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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2005
- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period ________________ to
_______________ .
COMMISSION FILE NUMBER: 033-07456-LA
SECURAC CORP.
(Exact name of registrant as specified in its charter)
Nevada 88-0210214
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2500, 520 - 5th Avenue S.W., Calgary, Alberta T2P 3R7
Canada
(Address of principal executive offices) (Zip Code)
(403) 225-0403
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Check whether the issuer (1) filed all reports required to Yes |X| No |_|
be filed by Section 13 or 15(d) of the Exchange Act during
the past 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.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 49,392,521
Transitional Small Business Disclosure Format: Yes |_| No |X|
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INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................1
Item 2. Management's Discussion and Analysis or Plan of Operations......7
Item 3. Controls and Procedures........................................13
PART II - OTHER INFORMATION
Item 5. Other Information..............................................13
Item 6. Exhibits.......................................................14
-i-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURAC CORP.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
ASSETS
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 73,515 $ 254,860
Accounts receivable, net 221,235 332,006
Advances and other receivables 59,512 56,385
Due from related company 7,467 --
Prepaid expenses and deposits 23,931 25,216
----------- -----------
Total Current Assets 385,661 668,467
----------- -----------
PROPERTY AND EQUIPMENT, net 49,151 51,096
----------- -----------
OTHER ASSETS
Intellectual property (Note 4) 2,839,694 --
Goodwill 91,000 91,000
----------- -----------
Total Other Assets 2,930,694 91,000
----------- -----------
TOTAL ASSETS $ 3,365,505 $ 810,563
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-1-
SECURAC CORP
Consolidated Balance Sheets (Continued)
(Expressed in Canadian Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 807,531 $ 561,646
Accrued liabilities 83,035 122,315
Deferred revenue 33,625 34,657
Current portion of obligation under capital leases 3,286 5,088
Due to related company 23,346 200,022
Notes payable 524,056 280,596
----------- -----------
Total Current Liabilities 1,474,879 1,204,324
----------- -----------
LONG-TERM DEBT
Obligations under capital leases 6,379 6,379
----------- -----------
Total Long-Term Debt 6,379 6,379
----------- -----------
Total Liabilities 1,481,258 1,210,703
----------- -----------
STOCKHOLDERS' EQUITY
Common stock , USD par value $0.01 per share (average
of $0.015 CDN par value); 200,000,000 shares
authorized, 46,965,366 and 43,546,990 shares issued
and outstanding, respectively 700,778 658,478
Additional paid-in capital 9,121,449 4,911,558
Subscriptions receivable (561,189) (617,708)
Other comprehensive loss (50,316) (59,470)
Accumulated deficit (7,326,476) (5,292,998)
----------- -----------
Total Stockholders' Equity 1,884,247 (400,140)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 3,365,505 $ 810,563
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
SECURAC CORP.
Consolidated Statements of Operations
(Unaudited)
(Expressed in Canadian Dollars)
For the
Three Months Ended
March 31,
----------------------------
Securac Inc.
2005 2004
------------ ------------
REVENUES
License fees $ 12,700 $ 7,250
Professional service fees 172,799 133,661
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Total Revenue 185,499 140,911
COST OF SALES 179,769 92,028
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GROSS MARGIN 5,730 48,883
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OPERATING EXPENSES
General and administrative 305,946 170,237
Sales, marketing and investor relations 613,429 51,887
Research and development 407,563 124,011
Stock-based compensation 706,186 --
Amortization and depreciation 3,313 4,339
------------ ------------
Total Operating Expenses 2,036,437 350,474
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LOSS FROM OPERATIONS (2,030,707) (301,591)
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OTHER INCOME (EXPENSE)
Interest expense (2,771) (2,574)
------------ ------------
Total Other Income (Expense) (2,771) (2,574)
------------ ------------
NET LOSS $ (2,033,478) $ (304,165)
============ ============
BASIC LOSS PER COMMON SHARE $ (0.04) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 46,119,429 34,593,380
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
SECURAC CORP.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in Canadian Dollars)
For the Three Months Ended
March 31,
--------------------------
Securac Inc.
