================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-KSB/A
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 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 Canada T2P 3R7
(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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The registrant's revenue for the year ended December 31, 2005 was CDN
$1,365,844.
The aggregate market value of the common equity held by non-affiliates of the
registrant as of May 12, 2006 was approximately $6 million.
As of May 12, 2006, 52,565,565 shares of Common Stock, $.01 par value, of the
registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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EXPLANATORY NOTE
This Amendment is being filed primarily to (i) correct the date of the Auditor's
Report found on Page F-2, as well as the date of such report referenced in
Exhibit 23.2 - Consent of Independent Auditor, (ii) include the warrant summary
tables in Note 14 of the Notes to the Financial Statements, and (iii) correct
the table in Part III. Item 11 under the caption Securities Authorized for
Issuance Under Equity Compensation Plans.
-i-
Item 7. Financial Statements.
The Index to Financial Statements appears on page F-1, the Report of the
Independent Registered Public Accounting Firm appears on page F-2, and the
Financial Statements and Notes to Financial Statements appear on pages F-4 to
F-25.
-2-
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table summarizes certain information as of May 12, 2006 with
respect to the beneficial ownership of our Common Stock by (i) each director and
named executive officer, (ii)all officers and directors as a group and (iii)
each other person known by us to be the beneficial owner of more than 5% of our
Common Stock. The term "named executive officer" refers to our chief executive
officer and each of our other four most highly compensated executive officers
whose annual salary and bonus for 2005 exceeded $100,000. Unless otherwise
indicated, the address for each person set forth in the table is the address of
our Company, 2500, 520 - 5th Avenue SW, Calgary, Alberta T2P 3R7, Canada.
----------------------------------------------------------------------------------------------------------------------------
Name of Beneficial Owner Amount And Nature of Beneficial Ownership Percent of Ownership
----------------------------------------------------------------------------------------------------------------------------
Plantagenet Trust(1) 3,789,550 7.21%
----------------------------------------------------------------------------------------------------------------------------
Kingsnorth Trust(2) 3,789,553 7.21%
----------------------------------------------------------------------------------------------------------------------------
Bayeux Trust(3) 3,742,300 7.12%
----------------------------------------------------------------------------------------------------------------------------
Mercia Trust(4) 3,742,303 7.12%
----------------------------------------------------------------------------------------------------------------------------
Swansea Trust(5) 3,122,650 5.94%
----------------------------------------------------------------------------------------------------------------------------
Hexham Trust(6) 3,122,653 5.94%
----------------------------------------------------------------------------------------------------------------------------
Hisahiro Kashida 4,860,000(7) 9.25%
2-11-24 Ebisu-nishi Shibuya-Ku, Tokyo,
156-0021 Japan
----------------------------------------------------------------------------------------------------------------------------
All Directors and Officers as a group 0(8) 0.0%
(4 persons)
----------------------------------------------------------------------------------------------------------------------------
(1) Paul James Hookham, an executive officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Hookham does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the
Plantagenet Trust is Plantagenet Holdings Ltd. which is controlled by
Codan Trustees (B.V.I.) Ltd. and our address is PO Box 3140, Romasco
Place, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands
(2) Paul James Hookham, an executive officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Hookham does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the Kingsnorth
Trust is Kingsnorth Ltd. which is controlled by Codan Trustees (B.V.I.)
Ltd. and our address is PO Box 3140, Romasco Place, Wickhams Cay 1, Road
Town, Tortola, British Virgin Islands.
(3) Bryce R. Mitchell, an officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Mitchell does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the Bayeux
Trust is Bayeux Holdings Ltd. which is controlled by Codan Trustees
(B.V.I.) Ltd. and our address is PO Box 3140, Romasco Place, Wickhams Cay
1, Road Town, Tortola, British Virgin Islands.
(4) Bryce R. Mitchell, an officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Mitchell does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the Mercia
Trust is Mercia Ltd. which is controlled by Codan Trustees (B.V.I.) Ltd.
and our address is PO Box 3140, Romasco Place, Wickhams Cay 1, Road Town,
Tortola, British Virgin Islands.
(5) Terry W. Allen, an executive officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Allen does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the Swansea
Trust is Swansea Holdings Ltd. which is controlled by Codan Trustees
(B.V.I.) Ltd. and our address is PO Box 3140, Romasco Place, Wickhams Cay
1, Road Town, Tortola, British Virgin Islands.
(6) Terry W. Allen, an executive officer and director of our company, is a
beneficiary of the shares held by this trust. Mr. Allen does not have
investment or voting power with respect to such shares and, accordingly,
is not deemed to beneficially own the shares within the meaning of the
Securities Exchange Act of 1934, as amended. The Trustee of the Hexham
Trust is Hexham Holdings Ltd. which is controlled by Codan Trustees
(B.V.I.) Ltd. and our address is PO Box 3140, Romasco Place, Wickhams Cay
1, Road Town, Tortola, British Virgin Islands.
(7) This amount includes 2,430,000 shares underlying outstanding and
exercisable warrants exercisable until July 16, 2006 at US$0.75 per share.
(8) Includes no shares of common stock and no shares of common stock issuable
upon options that are currently exercisable or will become exercisable in
the next 60 days.
-3-
Securities Authorized for Issuance under Equity Compensation Plans.
The following table sets forth certain information with respect to securities
authorized for issuance under equity compensation pans as of December 31, 2005.
