restricted shares of the Company's common shares
having a fair value of $0.75 per share and a total value of
$7,800,000 (before discounting as discussed below) in exchange for
15,746,369 shares of Avensys which constituted all of the issued and
outstanding common stock of Avensys. The Company also purchased and
cancelled all of the outstanding Avensys stock options for a total
of $312,652 (CDN$385,000). The beneficiaries of the options received
$187,592 (CDN$231,000) on February 28, 2005 and will receive the
balance of $124,970 (CDN$154,000) on or before December 31, 2005.
The Company issued 427,432 restricted shares of common stock as a
finder's fee to an unrelated party. The Company incurred direct
costs associated with the acquisition of $45,000 (CDN$55,413). The
total value of the cancelled stock options, finders fee and direct
costs were accounted for as purchase price adjustments to goodwill.
The 10,400,002 restricted shares are to be released from escrow over
the eighteen months after acquisition. As a result the value of
restricted stock paid was discounted in the amount of $166,414.
Avensys offers fiber optics sensor technology to monitor a variety
of environments, including air, water, soil as well as buildings and
infrastructures. Avensys specializes in providing solutions to
monitor different types of environments, solving environmental
monitoring problems, from micro scale in-building sensing systems to
macro scale wireless landslide and flood warning systems in
different countries, covering air, water and soil as well as the
security of materials and infrastructures, employing a wide range of
technologies including Optical Fiber Sensing Technology.
On February 28, 2005, the Company completed its acquisition of
Avensys. The purchase price allocation was previously preliminary
and subject to change. During the three months ended December 31,
2005 the Company completed the purchase price allocation which
resulted in certain adjustments to goodwill and intangible assets.
The results of operations of Avensys have been included with those
of the Company for periods subsequent to February 28, 2005.
The purchase price was allocated to the assets acquired and
liabilities assumed as follows:
Original allocation Reallocations Final allocation
$ in 2006 $
Current assets 3,499,635 - 3,499,635
Property and equipment 523,898 - 523,898
Customer relationships 2,786,978 1,387,841 4,174,819
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
-------------------------------------------------------------------------------------------------------------------
Amortizable Intangible Assets
Customer relationships represents information about customers such
as their name, contact information, order history and demographic
information. The income approach using a discounted cash flow method
was used to estimate the fair value of the customer list, more
specifically, the multi-period excess earnings method. This method
is predicated on the theory that the value of an asset or investment
is the present value of future cash flows discounted at a rate
commensurate with the time value of money and the underlying risks
of the subject investment. The Company is amortizing the fair value
of the customer relationships on a straight-line basis over the
remaining estimated useful life of ten years.
F-18
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Business Combinations (continued)
Avensys (continued)
Acquired In-process Research and Development
Of the total purchase price, $386,749 has been allocated to
in-process research and development ("IPR&D") and was charged
to operations. Projects that qualify as IPR&D represent those
that have not yet reached technological feasibility and which
have no alternative future use. Technological feasibility is
defined as being equivalent to a beta-phase working prototype
in which there is no remaining risk relating to the
development. At the time of acquisition, Avensys had multiple
IPR&D efforts under way for certain current and future product
lines. These efforts included physical sensors, interrogation
units, chemical sensors and limnimeters. In applying the
discounted cash flow method, the value of the acquired
technology was estimated by discounting to present value the
free cash flows expected to be generated by the products with
which the technology is associated, over the remaining
economic life of the technology. To distinguish between the
cash flows attributable to the underlying technology and the
cash flows attributable to other assets available for
generating product revenues, adjustments were made to provide
for a fair return to property and equipment, working capital,
and other assets that provide value to the product lines.
ITF
On April 18, 2006, Manaris, Avensys and Avensys Laboratories Inc
("ALI"), entered into an Asset Purchase Agreement (the "Agreement")
to acquire the manufacturing assets and research and development
assets of ITF Optical Technologies Inc.,, a designer and
manufacturer of advanced photonic solutions based on proprietary
all-fiber technology. The transaction represents the acquisition of
a business, which adds complementary products to Avensys' current
offerings and provides access to a new potential customer base. ITF
Optical Technologies Inc. specializes in providing applications for
submarine, military, telecom and industrial uses.
The purchase price paid for the manufacturing assets acquired by
Avensys, pursuant to the ITF Agreement, was approximately $1,526,651
(CAD $1,750,000), comprised of $654,279 (CAD $750,000) in cash and
$872,372 (CAD$1,000,000) of Manaris common stock (2,550,795 common
shares).
ALI, Avensys's research and development partner, also pursuant to
the ITF Agreement, purchased ITF Optical Technologies Inc. research
and development assets and intellectual property rights (the "R&D
assets") The consideration paid for the R&D assets was CAD$2,000,000
representing the fair market value of the R&D assets, payable in
580,000 shares of common stock of ALI and 2,000,000 shares of Class
E preferred stock of ALI (the "Avensys Laboratories Shares") issued
to the former shareholders of ITF Optical Technologies Inc. (the
"ITF Preferred Shareholders"). In the aggregate, the Avensys
Laboratories Shares issued pursuant to the ITF Agreement represent
58% of the voting stock of ALI. As a result of the ITF Agreement,
Avensys' ownership of the voting stock of ALI has decreased from 49%
to 42%.
In connection with the ITF Agreement, the following additional
agreements were also entered into:
o A License Agreement was entered into between Avensys and ALI,
pursuant to which Avensys was granted an exclusive license to
use ALI's intellectual property and patent improvements, as
defined in the License Agreement, in order to develop and sell
products incorporating ALI's intellectual property. As
consideration for the license, Avensys will be making royalty
payments to ALI. Also pursuant to the License Agreement, ALI
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. The Shareholder Agreement also stipulates that,
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
$1,793,722 (CAD $2,000,000), or (ii) exchange the Avensys
Laboratories Shares for 3,826,531 freely tradable shares of
Manaris common shares determined based upon its proportionate
share of $1,345,291 (CAD $1,500,000) divided by a reference
per share price of $0.35 (CAD $0.39), the "call option".
F-19
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Business Combinations (continued)
ITF (continued)
As a result of the above arrangements, ALI has been determined to be
a variable interest entity for which Avensys is the primary
beneficiary. Accordingly, ALI is accounted for as a consolidated
subsidiary. The Preferred Shareholder arrangement entitling these
shareholders to a right to receive a fixed amount of CAD$2,000,000
or a fixed number of the Company's common shares has been accounted
for as a convertible liability consisting of a debt instrument with
an embedded conversion option. The debt instrument has been measured
at its present value using a discount rate of 30% resulting in a net
present value of $794,148 on the date of issuance. This carrying
value will be accreted to the face amount of CAD$2,000,000 using the
effective interest rate method to the first date the shareholders
could require a payment. The carrying value of the note as at June
30, 2006 is $877,675. The embedded conversion option has been
classified as a liability and was recognized at its fair value on
the date of issuance of $503,814. Subsequently, this conversion
option is measured at fair value with changes in fair value included
in the Statement of Operations. The fair value of this embedded
conversion option was $458,271 as of June 30, 2006. The fair value
of the embedded conversion option is determined by using the
Black-Scholes Model.
The purchase price of the acquired assets was calculated as follows:
$
Manufacturing Assets
Cash 654,279
Fair value of Manaris shares issued 872,372
------------------------
1,526,651
------------------------
R&D Assets
Balance of purchase price payable 794,148
Fair Value of Derivative Instrument 503,814
------------------------
1,297,962
------------------------
Transaction Costs 139,493
------------------------
2,964,106
------------------------
The fair value of Manaris shares issued was determined based upon
the average share price for a period of three days before and after
the date the terms of the acquisitions were negotiated and
announced, being April 4, 2006.
The purchase price was allocated to the following assets and
liabilities:
$
Current Assets 506,960
Depreciable Fixed Assets 2,599,190
Developed Technologies 209,509
Trade Name 111,738
Current Liabilities (463,291)
------------------------
2,964,106
------------------------
The Company is amortizing the fair value of the purchased intangible
assets on a straight-line basis over the remaining estimated useful
life of five (5) years for Developed Technologies and seven (7)
years for Trade Names.
F-20
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Business Combinations (continued)
ITF (continued)
Unaudited Pro Forma Results of Operations
The pro forma data of the Company set forth below is unaudited and
gives effect to the ITF purchase transaction completed in fiscal
2006 as if it had occurred at the beginning of fiscal 2006 (being
July 1, 2005) and the ITF and Avensys acquisitions as if they had
occurred at the beginning of fiscal 2005 (being July 1, 2004). The
unaudited pro forma financial information is not intended to
represent or be indicative of the consolidated results of operations
or financial condition of the Company that would have been reported
had the acquisition been completed as of the dates presented, and
should not be taken as representative of the future consolidated
results of operations or financial condition of the Company.
June 30,
2006 2005
--------------------------
(In thousands, except per share amounts) $ $
Pro forma net revenues 13,258 13,284
Pro forma net loss applicable to common shareholders (17,216) (12,888)
Pro forma net loss per share (basic and diluted) (0.24) (0.23)
F-21
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
6. Property and Equipment
June 30,
2006
Accumulated Net Book
Cost Amortization Value
$ $ $
Automotive equipment 43,141 24,845 18,296
Computer equipment 470,631 395,952 74,679
Furniture and fixtures 327,787 309,461 18,326
Laboratory equipment 2,762,980 323,812 2,439,168
Leasehold improvements 383,364 73,408 309,956
Machinery and office equipment 315,328 184,581 130,747
Software 127,632 61,755 65,877
Capital leases - computer equipment 49,039 23,686 25,353
- ------------------------------------------------------------------------------------------------
Total property and equipment 4,479,902 1,397,500 3,082,402
- ------------------------------------------------------------------------------------------------
Depreciation during the year 270,270
- ------------------------------------------------------------------------------------------------
June 30,
2005
Accumulated Net Book
Cost Amortization Value
$ $ $
Automotive equipment 33,811 17,318 16,493
Computer equipment 394,655 339,294 55,361
Furniture and fixtures 321,999 271,199 50,800
Laboratory equipment 399,449 161,527 237,922
Leasehold improvements 57,482 44,357 13,125
Machinery and office equipment 260,659 140,683 119,976
Software 76,842 42,385 34,457
Capital leases - computer equipment - - -
- ----------------------------------------------------------------------------------------------
Total property and equipment 1,544,897 1,016,763 528,134
- ----------------------------------------------------------------------------------------------
Depreciation during the year 70,759
- ----------------------------------------------------------------------------------------------
F-22
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
7. Intangible Assets
The following table presents details of the Company's purchased intangible
assets with definite lives:
Weighted Average Accumulated June 30, 2006
Life in Years Cost Amortization Net Book Value
$ $ $
Technology 4.80 209,509 8,313 201,196
Customer relationships 8.97 4,286,704 839,106 3,447,598
Trade name 6.80 111,738 3,260 108,478
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets 8.68 4,607,951 850,679 3,757,272
- ------------------------------------------------------------------------------------------------------------------
Weighted Average Accumulated June 30, 2005
Life in Years Cost Amortization Net Book Value
$ $ $
Technology 1.44 699,285 448,010 251,275
Customer relationships 6.53 2,898,863 218,154 2,680,709
Trade name - - - -
- ------------------------------------------------------------------------------------------------------------------
Total intangible assets 6.09 3,598,148 666,164 2,931,984
- ------------------------------------------------------------------------------------------------------------------
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
$
2007 453,705
2008 439,335
2009 439,335
2010 439,335
2011 431,022
Thereafter 1,554,540
- ---------------------------------------------------------
3,757,272
- ---------------------------------------------------------
F-23
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Intangible Assets (continued)
The changes in the carrying amount of intangible assets during the years
ended June 30, 2006, and 2005 is as follows:
CSA & CLI Avensys & Total
(Disontinued Manaris
Operations)
$ $ $
Balance as of June 30, 2004 - 447,125 447,125
- --------------------------------------------------------------------------------------------------------------------
Acquisiton of intangible assets 981,588 2,914,439 3,896,027
Impairment of intangible assets during fiscal 2005 - (117,200) (117,200)
Amortization during year (60,800) (312,380) (373,180)
- --------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2005 920,788 2,931,984 3,852,772
- --------------------------------------------------------------------------------------------------------------------
Reclassifications (discontinued operations) (920,788) - (920,788)
- --------------------------------------------------------------------------------------------------------------------
Adjusted balance as of June 30, 2005 - 2,931,984 2,931,984
- --------------------------------------------------------------------------------------------------------------------
Acquisition of intangible assets - 321,247 321,247
Adjustment upon finalization of purchase price allocation - 1,387,841 1,387,841
Impairment of intangible assets during fiscal 2006 - (107,715) (107,715)
Amortization during year - (776,085) (776,085)
- --------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2006 - 3,757,272 3,757,272
- --------------------------------------------------------------------------------------------------------------------
Management recorded an intangible assets impairment charge of $107,715 in
the Consolidated Statement of Operations for the year ended June 30, 2006
relating to intangible assets of Manaris which were no longer in use.
F-24
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
8. Goodwill
The changes in the carrying amount of goodwill during the years ended June
30, 2006 and 2005 is as follows:
CSA & CLI
(discontinued
operations) Avensys & C-Chip Total
$ $ $
- -------------------------------------------------------------------------------------------------------------------------
Balance as of June 30,2004 107,000 - 107,000
Goodwill acquired during the period 3,004,620 6,679,608 9,684,228
Impairment of goodwill during fiscal 2005 (63,774) - (63,774)
- -------------------------------------------------------------------------------------------------------------------------
Balance as of June 30,2005 3,047,846 6,679,608 9,727,454
- -------------------------------------------------------------------------------------------------------------------------
Reclassifications (discontinued operations) (3,047,846) - (3,047,846)
- -------------------------------------------------------------------------------------------------------------------------
Reclassified balance as of June 30, 2005 - 6,679,608 6,679,608
- -------------------------------------------------------------------------------------------------------------------------
Impairment of goodwill - (1,529,767) (1,529,767)
Adjustment of goodwill following finalization
of purchase price allocation (1,387,841) (1,387,841)
- -------------------------------------------------------------------------------------------------------------------------
Balance as of June 30,2006 $ - $ 3,762,000 $ 3,762,000
- -------------------------------------------------------------------------------------------------------------------------
In May 2006, the Company completed its annual goodwill impairment test. In
evaluating whether there was an impairment of goodwill, management
compared the fair value of the Avensys reporting unit against its carrying
amount, including the goodwill. Measurement of the fair value was based on
the reporting unit's present value of expected future cash flows. As the
carrying amount exceeded the estimated fair value, the fair value was
allocated to the reporting unit's underlying assets and liabilities, and
management then determined that the carrying value of the goodwill
exceeded the implied fair value of the goodwill. Accordingly, the Company
recorded a goodwill impairment charge (labelled "Loss on Impairment of
Goodwill") of $1,529,767 in the Consolidated Statement of Operations for
the fiscal year ended 30 June 2006. Management believes this impairment
arose primarily as a result of an increase in the timeframe for realizing
growth objectives and anticipated cash flows of the Avensys reporting
unit.
