UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
x
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURIT
IES
EXCHANGE
ACT OF 1934.
For
the
quarterly period ended September 30, 2008
OR
r
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 0-16819
CREATIVE
VISTAS, INC.
(Exact
name of registrant as specified in its charter)
Arizona
(State
or Other Jurisdiction of
Incorporation
or Organization
2100
Forbes Street
Unit
8-10
Whitby,
Ontario, Canada
(Address
of Principal Executive Offices)
|
|
86-0464104
(I.R.S.
Employer
Identification
No.)
L1N
9T3
(Zip
Code)
|
(905)
666-8676
(Registrant’s
Telephone Number, Including Area Code)
Not
Applicable
(Former
Name, Former Address and Former Fiscal Year if Changed Since Last
Report)
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
Accelerated Filer
o
|
|
Accelerated
Filer
o
|
|
|
Non-Accelerated
Filer
o
|
|
Smaller
Reporting Company
x
|
|
|
(Do
not check if a smaller reporting company)
|
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
At
November 14, 2008, the number of shares outstanding of the registrant’s common
stock, no par value (the only class of voting stock), was
37,224,926
.
PART
I.
Financial
Information
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
|
|
|
Item
2.
|
Management's
Discussion And Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
22
|
|
|
|
Item
4.
|
Controls
and Procedures
|
22
|
|
|
|
PART
II.
|
|
|
|
Item
1.
|
Legal
Proceedings
|
22
|
|
|
|
Item
1A.
|
Risk
Factors
|
23
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
|
|
|
Item
3.
|
Defaults
upon Senior Securities
|
23
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
23
|
|
|
|
Item
5.
|
Other
Information
|
23
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
23
|
PART
I.
FINANCIAL
INFORMATION
Item
1.
Financial
Statements
|
|
|
|
|
|
Creative Vistas, Inc.
Condensed Consolidated Balance Sheets
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and bank balances
|
|
$
|
5,625,189
|
|
$
|
1,960,340
|
|
Accounts
receivable, net of allowance for doubtful accounts of $389,669
and
$405,432
|
|
|
6,453,916
|
|
|
6,187,551
|
|
Income
tax receivable
|
|
|
250,000
|
|
|
448,126
|
|
Inventory
and supplies
|
|
|
1,032,922
|
|
|
1,043,815
|
|
Prepaid
expenses
|
|
|
526,367
|
|
|
270,930
|
|
Due
from related parties
|
|
|
2,411
|
|
|
2,581
|
|
Total
current assets
|
|
|
13,890,805
|
|
|
9,913,343
|
|
Property
plant and equipment, net of depreciation
|
|
|
10,226,330
|
|
|
6,352,014
|
|
Deposits
|
|
|
358,810
|
|
|
125,498
|
|
Goodwill
|
|
|
3,087,879
|
|
|
3,101,598
|
|
Intangible
assets
|
|
|
1,105,974
|
|
|
1,717,003
|
|
Restricted
cash
|
|
|
-
|
|
|
53,430
|
|
Deferred
financing costs, net
|
|
|
593,184
|
|
|
551,747
|
|
Deferred
income taxes
|
|
|
36,775
|
|
|
37,547
|
|
|
|
$
|
29,299,757
|
|
$
|
21,852,180
|
|
Liabilities
and Shareholders' (Deficit)
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Bank
indebtedness
|
|
$
|
2,289,479
|
|
$
|
-
|
|
Accounts
payable and accrued liabilities
|
|
|
6,879,725
|
|
|
6,074,212
|
|
Current
portion of obligations under capital leases
|
|
|
2,155,377
|
|
|
1,195,366
|
|
Deferred
income
|
|
|
125,043
|
|
|
91,900
|
|
Deferred
income taxes
|
|
|
25,858
|
|
|
25,858
|
|
Current
portion of term notes
|
|
|
1,750,000
|
|
|
2,240,356
|
|
Current
portion of other payable
|
|
|
283,018
|
|
|
303,030
|
|
Due
to related parties
|
|
|
7,242
|
|
|
8,143
|
|
Total
current liabilities
|
|
|
13,515,742
|
|
|
9,938,865
|
|
Term
notes
|
|
|
14,418,459
|
|
|
13,565,421
|
|
Notes
payable to related parties
|
|
|
1,500,000
|
|
|
1,500,000
|
|
Obligations
under capital lease
|
|
|
5,142,262
|
|
|
3,184,103
|
|
Other
payables
|
|
|
-
|
|
|
303,030
|
|
Due
to related parties
|
|
|
217,801
|
|
|
233,203
|
|
|
|
|
34,794,264
|
|
|
28,724,622
|
|
Shareholders'
(deficit)
|
|
|
|
|
|
|
|
Share
capital
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
|
50,000,000
no par value preferred shares undesignated, none issued or
outstanding
|
|
|
|
|
|
|
|
100,000,000
no par value common shares 37,224,926 and 34,494,623 issued and
outstanding
|
|
|
|
|
|
|
|
Common
stock
|
|
|
6,488,137
|
|
|
1,439,307
|
|
Deferred
compensation
|
|
|
(318,186
|
)
|
|
-
|
|
Additional
paid-in capital
|
|
|
13,859,221
|
|
|
4,958,871
|
|
Accumulated
(deficit)
|
|
|
(25,110,246
|
)
|
|
(12,445,468
|
)
|
Accumulated
other comprehensive (losses)
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(413,433
|
)
|
|
(825,152
|
)
|
|
|
|
(5,494,507
|
)
|
|
(6,872,442
|
)
|
|
|
$
|
29,299,757
|
|
$
|
21,852,180
|
|
The
accompanying notes are an integral part of these financial
statements
Creative
Vistas, Inc.
Condensed
Consolidated Statements of Operations and Comprehensive
Losses
(Unaudited)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30
|
|
September 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Contract
and service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
$
|
1,756,739
|
|
$
|
1,715,233
|
|
$
|
5,022,254
|
|
$
|
4,576,497
|
|
Service
|
|
|
12,204,635
|
|
|
9,427,146
|
|
|
32,299,736
|
|
|
23,904,590
|
|
Other
|
|
|
33,208
|
|
|
11,082
|
|
|
48,807
|
|
|
42,575
|
|
|
|
|
13,994,582
|
|
|
11,153,461
|
|
|
37,370,797
|
|
|
28,523,662
|
|
Direct
Expenses (excluding depreciation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
1,169,824
|
|
|
1,184,318
|
|
|
3,153,590
|
|
|
3,150,460
|
|
Service
|
|
|
10,082,945
|
|
|
6,711,549
|
|
|
26,159,547
|
|
|
16,902,575
|
|
Project
expenses
|
|
|
269,309
|
|
|
328,355
|
|
|
861,381
|
|
|
933,658
|
|
Selling
expenses
|
|
|
259,436
|
|
|
193,189
|
|
|
739,415
|
|
|
580,759
|
|
General
and administrative expenses
|
|
|
2,745,487
|
|
|
1,448,742
|
|
|
8,783,283
|
|
|
4,145,380
|
|
Depreciation
expenses
|
|
|
728,492
|
|
|
459,402
|
|
|
1,847,254
|
|
|
1,210,311
|
|
Amortization
of intangible assets expenses
|
|
|
188,622
|
|
|
150,000
|
|
|
568,557
|
|
|
450,000
|
|
|
|
|
15,444,115
|
|
|
10,475,555
|
|
|
42,113,027
|
|
|
27,373,143
|
|
Income
(Loss) from operations
|
|
|
(1,449,533
|
)
|
|
677,906
|
|
|
(4,742,230
|
)
|
|
1,150,519
|
|
Interest
and other expenses
|
|
|
|
|
|
|
|
|
|
Net
financing expenses
|
|
|
603,392
|
|
|
844,469
|
|
|
6,419,775
|
|
|
2,143,758
|
|
Realized
loss on disposal of available for sale securities
|
|
|
822,916
|
|
|
-
|
|
|
822,916
|
|
|
-
|
|
Amortization
of deferred charges
|
|
|
69,666
|
|
|
45,511
|
|
|
159,581
|
|
|
137,362
|
|
Foreign
currency translation gain (loss)
|
|
|
384,502
|
|
|
(479,582
|
)
|
|
520,277
|
|
|
(1,057,737
|
)
|
|
|
|
1,880,476
|
|
|
410,398
|
|
|
7,922,549
|
|
|
1,223,383
|
|
Income
(loss) before income taxes
|
|
|
(3,330,009
|
)
|
|
267,508
|
|
|
(12,664,779
|
)
|
|
(72,864
|
)
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income (loss)
|
|
|
(3,330,009
|
)
|
|
267,508
|
|
|
(12,664,779
|
)
|
|
(72,864
|
)
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized
gain – available for sale securities
|
|
|
916,649
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
327,939
|
|
|
(305,083
|
)
|
|
411,719
|
|
|
(757,581
|
)
|
Comprehensive
(loss)
|
|
$
|
(2,085,421
|
)
|
$
|
(37,575
|
)
|
$
|
(12,253,060
|
)
|
$
|
(830,445
|
)
|
Basic
weighted-average shares
|
|
|
37,224,926
|
|
|
33,963,778
|
|
|
36,834,445
|
|
|
33,653,259
|
|
Diluted
weighted-average shares
|
|
|
37,224,926
|
|
|
40,046,891
|
|
|
36,834,445
|
|
|
33.653,259
|
|
Basic
earnings (loss) per share
|
|
$
|
(0.09
|
)
|
$
|
0.01
|
|
$
|
(0.34
|
)
|
$
|
(0.00
|
)
|
Diluted
earnings (loss) per share
|
|
$
|
(0.09
|
)
|
$
|
0.01
|
|
$
|
(0.34
|
)
|
$
|
(0.00
|
)
|
The
accompanying notes are an integral part of these financial
statements
Creative
Vistas, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(2,352,174
|
)
|
$
|
974,510
|
|
Investing
activities
|
|
|
|
|
|
|
|
Payment
for acquisition
|
|
|
(300,000
|
)
|
|
-
|
|
Proceeds
of sales of property and equipment
|
|
|
48,816
|
|
|
117,276
|
|
Proceeds
from sales of available for sale securities
|
|
|
5,623,933
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(1,777,302
|
)
|
|
(660,725
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
3,595,447
|
|
|
(543,449
|
)
|
Financing
activities
|
|
|
|
|
|
|
|
Proceeds
from bank indebtedness
|
|
|
2,267,274
|
|
|
-
|
|
Proceeds
from term note
|
|
|
2,500,000
|
|
|
-
|
|
Deferred
financing cost
|
|
|
(219,380
|
)
|
|
-
|
|
Repayment
of notes payable
|
|
|
-
|
|
|
(28,569
|
)
|
Due
to related parties
|
|
|
(385
|
)
|
|
(173
|
)
|
Repayment
of capital leases
|
|
|
(1,268,128
|
)
|
|
(849,395
|
)
|
Issuance
of common shares
|
|
|
1,260
|
|
|
-
|
|
Restricted
cash
|
|
|
52,894
|
|
|
246,411
|
|
Repayment
of term notes
|
|
|
(957,371
|
)
|
|
(854,148
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
2,376,164
|
|
|
(1,485,874
|
)
|
Effect
of foreign exchange rate changes on cash
|
|
|
45,412
|
|
|
(108,175
|
)
|
Net
change in cash and cash equivalents
|
|
|
3,664,849
|
|
|
(1,162,988
|
)
|
Cash
and cash equivalents,
beginning of period
|
|
|
1,960,340
|
|
|
3,560,181
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
5,625,189
|
|
$
|
2,397,193
|
|
The
accompanying notes are an integral part of these financial
statements
Creative
Vistas, Inc.