-------------------------- ---------------------------- ------------------------ ------------------------------------
Number of securities remaining
Number of Securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation plan
outstanding options, outstanding options, (excluding securities reflected in
Plan Category warrants and rights warrants and rights Column (a))
-------------------------- ---------------------------- ------------------------ ------------------------------------
(a) (b) (c)
-------------------------- ---------------------------- ------------------------ ------------------------------------
Equity compensation 1,747,750 $0.65 4,494,538
plans approved by
security holders
-------------------------- ---------------------------- ------------------------ ------------------------------------
Equity compensation - - -
plans not approved by
security holders
-------------------------- ---------------------------- ------------------------ ------------------------------------
Total 1,747,750 4,494,538
-------------------------- ---------------------------- ------------------------ ------------------------------------
Item 13. Exhibits
The following exhibits are filed with this Registration Statement:
Exhibit
No. Description
----- -----------
2.1 Form of Share Exchange Letter dated September 2, 2004 between Securac
Inc. and each of the shareholders of Risk Governance, Inc. (1)
2.2 Asset Purchase Agreement dated August 17, 2004 between Securac Inc.,
Telecom Security Management Ltd. And Terry Hoffman (5)
2.3 Share Purchase Agreement dated January 6, 2005 between us and the
shareholders of Risk Governance Inc. (2)
2.4 Asset Purchase Agreement dated December 13, 2005 between Securac Inc.,
Advanced Safety Management Ltd. and Scott Chisholm (11)
2.5 Form of Rescission Agreement dated effective as of April 30, 2006 between
Securac Inc., Advanced Safety Management Ltd. and Scott Chisholm (11)
3.1 Amended and Restated Articles of Incorporation (3)
3.2 By-Laws. (4)
10.1 Software License and Services Agreement, dated April 1, 2004, between
Securac Technologies Inc. and Securac Inc. (5)
10.2 Form of 2004 Incentive Stock Plan (3)
10.3 Loan Conversion Letter dated October 29, 2004 between our company and
Douglas Park Capital Ltd. (5)
10.4 Lease of Office Space, dated June 30, 2003, between Consolidated
Properties (520 - 5th Avenue) Ltd. ("Consolidated Properties") and
Paradigm Geophysical Canada Ltd. ("Paradigm") (5)
10.5 Consent to Sublease, dated June 14, 2004, between Consolidated
Properties, Paradigm and Securac Pacific Ltd. (formerly Brycol Consulting
Ltd.) ("SPL") (5)
10.6 Sublease, dated June 24, 2004, between Paradigm and SPL (5)
10.7 Exclusive License Distribution Agreement dated October 10, 2003 between
Risk Governance Ltd. and Risk Governance, Inc. (6)
10.8 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 (6)
10.9 Promissory Note dated June 29, 2005 granted in favour of an individual by
Securac Corp. (7)
10.10 Debenture Agreement dated September 30, 2005 granted in favour of
Dutchess Private Equity Funds II, LP (8)
10.11 Debenture Registrations Rights Agreement dated September 30, 2005
between Securac Corp. and Dutchess Private Equity Funds II, LP (8)
10.12 Security Agreement dated September 30, 2005 between Securac Corp. and
Dutchess Private Equity Funds II, LP (8)
10.13 Subscription Agreement dated September 30, 2005 granted in favour of
Dutchess Private Equity Funds II, LP (8)
10.14 Warrant Agreement dated September 30, 2005 granted in favour of Dutchess
Private Equity Funds II, LP (8)
10.15 Investment Agreement dated September 30, 2005 granted in favour of
Dutchess Private Equities Fund, LP (8)
10.16 Registration Rights Agreement (for Investment Agreement) (8)
10.17 Escrow Agreement between Securac Corp., Dutchess Private Equities Fund
II, LP and the escrow agent (8)
10.18 Form of Lock-up Agreement together with the Lock-Up Reinstatement
Letter (9)
10.19 Offer of Employment Letter and Employee Confidential Information and
Inventions Agreement dated May 17, 2004 for Deanna McKenzie (9)
14.1 Code of Ethics (5)
21.1 List of Subsidiaries: Securac Inc. and Risk Governance Inc. (5)
23.1 Consent of Chisholm, Bierwolf & Nilson (10)
-4-
Exhibit
No. Description
----- -----------
23.2 Consent of Chisholm, Bierwolf & Nilson (11)
24.1 Powers of Attorney (included on the signature page of this registration
statement)
31.1 Certification of Principal Executive Officer pursuant to Exchange Act
Rule 13a-14(a) (11)
31.2 Certification of Principal Financial Officer pursuant to Exchange Act
Rule 13a-14(a) (11)
32.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (11)
32.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (11)
---------------------------------
(1) Incorporated by reference to our Report on 8-K/A filed on January 19, 2005.
(2) Incorporated by reference to our Report on 8-K filed on January 19, 2005.
(3) Incorporated by reference to our Information Statement on Schedule 14C
filed on September 28, 2004.
(4) Incorporated by reference to our 10-KSB filed on January 4, 2002.
(5) Incorporated by reference to our 10-KSB filed on April 15, 2005.
(6) Incorporated by reference to our 10-QSB filed on May 24, 2005.
(7) Incorporated by reference to our 10-QSB filed on August 16, 2005.
(8) Incorporated by reference to our Report on 8-K filed on October 6, 2005.
(9) Incorporated by reference to our Form SB-2 Registration Statement filed on
October 31, 2005.
(10) Incorporated by reference to our Form S-8 Registration Statement filed on
January 21, 2005.