F-25
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
9. Balance Sheet Details
June 30, June 30,
2006 2005
$ $
Other Receivables
Grants receivable - 59,110
Investment tax credits receivable 117,190 596,417
Sales tax receivable 151,332 111,545
Other 107,220 92,036
- ------------------------------------------------------------------------------
375,742 859,108
- ------------------------------------------------------------------------------
Inventory
Raw materials 635,405 261,445
Work in process 120,864 -
Finished goods 807,536 739,062
- ------------------------------------------------------------------------------
1,563,805 1,000,507
- ------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities
Accounts payable 3,911,610 1,239,907
Payroll and benefits 184,785 513,617
Income taxes payable 1,794 68,485
Rent payable 12,894 10,800
Accrual for litigation costs - 160,392
Royalties payable - 236,144
Deferred revenue 151,272 9,832
Other 404,504 249,132
- ------------------------------------------------------------------------------
4,666,859 2,488,309
==============================================================================
F-26
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
10. 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 owned at the time 49% of ALI and the two
entities entered into an Agreement (the "Agreement") whereby ALI would
perform research and development activities for Avensys. The Agreement was
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 $448,430 (CAD$500,000). ALI provided 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.
As a result of the above, ALI had been included in the consolidated
financial statements commencing in the year ended June 30, 2005 since
Avensys was the primary beneficiary.
During the year ended June 30, 2006, ALI purchased ITF's R&D assets as
part of the ITF business combination described in Note 5, above. As a
result of the ITF transaction, Avensys' s ownership of the voting stock of
ALI decreased from 49% to 42%. Following this acquisition, ALI continues
to qualify as a VIE, of which Avensys is the primary beneficiary.
Consequently, ALI will continue to be consolidated by Avensys and Manaris
following the ITF transaction. Following this transaction, ALI changed its
name to ITF Optical Laboratories Inc.
ITF Laboratories Inc. continues to provide research & development solely
for Avensys. However, it may enter into agreements with third parties in
the future. As a result, ITF Laboratories Inc. continues to be included in
the consolidated financial statements of the company for the year ended
June 30, 2006, since Avensys is the primary beneficiary. The impact of
including ITF Laboratories Inc. in the consolidated balance sheet as at
June 30, 2006 includes approximate additions to current assets of
$967,397, net property and equipment of $1,201,358, intangible assets of
$343,717 and current liabilities of $1,138,306. The impact on the
consolidated statement of operations for the year ended June 30, 2006 was
an increase in revenue of approximately $180,000, an increase in expenses
of approximately $1,300,000. The increase in expenses includes an amount
for research and development expenses of approximately $1,100,000.
11. Related Party Transactions and Balances
The total amount due to officers and/or shareholders of the Company at
June 30, 2006 is $40,000 (June 30, 2005: $268,435). The amounts due are
non-interest bearing, unsecured and have no fixed terms of repayment.
12. Bank and Other Loans Payable
Avensys maintains a line of credit from a financial institution for an
authorized amount of $1,219,731 (CAD$1,360,000), which bears interest at
the Canadian bank prime rate plus 1.5%. The outstanding balance under the
line of credit as at June 30, 2006 amounted to $967,004 (CAD$1,078,209)
(June 30, 2005 $879,134 - CAD$1,077,291). Avensys has designated its
accounts receivable totalling $2,822,209 (CAD$3,146,763) and inventories
totalling $1,505,003 (CAD$1,678,078) 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 June 30, 2006.
Consequently, the financial institution may exercise its right to demand
repayment at any time. The line of credit is currently under review and
negotiation for renewal and a new agreement has not as yet been reached.
In 2005, a supplier of C-Chip extended a credit facility with an original
maximum amount of $1,000,000 (principal and interest) which bears interest
at a rate of 10% per annum (2005 - 15%). The supplier subsequently
permitted C-Chip to exceed the maximum amount of the credit facility,
giving rise to the balance outstanding as at June 30, 2006 of $1,364,692
(CAD$1,521,632) (June 30, 2005 $320,127 - CAD$392,284). The supplier holds
a lien on C-Chip's proprietary technology as collateral for the credit
facility.
F-27
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
13. Long-Term Debt
June 30, June 30,
2006 2005
$ $
Mortgage loan secured by Avensys' intangible and
movable tangible assets, (June 30, 2006-CAD$329,000),
bearing interest at prime rate plus 2.75%, payable in
monthly instalments of CAD$7,000 plus interest,
maturing in May 2010 295,067 331,320
Capital lease obligations (CAD$28,269), bearing
interest between 5.83% and 7.72%, maturing
between March 2007 and May 2008 25,353 -
Note payable (June 30, 2006-CAD$6,910), non-interest
bearing, payable in monthly instalments of $691,
unsecured, maturing in April 2007 6,197 12,408
Note payable, bearing interest at prime rate,
payable in six monthly payments, unsecured,
matured October 2005 - 44,720
Note payable on demand (June 30, 2005-CAD$16,382),
non-interest bearing, unsecured (1) - 13,369
Note payable (June 30, 2005-CAD$12,778),
non-interest bearing, unsecured, matured May 2006 - 10,428
Note payable (June 30, 2005-CAD$5,000),
non-interest bearing, unsecured, matured February 2006 - 4,080
- --------------------------------------------------------------------------------------------------------------
326,617 416,325
Less: Current portion of long-term debt 103,717 143,727
- --------------------------------------------------------------------------------------------------------------
Long-term debt 222,900 272,598
- --------------------------------------------------------------------------------------------------------------
Principal payments on long-term debt and capital leases are as follows:
$ $
2007 103,717 143,727
2008 78,506 72,664
2009 75,336 68,549
2010 69,058 68,549
2011 - 62,836
- --------------------------------------------------------------------------------------------------------------
Total 326,617 416,325
- --------------------------------------------------------------------------------------------------------------
(1) Note payable of $13,369 (CAD$16,382) was repaid on December 14, 2005.
F-28
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
14. Convertible Debentures
June 30, June 30,
2006 2005
$ $
Senior secured convertible debentures bearing
interest at 7%, payments of $233,750 for 20
months beginning June 16, 2005, interest payable
each June and December, maturing January 31,
2007, original principal amount of $4,675,000
(Note 14 (a)) 188,328 557,284
Secured convertible debentures bearing interest at
9%, maturing February 2010, original principal
amount of $1,387,302 (CAD$1,700,000) (Note 14 (b)) - 1,387,302
Unsecured convertible debentures bearing interest
at 15%, maturing September 1, 2007, original
principal amount of $437,220 (CAD$487,500)
(Note 14 (b)) 399,563 336,152
Unsecured convertible debentures bearing interest
at 12% maturing March 1, 2008, original principal
amount of $358,744 (CAD$400,000) (Note 14 (b)) 343,109 300,002
- --------------------------------------------------------------------------------------------------------
931,000 2,580,740
Less: Current portion of convertible debentures 587,891 557,284
- --------------------------------------------------------------------------------------------------------
Convertible debentures 343,109 2,023,456
- --------------------------------------------------------------------------------------------------------
Principal payments on the convertible debentures for the next five years are as
follows:
$
2007 587,891
2008 343,109
2009 -
2010 -
2011 -
- --------------------------------------------------------------------------------
Total 931,000
================================================================================
a) Senior Secured Convertible Debentures
On February 16, 2005, the Company issued Senior Secured Convertible
Notes Series A ("Notes") and Series E and F Warrants (See Note
16(b)) for an aggregate principal amount of $4,675,000.
In accordance with EITF 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and with EITF 00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments", the Company allocated
$1,863,870 to the Warrants Series E, $339,456 to the Warrants Series
F and recognized an embedded beneficial conversion feature of
$2,470,674 accounted for as additional paid-in capital and an
equivalent discount against the Notes. The carrying amount of the
Notes is being increased monthly by periodic accretion under the
effective interest method. The Company remains obligated for the
entire contractual balance of the Notes of $4,675,000.
These Notes bear interest at 9% per year from February 16, 2005
until the first principal payment date on June 16, 2005 and 7% per
year after this date. The principal amount on these Notes is payable
in twenty (20) equal monthly installments of $233,750 subject to
certain adjustments. Interest on these Notes is payable on the last
day of June and December of each year commencing on June 30, 2005.
At June 30, 2006, the outstanding principal amount on the Notes was
$1,015,843 with monthly installments of $145,120.
All payments of interest may be made, at the option of the Company,
(a) in cash; (b) by the issuance of additional Series A Notes in the
principal amount equal to the interest payment due; or (c) in shares
of common stock of the Company valued at 90% of the average price of
such security in the most recent five trading days ("Market Price").
All payments of principal may be made, at the option of the Company,
(a) in cash with a premium equal to 10% of the cash amount paid; or
(b) in shares of common stock of the Company valued at 85% of the
Market Price.
All payments made by the issuance of shares will be acceptable only
if the related shares of the Company have first been registered with
the Securities and Exchange Commission.
F-29
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Convertible Debentures (continued)
Senior Secured Convertible Debentures (continued)
The holders of these Notes have the right, at their option at any
time, to convert some or all of the Notes including the principal
amount and the amount of any accrued but unpaid interest into a
number of common shares of the Company valued initially at $0.65 per
share, subject to certain adjustments as described in the purchase
agreement. As part of the special warrant offering, the conversion
price on such notes was reduced to $0.35 (see Note 16).
In connection with the placement of these Notes, the Company issued
Warrant Series: IB1, IB2, IB3, IB4, and IB5 granting the right to
acquire up to 881,538 shares of the Company's common stock at prices
ranging from $0.01 to $0.76 per share subject to certain
adjustments, (see Note 16(b)) and expiring from three months
following the date of their Registration until February 16, 2010.
The Company valued the warrants at $486,586 and recognized this
amount to additional paid in capital of Warrants Series IB1, IB2 and,
IB3, IB4, and IB5 and as deferred issue expenses for the Notes and
issue expenses for the Warrants Series E and F.
To secure payment of the principal amount of the Notes and the
interest thereon, the Company hypothecated, in favor of the note
holders, the universality of all of the immovable and movable
assets, corporeal and incorporeal, present and future of the
Company.
The purchase agreement with respect to these Notes contain certain
covenants (a) related to the conduct of the business of the Company
and its subsidiaries; (b) related to creation or assumption of lien
other than liens created pursuant to the Security Documents and
Permitted Liens, as defined in the purchase agreement; (c) for so
long as at least $2,500,000 principal amount of these Notes remains
outstanding, the Company shall not, without the consent of holders
representing at least 50% of the then outstanding principal amount,
create, incur, guarantee, issue, assume or in any manner become
liable in respect of any indebtedness, other than permitted
indebtedness or issue other securities that rank senior to these
Notes provided however that the Company may have outstanding bank
debt.
b) Unsecured Convertible Debentures
With the acquisition of Avensys, the Company assumed 15% unsecured
convertible debentures having a nominal value of $918,068
(CAD$1,125,000) and maturing on September 1, 2007. When the
debentures were originally issued, Avensys recorded an equity
component of $378,445 (CAD$463,747) and a liability component of
$539,623 (CAD$661,253), for a total of $918,068 (CAD$1,125,000). In
April 2005, the Company issued 680,000 shares in settlement of
$520,238 (CAD$637,500) of the debentures outstanding, the value of
the debt settlement representing the fair value of the shares. The
remainder of the debentures, $397,829 (CAD$487,500) was replaced by
a new 15% unsecured debenture. The new debenture is convertible into
shares of the Company using the following formula: principal and
interest divided by a 17.5% discount on the 10 day weighted average
price of the Company's shares. At year-end the discount related to
the conversion feature is $37,657.
With the acquisition of Avensys, the Company also assumed 12%
unsecured convertible debentures having a nominal value of $652,848
(CAD$800,000) and maturing on March 1, 2008. When the debentures
were originally issued, Avensys recorded an equity component of
$305,857 (CAD$374,797) and a liability component of $346,991
(CAD$425,203), for a total amount of $652,848 (CAD$800,000). In
April 2005, the Company issued 426,667 shares in settlement of
$326,424 (CAD$400,000) of the debentures outstanding, the value of
the debt settlement representing the fair value of the shares. The
remainder of the debentures, $326,424 (CAD$400,000) were modified to
be convertible into 330,251 shares of the Company. At year-end the
discount related to the conversion feature is $15,635.
With the sale of CLI (Note 4), the Company settled the secured
convertible debentures owing as at June 30, 2005 in the amount of
$1,387,302 (CAD$1,700,000) by payments of cash in the amount of
$1,199,554 (CAD$1,400,000) and the issuance of 687,275 shares with a
fair value of $250,106 (CAD$300,000).
F-30
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
15. Common Stock
At June 30, 2006, the Company had authority to issue 500,000,000 shares of
common stock. The Company had 77,671,281 and 54,782,802 of common shares
outstanding at June 30, 2006 and 2005, respectively.
For the fiscal year ended June 30, 2006:
a) The Company issued 1,758,000 common shares for total proceeds of
$100,013 from the exercise of stock options.
b) The Company issued 10,221,522 common shares in connection with the
Series A Notes. Of that amount, 5,897,695 common shares, with a fair
value of $2,099,793, were issued for scheduled principal payments.