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,033,478) $ (304,165)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 3,313 4,339
Common stock issued for services rendered 706,186 --
Fair value of options and warrants 113,763 --
Changes in operating assets and liabilities:
Accounts receivable 110,771 (12,675)
Advances and other receivables (3,127) (6,023)
Prepaid expenses and deposits 1,285 12,414
Deferred revenue (1,032) --
Accounts payable and accrued liabilities 175,808 (80,647)
----------- -----------
Net Cash (Used in) Operating Activities (926,511) (386,757)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds to related party receivables (7,467) --
Purchases of property and equipment (1,367) --
----------- -----------
Net Cash Used in Investing Activities (8,834) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable 243,460 100,000
Payments on capital leases (1,802) (799)
Proceeds from issuance of common stock 434,030 330,003
Cash received on subscriptions receivable 69,158 --
----------- -----------
Net Cash Provided by Financing Activities 744,846 429,204
----------- -----------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 9,154 --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (181,345) 42,447
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 254,860 34,678
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,515 $ 77,125
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 2,771 $ 2,574
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES
Common stock issued for services rendered $ 706,186 $ --
Common stock issued for retirement of payables $ 145,879 $ --
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
SECURAC CORP. AND SUBSIDIARIES
Notes to the Condensed Financial Statements
(unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed financial statements have
been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with such
rules and regulations. The information furnished in the interim
condensed financial statements includes normal recurring
adjustments and reflects all adjustments, which, in the opinion of
management, are necessary for a fair presentation of such
financial statements. Although management believes the disclosures
and information presented are adequate to make the information not
misleading, it is suggested that these interim condensed financial
statements be read in conjunction with the Company's audited
financial statements and notes thereto included in its Annual
Report on Form 10-KSB for the year ended December 31, 2004.
Operating results for the three months ended March 31, 2005 are
not necessarily indicative of the results that may be expected for
the year ending December 31, 2005.
NOTE 2 - LOSS PER SHARE
Following is a reconciliation of the loss per share for the three
months ended March 31, 2005 and 2004:
For the
Three Months Ended
March 31,
-------------------------------
Securac Inc.
2005 2004
--------------- ------------
Net (loss) available to
common shareholders $ (2,033,478) $ (304,165)
=============== ============
Weighted average shares 46,119,429 34,593,380
=============== ============
Basic loss per share (based
on weighted average
shares) $ (0.04) $ (0.01)
=============== ============
Weighted average shares issuable upon the exercise of stock
options and warrants were not included in the foregoing
calculations because they are antidilutive.
-5-
SECURAC CORP. AND SUBSIDIARIES
Notes to the Condensed Financial Statements
(unaudited)
NOTE 3 - GOING CONCERN
The Company's consolidated financial statements are prepared using
generally accepted accounting principles applicable to a going
concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The
Company has historically incurred significant losses which have
resulted at March 31, 2005 in an accumulated deficit of
$7,326,477, a working capital deficit of approximately $1,089,000,
and limited internal financial resources. These factors combined,
raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result from
the outcome of this uncertainty. It is the intent of management to
raise additional equity capital and increase revenues and reduce
costs to sustain operations.
NOTE 4 - MATERIAL EVENTS
On January 6, 2005, the Company acquired all of the outstanding
stock of Risk Governance, Inc., a private Delaware corporation
("RGI"), in exchange for 2,295,444 shares of common stock of the
Company valued at $2,839,694, or $1.24 per share (based on the
market price of the common shares on the date of acquisition). The
transaction was effected pursuant to a share purchase agreement
entered into on the same date by the Company with the shareholders
of RGI. As a result of the acquisition, RGI is now a wholly-owned
subsidiary of the Company. As part of this transaction, the
Company recorded intellectual property of $2,839,694, as described
in the next paragraph.
