UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 000-33199
MANARIS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0467848
(State of other jurisdiction (IRS Employer Identification Number)
of incorporation)
1155 boul. Rene-Levesque, suite 2720
Montreal, Quebec
Canada H3B 2K8
(Address of principal executive offices)
(514) 337-2447
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of November 17, 2006 there were 79,292,907 shares of Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format Yes |_| No |X|
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Manaris Corporation
Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Index
Consolidated Balance Sheets............................................. F-2
Consolidated Statements of Operations................................... F-3
Consolidated Statements of Cash Flows................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit)................ F-6
Notes to Consolidated Financial Statements.............................. F-7
(Expressed in U.S. dollars)
September 30, June 30,
2006 2006
$ $
------------- -----------
ASSETS
Current Assets
Cash and cash equivalents 926,304 438,708
Accounts receivable, net of allowance for doubtful accounts of $115,721 and
$115,721, respectively 3,047,953 3,104,907
Deposits in trust (Note 4) -- 79,781
Other receivables (Note 9) 661,508 375,742
Inventories (Note 9) 1,350,955 1,563,805
Prepaid expenses and deposits 133,281 259,552
Deferred contract costs 558,814 151,272
Restricted held-to-maturity security 89,469 89,686
Current assets of discontinued operations (Note 4) 5,368 9,011
---------- ----------
Total Current Assets 6,773,652 6,072,464
Property and equipment, net (Note 6) 2,520,319 3,082,402
Intangible assets (Note 7) 3,642,698 3,757,272
Goodwill (Note 8) 3,762,000 3,762,000
Deferred financing costs 475,469 101,681
Prepaid expenses and deposits 86,035 86,225
Deferred contract costs 637,017 281,390
Assets of discontinued operations (Note 4) -- --
---------- ----------
Total Assets 17,897,190 17,143,434
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities (Note 9) 3,382,943 4,666,859
Bank and other loans payable (Note 12) 2,010,324 2,331,696
Current portion of long-term debt (Note 13) 78,747 103,717
Current portion of convertible debentures (Note 14) 293,314 587,891
Due to related parties (Note 11) 40,000 40,000
Current liabilities of discontinued operations (Note 4) -- --
---------- ----------
Total Current Liabilities 5,805,328 7,730,163
Long-term debt, less current portion (Note 13) 222,362 222,900
Deferred revenue 679,120 281,390
Convertible debentures (Note 14) 1,484,979 343,109
Balance of purchase price payable (Note 5) 936,640 877,675
Derivative financial instruments (Notes 5 and 14) 725,762 458,271
---------- ----------
Total Liabilities 9,854,190 9,913,508
Non-controlling Interest 23,992 23,939
---------- ----------
Stockholders' Equity
Common Stock, 500,000,000 shares authorized with a par value of $0.00001;
79,286,852 and 77,671,281 issued and outstanding, respectively 793 777
Additional Paid-in Capital 35,214,371 34,169,867
Accumulated other comprehensive loss (318,519) (316,566)
Deficit (26,877,637) (26,648,091)
---------- ----------
Total Stockholders' Equity 8,019,008 7,205,987
---------- ----------
Total Liabilities and Stockholders' Equity 17,897,190 17,143,434
========== ==========
Going Concern (Note 1)
Contingencies (Note 17)
(The Accompanying Notes are an Integral Part of the Consolidated
Financial Statements)
F-1
Manaris Corporation
Interim Consolidated Statements of Operations and Comprehensive Loss
Unaudited
(Expressed in U.S. dollars)
For the Three Months Ended
September 30,
--------------------------
2006 2005
$ $
---------- ----------
Revenue 3,758,205 1,987,895
---------- ----------
Costs of Revenue 2,389,283 1,268,844
---------- ----------
Gross Margin 1,368,922 719,051
---------- ----------
Operating Expenses
Depreciation and amortization 177,868 165,597
Selling, general and administration (Note 16) 1,409,484 1,811,663
Impairment of long-lived assets -- 35,822
Research and development 376,747 226,694
---------- ----------
Total Operating Expenses 1,964,099 2,239,776
---------- ----------
Loss from Operations (595,177) (1,520,725)
Other Expenses
Other income (expense) 129,655 27,581
Interest expense, net (246,041) (226,767)
Debentures and preferred shares accretion (Notes 5 and 14) (640,610) (1,540,287)
Change in fair value of derivative financial instruments (Note 14) 758,134 --
---------- ----------
Net Loss from Continuing Operations Before Income Tax Benefit (594,039) (3,260,198)
Income Tax Benefit - Refundable tax credits (Note 18) 364,602 221,230
---------- ----------
Net Loss from Continuing Operations before Non-Controlling Interest (229,437) (3,038,968)
Non-Controlling Interest (109) (284)
---------- ----------
Net Loss from Continuing Operations (229,546) (3,039,252)
Results of Discontinued Operations (Note 4) -- (267,581)
---------- ----------
Net Loss applicable to common stockholders (229,546) (3,306,833)
---------- ----------
Net Loss from continuing operations per share -- Basic
and Diluted (Note 16) (0.00) (0.05)
---------- ----------
Net Loss per share - Basic and Diluted (Note 16) (0.00) (0.05)
Weighted Average Shares Outstanding 79,516,000 62,036,000
---------- ----------
Statement of Comprehensive Loss:
Net loss (229,546) (3,306,833)
Foreign currency translation adjustments (1,953) (19,418)
---------- ----------
Comprehensive loss (231,499) (3,326,251)
---------- ----------
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated
Financial Statements)
F-2
Manaris Corporation
Interim Consolidated Statements of Cash Flows
Unaudited
(Expressed in U.S. dollars)
For the Three Months Ended
September 30,
--------------------------
2006 2005
$ $
---------- ----------
Operating Activities
Net loss (229,546) (3,306,833)
Adjustments to reconcile net loss to cash used in operating activities
Results of discontinued operations -- 267,581
Stock based compensation 17,728 424,900
Expenses settled with issuance of common shares -- 5,400
Depreciation and amortization 253,595 165,598
Interest expense 73,463 --
Gain on disposal of property and equipment (306,346) 31,359
Non-controlling interest 109 705
Loss on conversion of convertible debentures 129,922 --
Debentures and preferred shares accretion 640,609 1,540,287
Change in fair value of derivative financial instruments (758,134) --
Amortization of deferred financing costs 62,178 142,877
Changes in operating assets and liabilities
Decrease in accounts receivables 56,954 85,246
Decrease (increase) in inventories 178,588 (352,021)
(Increase) decrease in other receivables (285,766) 149,838
Increase in deferred contract costs (763,169) --
Increase in deferred revenue 397,730 --
Decrease (increase) in prepaid expenses and other assets 126,461 (26,625)
Increase in due to related parties -- 206,239
(Decrease) increase in accounts payable and accrued liabilities (1,258,208) 56,524
---------- ----------
Net Cash Used In Operating Activities from Continuing Operations (1,663,832) (608,925)
---------- ----------
Net Cash Provided by (Used in) Operating Activities from Discontinued Operations 3,643 1,614
---------- ----------
Net Cash Used In Operating Activities (1,660,189) (607,311)
---------- ----------
Investing Activities
Purchase of property and equipment (20,604) (33,880)
Disposal of property and equipment and inventory 774,850 --
Deposits in trust 79,781 --
---------- ----------
Net Cash Provided by (Used in) Investing Activities from Continuing Operations 834,027 (33,880)
---------- ----------
Net Cash Provided by (Used in) Investing Activities from Discontinued Operations -- (42,849)
---------- ----------
Net Cash Provided by (Used in) Investing Activities 834,027 (76,729)
---------- ----------
Financing Activities
Borrowing (repayment) of bank credit line (173,172) (69,418)
Repayment of senior convertible debt (159,662) (226,733)
Net proceeds from issue of unsecured convertible debentures 1,819,612 --
Long term debt repayments (21,370) (45,964)
Capital leases repayment (4,138) --
Repayment of related party advances -- (122,713)
Common stock issued pursuant to warrants exercised -- 2,127,591
Proceeds from other loans payable (148,200) 205,037
---------- ----------
Net Cash Provided by Financing Activities from Continuing Operations 1,313,070 1,867,800
---------- ----------
Net Cash (Used in) Provided by Financing Activities from Discontinued Operations -- (61,017)
---------- ----------
Net Cash Provided by Financing Activities 1,313,070 1,806,783
---------- ----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents 688 (121,908)
---------- ----------
Increase in Cash and Cash Equivalents 487,596 1,000,835
Cash and Cash Equivalents - Beginning of year 438,708 287,147
---------- ----------
Cash and Cash Equivalents - End of year 926,304 1,287,982
========== ==========
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-3
Manaris Corporation
Interim Consolidated Statements of Cash Flows (continued)
Unaudited
(Expressed in U.S. dollars)
For the Three Months Ended
September 30,
--------------------------
2006 2005
$ $
-------- -------
Non-Cash Financing and Investing Activities
Issuance of common shares for services 3,940 54,000
Issuance of common shares for late filing of registration statement 73,463 --
Issuance of common share warrants to settle related party and short term payables -- 181,649
Issuance of common shares for interest payments 58,410 143,863
Issuance of common shares for repayment of senior convertible notes, series A 341,458 724,999
Issuance of common shares for conversion of senior convertible notes, series A -- 815,985
Issuance of common shares to settle outstanding payables 25,709 105,501
======== =======
Supplemental Disclosures
Net interest (paid) received, continuing operations (107,142) 23,588
Interest (paid), discontinued operations -- 8,500
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-4
Manaris Corporation
Interim Consolidated Statement of Stockholders'
Equity (Deficit)
Unaudited
(Expressed in U.S. Dollars)
Accumulated
Common Shares Additional Other Total
----------------- Paid-In Comprehensive Stockholders'
# of Amount Capital Income Deficit Equity
Shares $ $ $ $ $
---------- ------ ---------- ------------- ----------- ------------
Balance, June 30, 2005 54,782,802 548 24,142,078 (364,415) (12,548,352) 11,229,859
Common stock issued for services 15,000 -- 5,400 -- -- 5,400
Issuance of common shares from exercise of stock
options 1,758,000 18 99,995 -- -- 100,013
Stock-based compensation -- -- 490,795 -- -- 490,795
Settlement of outstanding legal claims by the
issuance of options -- -- 77,000 -- -- 77,000
Common stock issued to settle outstanding
payables 257,000 3 136,857 -- -- 136,860
Common stock issued pursuant to interest
payments on Senior Secured Convertible Notes "A" 748,819 7 265,429 -- -- 265,436
Common stock issued pursuant to repayments of