Since the Company had been accreting the debt on the basis that the
principal payments would be settled in shares, no gain or loss was
recorded and the $2,099,792 was removed from the carrying value of the
convertible debentures and credited to capital stock and additional
paid in capital. In addition, the holders of the convertible debentures
converted debentures with a principal amount of $1,249,360 into
3,575,008 common shares at the existing conversion rate of $0.35. 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 $1,181,188 has
been charged as additional accretion expense and credited to capital
stock and additional paid in capital. Furthermore, a total of 748,819
common shares, with a fair value of $265,436, were issued for interest
payments. Since the company had been accruing interest on the basis
that the interest would be settled in shares, no gain or loss was
recorded.
c) The Company issued 7,525,124 common shares for total proceeds of
$2,309,296 following the exercise of 17,525,124 warrants.
d) A total of 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 has been charged to other expense.
e) In February 2006, the Company issued 631,038 common shares valued at
$224,397 as the repayment of secured convertible debentures with a
principle amount of $224,397 in accordance with the original terms of
the debt. Since the Company had been accounting for this debt on the
basis that the principal payments would be made in shares, no gain or
loss was recorded (Note 4).
f) In April 2006, the Company issued 2,550,795 restricted common shares
having a value of $872,372 for the acquisition of ITF assets. (Note 5)
g) In April 2006, the Company cancelled 70,000 restricted common shares
out of 120,000 restricted common shares issued in May 2005 for
consulting fees. These share had originally been issued and held in
escrow with 10,000 shares being released from escrow each month.
Consequently, there was no unearned compensation expense to reverse
upon cancellation.
For the fiscal year ended June 30, 2005:
a) The Company issued 2,120,501 common shares for total proceeds of
$205,012 from the exercise of stock options.
b) A total of 176,767 stock options were exercised after issuance to
settle outstanding payables in the amount of $127,327, the value of the
payables settlement representing the fair value of the shares.
c) The Company issued 121,250 restricted common shares and 95,193 common
shares for total proceeds of $2 following the exercise of 216,443
Series IB1 warrants.
d) In May 2005, the Company issued 120,000 restricted common shares with a
value of $79,200 for consulting fees.
e) In April 2005, the Company issued 1,106,667 restricted common shares
valued at $830,000 following the conversion of convertible debentures.
f) In April 2005, the Company issued 258,000 restricted common shares
valued at $175,182 as a finder's fee and 32,260 restricted common
shares valued at $32,260 as a consultant's fee related to the
acquisition of Avensys Inc. A total of 159,458 restricted common shares
valued at $146,701 were issued as a finder's fee related to the
acquisition of CLI Group (Notes 4(a) and (b)).
g) In January 2005, the Company issued 164,474 restricted common shares
with a value of $125,000 for the purchase price of Markus 360.
h) In March 2005, the Company issued 10,400,002 restricted common shares
having a value of $7,633,586 for the acquisition of Avensys Inc. The
Company issued 432,427 restricted common shares valued at $324,320 as
finder's fee related to the acquisition of Avensys Inc. (Note 5).
F-31
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Common Stock (continued)
June 30, June 30,
2006 2005
Common stock reserved for issuance:
Stock Options
Options outstanding 4,486,750 3,842,500
Reserved for future issuance 4,539,564 2,198,814
Warrants 13,015,714 14,390,652
Conversion of senior secured convertible notes 2,487,593 8,486,383
Conversion of secured convertible notes 2,154,739
Conversion of unsecured convertible notes 1,984,645
---------------------------------
26,514,266 31,073,088
=================================
16. Stock Options and Warrants
a) Stock Options
During the fiscal year ended June 30, 2006:
i) The Company granted 113,000 stock options to employees at
exercise prices ranging from $0.34 and $0.41 per share
respectively. These stock options vest over a period of one
year.
ii) During the year, a total of 118,750 employee stock options
were forfeited.
iii) The Company granted 575,000 stock options to directors
pursuant to a non-qualified stock option plan with exercise
prices ranging from $0.00001 and $0.38 per share, of which
275,000 stock options vested immediately and 300,000 vest over
a period of one year.
iv) The Company granted 990,000 stock options to consultants
pursuant to a non-qualified stock option plan at an exercise
price ranging from $0.00001 to $0.35 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 990,000 stock options granted to consultants
257,000 stock options were issued for settlement of
outstanding accounts payable of $105,501 (Note 15).
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 intrinsic value of these options
of 216,000 has been included in stock based compensation
expense.
F-32
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Stock Options and Warrants (continued)
Stock Options (continued)
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 vested immediately and
250,000 stock options vest upon completion of his term as
interim Chief Executive Officer, which has not as yet been
completed.
vii) On June 5, 2006, the Company registered 5,000,000 shares of
common stock pursuant to the Company's 2006 Nonqualified Stock
Option Plan (the "Plan"). The determination of those eligible
to receive options under this plan, and the amount, type,
price and timing of each stock option and the terms and
conditions shall rest at the sole discretion of the Company's
Compensation Committee, subject to the provisions of this
Plan. A total of 4,539,564 options under the Plan remain
available for issuance.
During the fiscal year ended June 30, 2005:
i) The Company granted 2,365,000 stock options to employees with
exercise prices ranging from $0.20 to $0.92 and which vest
over a period of one year. The Company granted 1,492,668 stock
options to non-employees with exercise prices ranging from
$0.0001 to $0.648 and which vest immediately. Also, a total of
176,767 stock options were issued to settle outstanding
payables of $127,327 (Note 15), the value of the payables
settlement representing the fair value of the shares. During
the year ended June 30, 2005 a total of 460,400 stock options
were cancelled. The Company charged stock-based compensation
expense of $1,068,542 to operations relating to stock options
and $148,000 relating to contingent consideration earned
during the fiscal year ended June 30, 2005.
A summary of the changes in the Company's common share stock options
is presented below:
June 30, 2006 June 30, 2005
-------------------------------------------- --------------------------------------------
Number of Weighted Number of Weighted
Options Average Options Average
Exercise Price Exercise Price
($) ($)
------------------------------------------------------------------------------------------
Balance at beginning of the year 3,842,500 0.65 2,742,500 0.40
Granted 2,778,000 0.14 3,857,668 0.47
Exercised (2,015,000) (0.05) (2,297,268) (0.09)
Forfeited (118,750) (0.78) (460,400) (0.50)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of the year 4,486,750 0.60 3,842,500 0.65
==============================================================================================================================
Additional information regarding options outstanding as at June 30,
2006 is as follows:
Outstanding Exercisable
---------------------------------------------------------------- ---------------------------------------
Range of Number of Weighted Weighted Number of Weighted
Exercise prices shares average average shares average
$ remaining exercise price exercise price
contractual $ $
life (years)
0.00 - 0.25 302,500 4.5 0.04 302,500 0.04
0.26 - 0.50 1,065,500 4.6 0.37 572,000 0.20
0.51 - 0.75 1,895,000 2.7 0.67 1,895,000 0.67
0.76 - 1.00 1,223,750 3.0 0.82 1,223,750 0.82
---------------------------------------------------------------- ---------------------------------------
4,486,750 3.4 0.60 3,993,250 0.60
================================================================ =======================================
F-33
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Stock Options and Warrants (continued)
Stock Options (continued)
The weighted average fair value of options granted for the fiscal
years ended June 30, 2006 and 2005 was $0.32 and $0.24,
respectively, as summarized below.
Weighted Weighted
average average
Number of exercise grant-date
options price fair value
---------------------------------------------------------------------------
Options with exercise prices below market price 1,715,000 0.00001 0.39
Options with exercise prices equal to market price 1,063,000 0.36 0.21
-------------------- ----------------- -----------------
Options granted during the year ended June 30, 2006 2,778,000 0.14 0.32
==================== ================= =================
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 $396,588 and $1,092,874 for the fiscal years
ended June 30, 2006 and 2005, respectively.
The Company recognized stock based compensation for non-employees in
the amount of $490,795 and $1,216,542 for the fiscal years ended
June 30, 2006 and 2005, 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 weigthed-average assumptions:
Year Ended June 30,
2006 2005
---------------- --------------
Risk - free interest rate 3.28% 3.73%
Expected volatility 100.95% 150.71%
Expected life of stocks options (in years) 1.39 1.78
Assumed dividends None None
Year Ended June 30,
2006 2005
$ $
Net loss applicable to common stockholders (14,099,739) (6,207,802)
Add: Stock-based compensation expense included in net loss - as reported 490,795 1,216,542
Less: Stock-based compensation expense determined under fair value method (887,383) (2,309,416)
- ----------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders - pro forma (14,496,327) (7,300,676)
- ----------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) - as reported (0.20) (0.14)
- ----------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) - pro forma (0.21) (0.16)
- ----------------------------------------------------------------------------------------------------------------------
F-34
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Stock Options and Warrants (continued)
b) Warrants
Warrants outstanding as at June 30, 2006
Warrant exercise
Outstanding prices
- ----------------------------------------------------
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 7,692 0.00001
IB-02 215,385 0.59
IB-03 323,077 0.67
IB-06 605,676 0.35
- ----------------------------------------------------
Total 13,015,714 0.48
====================================================
Changes in the warrants outstanding for the year ended June 30, 2006
are as follows:
Range of exercise prices 0.00001 0.001 0.35 0.50 0.59 0.63 0.67 0.70-1.10 Total
------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 120,192 - - - 215,385 107,693 343,077 13,604,307 14,390,654
Reduction in exercise price - - 13,604,307 - - - - (13,604,307) -
Granted - 52,289 5,294,245 5,579,160 - - - - 10,925,694
Exercised (112,500) (52,289) (7,360,335) - - - - - (7,525,124)
Expired - - (4,647,817) - - (107,693) (20,000) - (4,775,510)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as at June 30, 2006 7,692 - 6,890,400 5,579,160 215,385 - 323,077 - 13,015,714
===================================================================================================================================
Weigthed Average remaining
contractual life (years) 3.6 4.1 3.2 3.6 3.6 - 3.6 - 3.4
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in the warrants outstanding as at June 30, 2005 are as
follows:
Range of exercise prices 0.00001 0.001 0.35 0.50 0.59 0.63 0.69
-----------------------------------------------------------------------
Balance at beginning
of the year 2004 - - - - - - -
Repriced -
Granted 120,192 - - - 215,385 107,693 343,077
Exercised - - - - - - -
Expired - - - - - - -
- ------------------------------------------------------------------------------------------------
Balance as at
June 30, 2006 120,192 - - - 215,385 107,693 343,077
================================================================================================
Weigthed Average
remaining contractual
life (years) 4.6 - - - 4.6 4.6 4.6
- ------------------------------------------------------------------------------------------------
Range of exercise prices 00.70-0.75 1.00 1.10 1.5 Total
----------------------------------------------------------------
Balance at beginning
of the year 2004 - 3,873,637 2,538,462 6,412,099
Repriced -
Granted 7,192,208 1,650,000 1,650,000 11,278,555
Exercised -
Expired (1,650,000) (1,650,000) (3,300,000)
- -----------------------------------------------------------------------------------------
Balance as at
June 30, 2006 7,192,208 3,873,637 2,538,462 - 14,390,654
=========================================================================================
Weigthed Average
remaining contractual
life (years) 4.6 0.4 0.8 - 2.8
- -----------------------------------------------------------------------------------------
F-35
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Stock Options and Warrants (continued)
Warrants outstanding as at June 30, 2005
Warrant Exercise
Outstanding Price
- ------------------------------------------------
Class A 3,873,637 $ 1.000
- ------------------------------------------------
Series A 2,538,462 $ 1.100
- ------------------------------------------------
Series E 5,394,131 $ 0.750
- ------------------------------------------------
Series F 1,798,077 $ 0.700
- ------------------------------------------------
IB-01 120,192 $ 0.00001
- ------------------------------------------------
IB-02 215,385 $ 0.650
- ------------------------------------------------
IB-03 323,077 $ 0.750
- ------------------------------------------------
IB-04 107,693 $ 0.700
- ------------------------------------------------
IB-05 20,000 $ 0.750
- ------------------------------------------------
Total 14,390,654 $ 0.860
- ------------------------------------------------
In July 2005, the company completed a special warrant offering 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.
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.
F-36
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
17. Commitments and Contingencies
Commitments
Minimum lease payments for the next five years are as follows:
$
2007 511,257
2008 478,914
2009 429,938
2010 291,431
2011 11,923
- ------------------------------------------------------
1,723,463
======================================================
The Company leases premises for its various offices located across
Canada. Total rent expense was $400,934 for the year ended June 30,
2006 (2005 - $140,491).
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
$97,668 (CAD $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 the 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 4).
ii) A motion was filed on August 13, 2004 under Quebec law, in the district of
Montreal, Province of Quebec, totalling $76,545 (CAD $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 the
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 litigation of CSA (Note 4).
iii) A lawsuit was originally filed on December 3, 2002 with the Quebec Labour
Commission alleging wrongful dismissal. The former employee was claiming
an indemnity of approximately $143,498 (CAD $160,000). The case was
brought before the Quebec Court of Appeal, which ordered Avensys in August
2006 to follow the Quebec Labor Tribunal's decision, and pay an indemnity
of $160,731 (CAD $179,215) to the former employee. This indemnity has been
recorded as a liability in the consolidated financial statements of the
Company as at June 30, 2006.
iv) A lawsuit was filed on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $556,054 (CAD $620,000) with
regards to alleged breach of employment contract and wrongful dismissal.
This lawsuit was settled on September 2, 2005 for an amount of $89,686
(CAD $100,000) and the transfer of 200,000 shares of the Company,
currently held in escrow, with a value of $77,000 (CAD$85,855). The
parties exchanged under this agreement a complete and final release
regarding their business and employment relationship.
v) A lawsuit was filed on July 15, 2005, under Quebec law, in the District of
Montreal, Province of Quebec, for a total of $89,686 (CAD$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 $49,327 (CAD$55,000). Both
parties provided full and final release of any and all rights and claims,
related directly or indirectly to the dispute.
F-37
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
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 and the availability of separate financial
information.