The principal asset acquired through the acquisition of RGI is a
license to certain corporate governance software technology owned
and developed by Risk Governance Ltd., a United Kingdom company
under common ownership with RGI prior to the acquisition ("RGL").
The license gives RGI the right to commercialize applications of
the software technology on an exclusive basis in North America in
exchange for royalty payments to RGL. Contemporaneous with and as
a condition to the acquisition of RGI, Securac Holdings Inc., a
private Alberta corporation ("Holdings") from which Securac Corp.
licenses its Acertus(TM) software technology from Holding's
wholly-owned subsidiary, Securac Technologies, Inc., acquired all
of the outstanding stock of RGL in exchange for an equity interest
in Holdings. Holdings is controlled and substantially owned by
three members of management and beneficiaries of principal
shareholders of the Company.
On January 21, 2005, the Company filed a Form S-8 registration
statement with the Securities and Exchange Commission to register
a total of 6,343,288 shares of common stock pursuant to a 2004
Incentive Stock Plan.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion includes statements that are forward-looking in nature.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect our business and operations. Certain of these factors
are discussed in this report and in "Item 1. Business Description -Factors That
May Affect Future Results of Our Business" in our Annual Report on Form 10-KSB
for the year ended December 31, 2004. Words such as "anticipates", "plans",
"intends", "expects" and similar expressions are intended to identify such
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Unless otherwise stated, all references to dollars herein are to Canadian
dollars.
REVERSE TAKEOVER OF APPLEWOOD'S RESTAURANTS, INC.
In September 2004, Securac Inc.'s shareholders entered into share exchange
agreements with Applewood's Restaurants, Inc. ("Applewood's"). On October 19,
2004, Securac Inc. ("Inc.") consummated a Share Exchange with Securac Corp.
("Corp." - formerly Applewood's Restaurants, Inc.) pursuant to which Corp.
issued 2.7 shares of common stock in exchange for each issued common share of
Inc. held by its shareholders. Corp. issued a total of 37,246,289 shares of
common stock. In connection with the Share Exchange, Corp. assumed warrants held
by investors in Inc., which warrants will now entitle the holders to purchase an
aggregate of 2,970,000 shares of common stock of Corp. at any time until July
16, 2006 at an exercise price of US$0.75 per share. As the number of shares
issued in the Share Exchange by Corp. to the shareholders in Inc. represented
approximately 90% of the outstanding common stock of Corp. after issuance, the
transaction has been accounted for as a reverse takeover of Corp. by the
shareholders of Inc. In connection with and as a condition to the Share
Exchange, Corp. completed a one-for-fifteen reverse split of its outstanding
shares of common stock effective October 21, 2004. All share and per share
information referred to herein reflect the reverse split.
The attached Financial Statements for the first quarter ended March 31, 2004
(unaudited) do not reflect the consolidation of Inc. and Applewood's
Restaurants, Inc. however, the attached Financial Statements for the first
quarter ended March 31, 2005 (unaudited) give effect to the transaction.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis or Plan of Operations is based upon our
Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant estimates and assumptions used in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
Risk Management, Compliance, and Governance Software Products - Our software
products are licensed to our clients under the terms of our End User Enterprise
License Agreement and Order Form, whereby consideration in the form of License
fees are based on a subscription for a fixed term. Since the grant of the
License is irrevocable and the License fee is non-refundable prior to the expiry
of the fixed term, the License Fees are recorded as earned revenues when we
invoice the client pursuant to the Order Form. Maintenance fees are initially
deferred as unearned revenues and ratably recognized over the maintenance term.
Implementation and professional services fees are recorded as earned, generally
on a time and materials basis. The timing and certain methods of recognizing
revenues require management to make estimates with respect to costs incurred,
milestones reached and other factors.
-7-
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We evaluate the collectability of our trade receivables on a combination of
factors. When we become aware of a specific customer's inability to meet its
financial obligation to us, such as in the case of bankruptcy filings or
deterioration in the customer's financial position, we record a specific reserve
for bad debt to reduce the related receivable to the amount we reasonably
believe is collectible. We also record reserves for bad debt for all other
customers based on a variety of factors, including the length of time the
receivables are past due and historical experience. If circumstances related to
specific customers change, our estimates of the recoverability of receivables
could be further adjusted.