(11) Filed herewith.
-5-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Amendment on Form 10-KSB/A to
be signed on our behalf by the undersigned, thereunto duly authorized.
Securac Corp.
(Registrant)
By: /s/ Terry W. Allen
------------------
Terry W. Allen
Chief Executive Officer
Principal Executive Officer
Dated: May 19, 2006
-6-
INDEX TO FINANCIAL STATEMENTS
Description Page Number
----------- -----------
Report of Independent Registered Public Accounting Firm........... F-2
Consolidated Balance Sheet........................................ F-3
Consolidated Statements of Operations............................. F-5
Consolidated Statements of Consolidated Loss...................... F-6
Consolidated Statements of Changes in Stockholders' Equity
(Capital Deficit)............................................... F-7
Consolidated Statements of Cash Flows............................. F-9
Notes to Financial Statements..................................... F-11
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Securac Corp. and Subsidiaries
Calgary, Alberta, Canada
We have audited the accompanying consolidated balance sheet of Securac Corp. and
subsidiaries as of December 31, 2005 and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive loss, and cash
flows for the years ending December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the PCAOB (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company has determined that it is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Securac
Corp. and subsidiaries as of December 31, 2005 and the consolidated results of
their operations and their cash flows for the years ending December 31, 2005 and
2004, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has had recurring losses, has an
accumulated deficit and a negative working capital as of December 31, 2005.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
May 1, 2006
F-2
SECURAC CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2005
(Expressed in Canadian Dollars)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 58,733
Accounts receivable, net of allowance of $32,098 288,884
Notes receivable 16,904
Prepaid expenses and deposits 41,175
--------------------
Total Current Assets 405,696
--------------------
PROPERTY AND EQUIPMENT, Net (Notes 1 and 3) 38,823
--------------------
OTHER ASSETS
Notes receivable - related party (Note 6) 521,964
Intellectual property (Note 1) 803,205
Goodwill (Notes 1 and 10) 91,000
--------------------
Total Other Assets 1,416,169
--------------------
TOTAL ASSETS $ 1,860,688
====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
SECURAC CORP. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
December 31, 2005
(Expressed in Canadian Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 743,122
Accrued liabilities 286,393
Deferred revenue 218,131
Current portion of obligation under capital lease (Note 5) 1,485
Note payable (Note 7) 285,704
Note payable related party (Note 8) 863,643
Convertible debentures, net of discount of $222,949 (Note 9) 266,061
--------------------
Total Current Liabilities 2,664,539
--------------------
LONG-TERM LIABILITIES
Obligation under capital lease (Note 5) 6,379
--------------------
Total Long-Term Liabilities 6,379
--------------------
Total Liabilities 2,670,918
--------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; $0.01 USD par value
(average of $0.015 CDN par value), 200,000,000 shares
authorized, 50,930,487 shares issued and outstanding 749,808
Additional paid-in capital 14,698,337
Stock subscription receivable (1,047,400)
Other comprehensive loss (Note 11) (83,366)
Accumulated deficit (15,127,609)
--------------------
Total Stockholders' Equity (Deficit) (810,230)
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 1,860,688
====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
SECURAC CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
-------------------------------------------
2005 2004
--------------------- --------------------
REVENUES
License fees $ 141,775 $ 145,278
Professional services and training fees 1,224,069 579,994
--------------------- --------------------
Total Revenues 1,365,844 725,272
--------------------- --------------------
OPERATING EXPENSES
Direct cost of service revenue 656,041 209,392
General and administrative 651,428 297,170
Sales, marketing and investor relations 1,845,646 803,523
Research and development 1,065,459 795,302
Professional fees 453,567 734,378
Stock-based compensation 4,426,471 1,133,687
Amortization and depreciation 22,383 26,093
--------------------- --------------------
Total Operating Expenses 9,120,996 3,999,545
--------------------- --------------------
LOSS FROM OPERATIONS (7,755,152) (3,274,273)
--------------------- --------------------
OTHER INCOME (EXPENSE)
Impairment of intellectual property (2,036,489) -
Interest expense (47,579) (10,296)
Realized gain (loss) on foreign currency exchange 3,215 -
Other income (expense) 1,394 (173)
--------------------- --------------------
Total Other Income (Expense) (2,079,459) (10,469)
--------------------- --------------------
NET LOSS $ (9,834,611) $ (3,284,742)
===================== ====================
BASIC LOSS PER COMMON SHARE (Note 1) $ (0.19) $ (0.09)
===================== ====================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 50,930,487 36,572,730
===================== ====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
SECURAC CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
-------------------------------------------
2005 2004
--------------------- --------------------
NET LOSS $ (9,834,611) $ (3,284,742)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments (83,366) (59,470)
--------------------- --------------------
Total Other Comprehensive Income
(Loss) (Note 11) (83,366) (59,470)
--------------------- --------------------
NET COMPREHENSIVE LOSS $ (9,917,977) $ (3,344,212)
===================== ====================
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
SECURAC CORP. AND SUBSIDIARIES
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss
(Expressed in Canadian Dollars)
Common Stock Additional Stock Other
------------------------ Paid-in Subscription Comprehensive Accumulated
Shares Amount Capital Receivable Loss Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2004 34,061,118 537,956 334,888 -- -- (1,393,958)
Common stock issued for cash at prices
ranging from $0.58 - $1.50 per share 4,279,027 54,738 3,570,854 (617,708) -- --
Common stock issued for services at prices
ranging from $0.63 - $0.65 per share 658,400 8,359 409,624 -- -- --
Common stock issued for conversion of
payable at $0.61 per share 350,000 4,284 209,951 -- -- --
Common stock issued in acqusition of
Brycol Consulting Ltd. at $2.26 per share 177,778 2,325 264,342 -- -- --
Common stock issued in acqusition of
Telecomsecuritymanagement.com, Ltd.