Senior Secured Convertible Notes "A" 5,897,695 59 2,099,734 -- -- 2,099,793
Common stock issued pursuant to repayment of
Secured convertible debenture 631,038 6 224,391 -- -- 224,397
Common stock issued upon conversion of Senior
Secured Convertible Notes "A" 3,575,008 36 1,249,324 -- -- 1,249,360
Reduction in exercise price of outstanding warrants -- -- 2,197,296 -- (2,197,296) --
Common stock issued pursuant to warrants
exercised 7,525,124 75 2,309,221 -- -- 2,309,296
Common stock issued for purchase of business 2,550,795 26 872,346 -- -- 872,372
Common Stock cancellation (70,000) (1) 1 -- -- --
Translation adjustment 47,849 47,849
Net loss for the year (11,902,443) (11,902,443)
---------- --- ---------- -------- ----------- -----------
Balance, June 30, 2006 77,671,281 777 34,169,867 (316,566) (26,648,091) 7,205,987
========== === ========== ======== =========== ===========
Balance, June 30, 2006 77,671,281 777 34,169,867 (316,566) (26,648,091) 7,205,987
Stock-based compensation -- -- 17,728 -- -- 17,728
Common stock issued to settle outstanding
payables 82,933 1 25,708 -- -- 25,709
Common stock issued pursuant to interest
payments on Senior Secured Convertible Notes "A" 182,609 2 58,408 -- -- 58,410
Common stock issued pursuant to repayments of
Senior Secured Convertible Notes "A" 1,094,949 11 341,447 -- -- 341,458
Common stock to be issued upon conversion of
Unsecured Convertible Debentures (Note 14) 527,752 527,752
Common stock issued for late filing of registration
statement 255,080 2 73,461 -- -- 73,463
Translation adjustment (1,953) (1,953)
Net loss for the period (229,546) (229,546)
---------- --- ---------- -------- ----------- -----------
Balance, September 30, 2006 79,286,852 793 35,214,371 (318,519) (26,877,637) 8,019,008
========== === ========== ======== =========== ===========
Going Concern (Note 1)
(The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements)
F-5
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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 September 30, 2006, 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 September 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. Also, the first tranche of a
new debt financing, representing gross proceeds of $2,112,917 and net
proceeds of $1,819,612, was obtained in August 2006 (Note 14) to fund the
operations of the Company and, as a result of the Company's registration
statement becoming effective on November 9, 2006, the Company was eligible
to receive the second tranche of the debt financing. On November 17, 2006,
the Company expects to receive gross proceeds $1,509,226 from the second
tranche of the debt financing (Note 20).
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 the Company's subsidiaries, 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 September 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.
F-6
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
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.
Interim Financial Information
The financial information as at September 30, 2006 and for the three
month periods ended September 30, 2006 and 2005 is unaudited. In the
opinion of Management, all adjustments necessary to present fairly
the results of these periods have been included. The adjustments
made were of a normal-recurring nature. The results of operations
for the three month period ended September 30, 2006 are not
necessarily indicative of the operating results anticipated for the
full year. Except for the change in accounting policy described in
Note 16, the financial statements follow the same accounting
principles and methods of their application as the financial
statements for the year ended June 30, 2006.
The disclosures in these interim financial statements do not conform
in all respects to the requirements of generally accepted accounting
principles for annual financial statements and therefore, these
interim financial statements should be read in conjunction with the
annual financial statements for the year ended June 30, 2006.
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. All inter-company accounts
and transactions have been eliminated in the consolidation.
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 and Derivative 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.
Derivative financial instruments are carried at fair value.
We review the terms of convertible debt and equity instruments we
issue to determine whether there are embedded derivative
instruments, including the embedded conversion option, that are
required to be bifurcated and accounted for separately as a
derivative financial instrument. In circumstances where the
convertible instrument contains more than one embedded derivative
instrument, including the conversion option, that is required to be
bifurcated, the bifurcated derivative instruments are accounted for
as a single, compound derivative instrument. Also, in connection
with the sale of convertible debt and equity instruments, we may
issue freestanding options or warrants that may, depending on their
terms, be accounted for as derivative instrument liabilities, rather
than as equity.
Derivative financial instruments are initially measured at their
fair value. For derivative financial instruments that are accounted
for as liabilities, the derivative instrument is initially recorded
at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported as charges or credits to income.
For option-based derivative financial instruments, we use the
Black-Scholes option pricing model to value the derivative
instruments. To the extent that the initial fair values of the
freestanding and/or bifurcated derivative instrument liabilities
exceed the total proceeds received, an immediate charge to income is
recognized, in order to initially record the derivative instrument
liabilities at their fair value.
The discount from the face value of the convertible debt or equity
instruments resulting from allocating some or all of the proceeds to
the derivative instruments, together with the stated interest on the
instrument, is amortized over the life of the instrument through
periodic charges to income, usually using the effective interest
method.
F-7
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
re-assessed periodically, including at the end of each reporting
period. If re-classification is required, the fair value of the
derivative instrument, as of the determination date, is
re-classified. Any previous charges or credits to income for changes
in the fair value of the derivative instrument are not reversed.
Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12
months of the balance sheet date.
Advertising
The Company's advertising costs are expensed as incurred, which
amounted to $26,068 and $31,420 for the three month periods ended
September 30, 2006 and 2005, respectively.
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.
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.
In connection with derivative financial liabilities, the Company
uses the Black-Scholes option pricing model to value options and
warrants, and the embedded conversion option components of any
bifurcated embedded derivative instruments that are recorded as
derivative liabilities. See Note 14 related to embedded derivative
instruments that have been bifurcated from our Series B Notes and
OID Notes.
F-8
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Use of Estimates (continued)
In valuing the options and warrants and the embedded conversion
option components of the bifurcated embedded derivative instruments,
at the time they were issued and at September 30, 2006, we used the
market price of our common stock on the date of valuation, an
expected dividend yield of 0% and the remaining period to the
expiration date of the options or warrants or repayment date of the
convertible debt instrument. All options, warrants and conversion
options can be exercised by the holder at any time after issuance.
Because of the limited historical trading period of our common
stock, the expected volatility of our common stock over the
remaining life of the options and warrants has been estimated at
65%, based on a review of the volatility of entities considered by
management as comparable. The risk-free rates of return used ranged
from 4.62% to 4.71%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the
options or warrants.
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
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
Share Based Payments. SFAS 123R requires all entities to recognize
compensation cost for share-based awards, including options, granted
to employees. SFAS 123R eliminates the ability to account for
share-based compensation transactions using the Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock
Issued To Employees., and generally requires instead that such
transactions be accounted for using a fair-value based method.
Public companies are required to measure stock-based compensation
classified as equity by valuing the instrument the employee receives
at its grant-date fair value. The Company implemented SFAS 123R
commencing July 1, 2006 using the modified prospective transition
approach. SFAS 123R requires that the compensation cost relating to
share-based payment transactions be recognized in financial
statements. The Company will recognize the expense over the period
during which an employee is required to provide service in exchange
for the award.
Prior to the implementation of SFAS 123R, the Company was applying
the intrinsic value method of accounting for stock options granted
to employees.
SFAS 123R does not change the accounting guidance for share-based
payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
Accounting for Stock-Based Compensation 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.
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.
F-9
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Revenue Recognition (continued)
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 $89,469 (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.
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.
F-10
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
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.
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 significant Canadian operating losses since 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.
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.
F-11
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Recent Accounting Pronouncements
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, 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
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. This FASB
Statement was implemented by the Company commencing July 1, 2006 and
such did not 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 Company is evaluating the impact of
this standard on the Company's results of operations and 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.