INCENTIVE COMPENSATION
Annual incentive bonuses are a significant part of Securac's compensation
philosophy. These cash and stock option bonuses are generally tied to achieving
certain firm-wide financial metrics and department level objectives. We
generally accrue estimated annual cash bonus costs evenly over the fiscal year,
with certain quarterly adjustments related to terminations and hiring and
changes in expected financial or operational results. Incentive bonuses related
to any fiscal year are generally paid on March 31 following the fiscal year end.
In September 2003, the CICA issued CICA 3870 revised transitional provisions for
"Stock-Based Compensation and Other Stock-Based Payments". This Section requires
fair value based method of accounting for stock-based compensation and other
stock-based payments. The recommendations of this Section have been applied
retroactively commencing in the fiscal year beginning January 1, 2004 of the
Company.
INVESTMENT TAX CREDITS
Investment tax credits, which are earned as a result of qualifying research and
development expenditures, are recognized when the expenditures are made and
their realization is reasonably assured, and are applied to reduce related costs
and expenses in the year.
INCOME TAXES
Income taxes are provided for using the liability method whereby future tax
assets and liabilities are recognized using current tax rates on the difference
between the financial statement carrying amounts and the respective tax basis of
the assets and liabilities. The Company provides a valuation allowance on future
tax assets when it is more likely than not that such assets will not be
realized.
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed as incurred. Development costs are also generally
expensed as incurred unless such costs meet the criteria necessary for deferral
and amortization. To qualify for deferral, the costs must relate to a
technically feasible, identifiable product that the Company intends to produce
and market, there must be a clearly defined market for the product and Company
must have the resources, or access to the resources, necessary to complete the
development. The Company has not deferred any development costs to date.
USE OF ESTIMATES
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
-8-
RESULTS OF OPERATIONS
The following table sets forth our statements of operations data for the periods
indicated. Historical financials are stated in Canadian dollars, as unaudited:
(unaudited)
For the Three Months Ended
March 31,
----------------------------
Securac Inc.
2005 2004
------------ ------------
Revenue
License fees .......................... $ 12,700 $ 7,250
Professional Service Fees ............. 172,799 133,661
Cost of Sales ............................ 179,769 92,028
------------ ------------
Gross Profit ............................. 5,730 48,883
Operating Expenses
General and administrative ............ 305,946 142,472
Sales, marketing and investor relations 613,429 51,887
Research and development .............. 407,563 124,011
Professional fees ..................... -- --
Stock based compensation .............. 706,186 --
Amortization and depreciation ......... 3,313 4,339
------------ ------------
Loss from operations ..................... (2,030,707) (273,826)
Other income (expense) ................... (2,771) (2,574)
Net loss ................................. (2,033,478) (276,400)
Net loss per share:
Total shares outstanding .............. 46,119,429 34,593,380
Net loss per share .................... ($ 0.04) ($ 0.01)
COMPARISON OF QUARTERS ENDED MARCH 31, 2005 AND 2004
OVERVIEW
With our corporate reorganization and reverse merger transaction completed in
fiscal 2004, during the first quarter of 2005 we focused investment in marketing
and pre-sales activities and continued investment in ongoing development and
support of our software. While these initiatives resulted in a loss in the first
quarter of 2005, the corresponding revenue is expected to be realized in the
second, third, and fourth quarters of fiscal 2005, resulting in anticipated
improved financial performance by year end.