at $0.58 per share 200,000 2,614 113,386 -- -- --
Common stock issued in reverse
acquisition 3,820,667 48,202 (48,202) -- -- --
Loss distributed to shareholders from the
sale of Securac Tech to Securac Holdings -- -- -- -- -- (614,298)
Issuances of options for services -- -- 145,944 -- -- --
Issuances of warrants for services -- -- 16,315 -- -- --
Stock offering costs -- -- (105,544) -- -- --
Foreign currency translation adjustment -- -- -- -- (59,470) --
Net loss for the year ended
December 31, 2004 -- -- -- -- -- (3,284,742)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2004 43,546,990 $ 658,478 $ 4,911,558 $ (617,708) $ (59,470) $(5,292,998)
----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
SECURAC CORP. AND SUBSIDIARIES
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss (Continued)
(Expressed in Canadian Dollars)
Common Stock Additional Stock Other
------------------------ Paid-in Subscription Comprehensive Accumulated
Shares Amount Capital Receivable Loss Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 43,546,990 $ 658,478 $ 4,911,558 $ (617,708) $ (59,470) $ (5,292,998)
Cancellation of common stock (600,000) (7,314) (541,236) 548,550 -- --
Common stock issued to acquire RGI
at $1.24 per share 2,295,444 28,397 2,811,297 -- -- --
Common stock issued in exercise of
options at prices ranging from
$0.60 to $0.62 per share 3,380,000 42,120 2,063,894 (1,260,039) -- --
Common stock issued for cash in a private
placement at $0.93 per share 155,732 1,912 152,247 -- -- --
Common stock issued in lieu of accounts
payable and services rendered at prices
ranging from $1.55 to $1.86 per share 164,355 2,030 300,299 -- -- --
Common stock issued for services at
$1.87 per share 300,000 3,739 557,096 -- -- --
Common stock issued for services at
$2.14 per share 400,000 4,898 -- -- -- --
Common stock issued in reverse merger 10,000 125 -- -- -- --
Common stock issued for services
at prices ranging from $0.50
to $0.93 per share 1,177,966 14,258 730,160 -- -- --
Common stock issued in lieu of interest
payment on promissory note 100,000 1,166 -- -- -- --
Stock offering cost -- -- (21,579) -- -- --
Receipt of subscription receivable -- -- -- 281,797 -- --
Issuance/vesting of common stock options -- -- 3,499,918 -- -- --
Foreign currency translation adjustment -- -- -- -- (23,896) --
Issuance of warrants for services -- -- 58,000 -- -- --
Value attributed to beneficial conversion -- -- 176,683 -- -- --
Net loss for the year ended
December 31, 2005 -- -- -- -- -- (9,834,611)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 50,930,487 $ 749,808 $ 14,698,337 $ (1,047,400) $ (83,366) $(15,127,609)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
SECURAC CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
----------------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,834,611) $ (3,284,742)
------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 22,383 26,093
Common stock issued for services 1,576,642 417,983
Fair value of options and warrants 3,499,918 162,259
Common stock issued in reverse merger 125 --
Beneficial conversion interest 11,734
Impairment of Intellectual property 2,036,489 --
Common stock issued in lieu of interest
payment on promissory note 1,166 --
Changes in operating assets and liabilities:
Accounts receivables 43,122 138,278
Advances and other receivables 39,481 (56,385)
Prepaid expenses and deposits (15,959) 38,476
Accounts payable and accrued liabilities 384,572 388,196
Deferred revenue 183,474 28,657
------------ ------------
Net Cash Used In Operating Activities (2,051,464) (2,141,185)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on notes receivable - related party (521,964) --
Purchases of property and equipment (13,291) (22,468)
------------ ------------
Net Cash Used In Investing Activities (535,255) (22,468)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholder -- (206,990)
Proceeds from common stock issuance 1,000,134 3,625,592
Stock subscription receivable 281,797 (617,708)
Stock offering costs (21,579) (105,544)
Loss distributed to shareholders -- (614,298)
Due to related company 638,621 200,022
Proceeds from notes payable 233,204 282,098
Payments on notes payable (203,096) (115,119)
Proceeds from convertible debt 569,626 --
Payments on convertible debt (80,616) --
Payments on capital leases (3,603) (4,748)
------------ ------------
Net Cash Provided By Financing Activities 2,414,488 2,443,305
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-9
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
SECURAC CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
-----------------------------------------------
2005 2004
--------------------- --------------------
EFFECT OF CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS (23,896) (59,470)
--------------------- --------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (196,127) 220,182
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 254,860 34,678
--------------------- --------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 58,733 $ 254,860
===================== ====================
CASH PAID FOR:
Interest $ 47,579 $ 10,296
Taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES:
Conversion of note payable for common stock $ -- $ 214,235
Common stock issued for services $ 1,576,642 $ 417,983
Common stock issued in lieu of payables $ 35,837 $ --
Common stock issued in acquisition of Risk
Governance, Inc. $ 2,839,694 $ --
Common stock issued in acquisition of Brycol
Consulting Ltd. $ -- $ 266,667
Common stock issued in acquisition of
Telecomsecuritymanagement.com Ltd. $ -- $ 116,000
The accompanying notes are an integral part of these consolidated
financial statements.