The Company identifies a reportable segment through the internal
organizational structure. The Company's structure is distributed among two
reporting segments, Fiber & Monitoring and Credit Management, each with
different product and service offerings. The Fiber & Monitoring reporting
segment is comprised of the operations of Avensys and ITF and provides
fiber-based technologies and environmental monitoring solutions. The
Credit Management reporting segment is comprised of the operations of
C-Chip, and offers products and services to the credit management
marketplace.
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 year ended June 30, 2006
------------------------------------------------------------
Fiber & Monitoring Credit Management Consolidated
------------------------------------------------------------
Net revenues from external customers 10,179,426 319,079 10,498,505
- ----------------------------------------------------------------------------------------------------------------------
Cost of net revenues 7,059,045 405,665 7,464,710
Marketing and sales expense 1,918,171 394,327 2,312,498
Administrative expense 1,263,369 537,235 1,800,604
- ----------------------------------------------------------------------------------------------------------------------
Direct costs 10,240,585 1,337,227 11,577,812
- ----------------------------------------------------------------------------------------------------------------------
Direct contribution (61,159) (1,018,148) (1,079,307)
Operating expenses and indirect costs of net revenues 6,548,134
- ----------------------------------------------------------------------------------------------------------------------
Loss from operations (7,627,441)
- ----------------------------------------------------------------------------------------------------------------------
For the year ended June 30, 2005
------------------------------------------------------------
Fiber & Monitoring Credit Management Consolidated
------------------------------------------------------------
Net revenues from external customers 3,237,735 342,884 3,580,619
- ----------------------------------------------------------------------------------------------------------------------
Cost of net revenues 2,110,560 195,898 2,306,458
Marketing and sales expense 520,262 278,623 798,885
Administrative expense 327,495 69,838 397,333
- ----------------------------------------------------------------------------------------------------------------------
Direct costs 2,958,317 544,359 3,502,676
- ----------------------------------------------------------------------------------------------------------------------
Direct contribution 279,418 (201,475) 77,943
Operating expenses and indirect costs of net revenues 5,081,731
- ----------------------------------------------------------------------------------------------------------------------
Loss from operations (5,003,788)
- ----------------------------------------------------------------------------------------------------------------------
F-38
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Segment Disclosures (continued)
Revenue from one customer of the Company's Fiber & Monitoring segment
represented approximately $3,290,000 for the year ended June 30, 2006
(2005-approximately $867,000), of which the outstanding receivable balance
amounts to approximately $880,000 as at June 30, 2006 (2005-approximately
$673,000).
The Company's long-lived assets, comprised of property and equipment, intangible
assets and goodwill, substantially all of which are located in Canada, are
allocated as follows:
2006 2005
$ $
Fiber & Monitoring 10,523,564 9,795,470
Credit Management 22,567 24,708
All Other 55,543 319,548
- ----------------------------------------------------------------------------
The Company has three geographic business areas: Americas, Europe & Asia,
determined based on the locations of the customers. The revenues for the year
ended June 30, 2006 for the Americas includes $5,339,282 of sales from Canada
and $1,678,873 of sales from the United States of America. The revenues for Asia
include sales of $2,887,815 from China for the year ended June 30, 2006.
Geographic Information
2006 2005
Revenues $ $
Americas 7,018,155 2,660,135
Europe 518,072 657,520
Asia 2,962,278 262,964
- --------------------------------------------------------
Total 10,498,505 3,580,619
========================================================
F-39
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
19. Income Taxes
The Company utilizes the liability method of accounting for income taxes
as set forth in SFAS No. 109, "Accounting for Income Taxes". Under the
liability method, deferred taxes are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. A valuation allowance is recorded
when it is more likely than not that some of the deferred tax assets will
not be realized. Pursuant to SFAS 109 the Company is required to compute
tax asset benefits for net operating losses carried forward. In assessing
the recoverability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. The amount of the deferred tax asset considered
realizable could change materially in the near term based on future
taxable income during the carry forward period.
The Company's Federal Canadian operating losses expiry as follows:
$
2007 45,673
2008 1,129,904
2009 804,435
2010 1,334,834
2011 -
2012 -
2013 -
2014 3,729,839
2015 4,341,453
2016 5,611,533
------------
16,997,671
============
A reconciliation of the benefit for income taxes at the combined U.S. and
Canadian tax rate compared to the Company's effective tax rate is as
follows:
June 30,
2006 2005
$ $
Income tax at Federal US statutory rate (recovery) (4,215,777) (1,954,507)
Increase (decrease) resulting from:
Stock based compensation not deductible 137,093 400,474
Change in valuation allowance 3,270,461 126,861
Impairment of goodwill 477,593 -
Research and development tax credits (351,242) 1,234,207
Income tax rate differential of foreign subsidiaries 311,026 199,355
Change in income tax rate 47,115 -
Non-deductible items and other elements (27,511) (71,618)
- -----------------------------------------------------------------------------------------
Income tax benefit (351,242) (65,228)
- -----------------------------------------------------------------------------------------
F-40
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
Income Taxes (continued)
June 30,
2006 2005
$ $
Deferred tax assets:
Net tax losses and scientific research and
experimental development expenses carried forward 6,049,110 3,240,234
Difference between book and tax depreciation 110,050 82,842
Reserves and accruals not deductible for tax purposes 345,599 35,440
Research and development tax credits 228,125 621,022
- -------------------------------------------------------------------------------------
Total deferred tax assets 6,732,884 3,979,538
Valuation allowance (5,584,027) (2,150,056)
- -------------------------------------------------------------------------------------
1,148,857 1,829,482
Deferred tax liabilities:
Difference between book and tax depreciation (893,155) (607,540)
Long-term debt (255,702) (1,204,806)
Investment tax credits - (17,136)
- -------------------------------------------------------------------------------------
Total deferred tax liabilities (1,148,857) (1,829,482)
- -------------------------------------------------------------------------------------
Net tax assets - -
- -------------------------------------------------------------------------------------
Approximately $1,000,000 of the valuation allowance disclosed above
relates to losses incurred by Avensys prior to the date of the acquisition
by Manaris. Accordingly, any reversal of this portion of the valuation
allowance in future periods will be recorded as a reduction of goodwill
and intangible assets when realized.
For Canadian income tax purposes the Company has approximately $2,578,739
of Scientific Research and Experimental Development expenses available
indefinitely to reduce taxable income in future years.
F-41
Manaris Corporation
(Formerly A Development Stage Company)
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
June 30, 2006
20. Subsequent Events
a) Series B Notes
On August 11, 2006, the Company entered into a Note and Warrant
Purchase Agreement for the sale by the Company of Series B
Subordinated Secured Convertible Notes (the "Series B Notes") in an
aggregate principal amount of approximately $3.6 million and
Original Issue Discount Subordinated Secured Convertible Notes equal
to fifteen percent (15%) of the aggregate principal amount of Series
B Notes (the "OID Notes") to certain institutional and accredited
investors (the "Investors"). Pursuant to the Purchase Agreement, the
Company also issued four year warrants to purchase shares of the
Company's common stock in an amount equal to 37.5% of the number of
common shares underlying the Series B Notes at $0.45 per share (the
"Series Z Warrants") and 2.5% of the number of common shares
underlying the Series B Notes at $0.65 per share (the "Series Y
Warrants"). Gross proceeds of approximately $1.6 million were
initially received on August 22, 2006, to be followed by a second
disbursement of $500,000. The remaining $1.5 million will be
disbursed upon effectiveness of the Company's registration
statement. However, there is no assurance that this amount will be
received.
The Notes mature thirty (30) months from the date of issuance (the
"Maturity Date") and are convertible at any time into shares of the
Company's common stock at a fixed conversion price of $0.42, subject
to a conversion price reset of $0.35. The conversion price of the
Notes is subject to adjustment for certain events, including
dividends, distributions or split of the Company's Common Stock, or
in the event of the Company's consolidation, merger or
reorganization. Beginning nine months from the issuance date, the
Company is required to make principal payments equal to one-eighth
of the aggregate principal amount of the Notes on a quarterly basis.
The Company may pay the principal payment in either cash plus a
premium of 7% of each principal payment or in shares of registered
common stock at a 15% discount to the market price of the Company's
common stock. The Company's obligations under the Purchase Agreement
and the Notes are secured by a subordinated lien on substantially
all of the assets of the Company, pursuant to a Pledge and Security
Agreement.
The Company did not file a registration statement within 45 days
from the closing date of the August 11, 2006 private placement,
which is the filing date specified in the financing documents. As a
result, until such time as the registration statement is filed, the
investors can demand repayment in an amount equal to 110% of the
aggregate principal amount of the notes. However, the Company has
not received a notice of default from the investors.
In addition, as a result of the Company's failure to file the
registration statement by the filing date, the Company has begun to
accrue liquidated damages equal to 1.5%, for each calendar month
(prorated for shorter periods), of the initial investment in the
notes. The liquidated damages accrue until the registration
statement is filed.
b) Unsecured Convertible Debenture Conversion
With the acquisition of Avensys, the Company assumed 15% unsecured
convertible debentures having a nominal value of $918,068
(CAD$1,125,000) and maturing on September 1, 2007. In April 2005,
the Company issued 680,000 shares in settlement of $520,238
(CAD$637,500) of the debentures outstanding. The remainder of the
debentures, $397,829 (CAD$487,500) was replaced by a new 15%
unsecured debenture. On August 10, 2006 the new debenture, with a
nominal value of CAD$487,500, was fully converted into 1,654,394 of
Manaris common stock shares. The share price was calculated using
the following formula: principal and interest divided by a 17.5%
discount on the 10 day weighted average price of the Company's
shares which equaled to $0.26 (CAD$0.29) per share. The transaction
resulted in the Company recognizing a loss on conversion of
approximately $35,000 in the first quarter of fiscal 2007.
c) Issuance of ITF Related Shares
Pursuant to the ITF transaction, the Company did not file the
required registration statement within the time period required by
the Asset Purchase Agreement. As a result, the Company issued
255,080 restricted common shares on September 12, 2006 to the ITF
Preferred Shareholders. The fair value of the shares on that date
was approximately $74,000 and was expensed in the first quarter of
Fiscal 2007.
d) Patent Notice
On September 28, 2006, our subsidiary C-Chip Technologies (North
America) (C-Chip) received a letter dated September 27, 2006 from a
law firm representing one of our competitors, placing C-Chip on
notice of its potentially infringing activities, and demanding a
response within 30 days. No proceedings have been initiated and no
claim for damages has been made.
F-42
Pro Forma Financial Information
Pro Forma Consolidated and Statement of Operations
for the year ended June 30, 2006 ........................................F-44
Notes to the Pro Forma Consolidated Statement of
Operations ............................................................F-45
F-43
Manaris Corporation
(formerly a Development Stage Company)
Pro Forma Consolidated Statement of Operations
for the twelve months ended June 30, 2006
(expressed in 000's of US Dollars, except per share amounts)
(Unaudited)
Pro Forma
ITF US GAAP Concolidated
Manaris Statement of Statement of
Corporation Operations Adjustments Operations
(Note 3 A) (Note 3 B)
$ $ $ $
Revenue 10,499 2,759 13,258
Cost of Revenue 7,465 1,847 9,312
- ---------------------------------------------------------------------------------------------------------------
Gross Profit 3,034 912 - 3,946
- ---------------------------------------------------------------------------------------------------------------
Expenses
Depreciation and amortization 980 604 77 1,661
Selling, general and administrative 6,447 1,787 8,234
Loss on Impairment of goodwill 1,530 - 1,530
Loss on impairment of Intangible Assets 108 - 108
Research and development 1,106 1,366 677 3,149
Other Operating Expenses 304 304
Stock based compensation 491 - 491
- ---------------------------------------------------------------------------------------------------------------
Total Operating Expenses 10,662 4,061 754 15,477
- ---------------------------------------------------------------------------------------------------------------
Profit (Loss) from Continuing Operations (7,628) (3,149) (754) (11,531)
Interest Income (Expense) (762) 291 (262) (733)
Debenture accretion (3,991) - 355 (3,636)
Amortization of Deferred Issuance Costs 4 4
Financial Expenses (127) (127)
Foreign exchange gain (loss) 29 (29) -
Other revenues (expenses) (18) - (18)
- ---------------------------------------------------------------------------------------------------------------
Net Profit (Loss) before Income Tax Benefit (12,399) (2,952) (690) (16,041)
Provision for Income Taxes (2) (2)
Income Tax Benefit - Refundable tax credits 351 - 677 1,028
- ---------------------------------------------------------------------------------------------------------------
Net Profit (Loss) before Non-controling interest (12,048) (2,954) (13) (15,015)
Non-Controling Interest (4) - (4)
- ---------------------------------------------------------------------------------------------------------------
Net loss from Continuing Operations (12,052) (2,954) (13) (15,019)
Effect of reduction in exercise
price of outstanding warrants (2,197) - (2,197)
- ---------------------------------------------------------------------------------------------------------------
Net loss from continuing operations
applicable to common stockholders (14,099) (2,954) (13) (17,216)
- ---------------------------------------------------------------------------------------------------------------
Net loss from continuing operations
per share-Basic and diluted (0.20) (0.04) (0.24)
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 69,363 2,004 71,367(a)
- ---------------------------------------------------------------------------------------------------------------
(a) Weighted average shares outstanding calculation has been adjusted to include
the 2,550,795 common shares of Manaris that were issued to acquire the assets of
ITF Optical Technologies Inc. from July 1, 2005, rather than the actual issue
date of April 18, 2006.