Notes
to Consolidated Condensed Financial Statements
September
30, 2008 (Unaudited)
1.
|
Summary
of Accounting Policies
|
Basis
of presentation
The
accompanying unaudited condensed consolidated balance sheet as at September
30,
2008, and the consolidated condensed statements of operations and cash flows
for
the periods ended September 30, 2007 and 2008, include the accounts of Creative
Vistas, Inc. (“CVAS”), Creative Vistas Acquisition Corp. (“AC Acquisition”), AC
Technical Systems Ltd. (“AC Technical”), Cancable Holding Corp. (“Cancable
Holding”), Cancable Inc., Cancable, Inc., Cancable XL Inc., XL Digital Services
Inc. (“XL Digital”), 2141306 Ontario Inc., Iview Holding Corp. (“Iview
Holding”), and Iview Digital Video Solutions Inc. (“Iview DSI”). Intercompany
balances and transactions have been eliminated in consolidation. In the opinion
of management, these condensed consolidated financial statements reflect
all
adjustments (consisting of normal recurring adjustments) that are necessary
for
a fair presentation of the results for and as of the periods shown. The
accompanying condensed consolidated financial statements have been prepared
in
conformity with accounting principles generally accepted in the United States.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The results of operations for
such
periods are not necessarily indicative of the results expected for 2008 or
for
any future period. These financial statements should be read in conjunction
with
the financial statements and related notes included in our Annual Report
on Form
10-K for the fiscal year ended December 31, 2007, filed with the Securities
and
Exchange Commission.
Reclassifications
Certain
amounts from the September 30, 2007, financial statements have been reclassified
to conform to the current year’s presentation.
Liquidity
and going concern
Our
consolidated condensed financial statements were prepared using accounting
principles generally accepted in the United States of America applicable
to a
going concern, which contemplates the realization of assets and liquidation
of
liabilities in the normal course of business. We have incurred losses of
$12,664,779 for the nine months ended September 30, 2008, and have an
accumulated deficit of $25,110,246
at
September 30, 2008. In addition, we have working capital and stockholder
deficits of $375,063 and $5,494,507, respectively at September 30,
2008.
We
have
outstanding term loans aggregating $16,168,459, together with common stock
options and warrants, held by Laurus Master Fund Ltd, a Cayman Islands company,
and/or its affiliates (“Laurus”). We do not currently have the ability to repay
the notes in the event of a demand by the holder. Furthermore, we granted
a
security interest to Laurus in substantially all of our assets and, accordingly,
in the event of any default under our agreements with Laurus, they could
conceivably attempt to foreclose on our assets, which could cause us to
terminate our operations. Additionally, there were 49 shares of common stock
of
Cancable Holding issuable upon the exercise of options and 20 shares of common
stock of Iview Holding issuable upon the exercise of options to Laurus. (see
Note 9)
Over
the
next twelve months the Company believes that its existing capital will be
sufficient to sustain its operations. Management plans to seek additional
capital in the future to fund operations, growth and expansion through
additional equity, debt financing or credit facilities. The Company has had
early stage discussions with investors about potential investment in the
Company
at a future date. No assurance can be made that such financing would be
available, and if available it may take either the form of debt or equity.
In
either case, the financing could have a negative impact on our financial
condition and our shareholders. The Company has introduced cost cutting
initiatives within the Administration, Project and Selling departments to
improve efficiency within the Company and also improve cash flow. The Company
also expects to see the benefits of its research and development efforts
within
the next 12 months as it starts to introduce its own line of customized products
to the industry. These products and technologies are expected to improve
gross
margins. The Company believes that it will be eligible for research and
development tax credits at year end for its research and development efforts
during the year and these are additional sources of cash flow for the Company.
The Company is also negotiating longer credit terms with its suppliers from
45
days to 60 to 75 days. For all the reasons mentioned above, we believe that
we
have adequate short term borrowing capability and that we will be able to
sustain our operations and continue as a going concern for a reasonable period
of time although there can be no assurance of this.
The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts
and classification of liabilities that may result from the possible inability
of
the Company to continue as a going concern.
Inventory
Inventory
consists of materials and supplies and is stated at the lower of cost and
market
value. Cost is generally determined on the first in, first out basis. The
inventory is net of estimated obsolescence, and excess inventory based upon
assumptions about future demand and market conditions. Inventory consists
principally of parts, materials and supplies
Earnings
(loss) per share
The
Company applies Statement of Financial Accounting Standards No. 128, Earnings
Per Share (FAS 128). Basic loss per share (“LPS”) is computed using the weighted
average number of common shares outstanding during the period. Diluted LPS
is
computed using the weighted average number of common and dilutive potential
common shares outstanding during the period. Dilutive potential common shares
consist of common stock issuable upon exercise of stock options and warrants
using the treasury stock method. Dilutive common share equivalents are not
considered in periods when their effect is antidilutive.
2.
|
Deferred
Financing Costs, Net
|
Deferred
financing costs, net are associated with the Company’s term notes from Laurus.
For the period ended September 30, 2008, the amortization of deferred financing
costs was $159,581 (2007 - $137,362).
Cost
|
|
$
|
1,108,262
|
|
Accumulated
amortization
|
|
|
(515,078
|
)
|
|
|
$
|
593,184
|
|
The
estimated amortization expense for each of the next five fiscal years and
thereafter is as follows:
Year
|
|
Amount
|
|
2008
|
|
$
|
50,181
|
|
2009
|
|
|
172,135
|
|
2010
|
|
|
165,970
|
|
2011
|
|
|
142,763
|
|
2012
|
|
|
42,193
|
|
2013
|
|
|
19,942
|
|
|
|
$
|
593,184
|
|
3.
|
Other
Investments– Available For Sale
Securities
|
On
January 22, 2008, the Company entered into a Stock Purchase Agreement (the
“Stock Purchase Agreement”) with Erato Corporation (“Erato”) pursuant to which
the Company purchased and acquired from Erato 2,674,407 shares of common
stock,
par value $0.0001 per share (the “Shares”), of 180 Connect Inc., a Delaware
corporation, for an aggregate purchase price of $5,444,940 paid by the Company
by delivery to Erato of (i) 2,195,720 duly and validly issued shares of common
stock of the Company and (ii) a common stock purchase warrant, exercisable
for
812,988 shares of common stock of the Company at an exercise price of $0.01
per
share.
On
January 30, 2008, the Company entered into a Warrant Purchase Agreement with
Laurus, Erato Corporation, Valens U.S. Fund, LLC and Valens Offshore SPV
I, Ltd.
(collectively, the “Sellers”) pursuant to which the Company purchased and
acquired from the Sellers, warrants to purchase 450,000 shares of common
stock
at an exercise price of $0.01 per share of 180 Connect Inc. The aggregate
purchase price paid by the Company in exchange for the 180 Connect Warrants
was
$1,001,909 paid by the Company by delivery to the Sellers of common stock
purchase warrants, exercisable for 506,250 shares of common stock of the
Company
at an exercise price of $0.01 per share.
The
above
investment, which is classified as available for sale securities, was sold
in
July 2008 for an aggregate of $5,623,933. The realized loss on the disposal
of
this investment was $822,916.
|
|
Cost
|
|
Accumulated
amortization
|
|
Net
book value
|
|
Customer
relationships
|
|
$
|
1,632,075
|
|
$
|
676,415
|
|
$
|
955,660
|
|
Trade
name
|
|
|
1,275,472
|
|
|
1,125,158
|
|
|
150,314
|
|
|
|
$
|
2,907,547
|
|
$
|
1,801,573
|
|
$
|
1,105,974
|
|
Amortization
expense for the nine month period ended September 30, 2008, amounted to $568,557
(2007-$450,000).
During
the period ended March 31, 2008, the Company established credit facilities
with
a Canadian chartered bank to provide for borrowings by its subsidiaries,
AC
Technical and Cancable Inc. The credit facility for AC Technical and Cancable
was $500,000 and $3,500,000 respectively. Revolving credit loans bear interest
at the bank’s domestic prime rate plus 1.5% for Canadian dollar amounts.