F-10
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
The consolidated financial statements presented are those of Securac Corp.
and its wholly-owned Subsidiaries (the "Company"). The Company was formed
to design, develop and market enterprise governance, risk, and compliance
software and service. The Company operates in North America.
Securac Corp. ("Applewood") was incorporated on June 7, 1985 under the
laws of the State of Nevada as Applewood's Restaurants, Inc. Securac Inc.
("Securac") was incorporated under the Business Corporations Act of
Alberta, Canada on March 20, 2002.
Effective October 19, 2004, Applewood and Securac completed a Share
Exchange Agreement whereby Applewood issued 2.7 shares of its common stock
for each common share of Securac. Applewood issued a total of 37,246,289
shares of its common stock in the Share Exchange, which represented
approximately 90% of its outstanding stock after issuance. In connection
with the Share Exchange, Applewood effected a 1:15 reverse split of
outstanding common stock after the exchange. The name of Applewood's
Restaurants, Inc. was changed to Securac Corp. and the number of its
authorized shares and par value per share remained at 200,000,000 and
$0.01, respectively. For accounting purposes, the acquisition has been
treated as a recapitalization of Securac with Securac as the acquirer
(reverse acquisition). Securac was treated as the acquirer for accounting
purposes because the shareholders of Securac controlled Applewood after
the acquisition. The historical financial statements prior to October 19,
2004 are those of Securac.
Significant Accounting Policies
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements are as follows:
a. Accounting Method
The Company's consolidated financial statements are prepared using the
accrual method of accounting. The Company has elected a December 31
year-end.
b. Basis of Consolidation
The consolidated financial statements include the accounts of Securac
Corp. and its subsidiary, Securac Inc. All significant inter-company
accounts and transactions have been eliminated in the consolidation.
c. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. In these consolidated financial statements assets and liabilities
involve extensive reliance on management's estimates. Actual results could
differ from those estimates.
d. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
F-11
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e. Bad Debts
Bad debts on receivables are charged to expense in the year the receivable
is determined uncollectible, therefore, an allowance for doubtful accounts
is included in the consolidated financial statements. Amounts determined
as uncollectible are not significant to the overall presentation of the
consolidated financial statements.
f. Revenue and Cost Recognition
The Company applies the provisions of SEC Staff Accounting Bulletin
("SAB") No. 104, Revenue Recognition in Financial Statements ("SAB 104"),
which provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements filed with the SEC. SAB 104 outlines
the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. In
general, the Company recognizes revenue related to monthly contracted
amounts for services provided when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been
rendered, (iii) the fee is fixed or determinable, and (iv) collectibility
is reasonably assured.
g. Basic Loss Per Common Share
The computation of basic net loss per common share is based on the
weighted average number of shares outstanding as follows:
For the Years Ended
December 31,
2005 2004
---------------- -----------------
Net loss - (numerator) $ (9,834,611) $ (3,284,742)
Weighted average number of shares
outstanding - (denominator) 50,930,487 36,571,730
---------------- -----------------
Basic Loss per Common Share $ (0.19) $ (0.09)
================ =================
The Company's outstanding common stock options and warrants totaling
5,871,042 shares were considererd but have been excluded from the basic
loss per share calculation as they are anti-dilutive.
h. Income Taxes
The Company has been taxed under provisions for a C Corporation where
deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
At December 31, 2005, the Company had U.S. net operating loss
carryforwards of approximately $950,000 that may be offset against future
taxable income from the year 2006 through 2024. No tax benefit has been
reported in the December 31, 2005 financial statements since the potential
tax benefit is offset by a valuation allowance of the same amount. At
December 31, 2005, the Company also had Canadian non-capital loss
carryforwards and investment tax credit carryforwards totaling
approximately $1,656,000.
F-12
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The income tax provision differs from the amount of income tax as
determined by applying the U.S. federal income tax rate of 39% to pretax
income (loss) from operations due to the following:
For the Years Ended
December 31,
2005 2004
------------------ ------------------
Net loss $ (9,834,611) $ (3,284,742)
Foreign losses 9,834,611 3,284,742
------------------ ------------------
Net tax provision $ - $ -
================== ==================
Net deferred tax assets (liabilities) at December 31, 2005 consist of the
following components:
Operating loss carryforwards $ 323,000
Valuation allowance (323,000)
------------------
Net deferred tax assets (liabilities) $ -
==================
Due to the change in ownership provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for Federal income tax reporting purposes
are subject to annual limitations. Should a change in ownership occur, net
operating loss carryforwards may be limited as to use in the future years.
i. Property and Equipment
Property and equipment is stated at cost. Expenditures that materially
increase useful lives are capitalized, while ordinary maintenance and
repairs are expensed as incurred. Depreciation is computed using the
straight-line method over the estimated useful lives of the respective
assets, ranging as follows:
Office equipment 5 years
Computer equipment and software 2 to 3 years
j. Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No. 141,
the Company records impairment of long-lived assets to be held and used or
to be disposed of when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount.
k. Intellectual Property
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 value 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 below.
F-13
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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") of which Securac
Corp. licenses its Acertus(TM) software technology from its 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 the Company.