F-44
Manaris Corporation
(formerly a Development Stage Company)
Notes to the Pro Forma Consolidated Statement of Operations
(Unaudited)
Note 1 - The accompanying unaudited Pro Forma Consolidated Statement of
Operations, which gives effect to the acquisition of ITF Optical Technologies
Inc. (as described below) as if it had occurred on July 1, 2005, has been
prepared from the audited consolidated financial statements of Manaris
Corporation ("Manaris") for the year ended June 30, 2006 and the unaudited
consolidated financial statements of ITF Optical Technologies Inc. ("ITF") for
the nine-month period ended March 31, 2006. This pro forma information is
unaudited and should be read in conjunction with the above-noted consolidated
financial statements of Manaris and the unaudited consolidated financial
statements of ITF for the nine-month period ended March 31, 2006 and the audited
consolidated financial statements of ITF for the years ended June 30, 2005 and
2004 prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and presented in Canadian dollars included elsewhere in this
document. The accompanying unaudited pro forma information was prepared by
combining the Consolidated Statement of Operations of Manaris for the year ended
June 30, 2006 with the unaudited results of operations of ITF for the period
from July 1, 2005 to April 18, 2006. The unaudited results of operations of ITF
for the period from July 1, 2005 to April 18, 2006 have been compiled by adding
to the results of operations as disclosed in the unaudited consolidated
statement of operations of ITF for the nine-month period ended March 31, 2006,
the unaudited results of operations for the period from April 1 to April 18,
2006. Further, these results of operations have been adjusted for any
differences between Canadian and US GAAP and converted to US dollars using the
average exchange rate for the period, being USD $0.8511 = CAD $1.000. In
addition, this unaudited pro forma information includes other adjustments
necessary to reflect the ITF acquisition as if it had occurred on July 1, 2005.
An unaudited consolidated pro forma balance sheet has not been prepared to give
effect to the ITF acquisition as of any date since the effects of the
acquisition of ITF on the balance sheet of Manaris have already been reflected
in the Consolidated Balance Sheet of Manaris as of June 30, 2006 as included in
the company's recently filed annual report on Form 10KSB and included elsewhere
in this document.
The unaudited Pro Forma Consolidated Statement of Operations has been prepared
for informational purposes only and does not purport to be indicative of the
financial position or the results of operations that actually would have
occurred if the acquisitions had been consummated at the beginning of the period
presented, nor of results to be expected in the future. Furthermore, the
unaudited Pro Forma Consolidated Statement of Operations does not reflect
changes that may have occurred as the result of post-acquisition activities and
other matters.
Note 2 - The following is a reproduction of the business acquisition note
included in the audited financial statements of Manaris for the year ended June
30, 2006, as included in the company's recently filed annual report on Form
10KSB. This note summarizes the significant terms of the transaction and how it
has been accounted for.
On April 18, 2006, Manaris, Avensys and Avensys Laboratories Inc ("ALI"),
entered into an Asset Purchase Agreement (the "Agreement") to acquire the
manufacturing assets and research and development assets of ITF Optical
Technologies Inc., a designer and manufacturer of advanced photonic solutions
based on proprietary all-fiber technology. The transaction represents the
acquisition of a business, which adds complementary products to Avensys' current
offerings and provides access to a new potential customer base. ITF Optical
Technologies Inc. specializes in providing applications for submarine, military,
telecom and industrial uses.
The purchase price paid for the manufacturing assets acquired by Avensys,
pursuant to the ITF Agreement, was approximately $1,526,651 (CAD $1,750,000),
comprised of $654,279 (CAD $750,000) in cash and $872,372 (CAD$1,000,000) of
Manaris common stock (2,550,795 common shares).
ALI, Avensys's research and development partner, also pursuant to the ITF
Agreement, purchased ITF Optical Technologies Inc. research and development
assets and intellectual property rights (the "R&D assets"). The consideration
paid for the R&D assets was CAD$2,000,000 representing the fair market value of
the R&D assets, payable in 580,000 shares of common stock of ALI and 2,000,000
shares of Class E preferred stock of ALI (the "Avensys Laboratories Shares")
issued to the former shareholders of ITF Optical Technologies Inc. (the "ITF
Preferred Shareholders"). In the aggregate, the Avensys Laboratories Shares
issued pursuant to the ITF Agreement represent 58% of the voting stock of ALI.
As a result of the ITF Agreement, Avensys' ownership of the voting stock of ALI
has decreased from 49% to 42%.
In connection with the ITF Agreement, the following additional agreements were
also entered into:
o A License Agreement was entered into between Avensys and ALI, pursuant to
which Avensys was granted an exclusive license to use ALI's intellectual
property and patent improvements, as defined in the License Agreement, in
order to develop and sell products incorporating ALI's intellectual
property. As consideration for the license, Avensys will be making royalty
payments to ALI. Also pursuant to the License Agreement, ALI will continue
to conduct research and development for the mutual benefit of both
parties.
F-45
Manaris Corporation
(formerly a Development Stage Company)
Notes to the Pro Forma Consolidated Statement of Operations
(Unaudited)
Note 2 (continued)
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. The Shareholder Agreement also stipulates
that, 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 $1,793,722 (CAD
$2,000,000), or (ii) exchange the Avensys Laboratories Shares for
3,826,531 freely tradable shares of Manaris common shares determined based
upon its proportionate share of $1,345,291 (CAD $1,500,000) divided by a
reference per share price of $0.35 (CAD $0.39).
As a result of the above arrangements, ALI continues to be a variable interest
entity for which Avensys is the primary beneficiary. Accordingly, ALI is
accounted for as a consolidated subsidiary. The Preferred Shareholder
arrangement entitling these shareholders to a right to receive a fixed amount of
CAD$2,000,000 or a fixed number of the Company's common shares has been
accounted for as a convertible liability consisting of a debt instrument with an
embedded conversion option. The debt instrument has been measured at its present
value of $794,148 on the date of issuance. This carrying value will be accreted
to the face amount of CAD$2,000,000 using the effective interest rate method to
the first date the shareholders could require a payment. The carrying value of
the note as at June 30, 2006 is $877,675. The embedded conversion option has
been classified as a liability and was recognized at its fair value on the date
of issuance of $503,814. Subsequently, this conversion option is measured at
fair value with changes in fair value included in the Statement of Operations.
The fair value of this embedded conversion option was $458,271 as of June 30,
2006. The fair value of the embedded conversion option is determined by using
the Black-Scholes Model.
The purchase price of the acquired assets was calculated as follows:
$
Manufacturing Assets
Cash 654,279
Fair value of Manaris shares issued 872,372
-----------
1,526,651
===========
R&D Assets
Balance of purchase price payable 794,148
Fair Value of Derivative Instrument 503,814
-----------
1,297,962
===========
Transaction Costs 139,493
-----------
2,964,106
-----------
The fair value of Manaris shares issued was determined based upon the average
share price for a period of three days before and after the date the terms of
the acquisitions were negotiated and announced, being April 4, 2006.
The purchase price was allocated to the following assets and liabilities:
$
Accounts Receivable 31,351
Inventories 475,609
Depreciable Fixed Assets 2,599,190
Developed Technologies 209,509
Trade Name 111,738
Deferred Revenues (31,351)
Assumed Capital Leases (327,256)
Warranties (104,685)
-----------
2,964,106
===========
F-46
Manaris Corporation
(formerly a Development Stage Company)
Notes to the Pro Forma Consolidated Statement of Operations
(Unaudited)
Note 3 A - Reconciliation of ITF Canadian GAAP Statement of Operations to US
GAAP Statement of Operations for year ended June 30, 2006 (in 000's):
Nine months ended 3/31/2006
---------------------------
ITF CA GAAP Pro rata adjustment ITF US GAAP ITF US GAAP
Statement of US GAAP for period of 4/1/06 Statement of Statement of
Operations Adjustments to 4/18/06 Operations Operations
(ii) (iii) (i)
$ $ $ $ $
CAD CAD CAD CAD USD
Revenue 3,041 201 3,242 2,759
Cost of Sales 2,036 134 2,170 1,847
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 1,005 - 67 1,072 912
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses
Depreciation and amortization 666 44 710 604
Selling, general and administrative 1,970 130 2,100 1,787
Research and development 1,506 99 1,605 1,366
Other Operating Expenses 335 22 357 304
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 4,477 - 295 4,772 4,061
- ----------------------------------------------------------------------------------------------------------------------------------
Profit (Loss) from Continuing Operations (3,472) - (228) (3,700) (3,149)
Interest Income (Expense) 321 (9) 21 333 283
Amortization of Deferred Issuance Costs 76 5 81 69
Financial Expenses (140) (9) (149) (127)
Foreign exchange gain (loss) 32 2 34 29
- ----------------------------------------------------------------------------------------------------------------------------------
Net Profit (Loss) before Income Tax Benefit (3,259) 67 (209) (3,401) (2,895)
Provision for Income Taxes (2) - (2) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Profit (Loss) before Non-controling interest (3,261) 67 (209) (3,403) (2,897)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss from Continuing Operations (3,261) 67 (209) (3,403) (2,897)
- ----------------------------------------------------------------------------------------------------------------------------------
(i) Utilized Bank of Canada average noon rate for the year ending June 30,
2006 to establish the currency exchange rate to convert Canadian Dollar to
US Dollar amounts. Exchange rate is USD $0.8511 = CAD $1.000.
(ii) Interest Income: US GAAP require securities to be classified as either
held for trading, held to maturity or available for sale. ITF Optical
Technologies Inc. classified all investments as held for trading under US
GAAP, which are carried on the balance sheet at their fair value. Under
Canadian GAAP, short-term investments are carried at the lower of cost and
fair value, and include investments in commercial paper that is carried at
amortized cost. Other-than-temporary declines in the value of investments
are recorded in earnings based on net realizable values; declines in fair
values are generally presumed to be other than temporary if conditions
indicating impairment have persisted for a more prolonged period of time
than under United States GAAP. For the nine-month period ended March 31,
2006, had the consolidated financial statements of ITF Optical
Technologies Inc. been prepared in accordance with US GAAP, the effect on
net loss would have been a $9,000 increase in loss. Amortization of
Deferred Issuance Costs: Canadian GAAP require that equity instruments
that provide for mandatory redemption by the issuer for a fixed or
determinable amount at a fixed or determinable future date or that give
the holder the right to require the issuer to redeem the share at or after
a particular date for a fixed or determinable amount be classified as
liabilities rather than as equity, and that any related dividends, losses
or gains be charged to earnings. Furthermore, under Canadian GAAP,
issuance costs related to equity instruments classified as liabilities
would be deferred and amortized to earnings over the expected term of the
liability. Under US GAAP, such classification is only required when there
is an unconditional obligation to redeem at a fixed or determinable date
or upon occurrence of an event that is certain to occur. As the senior
convertible preferred shares are only redeemable in certain circumstances
which are not entirely under the control of the Company, US GAAP require
that the Company's senior convertible preferred shares be presented as
equity, net of issuance costs. Amortization of deferred issuance costs for
the nine-month period ended March 31, 2006 was $76.
(iii) Calculated results equivalent to 18 days of operations, based on the
results of operations for the nine months ended March 31, 2006, adjusted
for US GAAP.
F-47
Manaris Corporation
(formerly a Development Stage Company)
Notes to the Pro Forma Consolidated Statement of Operations
(Unaudited)
Note 3 B - Explanation of Adjustments to pro forma statement of operations for
the year ended June 30, 2006:
Adjustments
(in '000s of USD)
$
(i) Depreciation and amortization 77
(ii) Research and development 677
(iii),(v) Interest Income (Expense) (262)
(iv) Debenture Accretion 355
(iii) Foreign exchange gain (loss) (29)
(ii) Income Tax Benefit - Refundable tax credits 677
(i) Depreciation and amortization has been adjusted to account for
depreciation based on the fair value of acquired manufacturing and R&D
assets of $2,599,000, depreciated over periods of 3 to 8 years; and
amortization based upon the fair value of the acquired intangible assets
of $321,000, for periods of 3 to 10 years.
(ii) ITF Optical Technologies Inc. recorded research and development tax
credits of $677,000 for the nine month period ended March 31, 2006 as a
reduction of research and development expenses. Consequently, research and
development tax credits were reclassified to conform to the presentation
adopted by Manaris, which presents research and development tax credits as
a part of income tax in the statement of operations.
(iii) Interest income (expense) was adjusted to reclassify a $29,000 foreign
exchange gain to conform to Manaris presentation.
(iv) Debenture accretion has been adjusted to reflect one full year of
accretion expense related to CAD $2,000,000 debt instrument issued by
Manaris on the acquisition of ITF (see Note 2).
(v) ITF Optical Technologies Inc. recorded interest income investments and
deposits which are not a part of the ITF transaction. An adjustment of
$291,000 was taken to eliminate interest income from the pro forma results
of operations.
F-48
ITF OPTICAL TECHNOLOGIES INC.
Consolidated Financial Statements June 30, 2005, 2004 and nine-month period
ended March 31, 2006
F-49
Deloitte
Deloitte & Touche LLP
1 Place Ville Marie
Suite 3000
Montreal QC H3B 4T9
Canada
Tel: 514-393-5194
Fax: 514-390-4104
www.deloitte.ca
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of
ITF Optical Technologies Inc.,
We have audited the accompanying consolidated balance sheets of ITF OPTICAL
TECHNOLOGIES INC. (the "Company") as at June 30, 2005 and 2004 and the
consolidated statements of operations and deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. These standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at June 30, 2005 and
2004 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
September 2, 2005, except for Notes 22 and 23, which are as of September 14,
2006
Member of
Deloitte Touche Tohmatsu
F-50
ITF OPTICAL TECHNOLOGIES INC.
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
As at As at As at
June 30, 2004 June 30, 2005 March 31, 2006
- -------------------------------------------------------------------------------------------------------------
(In thousands of Canadian dollars) (unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 899 $ 367 $ 810
Short-term investments (Note 4) 20,621 16,660 11,997
Accounts receivable (Note 5) 965 267 658
Tax credits receivable (Note 7) 356 389 1,065
Inventories (Note 8) 472 710 508
Prepaid expenses and other current assets 127 67 78
-------------- -------------- --------------
23,440 18,460 15,116
DEFERRED ISSUANCE COSTS 314 212 136
CAPITAL ASSETS (Note 9) 5,443 3,133 2,016
-------------- -------------- --------------
$ 29,197 $ 21,805 $ 17,268
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT
Accounts payable and accrued liabilities (Note 11) $ 2,741 $ 2,246 $ 1,359
Deferred revenue 36 89 45
Current portion of long-term obligations (Note 12) 690 465 379
-------------- -------------- --------------
3,467 2,800 1,783
LONG-TERM OBLIGATIONS (Note 12) 615 318 59
DEFERRED CREDITS (Note 13) 59 - -
-------------- -------------- --------------
4,141 3,118 1,842
-------------- -------------- --------------
SENIOR CONVERTIBLE PREFERRED SHARES (Note 14) 39,409 39,409 39,409
-------------- -------------- --------------
COMMITMENTS (Note 17)
SHAREHOLDERS' DEFICIENCY
Capital stock (Note 14) 100,498 99,656 99,656
Contributed surplus 29 875 875
Deficit (114,880) (121,253) (124,514)
-------------- -------------- --------------
(14,353) (20,722) (23,983)
-------------- -------------- --------------
$ 29,197 $ 21,805 $ 17,268
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
ITF OPTICAL TECHNOLOGIES INC.