Interest is payable monthly. The facilities are secured by an assignment
of book
debts, inventory, certain other assets and life insurance. As at September
30,
2008, the interest rate of the Canadian dollar amount was 5.50%. At September
30, 2008, the borrowings outstanding under this facility were $2,289,479.
The
Company banking facility agreements contain financial covenants pertaining
to
maintenance of the tangible net worth and debt service coverage ratio. In
the
event of default, the bank could at its discretion cancel the facilities
and
demand immediate repayment of all outstanding amounts. Both credit facilities
are due in March 2009.
In
January 2006, concurrently with the closing of the acquisition of Cancable
Inc.,
the Company entered into a series of agreements with Laurus whereby Cancable
issued to Laurus a secured term note (the “Cancable Note”) in the amount of
$6,865,000 and Cancable Holding issued to Laurus a related option to purchase
up
to 49 shares of common stock of Cancable Holding (up to 49% of the outstanding
shares of Cancable Holding) at a price of $0.01 per share (the “Option”) (see
Note 9). The loan is secured by all of the assets of the Company and its
subsidiaries.
The
Cancable Note bears interest at the prime rate plus 1.75% with a minimum
rate of
7%. Interest accrued on the term note but was not payable until February
1,
2006. Interest is calculated on the basis of a 360 day year. The minimum
monthly
payment on the term note is $81,726 commencing from October 1, 2006. The
Company
is not obligated, except upon an event of default, to pay more than 25% of
the
original principal amount prior to December 31, 2011.
In
February 2006, the Company and its subsidiaries, Iview Holding and Iview
DSI
entered into a series of agreements with Laurus pursuant to a refinancing
transaction whereby the Company issued to Laurus a secured term note (the
“Company Note”) in the amount of $8,250,000, Iview DSI issued to Laurus a
secured term note (the “Iview Note”) in the amount of $2,000,000, the Company
issued to Laurus a related warrant to purchase up to 2,411,003 shares of
common
stock of the Company (up to 7.5% of the outstanding shares of the Company)
at a
price of $0.01 per share (the “Warrant”) and Iview Holding issued to Laurus a
related option to purchase up to 20 shares of common stock of Holding (up
to 20%
of the outstanding shares of Holding) at a price of $0.01 per share (the
“Option”). The loans are secured by all of the assets of the Company and its
subsidiaries. Simultaneously with the closing of this refinancing transaction,
the Company paid off the entire outstanding principal amount and all obligations
due to Laurus under a Secured Convertible Term Note, a Secured Convertible
Minimum Borrowing Note and a Secured Revolving Note, all dated September
30,
2004 (collectively, the “2004 Notes”) and such 2004 Notes were subsequently
cancelled.
The
options held by Laurus to acquire 49% of Cancable and 20% of Iview Holding
are
accounted for as minority interests. Because Cancable and Iview Holding have
incurred losses, no minority interest has been recognized at September 30,
2008.
The
Company Note bears interest at the prime rate plus 2% with a minimum rate
of 7%.
Interest accrued on the term note but was not payable until April 1, 2006.
Interest is calculated on the basis of a 360 day year. The minimum monthly
payment on the term note is $137,500 commencing March 1, 2007 to February
1,
2009, with a balance of $4,950,000 payable on the maturity date. Through
September 30, 2008, the Company has issued warrants to purchase up to 1,728,000
shares of common stock of the Company at prices from $0.90 to $2.84 per share
to
defer until maturity the principal repayments that were due from March 1,
2007
to June 1, 2008.
The
Iview
Note bears interest at the prime rate plus 2% with a minimum rate of 7%.
Interest accrued on the term note but was not payable until April 1, 2006.
Interest is calculated on the basis of a 360 day year. The minimum monthly
payment on the term note is $8,333 commencing March 1, 2007 to February 1,
2011,
with the balance of $1,600,000 payable on the maturity date. The Company
is not
obligated, except upon an event of default, to pay more than 25% of the original
principal amount prior to December 31, 2011.
In
June
2008, the Company and its subsidiary,
Cancable
Inc., entered into a financing transaction whereby the Company issued to
Valens
Offshore SPV II, Corp. (“Valens Offshore”) and Valens U.S. SPV I, LLC (“Valens
U.S.”) secured term notes in the amount of $1,700,000 and $800,000, respectively
(collectively, the “Company Second Notes”). The Company also issued to Valens
Offshore and Valens U.S. warrants to purchase up to 1,333,333 and 627,451
shares, respectively, of common stock of the Company at a price of $0.01
per
share. The loans are secured by all of the assets of the Company and all
its
subsidiaries.
Interest
on the term notes for the nine month period ended September 30, 2008 was
$1,052,523 (2007: $1,260,102).
|
|
Amount
|
|
Cancable
Note interest at prime plus 1.75% (minimum of 7%), due December
31,
2011
|
|
$
|
5,148,754
|
|
Company
Note interest at prime plus 2% (minimum of 7%), due February
13,
2010
|
|
|
7,837,500
|
|
Iview
Note bears interest at prime plus 2% (minimum of 7%), due on
February 13,
2011
|
|
|
1,839,873
|
|
Company
Second Notes. interest at 12%, due on June 24, 2013
|
|
|
2,500,000
|
|
Less:
unamortized discount on Company Second Notes
|
|
|
(1,157,668
|
)
|
|
|
|
16,168,459
|
|
Less:
current portion
|
|
|
1,750,000
|
|
|
|
$
|
14,418,459
|
|
The
principal payments for the next five fiscal years are as follows:
|
|
Amount
|
|
2008
|
|
$
|
437,500
|
|
2009
|
|
|
1,750,000
|
|
2010
|
|
|
5,875,000
|
|
2011
|
|
|
6,763,627
|
|
2013
|
|
|
1,342,332
|
|
|
|
$
|
16,168,459
|
|
7.
|
Net
Financing Expenses
|
|
|
Nine months ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Capital
leases
|
|
$
|
417,272
|
|
$
|
275,107
|
|
Interest
on terms and credit facility
|
|
|
1,052,523
|
|
|
1,260,102
|
|
Cost
of deferred principal repayment on term notes
–
648,000 warrants
|
|
|
628,238
|
|
|
570,530
|
|
Warrants
issued for proposed new financing
|
|
|
3,723,565
|
|
|
-
|
|
Financing
cost for the extension for the warrants issued (Note 9)
|
|
|
560,735
|
|
|
-
|
|
Others
|
|
|
37,442
|
|
|
38,019
|
|
|
|
$
|
6,419,775
|
|
$
|
2,143,758
|
|
Included
in net financing expenses is the fair value of $3,723,565 for 2,030,865 warrants
to purchase the Company’s common stock issued in January 2008 as
follows:
(i)
On
January 22, 2008 the Company entered into a letter agreement with Erato
Corporation for Erato to provide up to $12,000,000 in financing to the Company
on such terms and conditions as the Company and Erato shall mutually agree
(the
“Bridge Financing”). Any proceeds from the Bridge Financing may only be used by
the Company for the purpose of financing a third party. The Company does
not
currently have an agreement to provide financing to any such third party.
As
consideration for the letter agreement, the Company issued to Erato a warrant
to
purchase up to 1,738,365 shares of common stock of the Company at an exercise
price of $0.01 per share. Because the Company does not currently have any
agreement to provide financing to a third party, the financing has not occurred
and, as a result, the Company expensed the value of the warrants. The fair
value
of the warrants of $3,144,685 was measured using the Black-Scholes option
pricing model using the following assumptions: risk free interest rate of
4.23%,
expected dividend yield of 0%, volatility of 45%, share price of $1.81 and
the
expected life of the warrants of 50 years (see Note 9).
(ii)
On
January 30, 2008, the Company entered into a non-binding letter of intent
with
Valens U.S. Fund, LLC (the “Letter Agreement”) in which Valens U.S. Fund, LLC
confirmed its intention to provide up to $4,000,000 in financing to a subsidiary
of the Company. As consideration for the Letter Agreement, the Company issued
to
Laurus, Erato, Valens U.S. Fund, LLC and Valens Offshore SPV I, Ltd. warrants
to
purchase 292,500 shares of common stock of the Company at an exercise price
of
$0.01 per share. The Letter Agreement was only an expression of the present
intentions of the parties and no binding legal obligation will exist until
the
parties sign a definitive agreement. As a result, the Company expensed the
value
of the warrants. The fair value of the warrants of $578,880 was measured
using
the Black-Scholes option pricing model using the following assumptions: risk
free interest rate of 4.44%, expected dividend yield of 0%, volatility of
45%,
share price of $1.98 and the life of the warrants of 50 years. (see Note
9)
8.
|
Note
Payable to Related Parties
|
In
September 2004, the Company issued two promissory notes with an aggregate
principal amount of $3,300,000. On September 30, 2004, the Company repaid
an aggregate of $1,800,000 of the principal balance. The outstanding principal
of $1,500,000 bears interest at 3% per annum with no fixed terms of repayment.
The notes, each with a face amount of $750,000, are due to The Burns Trust
(the
Company’s president is one of the beneficiaries of the trust) and the Navaratnam
Trust (the Company’s CEO is one of the beneficiaries of the trust),
respectively. During the period ended June 30, 2006, both the notes were
transferred to Malar Trust Inc. (the Company’s CEO is the shareholder of Malar
Trust Inc.).
Interest
expense recognized for the nine month period end of September 30, 2008 was
$37,442 (2007: $38,019).
9.
|
Shareholders’
(Deficit)
|
The
Company has total authorized share capital of 50,000,000 preferred shares,
no
par value and 100,000,000 common shares, no par value.