Following an analysis of the intellectual property value, it was
determined that there was impairment to the asset value of the
intellectual property acquired in the amount of $2,036,489 as of December
31, 2005.
l. Goodwill and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), the
Company evaluates goodwill and intangible assets at least annually for
impairment by analyzing the estimated fair value based on the present
value of discounted cash flows compared to the net book value. The Company
will write off the amount of any goodwill or intangible in excess of its
fair value.
Intangible assets with a definite life are amortized over their legal or
estimated useful lives, whichever is shorter. The Company reviews the
carrying amounts of intangible assets with a definite life whenever events
or changes in circumstance indicate that the carrying amount of an asset
may not be recoverable. Such events or circumstances might include changes
in technology, significant litigation or other items.
Intangibles consist of distribution rights which are being amortized over
their estimated useful life of three years, although these were fully
amortized in 2004.
m. Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
accounts receivable, accounts payable and accrued expenses, and long-term
debt approximate their market values as of December 31, 2005 and 2004. The
Company has no investments in derivative financial instruments.
n. Concentrations of Risk
Functional Currency & Foreign Currency Translation
The Company's functional currency is the Canadian dollar. In accordance
with the Statement of Financial Accounting Standard No. 52, Foreign
Currency Translation, which stipulates that if the US-incorporated
registrant had little or no assets and operations in the U.S.,
substantially all the operations were conducted in a single functional
currency other that the U.S. dollar, and the reporting currency selected
was the same as the functional currency then reporting in the foreign
currency would produce little or no foreign currency translation effects.
The assets and liabilities denominated in foreign currency are translated
into Canadian dollars at the current rate of exchange existing at period
end and revenues and expenses are translated at average monthly exchange
rates. Related translation adjustments are reported as a separate
component of stockholders' equity, whereas, gains or losses relating from
foreign currency transactions are included in the results of operations.
F-14
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
o. 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.
p. Newly Adopted Pronouncements
On December 16, 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation. This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
generally requires such transactions to be accounted for using a
fair-value-based method and the resulting cost recognized in our financial
statements. This new standard is effective for awards that are granted,
modified or settled in cash in interim and annual periods beginning after
June 15, 2005. In addition, this new standard will apply to unvested
options granted prior to the effective date. The Company will adopt this
new standard effective for the fourth fiscal quarter of 2005, and has not
yet determined what impact this standard will have on its consolidated
financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs -- an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously
stated that ". . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be
so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal." In
addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of
the production facilities. This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management
does not believe the adoption of this Statement will have any immediate
material impact on the Company.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-sharing Transactions, which amends FASB statement No. 66, Accounting
for Sales of Real Estate, to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is
provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations
of Real Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. Management believes the adoption of this Statement
will have no impact on the financial statements of the Company.
F-15
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
Assets . This Statement addresses the measurement of exchanges of
nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges incurred during fiscal years beginning after the date of
this statement is issued. Management does not believe the adoption of this
Statement will have any impact on the Company.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections." This new standard replaces APB Opinion No. 20,
"Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements," and represents another step in
the FASB's goal to converge its standards with those issued by the IASB.
Among other changes, Statement 154 requires that a voluntary change in
accounting principle be applied retrospectively with all prior period
financial statements presented on the new accounting principle, unless it
is impracticable to do so. Statement 154 also provides that (1) a change
in method of depreciating or amortizing a long-lived non-financial asset
be accounted for as a change in estimate (prospectively) that was effected
by a change in accounting principle, and (2) correction of errors in
previously issued financial statements should be termed a "restatement."
The new standard is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005. Early
adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005.
The Company has evaluated the impact of the adoption of Statement 154 and
does not believe the impact will be significant to the Company's overall
results of operations or financial position.
The implementation of the provisions of these pronouncements is not
expected to have a significant effect on the Company's consolidated
financial statement presentation.
NOTE 2 - GOING CONCERN
The Company has had recurring operating losses, has an accumulated
deficit, has a negative working capital, and is dependent upon additional
financing to continue operations. These factors indicate that the Company
may be unable to continue in existence. These consolidated financial
statements do not include any adjustments relating to the recoverability
and classification of recorded assets, or the amounts and classification
of liabilities that might be necessary in the event the Company cannot
continue its existence. These consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. It is the intent of management to find additional capital
funding and increase revenues and reduce costs to sustain its operations.
As a result, management has determined that the Company is dependent upon
receipt of proceeds from additional equity and/or debt financings to
continue its plan of operations. The Company presently does not have
commitments from funding sources sufficient to satisfy its needs and there
can be no assurance that any financing will be available on terms
satisfactory to the Company or at all. If management is unable to secure
additional funding as and when needed, management may be forced to scale
back the level and scope of its planned operations.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 consisted of the following:
Office equipment $ 32,104
Computer equipment and software 43,451
Artwork 5,690
------------------
Totals 81,245
Less: accumulated depreciation (42,422)
------------------
Property and Equipment - Net $ 38,823
==================
Depreciation expense for the years ended December 31, 2005 and 2004 was
$22,383 and $13,027, respectively.
F-16
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at December 31, 2005 consisted of the following:
Distribution rights $ 39,198
Less: accumulated amortization (39,198)
------------------
Intangible Assets - Net $ -
==================
Amortization expense for the years ended December 31, 2005 and 2004 was
$-0- and $13,066, respectively.