Our strategy resulted in a series of stock based transactions having a
materially unfavourable impact on our operating expenses. Stock based
compensation totaling $706,186 has been presented as an individual line item due
to its unusual nature. The foregoing transactions resulted in an unusually high
net loss for the first quarter of 2005; however our prospects for the year end
are more positive. First, we expect Stock-based compensation to be significantly
lower as the fair market value of our shares has begun to stabilize with our
continuous disclosure since the reverse merger, and as we attempt to issue all
warrants and options equal to, or greater than fair market value, thus reducing
the expense of the Black-Scholes option pricing model. Second, we have been
recognizing a known trend in our market where the demand for GRC software
products has been spurred by the unprecedented additional compliance
requirements of the Sarbanes-Oxley Act of 2002 on all publicly-owned U.S.
companies. Our increased sales and marketing activities, along with this
recognizable trend substantiates our belief that our Acertus(TM) product suite
has gained significant visibility in the risk/compliance software market, and
has resulted in increased levels of sales opportunities. As of March 31, 2005,
we estimated a forward pipeline of potential software sales and services of
approximately $7M that will potentially close by year end. With the anticipated
-9-
further expansion of our revenues through both direct sales and strategic
channel partners, we believe we should be able to continue our present growth
trajectory and either breakeven or realize net income in 2005.
REVENUE
First quarter revenue of $185,499 increased by $44,588, or 24%, compared with
$140,911 in the comparable period in 2004. The increase is due primarily to
growth in professional services to new and existing customers. Revenue from our
business consists of annual subscription based License Fees to our risk
management, governance and compliance software products. Our licensing revenue
is augmented with related revenue in annual maintenance, installation, training
and professional services.
License Fees - This form of licensing allows customers to pay a minimum two-year
subscription fee based on the number of users (many cases) tied to a server. We
generally bill and collect these fees upon receipt of the Order Form and
recognize the income when we invoice the client because the grant of the license
is irrevocable and the License Fee is non-refundable prior to the expiry of the
fixed term. As matter of policy, we book our Licensing Fees revenue to the
extent possible in US dollars. The growth in License Fees continues to be
generated from our accelerated marketing and sales strategy aimed at obtaining
new clients through direct sales and channel partners.
For the first quarter of 2005 compared to 2004, License Fee revenue increased
from $7,250 to $12,700 representing the sale of a project based Acertus(TM)
License Fee to a Canadian chartered bank through one of our channel partners.
This License was sold under a pilot project program that will potentially lead
to a full enterprise license upon successful completion of the project.
Annual Maintenance - Our customers pay a separate Annual Maintenance Fee based
on our cost to provide knowledge database updates, version point updates,
enhancements, access to the user community and Tier 1-2 telephone support. We
bill and collect these fees upon receipt of the Order Form and record the entire
amount of the Annual Maintenance Fee in deferred revenue. As we deliver to the
client our Annual Maintenance throughout the term of the subscription, we
recognize the associated revenue on a straight-line basis. In the first quarter
of 2004 and 2005, no Annual Maintenance Fees were invoiced or collected based on
the project based nature of the licensing.
Installation and Training Fees - Installation and Training Fees are revenues
related to services in connection with software installations. Installation and
Training Fees are recorded as earned, generally on a time and materials basis.
The timing of the recording of Installation Fees is governed by the terms of the
implementation contracts and other factors that can cause significant variations
from year to year. Installation and training amounted to nil in the first
quarter of 2004 and 2005 as it was not required under our sales arrangements.
Professional Services - Professional Services revenue is derived from clients
who require risk management assessments, compliance assessments, and assistance
in integrating a risk management and governance framework into their
organizations. These fees are recorded as earned, generally on a time and
materials basis. The timing of the recording of installation fees is governed by
the terms of the professional services contracts and other factors that can
cause significant variations from year to year. Professional Services revenues
increased to $172,799 in the first quarter of 2005 through an extension of a
contract with a major client compared to $133,661 in the same period ended in
2004.
COST OF SALES
Cost of sales increased from $92,038 in the first quarter of 2004 to $179,769 in
2005 representing the direct labour cost to Securac in carrying out its
professional services activities. It is important to note here that in the last
quarter of 2004, there was a deferment of $78,503 that was invoiced to us by a
subcontractor in January, 2005 and subsequently recorded this quarter resulting
in abnormally higher cost of sales and lower margin. We do not anticipate this
happening again in the foreseeable future.