- -------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Nine-month
Year ended Year ended period ended
June 30, 2004 June 30, 2005 March 31, 2006
- -------------------------------------------------------------------------------------------------
(In thousands of Canadian dollars) (unaudited)
REVENUE $ 3,817 $ 4,241 $ 3,041
COST OF REVENUE 4,846 3,916 2,036
-------------- -------------- --------------
GROSS INCOME (LOSS) (1,029) 325 1,005
-------------- -------------- --------------
OPERATING EXPENSES
Research and development, net (Note 7) 1,761 2,827 1,506
Sales and marketing 707 583 412
General and administrative 1,689 1,530 1,558
Depreciation and amortization 1,910 1,655 666
Other (6) 357 335
-------------- -------------- --------------
Total operating expenses 6,061 6,952 4,477
-------------- -------------- --------------
LOSS FROM OPERATIONS (7,090) (6,627) (3,472)
-------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest 575 453 321
Financial expenses (Note 12) (314) (229) (140)
Foreign exchange (loss) gain (13) (12) 32
-------------- -------------- --------------
248 212 213
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES (6,842 (6,415) (3,259)
PROVISION FOR (RECOVERY OF) INCOME TAXES 27 (42) 2
-------------- -------------- --------------
NET LOSS (6,869) (6,373) (3,261)
DEFICIT at beginning (108,011) (114,880) (121,253)
-------------- -------------- --------------
DEFICIT at end $ (114,880) (121,253) $ (124,514)
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
ITF OPTICAL TECHNOLOGIES INC.
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-month
Year ended Year ended period ended
June 30, 2004 June 30, 2005 March 31, 2006
- -----------------------------------------------------------------------------------------------------------------
(In thousands of Canadian dollars) (unaudited)
Cash provided by (used for):
OPERATING ACTIVITIES
Net loss $ (6,869) $ (6,373) $ (3,261)
Items not affecting cash and cash equivalents:
Depreciation and amortization 2,767 2,657 1,155
Gain on disposal of capital assets - (39) (9)
Deferred credits (8) (59) -
Amortization of deferred issuance costs 102 102 76
Stock based compensation - employees 1 2 -
-------------- -------------- --------------
(4,007) (3,710) (2,039)
Net changes in non-cash items related to operations:
Accounts receivable (491) 698 (391)
Tax credits receivable 243 (33) (675)
Inventories (227) (238) 202
Prepaid expenses and other current assets (42) 60 (11)
Accounts payable and accrued liabilities (107) (495) (887)
Deferred revenue 35 53 (44)
-------------- -------------- --------------
(4,596) (3,665) (3,845)
-------------- -------------- --------------
INVESTING ACTIVITIES
Purchase of short-term investments (75,224) (65,063) -
Maturity of short-term investments 79,845 69,024 4,663
Acquisition of capital assets (571) (195) (40)
Proceeds from disposal of capital assets - 38 10
-------------- -------------- --------------
4,050 3,804 4,633
-------------- -------------- --------------
FINANCING ACTIVITIES
Repayment of long-term obligations (823) (673) (345)
Net proceeds from issuance of capital stock - 2 -
-------------- -------------- --------------
(823) (671) (345)
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS INFLOW (OUTFLOW) (1,369) (532) 443
CASH AND CASH EQUIVALENTS, beginning of year 2,268 899 367
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 899 367 $ 810
============== ============== ==============
Cash flows include the following items:
Interest paid $ 137 $ 68 $ 35
Income taxes paid $ 68 $ - $ -
Non-cash investing and financing activities:
Acquisition of capital assets through capital leases $ 166 $ 151 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
1. INCORPORATION AND NATURE OF ACTIVITIES
ITF Optical Technologies Inc. (the "Company") was incorporated in January
1997 under Part IA of the Companies Act (Quebec).
The Company's mission is to design and deliver state-of-the-art, highly
reliable photonic solutions over a wide power range, by leveraging its
propriety All-Fiber Technology; and to do it effectively and efficiently.
The Company manufactures a wide range of products using fiber as the
constituent medium in amplification and transmission systems for optical
communications equipment manufacturers, and also offers a wide range of
products for use in industrial and military applications.
The Company sells and markets its products through a combination of direct
sales and marketing personnel as well as a network of independent
distributors and manufacturer representatives. The Company's market is
global and its target customers include optical systems manufacturers and
fiber laser manufacturers. The Company has segmented the market into three
distinct geographic regions: North America, Europe, and the rest of the
world.
The Company currently purchases, from limited sources, supplies of several
key components and materials used in the manufacturing of its products.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, ITF Optical Technologies (USA) Inc. All
significant intercompany transactions and balances have been eliminated
upon consolidation.
Use of estimates
The presentation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
F-54
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency translation
The Company's currency of measurement is the Canadian dollar. Effective
July 1, 2004, the Company's reporting currency was changed to the Canadian
dollar.
The Company's wholly-owned subsidiary is considered to be integrated. As a
result, the subsidiary accounts are translated into Canadian dollars using
the temporal method. Under this method, monetary assets and liabilities
are measured at the exchange rates in effect at the balance sheet date.
Non-monetary assets and liabilities are measured at historical rates.
Revenue and expenses are measured at the average rate for the period.
Gains and losses resulting from translation are reflected in the statement
of operations.
Cash and cash equivalents
The Company's cash and cash equivalents consist of cash and highly liquid
short-term investments with original maturities of less than three months.
Short-term investments
Short-term investments are carried at cost and consist of liquid
investments with original maturities of more than three months.
Inventories
Inventories consist of raw materials, work in process and finished goods.
The raw materials are valued at the lower of cost and replacement cost,
determined using the first in, first out method. The work in process and
finished goods are valued at the lower of cost and net realizable value.
The cost of work in process and finished goods is computed on a currently
adjusted standard basis (which approximates actual costs on a first in,
first out basis).
F-55
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred issuance costs
Deferred issuance costs, related to the issuance of senior convertible
preferred shares, are amortized using the straight-line method, over the
term of the financial instrument.
Capital assets
Capital assets are accounted for at cost reduced by applicable research
and development tax credits and by governmental grants related thereto.
Assets under capital leases are accounted for at cost, that is at the
present value of minimum lease payments over the lease term, excluding
executory costs.
Depreciation and amortization is based on their estimated useful lives
using the straight-line method over the following periods:
Property, plant and equipment
Machinery and equipment 5 years
Computer hardware and software 3 years
Office furniture and equipment 5 years
Leasehold improvements The term of the leases
Assets under capital leases 5 years
F-56
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of long-lived assets
The Company evaluates the carrying amount of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company assesses
recoverability using undiscounted cash flows attributed to that asset. If
an asset is impaired, it is written down to fair value using discounted
cash flows attributed to that asset or prices for similar assets.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the price is fixed, the products or services are delivered and
collectibility is probable. When an acceptance period exists, the revenue
is recognized at the end of the acceptance period. Revenue from sales to
distributors is recorded upon shipment to the distributors since such
sales are not contingent upon the resale of the products.
The Company also recognizes revenue from research and development
collaboration agreements which specify milestones to be met and the
payments associated with meeting each milestone. Revenue derived from
these contracts is recognized upon completion of the milestones.
The Company defers revenue for products not yet accepted by the customers.
All products are warranted against defects in material and workmanship.
The Company accrues for such warranty costs at the time revenue is
recognized based on contract terms and experience from prior claims.
Income taxes
The Company provides for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities
are determined based on deductible or taxable temporary differences
between financial statement values and tax values of assets and
liabilities using substantially enacted income tax rates expected to be in
effect for the year in which the differences are expected to reverse. The
Company establishes a valuation allowance against future income tax assets
if, based on available information, it is more likely than not that some
or all of the future income tax assets will not be realized.
F-57
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-based compensation plan and other stock-based payments
The Company maintains a stock-based compensation plan, which is described
in Note 15. Any consideration paid by the plan participants on the
exercise of share options or purchase of shares is credited to "Capital
Stock".
Effective July 1, 2002, options granted to non-employees and consultants
are accounted for at fair value and the related compensation expense is
charged to operations in the period the services are rendered. Options
granted to non-employees and consultants continue to be accounted for
under the fair value method.
Research and development expenses
Research expenses are expensed as incurred net of related tax credits and
of government assistance. Expenses related to development, which do not
meet generally accepted criteria for deferral, are expensed as incurred.
Development expenses which meet generally accepted criteria for deferral
are capitalized and amortized against earnings over the estimated period
of benefit.
3. RESTRICTED FUNDS
Concurrently with the issuance of the senior convertible preferred shares
(see Note 14), the Company entered into a Special Account Agreement
("Agreement") with one of its shareholders, specifying the disbursement
terms to the Company of its share of the share issuance proceeds. The
Company deposited the shareholder's proceeds at its principal banking
institution in a separate account, in its name ("Special Account"). Under
the Agreement, two individuals shall at all times be required to approve
the transfer of funds out of the Special Account without the need for any
further authorization. One of the authorized signatories shall be the
shareholder, the other authorized signatory shall be a person designated
by the Company. Notwithstanding the preceding, a pre-approved monthly
withdrawal schedule is established from time to time accordingly exempting
the Company from any prior authorizations or prior signatures. This
Agreement terminated December 31, 2004, and on June 30, 2005 there were no
funds remaining, subject to the agreement.
F-58
4. SHORT-TERM INVESTMENTS
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Commercial paper denominated in
Canadian dollars, bearing interest
at annual rates of 3.75% to 3.85%,
maturing between May 2006 and
November 2006 $ 20,621 $ 16,660 $ 11,997
----------- ----------- -----------
$ 20,621 $ 16,660 $ 11,997
=========== =========== ===========
5. ACCOUNTS RECEIVABLE
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Trade receivables, net $ 784 $ 231 $ 616
Indirect taxes 94 36 42
Others 87 - -
----------- ----------- -----------
$ 965 $ 267 $ 658
=========== =========== ===========
The allowance for doubtful accounts was nil at June 30, 2004 and 2005 and
at March 31, 2006.
Approximately 86% of trade receivables were due from two customers at June
30, 2004, 89% from five customers at June 30, 2005 and 57% from 1 customer
at March 31, 2006.
The indirect taxes are a net receivable and represent the excess of sales
taxes paid on purchases or expenditures over the taxes collected or
collectable on sales.
F-59
6. GOVERNMENT GRANT RECEIVABLE AND DEFERRED GRANT
In 1999 and 2000, the Company received a government grant to support the
growth of the Company based on budgeted project spending of $9.0 million
and the creation of 80 permanent jobs from November 24, 1998 to November
24, 2000 for a total amount of $630,000. The jobs created must have been
maintained until January 31, 2005, otherwise the grant would have to be
reimbursed. As at January 31, 2005, the Company was in compliance. The
amounts received have been deferred and amortized to income over the term
of the agreement.
The Company recorded in results of operations nil and $54,508 of
government grants for the years ended June 30, 2004 and 2005,
respectively, and nil for the nine-month period ended March 31, 2006.
7. TAX CREDITS RECEIVABLE
The Company recorded research and development tax credits of $1,269,000,
$1,758,000 and $677,000 as a reduction of research and development
expenses for the years ended June 30, 2004 and 2005 and the nine-month
period ended March 31, 2006, respectively. These research and development
tax credits represent credits earned based on qualifying research and
development expenditures. In addition, the Company recorded research and
development tax credits of $58,000 and $17,000 as a reduction of the
carrying value of property and equipment for the years ended June 30, 2004
and 2005 respectively, and nil for the nine-month period ended March 31,
2006. These latter research and development tax credits represent credits
earned based on qualifying machinery and equipment purchases.
8. INVENTORIES
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Raw materials $ 290 $ 460 $ 348
Work in process 154 135 96
Finished goods 28 115 64
----------- ----------- -----------
$ 472 $ 710 $ 508
=========== =========== ===========
F-60
9. CAPITAL ASSETS
As at June 30,
2004
---------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------
Machinery and equipment $ 19,041 $ 15,953 $ 3,088
Computer hardware and software 3,525 3,456 69
Office furniture and equipment 1,558 1,316 242
Leasehold improvements 4,614 3,570 1,044
Assets under capital leases 6,165 5,165 1,000
----------- ----------- -----------
$ 34,903 $ 29,460 $ 5,443
=========== =========== ===========
As at June 30,
2005
---------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------
Machinery and equipment $ 19,103 $ 17,253 $ 1,850
Computer hardware and software 3,571 3,499 72
Office furniture and equipment 1,607 1,590 17
Leasehold improvements 4,614 3,987 627
Assets under capital leases 6,316 5,749 567
----------- ----------- -----------
$ 35,211 32,078 $ 3,133
=========== =========== ===========
As at March 31,
2006
---------------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------
(unaudited)
Machinery and equipment $ 19,119 $ 17,980 $ 1,139
Computer hardware and software 3,580 3,526 54
Office furniture and equipment 1,607 1,603 4
Leasehold improvements 4,614 4,262 352
Assets under capital leases 6,316 5,849 467
----------- ----------- -----------
$ 35,236 33,220 $ 2,016
=========== =========== ===========
F-61
9. CAPITAL ASSETS (Continued)
The Company recorded depreciation and amortization expenses of $2,767,000,
$ 2,657,000 and $1,155,000, of which $857,000, $1,002,000 and $489,000 is
included in cost of revenue for the years ended June 30, 2004 and 2005 and
the nine-month period ended March 31, 2006, respectively.
Capital assets of $166,000 and $151,000 were acquired through capital
leases for the year ended June 30, 2004 and 2005, respectively, and
$38,000 for the nine-month period ended March 31, 2006.