During
the period ended March 31, 2008, the Company entered into a consulting agreement
by issuing 222,414 common shares stock in consideration for investor relations
services rendered for 2008 with the fair value of $448,200. An expense in
the
amount of $330,014 was recorded under general and administrative expenses
for
the nine month period ended September 30, 2008. The remaining balance was
recorded as deferred compensation. Additionally, the Company issued 2,000
common
shares to an employee for the exercise of an employee stock option for cash
aggregating $1,260.
During
the period ended June 30, 2008, the Company entered into a consulting agreement
by issuing 300,000 common shares stock in consideration for investor relations
services rendered for 2008 with the fair value of $600,000. An expense in
the
amount of $400,000 was recorded under general and administrative expenses.
The
remaining balance was recorded as deferred compensation. Additionally, the
Company issued 10,169 common shares for the payment of outstanding legal
fees in
the amount of $25,117.
In
conjunction with the issuance of the Cancable Note and Iview Note in 2006,
the
Company has granted Laurus options to purchase up to 49% of Cancable Holding
Corp. and 20% of Iview Holding Corp. respectively. The financial statements
of
Cancable Holding Corp. and Iview Holding Corp. have negative equity on a
stand
alone basis. At such time as these entities have positive equity, the Company
will account for the options as minority interests.
Options
The
Company’s Stock Option Plan is intended to provide incentives for key employees,
directors, consultants and other individuals providing services to the Company
by encouraging their ownership of the common stock of the Company and to
aid the
Company in retaining such key employees, directors, consultants and other
individuals upon whose efforts the Company’s success and future growth depends
and in attracting other such employees, directors, consultants and
individuals.
The
Plan
is administered by the Board of Directors, or its Compensation Committee.
Under
the Plan, options on a total of 4,000,000 shares of common stock may be issued.
Shares of common stock covered by options which have terminated or expired
prior
to exercise are available for further options under the Plan. The maximum
aggregate number of shares of Stock that may be issued under the Plan as
“incentive stock options” is 3,500,000 shares. No options may be granted under
the Plan after June 30, 2011; provided, however, that the Board of Directors
may
at any time prior to that date amend the Plan.
Options
under the Plan may be granted to key employees of the Company, including
officers or directors of the Company, and to consultants and other individuals
providing services to the Company. Options may be granted to eligible
individuals whether or not they hold or have held options previously granted
under the Plan or otherwise granted or assumed by the Company. In selecting
individuals for options, the Committee may take into consideration any factors
it may deem relevant, including its estimate of the individual’s present and
potential contributions to the success of the Company.
The
Committee may, in its discretion, prescribe the terms and conditions of the
options to be granted under the Plan, which terms and conditions need not
be the
same in each case, subject to the following:
a.
|
Option
Price. The price at which each share of common stock covered by
an option
granted under the Plan may be purchased may not be less than the
market
value per share of the common stock on the date of grant of the
option.
The date of the grant of an option shall be the date specified
by the
Committee in its grant of the option, which date will normally
be the date
the Committee determines to make such
grant.
|
b.
|
Option
Period. The period for exercise of an option shall in no event
be more
than five years from the date of grant. Options may, in the discretion
of
the Committee, be made exercisable in installments during the option
period.
|
c.
|
Exercise
of Options. For the purpose of assisting an Optionee to exercise
an
option, the Company may make loans to the Optionee or guarantee
loans made
by third parties to the Optionee, on such terms and conditions
as the
Board of Directors may authorize. In no event shall any option
be
exercisable more than five years from the date of grant thereof.
|
d.
|
Lock-Up
Period. Without the consent of the Company, an Optionee may not
sell more
than fifty percent of the shares issued under the Plan for a period
of two
years from the date that the Optionee exercises the option. The
Committee
may impose such other terms and conditions, not inconsistent with
the
terms of the Plan, on the grant or exercise of options, as it deems
advisable.
|
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model, using the assumptions noted in the
following table. Expected volatility is based on the historical volatility
of
the Company’s stock, and other factors. The Company uses historical data to
estimate employee termination within the valuation model. Because the Company
has not previously granted options to employees, for purposes of the valuation
model, the Company has assumed that the life of the options will be equal
to
one-half of the combined vesting period and contractual life (i.e., that
employees will exercise the options at the midpoint between the vesting and
expiry date of the options). The risk-free rates used to value the options
are
based on the U.S. Treasury yield curve in effect at the time of
grant.
On
June
30, 2006, the Company granted to employees options to purchase 2,317,000
shares
of common stock at $0.63 per share; the options expire on June 30, 2011.
During
2007, the Company granted to employees options to purchase 1,226,000 shares
of
common stock, at prices ranging from $0.90 to $2.59 per share; the options
expire in 2012.
At
September 30, 2008 options to purchase 2,939,000 shares of common stock were
outstanding. These options vest ratably in annual installments, over the
four
year period from the date of grant. As of September 30, 2008, there was
$1,147,767 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plan. That cost is
expected to be recognized over the four year vesting period. At September
30,
2008, 786,500 options were vested. The cost recognized for the nine month
period
ended September 30, 2008 was $304,059 (2007:$158,825) which was recorded
as
general and administrative expenses.
In
valuing the options issued, the following assumptions were used;
|
2008
|
|
2007
|
Expected
volatility
|
45%
|
|
45%
|
Expected
dividends
|
0%
|
|
0%
|
Expected
term (in years)
|
3.0
– 4.5
|
|
3.0
– 4.5
|
Risk-free
rate
|
4.25%
- 5.13%
|
|
4.25%
- 5.13%
|
A
summary
of option activity under the Plan during the period ended September 30, 2008
is
presented below:
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining Contractual
Term
|
|
Intrinsic
Value
|
|
Outstanding at
December 31, 2007
|
|
|
3,222,000
|
|
$
|
0.63
|
|
|
4.75
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,000
|
)
|
$
|
0.63
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(281,000
|
)
|
$
|
0.63
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008
|
|
|
2,939,000
|
|
$
|
1.22
|
|
|
3.75
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2008
|
|
|
786,500
|
|
$
|
0.63
|
|
|
-
|
|
|
-
|
|
Warrants
The
Company uses the Black-Scholes option pricing model to value warrants issued
to
non-employees, based on the market price of our common stock at the time the
warrants are issued. All outstanding warrants may be exercised by the holder
at
any time. During the period ended March 31, 2008, in connection with financing
and acquisition arrangements, the Company issued warrants to purchase 3,674,103
shares of common stock. The fair value of the warrants of $6,470,357 was
measured using the Black-Scholes option pricing model using the following
assumptions: risk free interest rate of 2.18% to 4.44%, expected dividend yield
of 0%, volatility of 45%, exercise prices of $0.01 to $2.84 and the life of
warrants of 4 to 50 years. During the period ended June 30, 2008, in connection
with financing arrangements, the Company issued warrants to purchase 2,284,784
shares of common stock. The fair value of the warrants of $2,447,030 was
measured using the Black-Scholes option pricing model using the following
assumptions: risk free interest rate of 4.19%, expected dividend yield of 0%,
volatility of 120% to 125%, exercise prices of $1.07 to $1.90 and the life
of
the warrants 4 to 10 years.