F-12
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Basis of Presentation and Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), Fair Value Measurements, which
defines fair value, establishes guidelines for measuring fair value
and expands disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted,
provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. The Company is
evaluating the impact of this standard on its consolidated financial
position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current year
Financial Statements ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of prior year uncorrected misstatements
should be considered when quantifying misstatements in the current
year financial statements. SAB 108 requires registrants to quantify
misstatements using both an income statement ("rollover") and
balance sheet ("iron curtain") approach and evaluate whether either
approach results in a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. If
prior year errors that had been previously considered immaterial now
are considered material based on either approach, no restatement is
required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered.
If prior years are not restated, the cumulative effect adjustment is
recorded in opening accumulated earnings as of the beginning of the
fiscal year of adoption. SAB 108 is effective for fiscal years
ending after November 15, 2006. The Company has determined that
there will be no material impact to the financial statements for the
adoption of this bulletin.
Comparative Financial Statements
The comparative Consolidated Financial Statements have been
reclassified from statements previously presented to conform to the
presentation adopted in the current period.
F-13
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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-14
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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-15
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Discontinued operations (continued)
The carrying values of the major classes of assets and liabilities of
discontinued operations, which include CSA as at September 30, 2006 and
June 30, 2006, are as follows:
September 30, 2006 June 30, 2006
------------------ -------------
CSA CSA
$ $
Cash and cash equivalents 5,368 42
Accounts receivable -- 8,969
Other receivables -- --
Inventories -- --
Prepaid Expenses -- --
----- -----
Total Current Assets 5,368 9,011
Property and equipment -- --
Intangible assets -- --
Goodwill -- --
----- -----
Total Long-Lived Assets -- --
----- -----
Total Assets 5,368 9,011
----- -----
Accounts Payable and accrued liabilities -- --
Bank and other loans payable -- --
Due to related parties -- --
Current portion of long term debt -- --
----- -----
Total Current Liabilities -- --
Long Term Liabilities -- --
----- -----
Total Liabilities of Discontinued Operations -- --
----- -----
Summary results of discontinued operations:
Three months ended Three months ended Three months ended
September 30, September 30, September 30,
Total CLI CSA
------------------ ------------------ ------------------
2006 2005 2006 2005 2006 2005
---- ----------- ---- ----------- ---- -----------
$ $ $ $ $ $
Revenues from Discontinued Operations -- 1,737,742 -- 1,316,634 -- 421,108
--- -------- --- ------ --- --------
Pre-tax earnings (loss) from Discontinued Operations -- (220,936) -- 145,187 -- (366,123)
--- -------- --- ------ --- --------
After-tax earnings (loss) from Discontinued Operations -- (267,581) -- 86,384 -- (353,965)
--- -------- --- ------ --- --------
Results of Discontinued Operations -- (267,581) -- 91,213 -- (366,123)
--- -------- --- ------ --- --------
F-16
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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, subsequently, the balance of
$124,970 (CDN$154,000). 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 were to be released
from escrow over an eighteen month period after acquisition. As a
result, the value of the restricted stock paid was discounted in the
amount of $166,414. At September 30, 2006, substantially all of the
restricted shares have been released from escrow.
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-17
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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-18
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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. Subsequently, ALI changed its name to ITF Laboratories
Inc. 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 was $877,675. The carrying value of the note as at
September 30, 2006 is $936,640. 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 this embedded conversion option was $153,982 as of September 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-19
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
6. Property and Equipment
September 30,
2006
Accumulated Net Book
Cost Amortization Value
--------- ------------ -------------
$ $ $
Automotive equipment 43,037 26,154 16,883
Computer equipment 471,482 394,480 77,002
Furniture and fixtures 326,996 309,772 17,224
Laboratory equipment 2,320,956 425,684 1,895,272
Leasehold improvements 400,681 95,449 305,232
Machinery and office equipment 314,566 190,677 123,889
Software 127,324 66,535 60,789
Capital leases - computer equipment 48,921 24,893 24,028
--------- --------- ---------
Total property and equipment 4,053,963 1,533,644 2,520,319
========= ========= =========
Depreciation during the period 139,021
---------
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
---------
F-20
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
7. Intangible Assets
The following table presents details of the Company's purchased intangible
assets with definite lives:
Weighted Average Accumulated September 30, 2006
Life in Years Cost Amortization Net Book Value
---------------- --------- ------------ ------------------
$ $ $
Technology 4.32 209,509 18,787 190,722
Customer relationships 8.73 4,286,704 939,213 3,347,491
Trade name 6.31 111,738 7,253 104,485
---- --------- ------- ---------
Total intangible assets 8.43 4,607,951 965,253 3,642,698
==== ========= ======= =========
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
==== ========= ======= =========
The estimated future amortization expense of purchased intangible assets
with definite lives for the next five years is as follows:
$
2007 339,131
2008 439,335
2009 439,335
2010 439,335
2011 431,022
Thereafter 1,554,540
---------
3,642,698
=========
F-21
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Intangible Assets (continued)
The changes in the carrying amount of intangible assets during the year
ended June 30, 2006 and the three months ended September 30, 2006 is as
follows:
Avensys & Manaris
-----------------
$
Adjusted balance as of June 30, 2005 2,931,984
---------
Acquisition of intangible assets 321,247
Adjustment upon finalization of purchase price allocation 1,387,841
Impairment of intangible assets during fiscal 2006 (107,715)
Amortization during year (776,085)
---------
Balance as of June 30, 2006 3,757,272
---------
Amortization during period (114,574)
---------
Balance as of September 30, 2006 3,642,698
---------
Management recorded an intangible assets impairment charge of $107,715 in
the Consolidated Statement of Operations for the year ended June 30, 2006,
specifically during the fourth quarter of Fiscal 2006, relating to
intangible assets of Manaris which were no longer in use.
F-22
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
8. Goodwill
The changes in the carrying amount of goodwill during the year ended June
30, 2006 and the three months ended September 30, 2006 is as follows:
Avensys & C-Chip
----------------
$
Balance as of June 30, 2005 6,679,608
-----------
Impairment of goodwill (1,529,767)
Adjustment of goodwill following finalization of
purchase price allocation (1,387,841)
-----------
Balance as of June 30, 2006 and September 30, 2006 $ 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, specifically during the third and
fourth quarters of Fiscal 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-23
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
9. Balance Sheet Details
September 30, June 30,
2006 2006
------------- ---------
$ $
Other Receivables
Grants receivable 19,780 --
Investment tax credits receivable 482,507 117,190
Sales tax receivable 158,862 151,332
Other 359 107,220
--------- ---------
661,508 375,742
========= =========
Inventory
Raw materials 1,024,897 635,405
Work in process 71,615 120,864
Finished goods 254,443 807,536
--------- ---------
1,350,955 1,563,805
--------- ---------
Accounts Payable and Accrued Liabilities
Accounts payable 2,495,556 3,911,610
Payroll and benefits 97,619 184,785
Income taxes payable 1,789 1,794
Rent payable 12,042 12,894
Deferred revenue 578,200 151,272
Other 197,736 404,504
--------- ---------
3,382,942 4,666,859
--------- ---------
F-24
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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' 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 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 three months
ended September 30, 2006, since Avensys is the primary beneficiary. The
impact of including ITF Laboratories Inc. in the consolidated balance
sheet as at September 30, 2006 includes additions to current assets of
$791,948 (June 30, 2006 - $967,397), net property and equipment of
$1,005,161 (June 30, 2006 - $1,201,358), intangible assets of $307,273
(June 30, 2006 - $343,717) and current liabilities of $531,168 (June 30,
2006 - $1,138,306). The impact on the consolidated statement of
operations, for the three month periods ended September 30, 2006 and 2005,
was an increase in revenue of $450,667 and zero, respectively, and an
increase in expenses of $679,361and $237,288, respectively. The increase
in expenses includes an amount for research and development expenses of
$376,747 and $226,694, respectively.
11. Related Party Transactions and Balances
The total amount due to officers and/or shareholders of the Company at
September 30, 2006 is $40,000 (June 30, 2006 -$268,435). The amount due is
non-interest bearing, unsecured and has 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 $1,216,784 (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 September 30, 2006 amounted to $793,832 (CAD$887,266)
(June 30, 2006 $967,004 - CAD$1,078,209). Avensys has designated its
accounts receivable totalling $2,430,045 (CAD$2,716,061) and inventories
totalling $1,298,150 (CAD$1,450,942) 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 September 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 September 30, 2006 of
$1,216,492 (CAD$1,359,673) (June 30, 2006 $1,364,692 - CAD$1,521,632). The
supplier holds a lien on C-Chip's proprietary technology as collateral for
the credit facility.