NOTE 5 - OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment with lease terms through 2008. The
obligations under these capital leases have been recorded in the
accompanying financial statements at the present value of future minimum
lease payments. Obligations under capital leases as of December 31, 2005
consisted of the following:
Capital lease payable to a leasing company, interest at
24% per annum, principal and Interest payments of $147
due monthly, matures on December 1, 2006 with a purchase
option of
$398 at maturity, secured by computer equipment. $ 1,673
Capital lease payable to a leasing company, interest at
24% per annum, principal and interest payments of $93 due
monthly, matures on December 12, 2006 with a purchase
option of
$237 at maturity, secured by computer equipment. 1,383
Capital lease payable to a leasing company, interest at
24% per annum, principal and interest payments of $135
due monthly, matures on December 1, 2007 with a purchase
option of
$310 at maturity, secured by computer equipment. 2,710
Capital lease payable to a leasing company, interest at
24% per annum, principal and interest payments of $100
due monthly, matures on February1, 2008 with a purchase
option of
$250 at maturity, secured by computer equipment. $ 2,098
---------
Total capital leases payable 7,864
Less: current portion (1,485)
---------
Total long-term capital leases $ 6,379
=========
F-17
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 5 - OBLIGATIONS UNDER CAPITAL LEASES (Continued)
The future minimum lease payments under these capital leases and the net
present value of the future minimum lease payments are as follows:
For the
Years Ending
December 31,
---------------
2006 $ 4,529
2007 2,929
2008 -
2009 -
2010 -
Thereafter -
----------------
Total future minimum lease payments 7,458
Less: amount representing interest (1,079)
----------------
Total $ 6,379
================
Equipment held under these capital leases are included in property and
equipment and had a cost of $20,642 and accumulated depreciation of
$14,919 at December 31, 2005. The Company recorded depreciation expense of
$6,925 for the year ended December 31, 2005 for the vehicles and equipment
under these capital leases.
NOTE 6 - NOTES RECEIVABLE - RELATED PARTY
Notes receivable at December 31, 2005 consisted of three notes to separate
entities that have the same management as the Company totaling $521,964.
The notes are non-interest bearing, due on demand and unsecured. The notes
are all considered to be current.
F-18
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 7 - NOTES PAYABLE
Notes payable at December 31, 2005 are detailed in the following
schedules:
Note payable to former shareholders of Brycol
Consulting Ltd, monthly installments of $8,333,
non-interest bearing, unsecured, due in March 1, 2006. $ 52,500
Note payable to an individual, bearing interest at
18% per annum, unsecured, due in May 2006. 233,204
---------------
Total Notes Payable 285,704
Less: current portion (285,704)
---------------
Total Long-Term Notes Payable $ -
===============
There was no accrued interest on these notes for the years ended December
31, 2005 and 2004.
NOTE 8 - NOTES PAYABLE - RELATED PARTY
Notes payable - related party at December 31, 2005 are detailed in the
following schedules:
Note payable to a related entity, non-interest bearing,
unsecured, due on demand. 583,010
Note payable to a related entity, non-interest bearing,
unsecured, due on demand. 195,633
Note payable to a related individual, bearing interest at
12% per annum, unsecured, due in March 2006. 30,000
Note payable to a related individual, non-interest
bearing, unsecured, due on demand. 55,000
-------------
Total Notes Payable 863,643
Less: current portion (863,643)
-------------
Total Long-Term Notes Payable $ -
=============
Accrued interest on these notes was $26,842 and $10,000 at December 31,
2005 and 2004, respectively.
NOTE 9 - CONVERTIBLE DEBT
On September 30, 2005, the Company entered into a series of definitive
agreements with two affiliated funds, under which the funds provided the Company
with $300,000 in principal amount of short-term convertible debt and agreed to
provide the Company with an additional $200,000 principal amount of such debt
and established what is commonly referred to as an equity line of credit in the
Companies favor. The terms of these transactions are summarized below. The
summaries are qualified in their entirety by reference to the definitive
agreements, all of which are dated September 30, 2005 (the "Closing Date).
F-19
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 9 - CONVERTIBLE DEBT (Continued)
Pursuant to the terms of a subscription agreement and related debenture
agreement, Dutchess Private Equities Fund II, L.P. purchased $300,000 US
principal amount of our newly issued short-term convertible debentures and
agreed to purchase an additional $200,000 US in principal amount of such
debentures upon the Company's filing of a contemplated resale registration
statement with the Securities and Exchange Commission. After fees and expenses,
the Company received $252,925 us in net proceeds from the initial funding. The
debentures bear interest at 10% per annum, are subject to a 25% redemption
premium. Principal, interest and the redemption premium are payable monthly
during the first year. The Company has the right to redeem the debentures prior
to maturity, and is required to redeem the debentures if and to the extent the
Company receives proceeds from any subsequent financing in excess of $500,000
US.
If the debentures are not repaid in full or converted prior thereto, the
debentures mature on the fifth anniversary of the Closing Date, at which time
any amounts outstanding there under will automatically convert into our common
stock.
The conversion price of the debentures will be fixed at the time we file the
Registration Statement with the SEC. The conversion price is calculated as the
lower of $0.55 per share and the lowest closing bid price of our common stock
during the fifteen days trading days prior to the filing of the Registration
Statement. If the Registration Statement is not declared effective within 12
months of the Closing Date, the holder may elect for the conversion price to
become variable, calculated at 30% discount from the market price at the time of
conversion. To facilitate issuance of shares upon conversion and to provide
additional comfort to the investor that the shares will be so issued, the
Company placed 909,090 newly issued shares of common stock in escrow with a
third party pending conversion of the debentures. To the extent we repay the
debentures prior to conversion, these shares are to be returned to us for
cancellation.