As
of
September 30, 2008, we had the following common stocks warrants
outstanding:
Issue Date
|
|
Expiry Date
|
|
Number of
warrants
|
|
Exercise Price
Per share
|
|
|
Value-issue
date
|
|
Issued for
|
|
01–05-2004
|
|
01-05-2009
|
|
540,000
|
|
$0.33
|
|
$
|
447,463
|
|
Consulting
and investment banking fees
|
|
09–30-2004
|
|
09-30-2009
|
|
199,500
|
|
$1.00
|
|
$
|
111,853
|
|
Consulting
and investment banking fees
|
|
09-30-2004
|
|
09-30-2016
|
|
2,250,000
|
|
$1.15
|
|
$
|
1,370,000
|
|
Financing*
|
|
03-31-2005
|
|
03-31-2012
|
|
100,000
|
|
$1.20
|
|
$
|
60,291
|
|
Financing
|
|
04-30-2005
|
|
04-30-2017
|
|
100,000
|
|
$1.01
|
|
$
|
44,309
|
|
Financing*
|
|
05-31-2005
|
|
05-31-2012
|
|
100,000
|
|
$1.01
|
|
$
|
56,614
|
|
Financing
|
|
06-22-2005
|
|
06-22-2017
|
|
313,000
|
|
$1.00
|
|
$
|
137,703
|
|
Financing*
|
|
06-30-2005
|
|
06-30-2017
|
|
100,000
|
|
$0.90
|
|
$
|
50,431
|
|
Financing*
|
|
07-31-2005
|
|
07-31-2012
|
|
100,000
|
|
$1.05
|
|
$
|
56,244
|
|
Financing
|
|
08-31-2005
|
|
08-31-2012
|
|
100,000
|
|
$1.05
|
|
$
|
22,979
|
|
Financing
|
|
09-30-2005
|
|
09-30-2012
|
|
100,000
|
|
$0.80
|
|
$
|
36,599
|
|
Financing
|
|
10-31-2005
|
|
10-31-2012
|
|
100,000
|
|
$0.80
|
|
$
|
27,367
|
|
Financing
|
|
11-30-2005
|
|
11-30-2012
|
|
100,000
|
|
$0.80
|
|
$
|
16,392
|
|
Financing
|
|
12-31-2005
|
|
12-31-2012
|
|
100,000
|
|
$0.80
|
|
$
|
10,270
|
|
Financing
|
|
02-13-2006
|
|
02-13-2016
|
|
1,927,096
|
|
$0.01
|
|
$
|
1,529,502
|
|
Financing
|
|
03-01-2007
|
|
03-01-2016
|
|
108,000
|
|
$0.90
|
|
$
|
39,519
|
|
Financing*
|
|
04-01-2007
|
|
04-01-2016
|
|
108,000
|
|
$1.15
|
|
$
|
50,529
|
|
Financing*
|
|
05-01-2007
|
|
05-01-2011
|
|
108,000
|
|
$1.25
|
|
$
|
54,941
|
|
Financing
|
|
06-01-2007
|
|
06-01-2011
|
|
108,000
|
|
$2.28
|
|
$
|
101,470
|
|
Financing
|
|
07-01-2007
|
|
07-01-2011
|
|
108,000
|
|
$2.10
|
|
$
|
93,307
|
|
Financing
|
|
08-01-2007
|
|
08-01-2011
|
|
108,000
|
|
$2.55
|
|
$
|
112,117
|
|
Financing
|
|
09-01-2007
|
|
09-01-2011
|
|
108,000
|
|
$2.73
|
|
$
|
118,647
|
|
Financing
|
|
10-01-2007
|
|
10-01-2011
|
|
108,000
|
|
$2.43
|
|
$
|
105,362
|
|
Financing
|
|
11-01-2007
|
|
11-01-2011
|
|
108,000
|
|
$2.60
|
|
$
|
111,868
|
|
Financing
|
|
12-01-2007
|
|
12-01-2011
|
|
108,000
|
|
$2.55
|
|
$
|
107,284
|
|
Financing
|
|
01-01-2008
|
|
01-01-2012
|
|
108,000
|
|
$2.84
|
|
$
|
108,331
|
|
Financing
|
|
01-22-2008
|
|
01-22-2058
|
|
812,988
|
|
$0.01
|
|
$
|
1,470,687
|
|
Acquisition
|
|
01-22-2008
|
|
01-22-2058
|
|
1,738,365
|
|
$0.01
|
|
$
|
3,144,685
|
|
Financing
|
|
01-30-2008
|
|
01-30-2058
|
|
2,350
|
|
$0.01
|
|
$
|
4,650
|
|
Financing
|
|
01-30-2008
|
|
01-30-2058
|
|
582,367
|
|
$0.01
|
|
$
|
1,152,551
|
|
Financing
|
|
01-30-2008
|
|
01-30-2058
|
|
214,033
|
|
$0.01
|
|
$
|
423,588
|
|
Financing
|
|
02-01-2008
|
|
02-01-2012
|
|
108,000
|
|
$2.09
|
|
$
|
85,612
|
|
Financing
|
|
03-01-2008
|
|
03-01-2012
|
|
108,000
|
|
$2.04
|
|
$
|
80,253
|
|
Financing
|
|
04-01-2008
|
|
04-01-2012
|
|
108,000
|
|
$1.09
|
|
$
|
162,748
|
|
Financing
|
|
05-01-2008
|
|
05-01-2012
|
|
108,000
|
|
$1.19
|
|
$
|
103,180
|
|
Financing
|
|
06-01-2008
|
|
06-01-2012
|
|
108,000
|
|
$1.02
|
|
$
|
88,114
|
|
Financing
|
|
06-23-2008
|
|
06-23-2018
|
|
627,451
|
|
$0.01
|
|
$
|
669,756
|
|
Financing
|
|
06-23-2008
|
|
06-23-2018
|
|
1,333,333
|
|
$0.01
|
|
$
|
1,423,232
|
|
Financing
|
|
|
|
|
|
13,268,483
|
|
|
|
|
|
|
|
|
*
In
May
2008, the Company entered into an amendment to extend the expiry date of Stock
Purchase Warrants issued to Laurus, extending the expiry dates from 2011 to
2016
and from 2016 to 2017. The change in value of warrants in the amount of $560,735
was recorded under net financing costs.
10.
Major
Customers
During
the nine months ended September 30, 2008 the Company derived 55.9 % (2007:59.8%)
of its revenue from a single customer. The accounts receivable from this
customers comprises 31.7% (2007: 36.0%) of the total trade
receivable
.
11.
Segment
Information
We
determine and disclose our segments in accordance with SFAS No. 131 “Disclosures
about Segments of an Enterprise and Related Information”, which uses a
“management” approach for determining segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the reportable
segments. Our management reporting structure provides for the following
segments:
Cancable
Cancable
Inc. and its wholly owned subsidiaries XL Digital Services, Inc. and 2141306
Ontario Inc are Canadian based entities. Cancable, Inc. is a US cased entity
which is also the wholly owned subsidiary of Cancable Inc. (collectively, the
“Cancable”). Cancable is in the business of providing deployment and servicing
of broadband technologies in both residential and commercial markets. The
Cancable service offering, network deployment, IT integration, and support
services, enable the cable television and telecommunications industries to
deliver a high quality broadband experience to their customers. Cancable’s
clients rely on Cancable’s knowledge and expertise to rapidly deploy the latest
technologies to support advanced cable services, cable broadband Internet access
and DSL. Services provisioned include new installations, reconnections,
disconnections, service upgrades and downgrades, inbound technical call center
sales and trouble resolution for cable Internet subscribers, and network
servicing for broadband video, data, and voice services for residential,
business, and commercial marketplaces.
AC
Technical
A.C.
Technical Systems Ltd. (“AC Technical”), a corporation incorporated under the
laws of the Province of Ontario, is engaged in the engineering, design,
installation, integration and servicing of various types of security systems.
Iview
DSI
Iview
Digital Video Solutions Inc. (“Iview DSI”), a corporation incorporated under the
laws of the Province of Ontario, is a newly formed subsidiary incorporated
in
late 2005 to focus on providing video surveillance products and technologies
to
the market.
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Sales:
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
31,073,071
|
|
$
|
22,784,559
|
|
AC
Technical
|
|
|
6,052,378
|
|
|
5,632,174
|
|
Iview
|
|
|
214,929
|
|
|
102,826
|
|
Creative
Vistas, Inc.
|
|
|
30,419
|
|
|
4,103
|
|
Consolidated
Total
|
|
$
|
37,370,797
|
|
$
|
28,523,662
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
1,802,743
|
|
$
|
1,179,606
|
|
AC
Technical
|
|
|
30,399
|
|
|
30,705
|
|
Iview
|
|
|
14,112
|
|
|
-
|
|
Consolidated
Total
|
|
$
|
1,847,254
|
|
$
|
1,210,311
|
|
INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
901,751
|
|
|
746,128
|
|
AC
Technical
|
|
|
-
|
|
|
1,650
|
|
Iview
|
|
|
104,423
|
|
|
149,290
|
|
AC
Acquisition
|
|
|
37,443
|
|
|
36,369
|
|
Creative
Vistas, Inc.
|
|
|
5,376,158
|
|
|
1,210,321
|
|
CONSOLIDATED
TOTAL
|
|
$
|
6,419,775
|
|
|
2,143,758
|
|
Net
(Loss):
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
(4,886,837
|
)
|
$
|
2,235,371
|
|
AC
Technical
|
|
|
576,359
|
|
|
6,638
|
|
Iview
|
|
|
(275,428
|
)
|
|
(72,322
|
)
|
AC
Acquisition
|
|
|
(37,443
|
)
|
|
(38,019
|
)
|
Corporate
(1)
|
|
|
(8,041,430
|
)
|
|
(2,204,492
|
)
|
Consolidated
Total
|
|
$
|
(12,664,779
|
)
|
$
|
(72,824
|
)
|
TOTAL
ASSETS
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
16,709,205
|
|
$
|
11,534,613
|
|
AC
Technical
|
|
|
3,350,045
|
|
|
4,413,974
|
|
Iview
|
|
|
1,280,234
|
|
|
1,479,376
|
|
AC
Acquisition
|
|
|
-
|
|
|
-
|
|
Creative
Vistas, Inc.
|
|
|
7,960,273
|
|
|
3,924,026
|
|
Consolidated
Total
|
|
$
|
29,299,757
|
|
$
|
21,351,989
|
|
CAPITAL
ASSETS
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
9,345,536
|
|
$
|
5,156,776
|
|
AC
Technical
|
|
|
783,252
|
|
|
868,151
|
|
Iview
|
|
|
97,542
|
|
|
-
|
|
Consolidated
Total
|
|
$
|
10,226,330
|
|
$
|
6,024,927
|
|
CAPITAL
EXPENDITURES
|
|
|
|
|
|
|
|
Cancable
|
|
$
|
6,369,888
|
|
$
|
2,774,887
|
|
AC
Technical
|
|
|
14,350
|
|
|
3,917
|
|
Iview
|
|
|
113,534
|
|
|
-
|
|
CONSOLIDATED
TOTAL
|
|
$
|
6,497,772
|
|
$
|
2,778,804
|
|
(1)
|
Corporate
expenses primarily include certain stock-based compensation for consulting
and advisory services, which we do not internally allocate to our
segments
because they are related to our common stock and are non-cash in
nature.
|
Revenues
by geographic destination and product group were as follows:
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Contract
|
|
$
|
5,022,254
|
|
$
|
4,576,497
|
|
Service
|
|
|
32,299,736
|
|
|
23,904,590
|
|
Others
|
|
|
48,808
|
|
|
42,575
|
|
Total
sales to external customers
|
|
$
|
37,370,797
|
|
$
|
28,523,662
|
|
Revenue
generated by the Company in Canada and the United States was $33,910,653
(2007:$28,523,662) and $3,460,144 (2007: $Nil), respectively.
Item
2.
|
Management's
Discussion And Analysis
of
Financial Condition and Results of
Operations
|
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The following discussion contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed therein. Factors that could cause or contribute
to such differences include, but are not limited to, risks and uncertainties
related to the need for additional funds, the rapid growth of the operations
and
our ability to operate a number of new projects profitably. Except as required
by law, we do not intend to publicly release the results of any revisions to
those forward-looking statements that may be made to reflect any future events
or circumstances.
Results
of Operations
Comparison
of Three Month Period Ended September 30, 2008
to Period Ended September 30, 2007
For
purposes of this “Management’s Discussion and Analysis or Plan of Operation”, we
compared the three month period ended September 30, 2008, to the comparable
period in 2007.