10. BANK LOAN
On April 11, 2005, the Company entered into a new credit facility, which
includes a revolving demand line of credit of up to $4.0 million and a
demand loan of up to $1.5 million, both bearing interest at prime rate
plus 1%, as well as a lease-line of credit of $1.45 million. The credit
facilities are secured by a first rank chattel mortgage on property, both
corporal and incorporal, existing and future receivables including
research and development tax credits, and is repayable partly upon receipt
of the refund of the tax credits. The credit facility expires in April
2006.
As of June 30, 2005 and March 31, 2006, the bank loan facility was not
used.
The Company has outstanding letters of guarantee amounting to $30,000 and
$50,000 as at June 30, 2005 and March 31, 2006, respectively, maturing in
April 2006.
F-62
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Trade payables $ 722 $ 494 $ 153
Accrued liabilities 668 620 625
Income taxes 48 - -
Accrued payroll and related expenses 513 530 381
Provision for warranty 790 602 200
----------- ----------- -----------
$ 2,741 $ 2,246 $ 1,359
=========== =========== ===========
12. LONG-TERM OBLIGATIONS
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Obligations under capital leases
Equipment lease contracts ($1.2 million and
$0.7 million for 2004 and 2005, respectively),
interest rates ranging from
4.92% to 8.12%, maturing between July 2006 and July 2007 $ 1,276 $ 746 $ 409
Interest included in installments (72) (22) (14)
----------- ----------- -----------
1,204 724 395
Long-term debt
Other loans, interest rates ranging from
6% to 10%, maturing between
November 2005 and February 2010 101 59 43
----------- ----------- -----------
1,305 783 438
Current portion (690) (465) (379)
----------- ----------- -----------
$ 615 $ 318 $ 59
=========== =========== ===========
F-63
12. LONG-TERM OBLIGATIONS (Continued)
The interest expense on long-term obligations amounted to $137,000 and
$68,000 for the years ended June 30, 2004 and 2005, respectively and
$35,000 for the nine-month period ended March 31, 2006.
Long-term debt principal repayments and minimum lease payments under
capital leases for the next five years are as follows:
Long-term debt Capital leases
-------------- --------------
2006 - $ 23 2006 - $ 110
2007 - $ 11 2007 - $ 283
2008 - $ 12 2008 - 2
2009 - $ 10 2009 - -
2010 - $ 7 2010 - -
13. DEFERRED CREDITS
As at June 30, As at
---------------------------------- March 31,
2004 2005 2006
----------- ----------- -----------
(unaudited)
Deferred grant (Note 6) $ 54 $ - $ -
Lease inducements 5 - -
----------- ----------- -----------
$ 59 $ - $ -
=========== =========== ===========
F-64
14. CAPITAL STOCK
a) Authorized:
Unlimited number of common voting shares, participating, without par
value
Unlimited number of Class C non-voting shares, participating,
without par value, convertible into common shares on a one-to-one
basis under the following conditions on the earliest of:
(1) The date that the Company completes an underwritten public
offering of common shares in which the aggregate price paid is
at least U.S. $25,000,000.
(2) The completion by the Company of a registered public offering
(regardless of the size) initiated by certain holders of
common shares or by the holders of the senior convertible
preferred shares.
10,981,222 senior convertible preferred voting shares,
participating, convertible at the holder's option into common
shares, at any time on the basis of a conversion price, which
conversion price would be subject to adjustment upon the occurrence
of certain stated events, redeemable, at fair value after five
years, if the Company has not completed an initial public offering
with gross proceeds of at least U.S. $25,000,000 ("Qualified IPO"),
with non-cumulative dividends at the same rate as dividends are paid
with respect to the common shares, shall be entitled, out of funds
legally available for payment to the shareholders of the Company,
pari passu with each other and before any distribution or payment is
made upon any other class or series of shares, to be paid an amount
equal to the consideration for which such senior convertible
preferred shares were issued by the Company being an amount of U.S.
$2.28 for each senior convertible preferred share plus after such
liquidation preference payments the holders of the senior
convertible preferred shares shall be entitled to receive the
remaining property of the Company to be distributed on a pari passu
basis with the holders of the other classes of shares in case of
winding-up, without par value. 14. CAPITAL STOCK (Continued) b)
Warrant
F-65
14. CAPITAL STOCK (Continued)
b) Warrant
A warrant granted to an agent which provided for the right to
purchase 86,400 common shares expired, unexercised on April 6, 2005.
Accordingly, the recorded amount of such warrant was reclassified to
contributed surplus.
The following table summarizes the issued and outstanding capital
stock as at June 30, 2004 and 2005 and March 31, 2006:
As at June 30, As at June 30, As at March 31,
2004 2005 2006
---------------------------- ---------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
Preferred shares:
Presented as debt
Senior convertible
preferred shares 10,981,222 $ 39,409 10,981,222 $ 39,409 $ 10,981,222 $ 39,409
------------ ------------ ------------ ------------ ------------ ------------
Other capital stock:
Common shares 9,534,729 $ 99,140 9,534,729 $ 99,140 9,534,729 99,140
Class C shares 152,575 514 153,325 516 153,325 516
Warrants 844 - -
------------ ------------ ------------
$ 100,498 $ 99,656 $ $ 99,656
============ ============ ============
In 2005, the Company issued 750 Class C shares for net proceeds of
$2,000 under the Employee Stock Option Plan, and nil for the
nine-month period ended March 31, 2006.
15. STOCK OPTION PLAN
The Company has an Employee Stock Option Plan as amended in 2001 (the
"Plan") available to employees, directors and consultants of the Company
and its subsidiary. The options under the Plan are granted for Class C
shares at average prices equal to the fair market value of the shares at
the date of grant, and generally may be exercised during the three years
following the first anniversary of the date of grant, and expire on the
earliest of the sixth anniversary of the date of grant and 90 days
following termination of employment. As at June 30, 2005 and March 31,
2006, 647,065 and 888,833 Class C shares, respectively, were available for
future grants under the Plan.
F-66
15. STOCK OPTION PLAN (Continued)
The following table summarizes stock option activities under the Plan:
For the nine-month
period ended
For the year ended June 30, March 31, 2006
-------------------------------------------------------------- -----------------------------
2004 2005
----------------------------- -----------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
------------ ------------ ------------ ------------ ------------ ------------
(unaudited)
Outstanding, beginning of period 812,794 $ 9.35 778,341 $ 9.63 764,931 $ 9.63
Granted 11,955 3.36 10,365 3.36 - -
Exercised - - (750) 2.00 - -
Cancelled/forfaited (46,408) 3.10 (23,025) 7.12 (241,768) 5.59
------------ ------------ ------------ ------------ ------------ ------------
Outstanding, end of year 778,341 9.63 764,931 9.63 523,163 8.93
============ ============ ============ ============ ============ ============
Exercisable, end of year 633,556 $ 9.88 689,215 $ 10.32 485,230 $ 9.36
============ ============ ============ ============ ============ ============
F-67
15. STOCK OPTION PLAN (Continued)
The following table summarizes information about options outstanding as at
June 30, 2005:
As at June 30, 2005
--------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------------------------------ --------------------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise price outstanding life price exercisable price
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
$ 1.00 to 3.00 164,575 2.4 $ 1.11 164,575 $ 1.11
3.01 to 6.00 393,089 3.5 3.39 317,373 3.40
6.01 to 8.00 64,543 1.9 7.00 64,543 7.00
8.01 to 40.00 142,724 1.5 37.84 142,724 37.84
- ---------------- ---------------- ---------------- ---------------- ----------------
764,931 $ 9.63 689,215 $ 10.32
================ ================ ================ ================
As at March 31, 2006
--------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------------------------------ --------------------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise price outstanding life price exercisable price
- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
$ 1.00 to 3.00 143,643 1.7 $ 1.06 143,643 $ 1.06
3.01 to 6.00 247,671 2.7 3.40 209,738 3.41
6.01 to 8.00 42,793 0.9 7.00 42,793 7.00
8.01 to 40.00 89,056 0.8 37.92 89,056 37.92
- ---------------- ---------------- ---------------- ---------------- ----------------
523,163 $ 8.93 485,230 $ 9.33
================ ================ ================ ================
F-68
15. STOCK OPTION PLAN (Continued)
The fair value of options granted during the year ended June 30, 2004
amounted to $0.71 per option. The fair value of options granted during the
year ended June 30, 2005 amounted to $0.65 per option. The fair value of
each option granted was determined using the Black-Scholes option pricing
model and the following assumptions:
For options granted during the year ended June 30,
--------------------------------------------------
2004 2005
---- ----
Risk-free interest rate 4.0% 3.6%
Expected life 6 years 6 years
Minimum volatility 0% 0%
Expected dividend yield 0% 0%
The Company recorded an expense of $1,000 and $2,000 for options granted
to employees for the years ended June 30, 2004 and 2005 respectively.
16. INCOME TAXES
At June 30, 2005, the Company had research and development expenses
carried forward of $32,046,000 and $43,204,000 at the Federal and
Provincial levels respectively, which can be used indefinitely to reduce
future taxable income.
At June 30, 2005, the Company had net operating loss carryforwards of
$52,599,000 and $46,684,000 at the Federal and Provincial levels,
respectively. The net operating loss carryforwards are limited to use in
varying annual amounts through 2015.
At June 30, 2005, the Company had Canadian investment tax credits of
$5,570,000, available to offset future federal income tax liabilities.
These credits expire in varying amounts through 2014.
Substantially all of these tax losses originate from the operations in
Canada.
The benefits of these items have not been recorded in these financial
statements.
F-69
17. COMMITMENTS
The Company has non-cancelable operating lease commitments for terms
ending in May 2010. The balance of the commitments under such leases and
agreement excluding property taxes and other escalator clauses is
approximately $1,352,000. Total expenses were $393,000, $381,000 and
$295,000 for the years ended June 30, 2004 and 2005 and the nine-month
period ended March 31, 2006, respectively. Minimum payments payable over
the next five years are as follows:
2006 $ 372
2007 $ 286
2008 $ 271
2009 $ 266
2010 $ 155
2011 $ -
The Company must pay royalties of 4% of the net invoice price of all
optical fiber couplers that are incorporated, used, or manufactured by the
use of one or more of the licensed patents, whether produced separately or
incorporated as a part of another product, to the Communications Research
Center. Payments are due by February 28 of each year for the sales of the
preceding year and will continue to be due until the Company ceases to
sell these licensed products or until the applicable patent expires.
During the year and the nine-month period ended March 31, 2006, no amount
was accrued as a royalty expense.
The Company has a license agreement for the use and production of fiber
Bragg Gratings. Under this agreement, the Company will pay royalties to
the Communications Research Center for the lesser of $12 per Bragg Grating
or 4% of the net invoice price of any licensed product sold, that is
incorporated, used, or manufactured by the use of one or more of the
licensed patents whether produced separately or incorporated as a part of
another product. Payments are due by December 31 of each year for the
sales during the year and will continue to be due until the Company ceases
to sell these licensed products or until the applicable patent expires.
During the year and the nine-month period ended March 31, 2006, the
Company accrued $2,700 and $2,069 in royalty expenses, respectively.
The Company has an agreement with Polyvalor, Societe en Commandite, a
limited partnership created to commercially exploit the research results
and related intellectual property created by the professors and research
personnel of Ecole Polytechnique of the University of Montreal, which
includes an assignment to the Company of all rights, titles and interests
in certain patents relating to fibre optic filters and integrated couplers
for use in fibre optics. Under this agreement, the Company agreed to pay a
royalty of 3% of net revenue to Polyvalor in relation to the commercial
exploitation of the subject patents. During the year and the nine-month
period ended March 31, 2006, no amount was accrued as a royalty expense.
F-70
17. COMMITMENTS (Continued)
The Company has entered into a license agreement with British
Telecommunications for the use of wavelength flattened coupler patents.
Under this agreement, the Company agreed to pay a royalty of 4% of the
selling price of any licensed product sold, that is incorporated, used or
manufactured by the use of one or more of the licensed patents. Where the
licensed product is sold as a component of a product to which the Company
has added value beyond the value of the licensed product, the applicable
royalty shall be $2 for each licensed product incorporated into the value
added product. Payments are due within 45 days of the end of each Semi
Annual Accounting Period that ends June 30 and December 31 of each year.
The guaranteed minimum annual royalty sum is $3,000. During the year and
the nine-month period ended March 31, 2006, the Company accrued $2,300 and
$625 in royalty expenses, respectively.
18. FINANCIAL INSTRUMENTS
FAIR VALUE
Cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued liabilities and long-term obligations are
financial instruments of which the fair values approximate their carrying
values.
As disclosed in Note 14 , the senior convertible preferred shares are
redeemable at fair value if a Qualified IPO has not occurred on or before
August 12, 2007. Since an open market for these shares does not exist, it
is not practicable to establish the fair value of these shares with
sufficient reliability. Information about the principal characteristics of
the senior convertible preferred shares that are pertinent to their fair
value may be found in Note 14.
CONCENTRATION OF CREDIT RISK
Financial instruments, which subject the Company to potential credit risk,
consist of cash and cash equivalents, short-term investments and trade
receivables. The Company maintains its short-term investments with
high-credit quality financial institutions. To date, the Company has not
incurred losses related to these investments.
The Company extends reasonably short collection terms but does not require
collateral. The Company provides allowances for potential credit losses.
The Company has not experienced significant losses to date. Management
believes the financial risks associated with these financial instruments
are minimal.
Four customers account for approximately 73%, 70% and 69% of revenue for
the years ended June 30, 2004 and 2005 and the nine-month period ended
March 31, 2006, respectively (see Note 5).
F-71
18. FINANCIAL INSTRUMENTS (Continued)
CURRENCY RISK
The Company realizes a significant portion of its sales in foreign
currencies, principally U.S. dollars. The foreign exchange risk is
mitigated due to the purchase of raw materials and capital assets in the
same currency. The foreign exchange risk is also managed whenever possible
by matching assets with related liabilities by currency.
Fluctuations in the exchange rate between Canadian and U.S. dollars could
have a material effect on the Company's business, financial condition and
results of operations.