EXPENSES
General and Administrative- General and Administrative expenses ("G&A") consist
of management and administrative salaries and benefits, insurance, software and
data costs, computer leasing, rent, legal and related expenses required to
-10-
support our R&D, sales, and marketing initiatives. G&A increased to $305,946 in
the first quarter of 2005 from $142,472 in the same period in 2004 reflecting
the increase of operational activity associated with growing our business from
straight R&D activities to full commercialization.
Sales, Marketing, and Investor Relations - These expenses increased to $613,429
in the first quarter of 2005 from $51,887 in the same period in 2004. This
increase represents the travel, meals, and legal expenditures related to our
private placement equity financing and our increased our sales and marketing
activities as we expanded into the United States.
Research and Development - Research and Development expenses ("R&D") are
expensed as incurred unless such costs meet the criteria necessary for deferral
and amortization. To qualify for deferral, the costs must relate to a
technically feasible, identifiable product that we intend to produce and market,
there must be a clearly defined market for the product and we must have the
resources, or access to the resources, necessary to complete the development. We
have not deferred any development costs to date. Pursuant to our reorganization
in March, 2004, our R&D are conducted through Securac Technologies Inc., a
privately-owned company that is owned and controlled by Messrs. Allen, Hookham
and Mitchell, and which is considered a Canadian Controlled Private Corporation
("CCPC") for Canadian tax purposes. While we pay for the R&D activities incurred
by the CCPC, the costs are significantly less than if the R&D activities were
incurred directly within the Company, due to the qualification of a CCPC for
investment tax credits and research grants that would not otherwise be available
to a U.S. publicly traded entity. All intellectual property developed by the
CCPC is owned by the CCPC and licensed to us on an exclusive basis for
commercialization in North America. The right to commercialize outside of North
America is retained by the CCPC.
R&D expenses increased substantially in the first quarter of 2005 to $407,563
from $124,011 in the same period in 2004 as the headcount increased as a result
of internalizing our research, development and testing staff and completing our
outsourced programming initiative. The research and development efforts are
focused on improving and enhancing existing solution offerings as well as
developing new solutions. The research and development organization
responsibilities include product management, product development, and software
maintenance and solution release management.
Stock Based Compensation - Since Securac did not have a stock based compensation
plan in the first quarter of 2004, no expenditures were incurred. In the first
quarter of 2005, we issued 42,800 shares to two individuals that provided
services on our insurance industry advisory board and 114,400 shares to a
consultant to settle a debt owing, all at a price of US$0.75 per share.
Notwithstanding the issuance price agreed to between the parties, we are
obligated to report the expenditure based on the actual closing price at the
time, which has resulted in an additional expense of $145,351. Subsequently, the
Company issued 300,000 shares to a consultant in connection with a statement of
work whereby he will provide marketing and investor relations services to the
company for a period of one year. These shares were deemed to be issued at the
closing price at the time of grant, US$1.50 per common share, resulting in a
charge to Stock Based Compensation in the amount of $560,835.
Amortization and Depreciation - This consists of the depreciation of computer
equipment and capital assets. In the first quarter of 2005 we recorded $3,313
compared to $4,339 in the same period last year
FOREIGN CURRENCY
We realize a significant portion of our revenue in U.S. dollars. At present,
there is no policy in place to manage foreign currency risk.
-11-
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our summarized balance sheet data represented by items
in our consolidated balance sheet as of March 31, 2005:
As of
BALANCE SHEET DATA: March 31, 2005
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Cash and cash equivalents................................ $ 73,515
Accounts receivable...................................... 288,214
Prepaids................................................. 23,931
Property and equipment................................... 49,151
Goodwill and intellectual property....................... 2,930,694
Total assets............................................. 3,365,505
Total liabilities........................................ 1,481,258
Total shareholders equity (deficiency)................... 1,884,247
As of March 31, 2005, we had a working capital deficit of $1,089,218 and an
accumulated deficit of $7,326,476. We have incurred operating losses since
inception. Our activities have been funded principally through equity and debt
financings.