Sales
:
Sales
for the three month period ended 2008 increased 25.4% to $13,994,600 from
$11,153,500 for the three month period ended 2007. The double-digit growth
in
revenue was mainly due to the increase in service revenue of the Cancable
Segment to $11,805,300 for the three month period ended 2008 from $8,968,200
for
the same period in 2007.
(a)
Cancable Segment - This segment includes Cancable Inc., Cancable, Inc., XL
Digital and OSS-IM View (collectively, “Cancable Group”). The principal activity
is provisioning the deployment and servicing of broadband technologies in both
residential and commercial markets. The Cancable Group’s service offering,
network deployment, IT integration, and support services, enable the cable
television and telecommunications industries to deliver a high quality broadband
experience to their customers. In October 2007, we acquired XL Digital which
is
incorporated under the laws of Ontario and with the same principal business
activity of Cancable Inc. XL Digital, with over 70 employees, provides its
deployment and provisioning services for Rogers Cable Inc. within two
territories where the Company did not previously have a presence.
Total
revenue of this segment for the third quarter of fiscal 2008 was $11,805,300
from $8,968,200 for the same period in fiscal 2007. The increase reflects
continued growth in revenue, particularly from having Rogers Cable Inc. as
a
customer. We continued to allocate resources to support the growth of our
business. Total revenue generated in the United States in the third quarter
of
fiscal 2008 was $2,242,500 and there was no such revenue in the same period
of
fiscal 2007.
Rogers
Cable Inc. is Cancable Group’s largest customer and the revenue from this
customer for the third quarter of fiscal 2008 was approximately $7,338,600
or
62.2% of Cancable Group’s total revenue compared to $6,860,000 or 76.5% for the
three months ended September 30, 2007. The increase was primarily due to the
acquisition of XL Digital. (b) AC Technical segment - Total revenue of AC
Technical segment was $2,047,900 for the third quarter of fiscal year 2008
compared to $2,140,000 for the third quarter of fiscal year 2007. Contract
revenue was $1,648,500 for the three months ended September 30, 2008 compared
to
$1,681,100 for the same period of fiscal 2007. The service revenue was $399,400
for the three months ended September 30, 2008, compared to $458,900 for the
same
period of fiscal 2007. Service revenue primarily represents the cumulative
effect of the growth in contracts and number of customers over the past few
years. We have experienced a significant increase in the number of inquiries
for
systems from the government and retail sector. This increased interest in
security products and services may result in our achieving increased revenues
in
future periods if we are successful in attracting new customers or obtaining
additional projects from existing customers. There is no assurance that the
Company will be able to attract new customers.
Direct
Expenses (excluding depreciation)
:
Direct
expenses as a percentage of revenue for three months ended September 30, 2008
was $11,252,800 or 80.4% of revenues compared to $7,895,900 or 70.8% of revenues
for the three month period ended September 30, 2007. The increase in direct
expenses was driven predominantly by the continued growth of
the
service revenue from $6,711,500 for the three month period ended September
30,
2007 to $10,082,900
for the
three month period ended September 30, 2008. The increase in percentage of
the
direct cost was primarily due to the initial training and set up cost of the
new
development in the United States. Total revenue generated in the United States
in the third quarter of fiscal 2008 was $2,242,500 and there was no such revenue
in the same period of fiscal 2007. (a) Cancable segment – Direct expenses
of this segment were $10,082,900 for the three months ended September 30, 2008,
which is comprised principally of labor expenses $7,452,900, vehicle expenses
$950,400 and material cost $714,600. The increase in direct expenses is
primarily due to the revenue growth discussed above. (b) AC Technical
segment – Direct expenses of this segment was $1,098,600. The material cost
was $626,200 or 30.6% of the AC Technical revenue for the three months ended
September 30, 2008 compared to $788,900 or 36.9% of revenues in the same period
of fiscal 2007. The decrease in percentage of material costs was mainly due
to
some contracts having less material needs. On the other hand, the labor and
subcontractor cost increased to $457,800 or 22.3% of AC Technical revenues
for
the three months ended September 30, 2008 and $504,500 or 23.6% of AC Technical
revenues for fiscal 2007. The increase in labor and subcontractor cost was
mainly due to the increase in revenue.
Project
cost
:
Project
cost was decreased to $269,300 or 1.9% of revenue for the three months ended
September 30, 2008, compared to $328,300 or 2.9% for the same period of fiscal
year 2007. Project cost was mainly related to the AC Technical segment. The
balance mainly includes the salaries and benefits of indirect staff amounting
to
$156,600 in the third quarter of fiscal 2008 compared to $202,500 for the same
period of fiscal 2007. The decrease was mainly due to the decrease in the number
of indirect staff. Automobile and travel expenses increased to $78,500 for
the
three months ended September 30, 2008 compared to $74,600 for the same period
of
fiscal 2007due to more travel by our staff this year.
Selling
expense
:
Selling
expense was $259,400 or 1.9% of revenues for the third quarter of 2008 compared
to $193,200 or 1.7% of revenues for the first quarter of fiscal 2007. Selling
expenses were mainly related to AC Technical segment. As at September 30, 2008,
AC Technical segment has the same number of salespersons, 5, as it did at
September 30, 2007. Salaries and commission to salespersons for the three months
ended September 30, 2008 was $141,800 compared to $141,600 for the same period
of fiscal 2007 amount to no material fluctuation. The advertising and promotion
and trade show expenses were $23,600 in the third quarter of fiscal 2008
compared to $23,700 for the same period of fiscal 2007.
General
and administrative expenses
:
General
and administrative expenses were $2,745,500 or 19.6% of revenues for the three
month period ended September 30, 2008 compared to $1,448,700 or 13.0% for the
same period of fiscal 2007. The balance for the three months ended September
30,
2008 is mainly comprised of $114,500 of professional fees related to preparation
of the quarterly reports and other corporate matters. In addition, investor
relations expenses amounted to $413,200 for the three month period ended
September 30, 2008 compared to $289,500 for the same period last year. Total
salaries and benefits to administrative staff were $2,409,200 for the third
quarter of 2008 compared to $622,200 for the same period last year. The increase
in salaries and benefits was a result of the Company hiring additional employees
who were required for the expansion of the business.
Depreciation
:
Total
depreciation of property plant and equipment was $728,500 for the third quarter
of fiscal 2008 compared to $459,400 for the same period of last year. The
increase in balance was primarily due to the addition of Company vehicles in
the
amount of $1,769,000.
Amortization
of Intangible Assets
:
Amortization of customer relationships and trade name was $188,700 compared
to
$150,000 for the same period last year.
Interest
and other Expenses
:
Interest and net other expenses for the three months ended September 30, 2008,
was $1,880,500 or 13.4% of revenues compared to net expenses of $410,400 or
3.7%
of revenues for the same period of fiscal 2007. The balance for the current
period is primarily comprised of the amortization of deferred charges amounting
to $69,700 compared to $45,500 for the same period of fiscal 2007. Additionally,
net financing expenses decreased to $603,400 or 4.3% of revenues compared to
$844,500 or 7.6% of revenues for the same period of fiscal 2007. The interest
due with respect to the Company’s credit facility was $421,100 for the three
months ended September 30, 2008 compared to $413,600 in the same period of
2007.
The increase in the balance reflects the increase in outstanding payables of
the
term notes compared to the same period of the prior year. During this quarter,
the Company sold common stock of 180 Connect Inc. (see Note 3) for an aggregate
of $5,623,900 and the realized loss on the disposal of this investment was
$822,900. There was no such balance in the same period of fiscal 2007.
Additionally, the realized foreign currency translation loss for this quarter
was $384,500 compared to foreign currency translation gain of $479,600 for
the
same quarter of fiscal 2007. The balance was related to the foreign currency
translation of term notes (see Note 6).
Income
taxes
:
No
income tax was paid for the period ended September 30, 2008, which was mainly
due to the Company’s losses carried forward to offset all income generated by
the Company. All prior taxes have already been accounted for in the income
tax
recoverable and therefore, there is no additional provision for income taxes
recoverable and deferred tax asset.
Net
Income/Loss
:
Net
loss for the three months ended September 30, 2008 was $3,330,000 compared
to
net income of $267,500 for the three month period ended September 30, 2007.
The
Company’s operating loss was $1,449,600 for the third quarter of fiscal 2008
compared to operating income of $677,900 for the same period of fiscal 2007.
The
loss was primarily attributed to the Company’s allocation of resources to grow
the business in the United States and increased costs.
Results
of Operations
Comparison
of Nine Month Period Ended September 30, 2008
to
Period Ended September 30, 2007
For
purposes of this “Management’s Discussion and Analysis or Plan of Operation”, we
compared the first nine month period ended September 30, 2008, to the comparable
period in 2007.
Sales
:
Sales
for the nine month period ended 2008 increased 31.0% to $37,370,800 from
$28,523,700 for the nine month period ended 2007. The increase in revenue was
mainly due to the increase in service revenue of Cancable Segment to $31,073,100
for the nine month period ended 2008 from $22,784,600 for the same period in
2007.
(a)
Cancable Segment - This segment includes Cancable Inc., Cancable, Inc., XL
Digital and OSS-IM View (collectively, “Cancable Group”). Total revenue of this
segment for the nine month period ended 2008 was $31,073,100 from $22,784,600
for the same period in fiscal 2007. The increase reflects continued growth
in
revenue, particularly from Cancable Group’s largest customer, Rogers Cable Inc.
We continued to allocate resources to support the growth of our business. Total
revenue generated in the United States for the nine month period ended September
30, 2008 was $3,460,100 and there was no such revenue for the same period of
last year.