The Company has not experienced significant foreign currency losses to
date. The Company has not entered into foreign exchange contracts or other
instruments to mitigate this risk.
19. SEGMENTED INFORMATION
The Company's activities are grouped under one reportable operating
segment. All of the Company's long-lived assets are located in Canada. The
Company has segmented the market into three distinct geographic regions:
North America, Europe and the rest of the world. Given that substantially
all revenue is generated from customers located in North America, no
geographic disclosure is presented for Europe and the rest of the world.
20. RELATED PARTY TRANSACTIONS
For the year ended June 30, 2004 and 2005 respectively, the Company
recorded $17,437 and $24,919 of expenses for consulting services rendered
by one of its board members. For the nine-month period ended March 31,
2006, $41,689 was recorded.
These transactions are in the normal course of operations and measured at
the exchange amount.
21. COMPARATIVE AMOUNTS
Certain comparative amounts for the year ended June 30, 2004 have been
reclassified in order to conform to the presentation adopted in the
current year.
F-72
22. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
THOSE OF THE UNITED STATES
The Company's consolidated financial statements were prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). The principal differences between Canadian GAAP and United
States GAAP are presented below.
Had these consolidated financial statements been prepared in accordance
with United States GAAP, the effect on net earnings (loss) and on
shareholders' equity would have been as follows:
Nine-month
Year ended Year ended period ended
June 30, June 30, March 31,
2004 2005 2006
- ------------------------------------------------------------------------------------------------
Net loss in accordance
with Canadian GAAP $ (6,869) $ (6,373) $ (3,261)
- ------------------------------------------------------------------------------------------------
(unaudited)
Adjustments with respect to the following items:
Short-term investments (a) 1 10 (9)
Senior convertible preferred shares (b) 102 102 76
Stock-based compensation (c) (36) 2 -
- ------------------------------------------------------------------------------------------------
67 114 67
- ------------------------------------------------------------------------------------------------
Net loss in accordance
with United States GAAP $ (6,802) $ (6,259) $ (3,194)
================================================================================================
As at
---------------------------------------------
June 30, June 30, March 31,
2004 2005 2006
- ------------------------------------------------------------------------------------------------
(unaudited)
Shareholders' equity in accordance
with Canadian GAAP $ (14,353) $ (20,722) $ (23,983)
- ------------------------------------------------------------------------------------------------
Add (deduct):
Short-term investments (a) (9) 1 (8)
Senior convertible preferred shares (b) 39,095 39,197 39,273
Stock-based compensation (c) - - -
- ------------------------------------------------------------------------------------------------
39,086 39,198 39,265
- ------------------------------------------------------------------------------------------------
Shareholders' equity in accordance
with United States GAAP $ 24,733 $ 18,476 $ 15,282
================================================================================================
F-73
22. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
THOSE OF THE UNITED STATES (Continued)
(a) Investments:
United States GAAP require securities to be classified as either
held for trading, held to maturity or available for sale. The
Company has classified all investments as held for trading under
United States GAAP, which are carried on the balance sheet at their
fair value. All changes in the fair value of held for trading
securities are recorded in income in the period in which they occur.
Under Canadian GAAP, short-term investments are carried at the lower
of cost and fair value, and include investments in commercial paper
that is carried at amortized cost. Other-than-temporary declines in
the value of investments are recorded in earnings based on net
realizable values; declines in fair values are generally presumed to
be other than temporary if conditions indicating impairment have
persisted for a more prolonged period of time than under United
States GAAP.
As at March 31, 2006, June 30, 2004, and June 30, 2003, the excess
of their cost over their fair value is $8, $9 and $10, respectively.
As at June 30, 2005, the excess of their fair value over their cost
is $1.
(b) Senior convertible preferred shares:
Canadian GAAP require that equity instruments that provide for
mandatory redemption by the issuer for a fixed or determinable
amount at a fixed or determinable future date or that give the
holder the right to require the issuer to redeem the share at or
after a particular date for a fixed or determinable amount be
classified as liabilities rather than as equity, and that any
related dividends, losses or gains be charged to earnings.
Furthermore, under Canadian GAAP, issuance costs related to equity
instruments classified as liabilities would be deferred and
amortized to earnings over the expected term of the liability. Under
United States GAAP, such classification is only required when there
is an unconditional obligation to redeem at a fixed or determinable
date or upon occurrence of an event that is certain to occur. As the
senior convertible preferred shares are only redeemable in certain
circumstances which are not entirely under the control of the
Company, US GAAP require that the Company's senior convertible
preferred shares be presented as equity, net of issuance costs of
$509.
Amortization of deferred issuance costs for the nine-month period
ended March 31, 2006 and the years ended June 30, 2005 and 2004 was
$76, $102 and $102 respectively.
F-74
22. RECONCILIATION OF CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO
THOSE OF THE UNITED STATES (Continued)
(c) Stock-based compensation:
The Company has a stock option plan for the benefit of its
employees, directors and consultants as described in the notes to
the consolidated financial statements.
(i) Stock option plan for employees:
Under United States GAAP, in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", the Company applied
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option
plan. Under the provisions of APB 25, the Company's stock
option plan was accounted for as non-compensatory. However,
the life of certain of the Company's stock options was
extended, and a compensation cost was recorded at the date of
modification based on the intrinsic value of the stock options
at that date.
Under Canadian GAAP, options granted to employees subsequent
to July 1, 2003, are accounted for under the fair value
method, whereby compensation expense is recognized in earnings
based on the fair value of the options granted and the period
over which they become exercisable. For option grants prior to
July 1, 2003, no compensation cost was recorded under Canadian
GAAP. Compensation expense recorded under Canadian GAAP
related to options granted to employees for the nine-month
period ended March 31, 2006 and the years ended June 30, 2005
and 2004 was nil, $2 and $1 respectively.
(ii) Stock option plan for non-employees:
Under United States GAAP, the Company accounted for stock
options granted to non-employees under the fair value method.
Under Canadian GAAP, prior to July 1, 2002, such transactions
were accounted for as capital transactions.
Compensation expense under United States GAAP related to
options granted to non-employees prior to July 1, 2002
totalled $36 in the year ended June 30, 2004. There was no
compensation expense in the year ended June 30, 2005 or in the
nine-month period ended March 31, 2006.
F-75
23. SUBSEQUENT EVENTS
On April 18, 2006, the Company entered into an Asset Purchase Agreement
whereby substantially all of the manufacturing and research and
development related assets were wold to Avensys Inc., a wholly owned
subsidiary of Manaris Corporation and a related Company, Avensys
Laboratories Inc. The assets sold were comprised principally of inventory,
capital assets and intellectual property rights.
The consideration for the transaction was cash of $750,000 and 2,550,795
common shares of Manaris Corporation, with an estimated fair value of
$1,000,000, and the assumption of certain obligations of the Company. In
addition, the shareholders of the Company received 580,000 common shares
and 2,000,000 Class E preferred shares of Avensys Laboratories.
F-76
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other arrangement under
which any controlling person, director or officer of the registrant is insured
or indemnified in any manner against any liability which he may incur in his
capacity as such, is as follows:
1. Article XII of the Articles of Incorporation of the company, filed as Exhibit
3.1 to our Form SB-2 registration statement.
2. Article X of the Bylaws of the company, filed as Exhibit 3.2 to our Form SB-2
registration statement.
3. Nevada Revised Statutes, Chapter 78.
The general effect of the foregoing is to indemnify a control person, officer or
director from liability, thereby making the company responsible for any expenses
or damages incurred by such control person, officer or director in any action
brought against them based on their conduct in such capacity, provided they did
not engage in fraud or criminal activity.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the offering (assuming all shares are sold), all of
which are to be paid by the registrant, are as follows:
SEC Registration Fee $ 176.24
Printing Expenses $ 5,000
Accounting/administrative Fees and Expenses $ 25,000
Blue Sky Fees/Expenses $ 0
Legal Fees/ Expenses $ 25,000
Escrow fees/Expenses $ 0
Transfer Agent Fees $ 0
Miscellaneous Expenses $ 0
TOTAL $55,176.24
F-77
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Except as set forth below, there were no sales of unregistered securities by
Manaris Corporation during the past three (3) years:
As part of the transaction entered into between Avensys and ITF Optical
Technologies on April 18, 2006, the Company issued approximately 2,550,795
restricted common stock shares as part of the purchase price of US $1,526,651 (
(CDN$1,750,000), and 255,079 restricted common shares as since the Company did
not file the required registration statement within the required time period.
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Manaris Corporation or executive
officers of Manaris Corporation, and transfer was restricted by Manaris
Corporation in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean Manaris Corporation, a Nevada
corporation.
3.1 Articles of Incorporation of Manaris Corporation dated June 22, 2000 (as
incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on September 29, 2000).
3.2 Bylaws of Manaris Corporation dated July 13, 2000 (as incorporated by
reference to Form SB-2 filed with the Securities and Exchange Commission
on September 29, 2000).
3.3 Manaris Corporation Specimen Stock Certificate (as incorporated by
reference to Form SB-2 filed with the Securities and Exchange Commission
on September 29, 2000).
3.4 Amended Articles of Incorporation (as incorporated by reference from our
Form 8-K filed with the Securities and Exchange Commission on March 18,
2003).
3.5 Amended Articles of Incorporation (as incorporated by reference to the
Issuer's Form SB-2 filed with the Securities and Exchange Commission on
November 7, 2005).
5.1 Consent of Sichenzia Ross Friedman Ference LLP.
10.1 Registration Rights Agreement dated February 16, 2005 (as incorporated by
reference to the Issuer's Form SB-2 filed with the Securities and Exchange
Commission on November 7, 2005).
10.2 Placement Agency Agreement between Midtown Partners Co,. LLC and Manaris
Corporation dated February 2, 2005 (as incorporated by reference to the
Issuer's Form SB-2 filed with the Securities and Exchange Commission on
November 7, 2005).
10.3 Asset Purchase Agreement dated April 4, 2006 (as incorporated by reference
to the registrant's Current Report on Form 8-K filed on April 10, 2006).
10.4 Shareholder Agreement (as incorporated by reference to the registrant's
Current Report on Form 8-K filed on April 24, 2006).
10.5 License Agreement (as incorporated by reference to the registrant's
Current Report on Form 8-K filed on April 24, 2006).
48
10.6 FondAction Debenture dated February 28, 2005.
10.7 Series IB1 Warrants (as incorporated by reference to the Issuer's Form
SB-2 filed with the Securities and Exchange Commission on May 9, 2006).
10.8 Series IB2 Warrants (as incorporated by reference to the Issuer's Form
SB-2 filed with the Securities and Exchange Commission on May 9, 2006).
10.9 Series IB3 Warrants (as incorporated by reference to the Issuer's Form
SB-2 filed with the Securities and Exchange Commission on May 9, 2006).
10.10 Form of Series Y Warrant (as incorporated by reference to the Issuer's
Form 8-K filed with the Securities and Exchange Commission on August
17,2006).
10.11 Form of Series Z Warrant (as incorporated by reference to the Issuer's
Form 8-K filed with the Securities and Exchange Commission on August
17,2006).
10.12 Form of Series B Subordinated Secured Convertible Promissory Note as
incorporated by reference to the Issuer's Form 8-K filed with the
Securities and Exchange Commission on August 17,2006).
10.13 Form of Original Issue Discount Series B Subordinated Secured Convertible
Promissory Note (as incorporated by reference to the Issuer's Form 8-K
filed with the Securities and Exchange Commission on August 17,2006).
10.14 Form of Note and Warrant Purchase Agreement (as incorporated by reference
to the Issuer's Form 8-K filed with the Securities and Exchange Commission
on August 17,2006).
10.15 Form of Registration Rights Agreement (as incorporated by reference to the
Issuer's Form 8-K filed with the Securities and Exchange Commission on
August 17,2006).
10.16 Form of Pledge and Security Agreement (as incorporated by reference to the
Issuer's Form 8-K filed with the Securities and Exchange Commission on
August 17,2006).
10.17 Deed of Hypothec (as incorporated by reference to the Issuer's Form 8-K
filed with the Securities and Exchange Commission on August 17,2006).
10.18 Midtown Placement Agent Agreement for August 2006 Financing
14 Code of ethics (as incorporated by reference to the issuer's Form 10-KSB
filed with the Securities and Exchange Commission on September 29, 2003).
16 Letter from former independent registered public accounting firm (as
incorporated by reference to the registrant's Current Report on Form 8-K
filed on January 17, 2006).
21 List of subsidiaries of Manaris Corporation.
23.1 Consent of Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1)
49
23.2 Report of Independent Registered Public Accounting Firm - Manning Elliott
LLP
23.3 Consent of Manning Elliott, Chartered Accountants
23.4 Consent of PricewaterhouseCoopers, LLP - Montreal Canada
23.5 Consent of Deloitte & Touche LLP
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
50
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(5) Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of this Form SB-2 Registration Statement and has duly
caused this Form SB-2 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Montreal, Quebec, Canada.
MANARIS CORPORATION
BY: /s/ John Fraser
------------------------------------------
John Fraser, President and Chief Executive
Officer (Principal Executive Officer
and Principal Financial and Accounting Officer)
51
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints John G. Fraser, as true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendment (including
post-effective amendments) to this registration statement, and to file the same,
therewith, with the Securities and Exchange Commission, and to make any and all
state securities law or blue sky filings, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in about the premises, as fully to all
intents and purposes as she might or could do in person, hereby ratifying the
confirming all that said attorney-in-fact and agent, or any substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Form SB-2
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signatures Title Date
- -------------------- ------------------------------------- ----------------
/s/ John Fraser President and Chief Executive Officer October 12, 2006
and Interim Chief Financial Officer
(Principal Executive and Financial Officer)
- --------------------
John Fraser
/s/ John Simons Chairman of the Board of Directors October 12, 2006
- --------------------
John Simons
/s/ Jos J. Wintermans Director October 12, 2006
- --------------------
Jos J. Wintermans
/s/ Bernard Bougie Director October 12, 2006
- --------------------
Bernard Bougie
/s/ Marc Bouchard Director October 12, 2006
- --------------------
Marc Bouchard
52