We expect to continue to invest significantly in our organization to intensify
our marketing and sales efforts, enhance current services and expand our service
offerings. We also plan to hire additional people in certain areas of our
company in order to support our business and promote and sell our services. In
addition, we expect to continue to incur significant fixed and other costs
associated with supporting our channel partners and with the implementation and
support of our software applications, for our customers. As a result of all of
these factors, to achieve operating profitability on a consistent basis,
excluding non-cash charges, we will need to increase our customer base, increase
our revenue, decrease our overall costs of providing services, including the
costs of our licensed technology and our operations.
Our existing cash resources, together with anticipated funds from operations,
are insufficient to fund our planned operations during the next 12 months. As a
result, we are dependent upon receipt of proceeds from additional equity and/or
debt financings to continue our plan of operations. We do not presently have
commitments from funding sources sufficient to satisfy our needs. There can be
no assurance that any financing will be available on terms satisfactory to the
Company or at all. If we are unable to secure additional funding as and when
needed, we may be forced to scale back the level and scope of our planned
operations.
PRINCIPAL FINANCIAL COMMITMENTS
As of March 31, 2005, our principal financial commitments consisted of trade
payables, obligations under capital leases, contracts for office facilities, and
notes payable to unrelated parties consisting of (a) $100,000 owing to the
vendors of Brycol Consulting Ltd. that is non-interest bearing, unsecured and to
be paid over 12 months commencing April 1, 2005; (b) $243,460 owing to
Generation Capital Associates that is jointly and severably secured with
personal guarantees of three directors at a term interest rate of 6% until the
maturity date of May 31, 2005; and (c) $100,000 owed to a former employee at an
annual interest rate of 12% to be repaid in equal $20,000 instalments beginning
April 29, 2005.
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ITEM 3. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer, after evaluating the
effectiveness of our company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e);
collectively, "Disclosure Controls") as of the end of the period covered by this
quarterly report (the "Evaluation Date") have concluded that as of the
Evaluation Date, our Disclosure Controls were effective to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified by the SEC, and that
material information relating to our company and any consolidated subsidiaries
is made known to management, including the chief executive officer and chief
financial officer, particularly during the period when our periodic reports are
being prepared to allow timely decisions regarding required disclosure.
In connection with the evaluation referred to in the foregoing paragraph, we
have identified no change in our internal control of financial reporting that
occurred during the quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and chief financial
officer, does not expect that our Disclosure Controls or our internal control
over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
(a) Effective March 30, 2005, we borrowed US$200,000 from Generation
Capital Associates, in exchange for which we issued a promissory
note for the full principal amount to the lender. The promissory
note bears interest at 6% per annum. Principal and interest are
payable on the earlier to occur of 60 days from the date of the note
or the date on which we receive US$200,000 in proceeds from an
existing unfunded subscription for our common stock. The promissory
note is jointly and severally guaranteed by three of our directors
and executive officers, Messrs. Terry Allen, Paul Hookham and Bryce
Mitchell, who are also beneficiaries of our principal stockholders.
(b) None.
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ITEM 6. EXHIBITS
Exhibit No. Description
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10.1 Exclusive License Distribution Agreement dated October 10,
2003 between Risk Governance Ltd. and Risk Governance, Inc.
10.2 Promissory Note dated March 30, 2005 granted in favour of
Generation Capital Associates by Securac Corp. and jointly and
severally guaranteed by Messrs. T.W. Allen, P. Hookham and B.
Mitchell, including individual guarantees.
31.1 Certification of Principal Executive Officer pursuant to
Exchange Act Rule 13a-14(a)
31.2 Certification of Principal Financial Officer pursuant to
Exchange Act Rule 13a-14(a)
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SECURAC CORP.
(Registrant)
By: /s/ Paul James Hookham
--------------------------
Paul James Hookham
Chief Financial Officer
Treasurer and Secretary
Dated: May 23, 2005
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