Revenue
from Rogers Capble Inc. for the nine month period ended September 30, 2008
was
approximately $20,685,200 or 66.6% of Cancable Group’s total revenue compared to
$17,078,800 or 75.0% for the nine months ended September 30, 2007. (b) AC
Technical segment - Total revenue of AC Technical segment was $6,052,400 for
the
nine months ended September 30, 2008 compared to $5,632,200 for the nine months
ended September 30, 2007. Contract revenue increased to $4,825,700 for the
nine
months ended September 30, 2008 compared to $4,505,000 for the same period
of
fiscal 2007. This increase was mainly due to an increase in the number of
subcontracts for the provision of services to government and commercial
contracts. The service revenue has increased to $1,226,700 for the nine months
ended September 30, 2008 from $1,120,000 for the same period of fiscal 2007.
Service revenue primarily represents the cumulative effect of the growth in
contracts and number of customers over the past few years. We have experienced
a
significant increase in the number of inquiries for systems from the government
and retail sector. This increased interest in security products and services
may
result in our achieving increased revenues in future periods if we are
successful in attracting new customers or obtaining additional projects from
existing customers. There is no assurance that the Company will be able to
attract new customers.
Direct
Expenses (excluding depreciation)
:
Direct
expenses sold as a percentage of revenue for the nine months ended September
30,
2008 was $29,313,100 or 77.9% of revenues compared to $20,053,000 or 70.3%
of
revenues for the nine month period ended September 30, 2007. (a) Cancable
segment – Direct expenses of this segment was $26,159,500 for the nine
months ended September 30, 2008 which is mainly comprised of labor expenses
$19,397,500, vehicle expenses $2,567,600 and material cost $1,943,300 (b) AC
Technical segment – Direct expenses of this segment was $3,017,928. The
material cost was $1,753,873 or 31.7% of the AC Technical revenue for the nine
months ended September 30, 2008 compared to $2,015,900 or 35.8% of revenues
in
the same period of fiscal 2007. The decrease in percentage of the material
cost
was mainly due to some contracts requiring less material. On the other hand,
the
labor and subcontractor cost increased to $1,212,900 or 20.0% of AC Technical
revenues for the nine months ended September 30, 2008, from $1,161,900 or 20.7%
of AC Technical revenues for the nine month ended September 30, 2007 indicating
no material fluctuation.
Project
cost
:
Project
cost was $861,400 or 2.3% of revenue for the nine months ended September 30,
2008, compared to $933,700 or 3.3% for the same period of fiscal year 2007.
Project cost was mainly related to the AC Technical segment. The balance mainly
includes the salaries and benefits of indirect staff amounting to $514,500
for
the nine months ended September 30, 2008, compared to $542,000 for the same
period of fiscal 2007. The decrease in expenses was mainly due to the decrease
in indirect staff. The automobile and travel expenses were approximately
$203,100 for the nine month period ended September 30, 2008 compared to $220,900
for the same period of fiscal 2007. The decrease in balance was mainly due
to
the decrease in number of vehicles and less travel for the nine months ended
September 30, 2008.
Selling
expenses:
Selling
expenses were $739,400 or 2.0% of revenues for the nine month period ended
2008
compared to $580,800 or 2.0% of revenues for the same period of fiscal 2007.
Selling expenses were mainly related to the AC Technical segment. The balance
for the nine months ended September 30, 2008 is mainly comprised of
salaries and commission to salespersons of $399,800 compared to $361,100 for
the
same period of fiscal 2007. The increase was mainly due to the increase in
commission for the increase in revenue and the hiring of additional employees.
The advertising, promotion and trade show expenses were $91,300 for the nine
months ended September 30, 2008, and $74,200 for the same period of fiscal
2006.
There was no material fluctuation between the two periods.
General
and administrative costs:
General
and administrative costs were $8,783,300 or 23.5% of revenues for the nine
month
period ended September 30, 2008 compared to $4,145,400 or 14.5% for same period
of fiscal 2007. The balance for the nine month period ended September 30,
2008, is comprised of $466,900 of professional fees related to the preparation
of the quarterly reports and other corporate matters. The investor relations
expenses increased to $908,700 for the nine month period ended September 30,
2008, compared to $577,500 for the same period last year. Total salaries and
benefits to administrative staff increased to $4,668,900 for the nine month
period ended September 30, 2008 compared to $1,765,200 for the same period
last
year. The increase was mainly due to the increase in headcounts.
Depreciation
:
Total
depreciation of property plant and equipment was $1,847,300 for the nine months
ended September 30, 2008, compared to $1,210,300 for the same period of last
year. The increase was mainly due to the addition of vehicles.
Amortization
of Intangible Assets
:
Amortization of customer relationships and trade name was $568,600 compared
to
$450,000 for the same period last year.
Interest
and other Expenses (Income)
:
Interest and net other expenses for the nine months ended September 30, 2008,
of
$7,922,500 or 21.2% of revenues compared to net expenses of $1,223,400 or 4.3%
of the revenues for the same period of fiscal 2007. The balance for the current
period is primarily comprised of the amortization of deferred charges amounting
to $159,600 compared to $137,400 for the same period of fiscal 2007.
Additionally, net financing expenses increased to $6,419,800 or 17.2% of
revenues compared to $2,143,800 or 7.5% of revenues for the same period of
fiscal 2007. During the three months ended March 31, 2008, the Company entered
into two financing arrangements in which the Company has issued 2,030,865
warrants with a value of $3,723,600. The interest due with respect to the
Company’s credit facility was $1,052,500 for the nine months ended September 30,
2008 compared to $1,260,102 in the same period of 2007. The decrease in the
balance was due to the decrease in interest rate and outstanding payables of
the
term notes. During the third quarter of fiscal 2008, the Company sold common
stock of 180 Connect Inc. (see Note 3) for an aggregate of $5,623,900 and the
realized loss on the disposal of this investment was $822,900. There was no
such
balance in the same period of fiscal 2007. Additionally, the realized foreign
currency translation loss for nine months ended September 30, 2008 was $520,300
compared to foreign currency translation gain of $1,057,800 for the nine months
ended September 30, 2007. The balance was related to the foreign currency
translation of term notes (see Note 6).
Income
taxes
:
No
income tax was paid for the period ended September 30, 2008 which was mainly
due
to the Company’s losses carried forward to offset all income generated by the
Company. All prior taxes have already been accounted for in the income tax
recoverable and therefore, there is no additional provision for income taxes
recoverable and deferred tax asset.
Net
Income/Loss
:
Net
loss for the nine months ended September 30, 2008 was $12,664,800 compared
to net loss of $72,900 for the nine month period ended September 30, 2007.
The
Company’s operating loss was $4,742,200 for the nine months ended 2008 compared
to operating income of $1,150,500 for the same period of fiscal 2007. The loss
was primarily attributed to the financing transactions in January 2008 and
the
Company’s allocation of resources to grow the business in the United States.
Liquidity
and Capital Resources
Since
our
inception, we have financed our operations through bank debt, loans and equity
from our principals, loans from third parties and funds generated by our
business. At September 30, 2008, we had $5,625,200 in cash. We believe that
cash
from operations and our credit facilities with our banks will continue to be
adequate to satisfy the ongoing working capital needs of the Company. During
fiscal year 2008, our primary objectives in managing liquidity and cash flows
will be to ensure financial flexibility to support growth and entry into new
markets, improve inventory management and accelerate the collection of accounts
receivable.
Net
Cash Used in Operating Activities
:
Net
cash used in operating activities amounted to $2,352,200 for the nine months
ended September 30, 2008. The changes in operating assets and liabilities
resulted in net cash of $302,980, which included a $735,400 increase in accounts
receivable, a $7,900 increase in inventory, a $547,000 increase in prepaid
expenses, a $1,372,600 increase in accounts payable, a $177,800 increase in
income tax recoverable and a $43,000 increase in deferred revenue.
Comparison
of the balance sheet as at September 30, 2008 to December 31,
2007
Accounts
Receivable
Our
accounts receivable increased to $6,453,900 as at September 30, 2008 from
$6,187,600 as at December 31, 2007. Accounts receivable of the Cancable
segment was $4,523,400 as at September 30, 2008 compared to $3,989,100 as at
December 31, 2007. The increase in balance was mainly driven by the increase
in
revenue.
Accounts
receivable of the AC Technical segment was $1,746,800 as at September 30, 2008
compared to $2,083,200 as at December 31, 2007.
The
decrease in balance was mainly due to the timing of payments from our customers.
Inventory
Inventory
on
hand at
September 30, 2008 was $1,032,900 compared to $1,043,800 as at December 31,
2007. The inventory of the Cancable segment as at September 30, 2008 was
$398,400 compared to $363,600 as at December 31, 2007. There was no material
fluctuation from the fiscal year ended December 31, 2007. The inventory of
AC
Technical segment as at September 30, 2008 was $541,500 compared to $638,900
as
at December 31, 2007. The level of inventory was higher as at December 31,
2007
as we had purchased inventory close to year end required for work to be started
during the first quarter of 2008.
Accounts
Payable and Accrued Liabilities
Accounts
payable increased to approximately $6,879,700 as at September 30, 2008 from
$6,074,200 as at December 31, 2007. The increase was mainly due to the timing
of
payments to our suppliers and also the increase in our direct and indirect
expenses during the nine month period ended September 30, 2008.
Deferred
Revenue
Deferred
revenue increased to $125,000 as at September 30, 2008 compared to a balance
of
$91,900 as at December 31, 2007. This increase was mainly due to the timing
of
payments by our customers. Deferred revenue primarily relates to payments
associated with contracts in which revenue is recognized on a percentage of
completion basis.
Incomes
Taxes Recoverable
The
decrease in income taxes recoverable was mainly due to the Company’s receipt of
a refund from the Government relating to the losses carried back to prior years
and investment tax credits.
Net
Cash Used in Investing Activities
.