F-25
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
13. Long-Term Debt
September 30, June 30,
2006 2006
------------- --------
$ $
Mortgage loan secured by Avensys' intangible and movable tangible assets,
(September 30, 2006-CAD$308,000), bearing interest at prime rate plus 2.75%,
payable in monthly instalments of CAD$7,000 plus interest, maturing in May 2010 275,566 295,067
Capital lease obligations (CAD$23,712), bearing interest between 5.83% and 7.72%,
maturing between March 2007 and May 2008 21,215 25,353
Note payable (June 30, 2006-CAD$4,837), non-interest bearing, payable in monthly
instalments of $691, unsecured, maturing in April 2007 4,328 6,197
------- -------
301,109 326,617
Less: Current portion of long-term debt 78,747 103,717
------- -------
Long-term debt 222,362 222,900
======= =======
Principal payments on long-term debt and capital leases are as follows:
$ $
2007 78,747 103,717
2008 78,316 78,506
2009 75,154 75,336
2010 68,892 69,058
2011 -- --
------- -------
Total 301,109 326,617
======= =======
F-26
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
14. Convertible Debentures
September 30, June 30,
2006 2006
------------- --------
$ $
Series A Senior Secured Convertible Debentures bearing interest at 7%, payments
for 20 months beginning June 16, 2005, interest payable each June and 130,494 188,328
December, maturing January 31, 2007, original principal amount of $4,675,000 (Note 14 (a))
Series B Subordinated Secured Convertible Debentures (original principal amount
of $2,112,917) and Original Issue Discount Series B Subordinated Secured
Convertible debentures (original principal amount equal to 15% of the Series 1,302,176 --
B debentures), maturing February 11, 2009 (Note 14 (b))
Unsecured Convertible Debentures bearing interest at 15%, maturing September 1, 2007,
original principal amount of $437,220 (CAD$487,500) (Note 14 (c)) -- 399,563
Unsecured Convertible Debentures bearing interest at 12% maturing March 1, 2008,
original principal amount of $358,744 (CAD$400,000) (Note 14 (c)) 345,623 343,109
--------- -------
1,778,293 931,000
Less: Current portion of convertible debentures 293,314 587,891
--------- -------
Convertible debentures 1,484,979 343,109
--------- -------
Principal payments on the convertible debentures for the next five years are as
follows:
$ $
2007 293,314 587,891
2008 996,904 343,109
2009 488,075 --
2010 -- --
2011 -- --
--------- -------
Total 1,778,293 931,000
========= =======
a) Series A Senior Secured Convertible Debentures
On February 16, 2005, the Company issued Series A 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. At the time of issuance, the Company was obligated for the
entire contractual balance of the Notes of $4,675,000. At September
30, 2006, the outstanding principal amount on the Notes was $580,491
with monthly installments of $145,120.
These Series A 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.
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").
F-27
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Convertible Debentures (continued)
Series A Senior Secured Convertible Debentures (continued)
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.
The holders of these Series A Notes have the right, at their option
at any time, to convert some or all of the Notes including the
principal amount and the amount of any accrued but unpaid interest
into a number of common shares of the Company valued initially at
$0.65 per share, subject to certain adjustments as described in the
purchase agreement. 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 Series A Notes, the
Company issued Warrant Series: IB1, IB2, IB3, IB4, and IB5 granting
the right to acquire up to 881,538 shares of the Company's common
stock at prices ranging from $0.01 to $0.76 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 Series
A Notes and issue expenses for the Warrants Series E and F.
To secure payment of the principal amount of the Series A Notes and
the interest thereon, the Company hypothecated, in 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 liens
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) Series B Subordinated Secured Convertible Debentures
On August 11, 2006, the Company entered into a Note and Warrant
Purchase Agreement for the sale of Series B Subordinated Secured
Convertible Notes ("Series B Notes"), for a principal amount of
$2,112,917, Original Issue Discount Series B Subordinated Secured
Convertible Notes ("OID Notes"), for a principal amount of $316,938,
and Series Y and Z Warrants (see Note 16(b)). Such amounts
represented the first tranche of the debt financing. On November 17,
2006, the Company received gross proceeds of $1,509,226 from the
second tranche of the debt financing. The second tranche shall be
recorded and accounted for by the Company in the second quarter of
the current fiscal year.
In accordance with EITF 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", the Company allocated $21,210 to the Warrants Series Y,
$398,164 to the Warrants Series Z, and recognized an embedded
conversion option feature of $608,440. The warrants and the embedded
conversion option feature components are accounted for as a
derivative liability. The Company allocated the remaining proceeds
to the Series B Notes in the amount of $1,064,461 and to the OID
Notes in the amount of $159,669. The carrying amounts of the Series
B Notes and the OID Notes are being increased monthly by periodic
accretion under the effective interest method. The Company used the
Black-Scholes option pricing model to value the warrants and the
embedded conversion option feature at the issue date and will use
the same model to value these elements on a quarterly basis The
following table illustrates the values of the various components at
the issue date, August 11, 2006, and September 30, 2006. The Company
remains obligated for the entire contractual balance of the Series B
Notes and OID Notes of $2,429,855.
F-28
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Convertible Debentures (continued)
Series B Subordinated Secured Convertible Debentures (continued)
Issue Date Expiry Date Value at August 11, 2006 Value at September 30, 2006
---------- ----------- ------------------------ ---------------------------
Derivative Liabilities $ $
Series B Notes 8/11/2006 2/11/2009 529,078 279,170
OID Notes 8/11/2006 2/11/2009 79,362 41,876
Series Y Warrants 8/11/2006 11/8/2010 21,210 12,138
Series Z Warrants 8/11/2006 11/8/2010 398,164 238,596
--------- -------
1,027,814 571,780
--------- -------
Carrying Value of
Subordinated Secured
Convertible Debentures
Series B Notes 8/11/2006 2/11/2009 1,064,461 1,132,327
OID Notes 8/11/2006 2/11/2009 159,669 169,849
--------- ---------
1,224,130 1,302,176
--------- ---------
Total 2,251,944 1,873,956
========= =========
The convertible notes include both Series B Notes and OID Notes. The
Series B Notes are non-interest bearing and the OID Notes
effectively provide the interest component on the Series B Notes.
Pursuant to the Purchase Agreement, the Company 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").
The Series B Notes and OID 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 Series B Notes and OID Notes are 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 Series B Notes and OID 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 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) related to
permitted acquisitions and disposition of the assets; (d) for so
long as the Notes remain outstanding, the Company shall not issue
any securities that rank pari passu or senior to the Notes without
the prior written consent of a majority of the principal amount of
the Notes outstanding at such time except for secured non-equity
linked commercial debt which shall rank senior to the Notes in an
amount equal to the greater of (i) $2,000,000 or (ii) fifty percent
(50%) of the Purchase Price.
c) 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 June 30, 2006, the discount
related to the conversion feature was $37,657. On August 10, 2006
the debenture was fully converted into 1,654,394 of Manaris common
shares. Pursuant to the conversion agreement, the Company has filed
a registration statement that includes the said shares. On October
9, 2006, the Company's registration statement became effective
enabling the shares to be issued 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 $129,922
in the first quarter of fiscal 2007.
F-29
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Convertible Debentures (continued)
Unsecured Convertible Debentures (continued)
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 September 30,
2006, the discount related to the conversion feature is $12,255
(June 30, 2006 - $15,635).
15. Common Stock
At September 30, 2006, the Company had authority to issue 500,000,000
shares of common stock. The Company had 79,286,852 and 77,671,281 of
common shares outstanding at September 30, 2006 and June 30, 2006,
respectively.
For the three months ended September 30, 2006:
b) The Company issued 1,277,558 common shares in connection with the
Series A Notes. Of that amount, 1,094,949 common shares with a fair
value of $341,458, 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 $341,458 was removed from the carrying value of the
convertible debentures and credited to capital stock and additional
paid in capital. Also, a total of 182,609 common shares, with a fair
value of $58,410, 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 82,933 common shares to settle outstanding
payables in the amount of $25,709.
d) In September 2006, pursuant to the ITF transaction and in connection
with the Company's failure to file the required registration
statement within the time period required by the Asset Purchase
Agreement, the Company issued 255,080 restricted common stock shares
to the ITF preferred shareholders. The fair value of the shares at
the issue date that was expensed in the financial statements was
$73,463.
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 shares 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.
F-30
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Common stock (continued)
September 30, June 30,
2006 2006
------------- ----------
Common stock reserved for issuance:
Stock Options
Options outstanding 4,480,500 4,486,750
Reserved for future issuance 4,545,814 4,539,564
Warrants 15,194,031 13,015,714
Conversion of Series A Notes 1,658,551 2,487,593
Conversion of Series B Notes and OID Notes 8,624,150
Conversion of unsecured convertible debentures 1,984,645 1,984,645
---------- ----------
36,487,691 26,514,266
========== ==========
16. Stock Options and Warrants
a) Stock Options
During the three months ended September 30, 2006:
i) The Company granted 50,000 stock options to the Company's
current Chief Financial Officer pursuant to a non-qualified
stock option plan at an exercise price of $0.33 per share.
Under the plan, the stock options will vest quarterly over a
one year period commencing November 7, 2006. In accordance
with the Company's accounting policy on stock-based
compensation, the total cost of the grant of stock options,
which amounted to $3,580, will be expensed over the vesting
period of the stock award.
ii) During the period, a total of 56,250 stock options were
forfeited by a former director of the Company. Such options
were not expensed by the Company at the time of issuance.