Net
cash used in by investing activities was $3,595,500 for the nine months ended
September 30, 2008, compared to $543,500 used for the nine months ended
September 30, 2007. As a result of the sale of the investment in July 2008,
the
Company received cash in the amount of $5,623,900. The total purchase of
property and equipment of the Company was $1,777,300 for the period ended
September
30, 2008
and
$660,700-for the period ended
September
30, 2007
.
Net
Cash Provided From Financing Activities
.
Net
cash provided by financing activities was $2,376,200 for the nine months ended
September 30, 2008 compared to net cash used of $1,485,900 for the nine months
ended September 30, 2007. Last year’s balance mainly represents the repayment of
capital leases and term notes in the amount of $1,703,500. The current year
balance represents net proceeds received from new banking facilities set up
with
a Canadian financial institution in the amount of $2,267,300. The balance was
offset with the repayment of term notes and capital leases in the amount of
$2,225,500. Additionally, the Company has issued a term loan to LV
Administrative Services, Inc. in the amount of $2,500,000 with total financing
cost of $167,380. Total net proceeds from this term loan were
$2,332,620.
Our
capital requirements have grown since our inception with the growth of our
operations and staffing. We expect our capital requirements to continue to
increase in the future as we seek to expand our operations. On September 30,
2004, we obtained funding through a series of agreements with Laurus. In 2006,
through our wholly owned subsidiary, we acquired all of the issued and
outstanding shares of capital stock and any other equity interests of Cancable.
Simultaneously, Cancable entered into a series of agreements with Laurus whereby
Cancable issued to Laurus a secured term note (the “Cancable Note”) in the
amount of $6,865,000. We completed a refinancing transaction with Laurus in
February 2006; we issued to Laurus a secured term note (the “Company Note”) in
the amount of $8,250,000 and Iview DSI issued to Laurus a secured term note
(the
“Iview Note”) in the amount of $2,000,000. Simultaneously with the closing of
this refinancing transaction, we paid off the entire outstanding principal
amount and all obligations due to Laurus under the Secured Convertible Term
Note
dated September 30, 2004, the Secured Convertible Minimum Borrowing Note dated
September 30, 2004 and the Secured Revolving Note dated September 30, 2004
(collectively, the “2004 Notes”) and such 2004 Notes were subsequently
cancelled.
In
September 2008, the Company and its subsidiary,
Cancable
Inc., entered into a financing transaction whereby the Company issued to Valens
Offshore SPV II, Corp. (“Valens Offshore”) and Valens U.S. SPV I, LLC (“Valens
U.S.”) secured term notes in the amount of $1,700,000 and $800,000, respectively
(collectively, the “Company Second Notes”). The Company also issued to Valens
Offshore and Valens U.S. warrants to purchase up to 1,333,333 and 627,451 shares
of common stock, respectively, of the Company with an exercise price of $0.01
per share. The loans are secured by all of the assets of the Company and all
its
subsidiaries.
Over
the
next twelve months we believe that our existing capital will be sufficient
to
sustain our operations. Management plans to seek additional capital in the
future to fund operations, growth and expansion through additional equity,
debt
financing or credit facilities. We have had early stage discussions with
investors about potential investment in our firm at a future date. No assurance
can be made that such financing would be available, and if available it may
take
either the form of debt or equity. In either case, the financing could have
a
negative impact on our financial condition and our shareholders.
Recent
Accounting Pronouncements
In
May
2008, the FASB issued FAS 163 (“FAS 163”), “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60
”.
This
Statement interprets Statement 60 and amends existing accounting pronouncements
to clarify their application to the financial guarantee insurance contracts
included within the scope of this Statement. FAS 163 is not expected to have
a
material impact on the Company’s consolidated financial statements.
In
May
2008, the FASB issued FAS 162 (“FAS 162”), “The Hierarchy of Generally Accepted
Accounting Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. Although this statement formalizes the
sources and hierarchy of GAAP within the authoritative accounting literature,
it
does not change the accounting principles that are already in place. This
statement will be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” FAS 162 is not expected to have a material impact on the Company’s
consolidated financial statements.
In
April
2008, the FASB issued FSP FAS 142-3,
Determination
of the Useful Life of Intangible Assets
(“FSP
FAS 142-3”). FSP FAS No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of
a recognized intangible asset under FAS 142,
Goodwill
and Other Intangible Assets
(“FAS
142”). The intent of FSP FAS 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under FAS 142 and the period of
expected cash flows used to measure the fair value of the asset under FAS 141(R)
and other applicable accounting literature. FSP FAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008 and must be applied prospectively to intangible assets acquired after
the
effective date. The Company has not determined the impact, if any, of the
adoption of FSP FAS 142-3.
Effective
January 1, 2008, we adopted the provisions of FAS 157,
Fair
Value Measurements,
except
as it applies to those nonfinancial assets and nonfinancial liabilities as
noted
in proposed FSP FAS 157-b. The partial adoption of FAS 157 did not have a
material impact on our consolidated financial position, results of operations
or
cash flows. FAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement does not require
any
new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the
information. In February 2008, the FASB issued FASB Staff Position (“FSP”)
157-2,
Effective Date of FASB Statement No. 157,
which
delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least
annually).
In
March
2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment
of
FASB Statement No. 133,
which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under FAS 133 and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on our
financial position, financial performance, and cash flows. FAS 161 is effective
for us beginning January 1, 2009. We are currently assessing the potential
impact that adoption of FAS 161 may have on our financial
statements.
Effective
January 1, 2008, we adopted the provisions of FAS 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
.
The
adoption did not have a material impact on our consolidated financial position,
results of operations or cash flows. FAS 159 gives us the irrevocable option
to
carry many financial assets and liabilities at fair values, with changes in
fair
value recognized in earnings.
In
December 2007, the FASB issued FAS 141R,
Business Combinations
,
which
replaces FAS 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising
from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. FAS 141R is effective for us beginning January 1, 2009
and will apply prospectively to business combinations completed on or after
that
date.
In
December 2007, the FASB issued FAS 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment
of
ARB No. 51,
which
changes the accounting and reporting for minority interests. Minority interests
will be re-characterized as non-controlling interests and will be reported
as a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted
for
as equity transactions. In addition, net income attributable to the
non-controlling interest will be included in consolidated net income on the
face
of the income statement and, upon a loss of control, the interest sold, as
well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. FAS 160 is effective for us beginning January 1, 2009
and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing
the
potential impact that adoption of FAS 160 may have on our financial
statements.
Off
Balance Sheet Arrangements
None
DISCUSSION
OF CRITICAL ACCOUNTING ESTIMATES
Critical
accounting estimates are those that management deems to be most important to
the
portrayal of our financial condition and results of operations, and that require
management’s most difficult, subjective or complex judgments, due to the need to
make estimates about the effects of matters that are inherently uncertain.
We
have identified six critical accounting estimates: accounts receivable
allowances, goodwill, revenue, inventory, accounting for income taxes and
financial instruments. See our Form 10-K for the year ended December 31, 2007,
for a discussion of our critical accounting estimates.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
quarterly report contains forward-looking statements about our company that
are
not historical facts but, rather, are statements about future expectations.
When
used in this document, the words “anticipates,” “believes,” “expects,”
“intends,” “should” and similar expressions as they relate to us, or to our
management, are intended to identify forward-looking statements. However,
forward-looking statements in this document are based on management’s current
views and assumptions and may be influenced by factors that could cause actual
results, performance or events to be materially different from those projected.
These forward-looking statements are subject to numerous risks and
uncertainties. Important factors, some of which are beyond our control, could
cause actual results, performance or events to differ materially from those
in
the forward-looking statements. These factors include impact of general economic
conditions in North America, changes in laws and regulations, fluctuation in
interest rates and access to capital markets.
Our
actual results or performance could differ materially from those expressed
in,
or implied by, these forward-looking statements and, accordingly, we cannot
predict whether any of the events anticipated by the forward-looking statements
will transpire or occur, or if any of them do, what impact they will have on
our
results of operations and financial condition.
For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in our December 31, 2007, Annual Report
on
Form 10-K under the caption “Risk Factors.”
You
should not place undue reliance on any forward-looking statements. Except as
otherwise required by federal securities laws, we undertake no obligation to
publicly update or revise any forward-looking statements or risk factors,
whether as a result of new information, future events, changed circumstances
or
any other reason after the date of this quarterly report.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
This
item
is not applicable to the Company because we are a smaller reporting
company.
Item
4.
Controls
and Procedures
We
maintain a system of disclosure controls and procedures, as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed
to
provide reasonable assurance that information required to be disclosed by us
in
the reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosures.
We
have
carried out an evaluation under the supervision and with the participation
of
the Company’s management, including the Company’s Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the des
ign
and
operation of our disclosure controls and procedures. Based upon their evaluation
and subject to the foregoing
,
the
Chief Executive Officer and Chief Financial Officer concluded that such controls
and procedures were effective as of the end of the period covered by this
report, in all material respects, to ensure that required information will
be
disclosed on a timely basis in our reports filed under the Exchange
Act.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply their judgment
in evaluating the cost-benefit relationship of
possible
controls and procedures.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2008, that have materially affected,
or
are reasonably likely to materially affect our internal control over financial
reporting.
PART
II.
OTHER
INFORMATION
Item
1.
Legal
Proceedings
Not
applicable.
Item
1A.
Risk
Factors
This
item
is not applicable to the Company because we are a smaller reporting
company.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
Not
applicable.
Item
3.
Defaults
upon Senior Securities
Not
applicable.
Item
4.
Submission
of Matters to a Vote of Security Holders
Not
applicable.
Item
5.
Other
Information
Not
applicable.
Item
6.
Exhibits
(a)
Exhibits
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
|
Chief
Executive Officer certification pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
|
Chief
Financial Officer certification pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
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.
CREATIVE
VISTAS, INC.
|
|
By:
|
/s/
Dominic Burns
|
|
|
Dominic
Burns, President and Chief
Executive
Officer
|
Dated:
November 14, 2008
|
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