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
expense. 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-31
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 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 $0.38 per share.
Under the plan, 250,000 stock options vested immediately and
the remaining 250,000 stock options were expensed during the
third quarter of Fiscal 2006.
vii) On June 5, 2006, the Company registered 5,000,000 shares of
common stock pursuant to the Company's 2006 Nonqualified Stock
Option Plan (the "Plan"). The determination of those eligible
to receive options under this plan, and the amount, type,
price and timing of each stock option and the terms and
conditions shall rest at the sole discretion of the Company's
Compensation Committee, subject to the provisions of this
Plan. A total of 4,539,564 options under the Plan remain
available for issuance.
A summary of the changes in the Company's common share stock options
is presented below:
September 30, 2006 June 30, 2006
---------------------------- -----------------------------
Weighted Weighted
Number of Average Exercise Number of Average Exercise
Options Price($) Options Price ($)
--------- ---------------- ---------- ----------------
Balance at beginning of the year 4,486,750 0.65 3,842,500 0.65
Granted 50,000 0.14 2,778,000 0.14
Exercised -- -- (2,015,000) (0.05)
Forfeited (56,250) (0.78) (118,750) (0.78)
--------- ----- ---------- -----
Balance at end of the year 4,480,500 0.60 4,486,750 0.60
========= ===== ========== =====
Additional information regarding options outstanding as at September
30, 2006 is as follows:
Outstanding Exercisable
----------------------------------------- --------------------------
Weighted
average Weighted Weighted
Range of remaining average average
Exercise prices Number of contractual exercise price Number of exercise price
$ shares life (years) $ shares $
- --------------- --------- ------------ -------------- --------- --------------
0.00 - 0.25 302,500 4.30 0.04 302,500 0.04
0.26 - 0.50 1,059,250 4.40 0.36 862,250 0.37
0.51 - 0.75 1,895,000 2.70 0.67 1,895,000 0.67
0.76 - 1.00 1,223,750 3.00 0.82 1,223,750 0.82
--------- ---- ---- --------- ----
4,480,500 3.32 0.60 4,283,500 0.61
========= ==== ==== ========= ====
F-32
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Stock Options and Warrants (continued)
Stock Options (continued)
The weighted average fair value of options granted for the three
months ended September 30, 2006 and fiscal year ended June 30, 2006
was $0.07 and $0.32, respectively, as summarized below.
Weighted Weighted
average average
Number of exercise grant-date
options price fair value
--------- -------- ----------
Options with exercise prices equal to
market price 50,000 0.33 0.07
------ ---- ----
Options granted during the three months
ended September 30, 2006 50,000 0.33 0.07
====== ==== ====
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
========= ======= ====
Commencing July 1, 2006 and as described in the Company's accounting policy
relating to stock-based compensation, the Company began to expense the
compensation cost relating to employee share-based payment transactions The
Company recognized stock-based compensation for employees in the amount of
$17,728 for the three month period ended September 30, 2006. Had the Company
determined compensation cost based on the fair value at the date of grant for
its employee stock options, the net loss would have increased by $177,613 for
the three month period ended September 30, 2005.
The Company recognized stock-based compensation for non-employees in the amount
of zero for the three month period ended September 30, 2006. The Company
recognized stock based compensation for non-employees in the amount of $424,900
for the three month period ended September 30, 2005.
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:
Three months Three months
ended ended
September 30, September 30,
2006 2005
------------- -------------
Risk - free interest rate 3.90% 2.97%
Expected volatility 50.99% 100.00%
Expected life of stocks options (in years) 1 0.83
Assumed dividends None None
F-33
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Stock Options and Warrants (continued)
Stock Options (continued)
The following table illustrates the effect on net loss per share as
if the fair value method had been applied to all grants of stock
options:
Three months
ended
September 30,
2005
$
-------------
Net loss applicable to common stockholders (3,306,833)
Add: Stock-based compensation expense included in net loss - as
reported 424,900
Less: Stock-based compensation expense determined under fair
value method (602,513)
==========
Net loss applicable to common stockholders - pro forma (3,484,446)
==========
Net loss per share (basic and diluted) - as reported (0.05)
==========
Net loss per share (basic and diluted) - pro forma (0.06)
----------
F-34
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Stock Options and Warrants (continued)
b) Warrants
Warrants outstanding as at September 30, 2006
Outstanding Warrant exercise 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
Series Y 136,145 0.65
Series Z 2,042,172 0.45
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 15,194,031 0.43
=========== =======
Changes in the warrants outstanding as at September 30, 2006 are as follows:
Exercise prices 0.00001 0.350 0.45 0.50 0.59 0.65 0.67 Total
------- --------- --------- --------- ------- ------- ------- ----------
Balance at June 30, 2006 7,692 6,890,400 -- 5,579,160 215,385 -- 323,077 13,015,714
Repriced -- --
Granted -- -- 2,042,172 -- -- 136,145 -- 2,178,317
Exercised -- -- -- -- -- -- -- --
Expired -- -- -- -- -- -- -- --
------- --------- --------- --------- ------- ------- ------- ----------
--
Balance as at September 30,
2006 7,692 6,890,400 2,042,172 5,579,160 215,385 136,145 323,077 15,194,031
------- --------- --------- --------- ------- ------- ------- ----------
Weigthed Average remaining
contractual life (years) 3.9 3.4 4.2 3.9 3.9 4.2 3.9 3.5
------- --------- --------- --------- ------- ------- ------- ----------
F-35
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Stock Options and Warrants (continued)
Warrants outstanding as at June 30, 2006
Outstanding Warrant Exercise Price
----------- ----------------------
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:
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
-------- ------- ---------- --------- ------- -------- ------- ----------- ----------
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
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
17. Commitments and Contingencies
Commitments
Minimum lease payments for the next five years are as follows:
$
2007 338,426
2008 463,467
2009 414,460
2010 285,692
2011 11,930
---------
1,513,975
=========
The Company leases premises for its various offices located across
Canada. Total rent expense was $153,306 and $115,634 for the three
month periods ended September 30, 2006 and 2005, respectively.
Litigation and Settlement Costs
i) On October 4, 2006, the Company was served with a demand letter from
a former employee who is alleging wrongful dismissal and claiming an
indemnity of approximately $295,786 (CAD $330,600). The case has not
yet been filed with the courts however the Company has since then
responded accordingly and intends to vigorously contest the alleged
claim.
ii) On September 27, 2006 our subsidiary C-Chip received a letter
claiming that the Company is infringing on a patent of another
similar device to that being sold by C-Chip. C-Chip has since
responded to the alleged claim and is currently investigating the
matter.
18. Research and Development Investment Tax Credits
The Company's investment tax credit claims previously calculated for the
fiscal year ended June 30, 2006 has been reviewed, and as a result of this
review, the Company estimates that it will collect approximately $185,482
more than what had been originally recorded. The Company records
investment tax credits arising from research and development activities as
a reduction of the income tax provision for the year. The Company applied
the above noted excess as a further reduction of the income tax provision
for the three month period ended September 30, 2006.
The investment tax credits recorded by the Company are subject to review
and approval by taxation authorities and it is possible that the amounts
granted will be different from the amounts recorded by the Company.
F-37
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
19. 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 quarter ended September 30, 2006
Fiber & Credit
Monitoring Management Consolidated
---------- ---------- ------------
Net revenues from external customers 3,666,465 91,740 3,758,205
--------- -------- ---------
Cost of net revenues 2,338,109 51,174 2,389,283
Marketing and sales expense 497,304 65,173 562,477
Administrative expense 300,407 86,857 387,264
Research & development 376,747 -- 376,747
Depreciation & amortization 73,881 2,214 76,095
--------- -------- ---------
Direct costs 3,586,448 205,418 3,791,866
--------- -------- ---------
Direct contribution 80,017 (113,678) (33,661)
Other operating expenses & indirect
costs of net revenues 561,517
---------
Loss from Operations (595,178)
---------
Other income (expense) 129,655
Interest expense, net (246,041)
Debenture accretion and change in fair
value of derivative financial instruments 117,525
Income Tax Benefit - Refundable tax credits 364,602
Non-Controlling Interest (109)
---------
Net Loss from Continuing Operations (229,546)
=========
F-38
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
Segment Disclosure (continued)
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
FIBER & CREDIT
MONITORING MANAGEMENT CONSOLIDATED
---------- ---------- ------------
Net revenues from external customers 1,914,159 73,736 1,987,895
--------- ------- ----------
Cost of net revenues 1,241,144 27,700 1,268,844
Marketing and sales expense 391,794 143,745 535,539
Administrative expense 204,602 136,818 341,420
Research & development 226,108 586 226,694
Depreciation & amortization 22,940 1,392 24,332
--------- ------- ----------
Direct costs 2,086,588 310,241 2,396,829
--------- -------- ----------
Direct contribution (172,429) (236,505) (408,934)
Operating expenses and indirect costs of net revenues 1,111,791
----------
Loss from Operations (1,520,725)
----------
Other income (expense) 27,581
Interest expense, net (226,767)
Debenture accretion (1,540,287)
Income Tax Benefit - Refundable tax credits 221,230
Non-Controlling Interest (284)
----------
Net Loss from Continuing Operations (3,039,252)
==========
Revenue from two customers of the Company's Fiber & Monitoring segment
represented $1,782,998 for the three months ended September 30, 2006, of
which the outstanding receivable balances amount to $1,187,333 as at
September 30, 2006.
The Company's long-lived assets, comprised of property, plant & equipment,
intangible assets, and goodwill, substantially all of which are located in
Canada, are allocated as follows:
September 30, June 30,
2006 2005
------------- ----------
$ $
Fiber & Monitoring 9,855,477 10,523,564
Credit Management 22,724 22,567
All Other 46,816 55,543
--------- ----------
Total long-lived assets 9,925,017 10,601,674
--------- ----------
F-39
Manaris Corporation
Notes to Interim Consolidated Financial Statements
Unaudited
(Expressed in U.S. dollars)
September 30, 2006
20. Subsequent Events
a) Employment Agreements
Martin d'Amours
On October 11, 2006 and effective November 1, 2006, the Company
entered into an Employment Agreement with Martin d'Amours pursuant
to which Mr. d'Amours will remain as the President and Chief
Executive Officer of Avensys. The Agreement provides for an annual
salary of US$178,939 (CAD$200,000) in the first year and increasing
to US$201,306 (CAD$225,000) in the third year He also was granted
stock options to purchase 1,000,000 shares of the Company's common
stock pursuant to the Company's non-qualified stock option plan. The
stock options have an exercise price of $0.23 and a term of ten (10)
years. The stock options vest equally over a period of three years
commencing on June 30, 2007. The fair value of the stock award has
been determined to be $96,081 and will be expensed equally over the
vesting period of the stock options
John G. Fraser
On October 18, 2006 and effective October 1, 2006, the Company
entered into an Employment Agreement with John G. Fraser, pursuant
to which Mr. Fraser will remain as the President and Chief Executive
Officer of Manaris until June 30, 2009. The agreement provides for
an annual salary of US$268,408 (CAD$300,000) in the first year,
increasing to US$281,829 (CAD$315,000) in the second year and
295,249 (CAD$330,000) in the third year. He also was granted stock
options to purchase 1,500,000 shares of the Company's common stock
pursuant to the Company's non-qualified stock option plan. The
options have an exercise price of $0.27 and a term of ten (10)
years. The stock options vest equally over a period of three years
commencing on June 30, 2007. The fair value of the stock award has
been determined to be $100,059 and will be expensed equally over the
vesting period of the stock options
b) Series B Notes
On November 9, 2006 the Company's amended registration statement,
which was filed on October 10, 2006, was rendered effective.
Pursuant to the Purchase Agreement relating to this debt financing,
as more fully described in Note 14, the remaining second tranche of
the debt financing shall be disbursed to the Company no later than
five (5) business days following the effective date of the
registration statement. On November 20, 2006, the Company expects to
receive gross proceeds of $1,509,226 from the second tranche of the
debt financing.
F-40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 three months ended
September 30, 2006 and 2005 as included in this Form 10-QSB.
We make forward-looking statements in this document. Our forward-looking
statements are subject to risks and uncertainties. You should note that many
factors, some of which are described in this Management's Discussion or
discussed elsewhere in this document, could affect our company in the future and
could cause our results to differ materially from those expressed in our
forward-looking statements, including those matters discussed under the heading
"Risk Factors". Forward-looking statements include those regarding our goals,
beliefs, plans or current expectations and other statements regarding matters
that are not historical facts. For example, we use the words "believe,"
"expect," "anticipate" or similar expressions to make forward-looking
statements. Important factors that could cause our actual results to differ
materially from those expressed or implied by such forward-looking statements
include:
- - Our ability to grow our revenue and expand acceptance of our products in
our principal markets.
- - The continued availability of capital to finance our activities in the
event that we are not profitable.
- - Our ability to successfully integrate technologies or companies that we
acquire.
- - Our ability to obtain and enforce, in a timely manner, patent and other
intellectual property protection for our technology and products.
- - Our ability to avoid, either by product design, licensing arrangement or
otherwise, infringement of third parties' intellectual property.
- - Our ability to complete and maintain corporate alliances relating to the
development and commercialization of our technology and products.
- - The competitive environment and the impact of technological change on our
business.
- - Other factors discussed under the heading "Risk Factors."
We are not required to publicly release the results of any revisions to these
forward-looking statements we make to reflect future events or circumstances,
except as may be required under applicable securities laws.
CORPORATE OVERVIEW
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
largely targeted to industrial and 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. Its technology allows credit providers to locate and
disable the operation of any vehicle in the event of a delinquent
payment.
2
As announced in October, C-Chip shipped 4,500 units of the Credit Chip 200G
device in the three months ended September 30, 2006. However, our current
revenue recognition accounting policy obliges us to amortize the revenues and
corresponding cost of sales over 36 months. As a result, although shipments for
C-Chip devices during the 3 months ended September 30, 2006 amounted to $908,000
in value, approximately 10%, or $91,000 was recognized as revenues for the
quarter. The total value is reflected in our accounts receivable which stands at
$618,000 at September 30, 2006 compared to $65,000 a year earlier for the same
period.
Company-wide, we reduced our loss from operations to $595,000 for the quarter
ended September 30, 2006, as compared to a loss of $1.5 million for the same
period a year earlier. Net cash used in operating activities totaled $1.66
million. Of this amount, only $116,000 resulted from income statement activities
compared with $728,000 for the same period a year earlier and $4.6 million for
the year ended June 30, 2006. The balance of the Net cash used in operating
activities was as a result of changes in working capital, of which $1.26 million
was used to reduce accounts payable.
CHANGES IN PERSONNEL
Our former CFO resigned effective as of September 30, 2006. He has been replaced
by the Company's Controller, Tony Giuliano.
On October 1, 2006, Marie-Annick Riel was appointed as President of our C-Chip
subsidiary, replacing Claude Arbour. In this capacity, Ms. Riel is also
responsible for overseeing the operations of the Avensys Solutions division of
our Avensys subsidiary. Both C-Chip and Manaris will be relocating to the
Avensys premises during the month of December 2006.
CHANGE IN AUDITORS
On October 25, 2006, PricewaterhouseCoopers LLP - Montreal Canada was dismissed
as the Company's independent registered public accounting firm. We have engaged
Raymond Chabot Grant Thornton LLP, Montreal - Canada as our new independent
registered public accounting firm.
OVERVIEW OF AVENSYS
During the three months ending September 30, 2006, important milestones were
realized at Avensys. On a stand alone basis, the Avensys subsidiary was
profitable during the first quarter. In addition, on a stand-alone basis,
Avensys revenues for the first quarter increased by approximately 89% as
compared to the same period a year ago. Avensys' two divisions, Avensys
Technology (optical fiber) and Avensys Solutions (environmental monitoring
systems), as well as the Company's R&D partner, ITF Labs, contributed to the
improved performance.
3
The positive results from Avensys, which continue to represent more than 95% of
Manaris' total revenue, confirm the validity of our strategic choice to use
Avensys as a primary vehicle for future growth.
The President of Avensys, Martin d'Amours, who helped orchestrate the
integration of Avensys within Manaris and its subsequent acquisition of ITF
Optical, signed a long-term contract with the company effective November 1,
2006.
Avensys is comprised of two divisions: (i) Avensys Technology, which produces
optical components and modules for the telecom, fiber laser and optical sensor
markets, and (ii) Avensys Solutions, which provides environmental solutions and
instrumentation.
The optical market, which is served by the Avensys Technology division,
continues to experience solid growth. The telecom segment represents about 75%
of our optical sales. Fiber laser components and modules, and optical sensors
comprising the remaining 25% of optical sales. All of the operations of Avensys
Technology are now regrouped in the facility that we acquired from ITF Optical.
Approximately 45% of the total revenue of Avensys for the quarter was generated
from activities that are directly attributable to our acquisition of ITF
Optical. This has enabled the Avensys subsidiary, on a stand alone basis, to
generate a profit during the first quarter.
Generally speaking, the optical manufacturing industry has experienced
significant pressure on margins over the last few years. At Manaris, this trend
has been compounded by a weaker US dollar. The fact that the majority of our
optical sales are conducted in US dollars, while a majority of our cost
structure is funded in Canadian dollars, has put significant additional pressure
on our margins. Despite these negative factors, the Avensys subsidiary reported
positive operating margins during the first quarter which is attributable to
operational gains and synergies following our acquisition of ITF Optical.
The successful integration of Avensys' acquisition of ITF Optical Technologies
enables Avensys to concentrate on organic revenue growth and potential
additional consolidation opportunities in the optical market. Our strategic
goals for growth over the next year are as follows:
1- Increase direct and indirect distribution channels
2- Improve operational efficiencies and increase margins
3- Introduce new complementary products to our customers
Manaris' consolidated financial statements also include the results of ITF Labs.
Avensys owns 42% of the voting stock of ITF Labs. ITF Labs has contributed
revenues to Manaris through research and development contracts. On a stand alone
basis, ITF Labs generated a profit during the first quarter. The relationship
between Avensys and ITF Labs has enabled Avensys to benefit from ITF Labs'
ongoing research and development activities while limiting Avensys' direct
research and development exposure.
The Avensys Solutions division of Avensys continues to grow as well. In
September, we announced Marie-Annick Riel's appointment to general manager of
the division. This nomination of Marie-Annick, a leader with a proven track
record in the industry, confirms our commitment to the growth of this division.
We expect to realize this growth through both organic initiatives and potential
merger or acquisition opportunities. We continue to be firm believers in this
exciting business segment that has allowed us, through its stability, to be a
more solid organization.
4
Avensys Solutions generated gross margins slightly higher than 35% during the
first quarter. Although Avensys Solutions' market is in a fairly stable sector
with expected overall industry growth estimated at 3-5% year over year, our
results for Q1 2007 show a 24% increase in revenues over the same period last
year. This growth is partially attributable to the delivery of our Intelligent
Bubbler System product, developed in cooperation with Hydro Quebec, and the
execution of our strategy of "moving up the value chain" with value-added
integrated solutions built around our core products. The Intelligent Bubbler is
an automated system used to measure the level of both surface and ground water.
The system can also be used for industrial applications to remotely measure
levels of liquids in tanks and reservoirs as well as for critical hydrological
applications such as flood prevention. While single-tube bubblers have existed
for many years, Avensys Solutions' multi-tube bubbler, which is based on a
patent owned by Hydro-Quebec and features proprietary software, is designed to
improve precision and reliability.
During the first quarter, Avensys Solutions completed the deployment of a
made-to-measure methane monitoring station in the Central American country of El
Salvador. This project was completed in partnership with a Canadian consulting
company, and included the work of specialists in the reduction of greenhouse gas
effects and emission of industrial pollutants.
The strategic goals for Avensys Solutions over the next year are two-fold.
First, we intend to be active in the consolidation movement of this mature
industry, comprised of a fairly large number of small privately owned
distributors while growing our distribution channel and product offering through
a merger and acquisition strategy. Secondly, we expect to continue "moving up
the value chain" by adding integration capabilities and services to Avensys
Solutions' core products.
OVERVIEW OF C-CHIP
For C-Chip Technologies, the introduction of the GSM Credit Chip 200G in April
2006 represents the beginning of a new era focused on growing sales and shipping
larger quantities. During the first quarter, C-Chip continued to develop a
network of knowledgeable and established resellers to distribute the Credit Chip
200G product, primarily in the United States, to the "buy here, pay here"
market. We now have 17 resellers for the Credit Chip 200G.
5
Results of Operations for the three months ended September 30, 2006 compared to
the three months ended September 30, 2005
The results of operations include the accounts of the Company and its
subsidiaries.
Three months ended September 30,
--------------------------------
2006 2005 Change Change
--------- ---------- --------- ------
$ $ $ %
Revenue 3,758,205 1,987,895 1,770,310 89%
Cost of Revenue 2,389,283 1,268,844 1,120,439 88%
--------- --------- ---------
Gross margin 1,368,922 719,051 649,871 90%
--------- --------- ---------
Gross Margin as % of Revenue 36% 36%
Operating expenses
Depreciation and amortization 177,868 165,597 12,271 7%
Selling, general and administration 1,409,484 1,811,663 (402,179) -22%
Loss on impairment of Intangible Assets -- 35,822 (35,822) -100%
Research and development 376,747 226,694 150,053 66%
--------- --------- ---------
Total Operating expenses 1,964,099 2,239,776 (275,677) -12%
--------- --------- ---------
--------- --------- ---------
Operating gain (loss) (595,177) (1,520,725) 925,548 -61%
--------- --------- ---------
Other income (expenses) 129,655 27,581 102,074 370%
Interest expense, net (246,041) (226,767) (19,274) 8%
Debenture & preferred shares accretion (640,610) (1,540,287) 899,677 -58%
Change in fair value of derivative financial instruments 758,134 -- 758,134
Income tax benefits - refundable tax credits 364,602 221,230 143,372 65%
Non-Controlling interest (109) (284) 175 -62%
Results of discontinued operations -- (267,581) 267,581 -100%
--------- --------- ---------
Net loss (229,546) (3,306,833) 3,077,287 -93%
--------- --------- ---------
Revenue
Sales from the Fiber & Monitoring operating segment of Avensys products and
solutions, account for 98% of our net revenues. Avensys products were sold
directly to customers throughout the world. Sales from the Credit Management
operating segment of C-Chip products and solutions, were generated through a
network of 17 resellers located in North America.
Our revenues were composed of the following:
Three months ended September 30,
--------------------------------
2006 2005 Change Change
--------- --------- --------- ------
$ $ $ %
Avensys 3,666,465 1,914,159 1,752,306 92%
C-Chip 91,740 73,736 18,004 24%
--------- --------- ---------
Revenue 3,758,205 1,987,895 1,770,310 89%
--------- --------- ---------
Our revenues for the three months ended September 30, 2006 increased 89% over
the same period in 2005. This increase is primarily due to the addition of new
customers by both Avensys and C-Chip during the course of the fiscal year ended
June 30, 2006. The ITF transaction resulted in the expansion and diversification
of Avensys' customer base. On the other hand, C-Chip's focused efforts on
signing new resellers for its credit management product brought positive results
during the quarter - C-Chip added 9 new resellers since the end of the end of
2006 fiscal year.
6
Cost of revenue and gross margin
Cost of goods sold as a percentage of revenue was unchanged at 64% for the three
months ended September 30, 2006, compared with the same period in 2005. Gross
margin, relative to revenues, was unchanged, as Avensys saw reductions in the
operational costs of production, following the ITF transaction, that were offset
by the negative effects of a weak U.S. dollar and the price pressures currently
affecting the optical fiber market.
Operating Expenses
Depreciation and amortization
Depreciation and amortization for the three months ended September 30, 2006
increased by $12,271 over the same period last year. This increase is primarily
attributable to the addition of manufacturing and research and development
assets as part of the acquisition of ITF Optical assets.
Selling General and Administrative expenses
Selling, general and administrative (SG&A) expenses consist primarily of
marketing and sales expenses, general and administrative expenses, payroll and
related expenses, and professional fees. SG&A expenses for the three months
ended September 30, 2006 decreased 22% as compared to the same period in 2005.
SG&A are composed of the following:
Three Months Ended September 30,
--------------------------------
2006 2005 Change Change
--------- --------- --------- ------
$ $ $ %
General and administrative 399,322 303,746 95,576 31%
Marketing and Sales 589,028 557,547 31,481 6%
Payroll and related expenses 137,737 187,330 (49,593) -26%
Professional fees 234,428 265,767 (31,339) -12%
Travel 18,319 21,546 (3,227) -15%
Other selling, general and administrative 30,649 475,727 (445,078) -94%
--------- --------- ---------
Selling, General and Administrative Expenses 1,409,484 1,811,663 $(402,179) -22%
--------- --------- ---------
o General and administrative expenses for the three months ended September
30, 2006 increased by 31% versus the same period in 2005 primarily due to
expansion of operations at Avensys.
o Marketing and sales expenses remained largely unchanged, recording an
increase of 6% as compared to the same period in 2005.
o The reduction in payroll expenses is primarily attributable to the holding
company, Manaris.
o SG&A expenses classified as 'Other selling, general and administrative',
includes stock based compensation, which makes up $407,172 of the $445,078
reduction in 'Other selling, general and administrative' expenses.
Research and Development
For the three months ended September 30, 2006, research and development expenses
primarily consisted of salaries and related expenses for research personnel,
prototype manufacturing and testing at the ITF Labs facility in Montreal,
Quebec.
7
Research and development expenses for the three months ended September 30, 2006
increased by $150,053 over the same period in 2005. This increase is primarily
attributed to the expanded roster of research and development projects at ITF
Labs.
Net Loss
Our net loss decreased to $229,546 for the quarter ended September 30, 2006,
compared to $3,306,833 for the same period in 2005. This change, however, was
affected by the addition of derivative financial instruments to our balance
sheet. We incurred liabilities that are treated as derivative financial
instruments as part of our acquisition of ITF Optical assets and the August 2006
financing ("derivative liabilities"). These derivative liabilities are
re-measured at each period end using the Black-Scholes option pricing model, and
are consequently, sensitive to changes in the market price of our own shares.
Due to this expanded use of derivative financial instruments, the volatility of
our results of operations has increased considerably, as they are increasingly
affected by fluctuations in the fair value of our shares. At September 30, 2006,
our share price had dropped to $0.23 a share, which significantly reduced the
fair values of the derivative liabilities on our balance sheet, and reduced our
net loss by $758,134. Excluding the gain from changes in fair values of these
derivative liabilities, our net loss would have been $987,680 for the quarter
ending September 30, 2006. Two non-recurring events also had a significant
impact on the net loss for the quarter ended September 30, 2006. A gain on sale
of fixed assets amounting to $343,629 and a revaluation of our estimates for
research and development tax credits receivable resulted in a gain of
approximately $186,000, both improved our results by reducing net loss for the
quarter ended September 30, 2006.
Financial Condition, Liquidity and Capital Resources
Historically, Manaris' operations have been financed primarily from cash on
hand, from the sale of common shares or of convertible debentures. The
operations of our Avensys subsidiary have been supported primarily from revenue
from the sales of products and services.
As of September 30, 2006, we had working capital of $968,324, compared to a
working capital deficiency of $1,657,699 at June 30, 2006. Included in these
figures for net working capital:
September 30, June 30,
2006 2006 Change Change
------------- ---------- ---------- ------
$ $ $ %
Cash, cash equivalents, and short term investments 926,304 438,708 487,596 111%
Receivables 3,709,461 3,480,649 228,812 7%
Inventory 1,350,955 1,563,805 (212,850) -14%
Other current assets 786,932 589,302 197,630 34%
--------- ---------- ---------- ----
Current assets 6,773,652 6,072,464 701,188 12%
--------- ---------- ---------- ----
Accounts payable and accrued liabilities 3,382,942 4,666,859 (1,283,917) -28%
Loans payable 2,010,324 2,331,696 (321,372) -14%
Other current liabilities 412,062 731,608 (319,546) -44%
--------- ---------- ---------- ----
Current Liabilities 5,805,328 7,730,163 (1,924,835) -25%
--------- ---------- ---------- ----
Net working capital (deficiency) 968,324 (1,657,699) 2,626,023 158%
--------- ---------- ---------- ----
8
Since the end of the 2006 fiscal year, we began implementing the following
measures to address our concerns over the liquidity of the Company, and its
ability to continue as a going concern:
o Secured convertible debt financing, on August 11, 2006, to fund our
operations and growth.
o Assisted our subsidiaries in obtaining financing to fund revenue growth.
o Renegotiated debt financing at our C-Chip subsidiary to obtain improved
repayment terms.
During the three months ended September 30, 2006, net cash used to fund
continuing operating activities was $1,663,833, consisting primarily of:
o $116,423 net use of cash in operating activities
o $1,258,208 used to pay accounts payable.
During the three months ended September 30, 2006, we mainly financed our
operations through the August 11, 2006 Series B Notes and revenue from the sales
of products and services.
Selected Balance Sheet information:
September 30, June 30,
2006 2005 Change Change
------------- ---------- ---------- ------
$ $ $ %
Total Assets 17,897,89 17,143,434 753,755 4%
Current Liabilities 5,805,328 7,730,163 (1,924,835) -25%
Long-Term Liabilities 4,048,862 2,183,345 1,865,517 85%
Non-Controlling Interest 23,992 23,939 53 0%
Total Stockholder's Equity 8,019,008 7,205,987 813,021 11%
Total assets remain largely unchanged as increases in cash and other current
assets were largely offset by the disposition of some outdated fixed assets. The
decrease in current liabilities is primarily a result of current accounts
payable payments throughout the Company, repayments on the C-Chip line of credit
and the conversion of a convertible debenture into shares of the Company.
As of September 30, 2006, the Company had 79,286,852 issued and outstanding
shares compared to 77,671,281 on June 30, 2006. The increase is mainly due to
the issuance of 1,277,558 common shares in connection with the Series A Notes.
Stock options outstanding at September 30, 2006 totaled 4,480,500 at a weighted
average exercise price of $0.60 and have a weighted average remaining
contractual life of 3.32 years.
The Series A Notes we issued in February 2005 in an aggregate principal amount
of $4.68 million have been largely repaid or converted, with approximately
$400,000 outstanding as of October 31, 2006.
9
August 2006 Convertible Note and Warrant Private Placement
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 $3.6M 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 $2.1M were received by August 22, 2006, with net proceeds of
approximately $1.8M, after transaction fees. We are entitled to receive the
remaining $1.5 million following effectiveness of the Company's registration
statement (File No. 333-136608), which was declared effective on November 9,
2006. On November 20, 2006, the Company expects to receive gross proceeds of
$1,509,226 from the second tranche of the debt financing.
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.
Critical Accounting Policies and Estimates
The accompanying management discussion and analysis of our results of operations
and financial condition are based on our consolidated financial statements,
which are prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP). The preparation of financial
statements in conformity with United States generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Our management routinely makes estimates about the
effects of matters that are inherently uncertain. These estimates form the basis
for making judgments about the financial position and results of operations,
which are integral to understanding the Company's financial statements. We base
our estimates and judgments on historical experience and on other assumptions
that we believe are reasonable under the circumstances. However, future events
cannot be forecast with certainty and the best estimates and judgments routinely
require adjustment. We are required to make estimates and judgments in many
areas, including those related to fair value of derivative financial
instruments, recording of various accruals, bad debt and inventory reserves, the
useful lives of long-lived assets such as property and equipment, warranty
obligations and potential losses from contingencies and litigation. We believe
the policies disclosed are the most critical to our financial statements because
their application places the most significant demands on management's judgment.
Senior management has discussed the development, selection and disclosure of
these estimates with the Audit Committee of our Board of Directors.
10
There have been no significant changes during the first quarter of fiscal 2007
to the items that we disclosed as our critical accounting policies and estimates
in our discussion and analysis of financial condition and results of operations
in our Form 10-KSB for the fiscal year ended June 30, 2006, except as noted
below for stock-based compensation.
Stock-Based Compensation Expense
Effective July 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123 (Revised 2004), "Share-Based Payment. SFAS 123(R) requires the
recognition of the fair value of stock-based compensation as an expense in the
calculation of net income. Under the fair value recognition provisions of SFAS
123R, stock-based compensation cost is estimated at the grant date based on the
fair value of the award and is recognized as expense ratably over the requisite
service period of the award. Determining the appropriate fair value model and
calculating the fair value of stock-based awards requires judgment, including
estimating stock price volatility and expected lives. The Company has elected
the modified prospective transition method for adopting FAS 123(R). Under this
method, the provisions of FAS 123(R) apply to all stock-based awards granted
after the July 1, 2006 effective date. The unrecognized expense of awards not
yet vested as of July 1, 2006 are also recognized as an expense in the
calculation of net income.
Derivative instruments
In connection with the sale of debt or equity instruments, we may sell options
or warrants to purchase our common stock. In certain circumstances, these
options or warrants may be classified as derivative liabilities, rather than as
equity. Additionally, the debt or equity instruments may contain embedded
derivative instruments, such as conversion options, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
The identification of, and accounting for, derivative instruments is complex.
Our derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated conversion options that are accounted for as
derivative instrument liabilities, we determine the fair value of these
instruments using the Black-Scholes option pricing model. That model requires
assumptions related to the remaining term of the instruments and risk-free rates
of return, our current common stock price and expected dividend yield, and the
expected volatility of our common stock price over the life of the option.
Because of the limited trading history for our common stock, we have estimated
the future volatility of our common stock price based on not only the history of
our stock price but also the experience of other entities considered comparable
to us. The identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial
statements.
Off-Balance Sheet Arrangements
None.
11
PART II
ITEM 1. LEGAL PROCEEDINGS
Manaris is not a party to any 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.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
During the first quarter, we issued 255,080 shares of common stock to the ITF
preferred shareholders of ITF Optical Technologies, Inc. pursuant to the Asset
Purchase Agreement dated as of April 4, 2006.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of
Manaris Corporation or executive officers of Manaris Corporation, and
transfer was restricted by Manaris Corporation in accordance with the
requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations
that all of the above-referenced persons were accredited or sophisticated
investors, and that they were capable of analyzing the merits and risks of
their investment, and that they understood the speculative nature of their
investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 12, 2006 we filed an amendment to our Registration Statement that was
originally filed on August 14, 2006 (File No. 333-136608). The Registration
Statement relates to the resale by the selling stockholders of 24,319,497 shares
of our common stock. The Registration Statement was rendered effective by the
Securities Exchange Commission on November 9, 2006.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Placement Agent Agreement by and between Manaris Corporation and Midtown
Partners & Co., LLC. dated as of April 17, 2006.
10.10 Employment Agreement between Manaris Corporation and Tony J. Giuliano (as
incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on October 26, 2006).
10.11 Addendum to Employment Agreement between Manaris Corporation and Tony J.
Giuliano (as incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on October 26, 2006).
10.12 Employment Agreement between Manaris Corporation and Martin d'Amours (as
incorporated by reference to the Form 8-K filed with the Securities and
Exchange Commission on November 6, 2006).
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-15(e)
and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934,
as amended
13
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-15(e)
and Rule 15d-15(e), promulgated under the Securities Exchange Act of 1934,
as amended
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 20th day of November, 2006.
MANARIS CORPORATION
(Registrant)
BY: /s/ John Fraser
------------------------------------------
John Fraser, President and Chief Executive
Officer (Principal Executive Officer)
BY: /s/ Tony Giuliano
------------------------------------------
Tony Giuliano, Chief Financial Officer,
(Principal Financial and Accounting
Officer)
15