The debentures are repayable in twelve consecutive monthly installments each in
the amount of $54,345 US, commencing on November 1, 2005. An initial $4,126 US
installment, consisting of interest only, was due and paid on October 1, 2005.
Any excess monthly payment will be applied to principal.
Upon an event of default (as defined in the debenture agreement), the Company
may be subject to an initial penalty equal to 10% of the face amount of the
debentures, and an additional penalty equal to 2.5% of the face amount for each
month (prorated for partial periods) that the event of default continues. The
Company is entitled to notice and an opportunity to redeem the debentures prior
to triggering any such penalties.
The Company's obligations under the debentures are secured by a general security
interest in all of the Company's assets, as well as a pledge of shares (valued
at 150% of the funding amount) owned by certain of the Company's trust
stockholders, the beneficiaries of whom include certain directors and
management. The security agreement contains, among other things, restrictions on
the Company's ability to incur additional indebtedness, declare dividends and
grant security interests in its assets.
In connection with the investment, and as contemplated by the subscription
agreement, the Company also issued to the investor a warrant to purchase 181,819
shares of its common stock at an exercise price of $0.41 US per share (subject
to adjustment for stock splits and the like, as well as below market issuances).
The warrant is exercisable at any time until September 30, 2010, five years from
the Closing Date. The warrant includes a cashless exercise provision which is
triggered in the event the Registration Statement is not declared effective
within 12 months from the Closing Date.
Pursuant to a debenture registration rights agreement, the Company has agreed to
file the Registration Statement with the SEC within 30 days of the Closing Date,
and to use its best efforts to cause the same to be declared effective within 90
days of the filing date. The Registration Statement must cover the shares
underlying the debenture, as well as the shares underlying the warrant. The
Company may also include in the Registration Statement shares held by our
existing stockholders, provided such stockholders agree to restrictions on
resale acceptable to the investor.
F-20
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 9 - CONVERTIBLE DEBT (Continued)
The Company also entered into an investment agreement with Dutchess Private
Equities Fund, L.P., pursuant to which the investor committed to purchase, under
certain conditions, up to $10,000,000 in aggregate purchase price of the
Company's common stock from time to time over a 36-month period beginning on the
date of effectiveness of a resale registration statement covering the underlying
shares (the "Equity Line Registration"). Under the agreement, provided the
Equity Line Registration is effective, The Company is entitled to put shares of
its common stock to the investor from time to time, subject to a maximum dollar
amount for each put, at the Company's election, of (i) $200,000 or (ii) 200% of
the average daily dollar volume prior to the put date (calculated in accordance
with the agreement); subject to a maximum put amount of $1,000,000. The purchase
price for each put is equal to 95% of the lowest closing bid price of the common
stock during the five trading days immediately following the put notice.
Notwithstanding the foregoing, the investor shall not be required to purchase
pursuant to any put more than an amount equal to the average daily dollar volume
during the five trading-day pricing period following the put date (calculated in
accordance with the agreement). The Company would not be entitled to deliver a
put notice under the agreement more frequently than once every seven trading
days. If the market price of the common stock over the pricing period
immediately following the put notice drops by more than 25% from the pre put
notice level (during the 10 trading days prior to the put notice), the Company
may withdraw the put notice.
As noted above, the Company's ability to draw down on the Equity Line is subject
to achieving and maintaining an effective Equity Line Registration for the
requisite number of shares. The number of shares issuable under the Equity Line
is not presently known, as it is based upon the trading price of the Company's
common stock at the time of each draw down. The Company's ability to draw down
on the Equity Line will be limited to the extent the trading volume in its
common stock is low and to the extent the market price of our common stock is
low.
As long as the Equity Line is in effect, the Company has granted the investor a
right of first refusal on certain subsequent financings during the 12 months
following the effective date of the Equity Line Registration. The Equity Line is
generally terminable by the Company at any time provided there is no outstanding
balance under the convertible debentures.
The Company has agreed to file the Equity Line Registration with the SEC within
30 days of the Closing Date, and to use its best efforts to cause the same to be
declared effective within 90 days of the filing date. The agreement does not
contain liquidated damages for failure to comply with the registration
commitments.
In conjunction with the above transactions, the Company recorded a discount on
the convertible debt totaling $234,683 pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", and EITF Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments." The
discount is being amortized over the life of the convertible debt as beneficial
conversion interest. Beneficial conversion interest for the period ended
December 31, 2005 totaled $11,734.
Convertible debt, at December 31, 2005 is detailed in the following schedules:
Convertible debt 489,010
Less: discount (222,949)
------------------
Total Long-Term Convertible Debt $ 266,061
==================
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has an ongoing relationship with its employees that have
perpetual employment agreements and may be terminated at will. The Company
offers a severance amount ranging from one month's base salary to one year
severance depending upon completed years of service.
Office Leases
The Company subleases its office space located in Calgary, Alberta, Canada
for approximately $125,178 per year, or about $10,400 per month, plus its
pro-rata share of operating expenses and taxes. The lease commenced on
July 1, 2004 and expires on December 31, 2008.
F-21
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
The future minimum lease payments, excluding operating expenses and taxes,
are as follows:
For the
Years Ending
December 31,
2006 $ 125,178
2007 125,178
2008 104,315
2009 -
2010 -
Thereafter -
-
Total future minimum lease payments $ 354,671
================
The Company recognized rent expense of $103,400 and $135,502 related to
this lease for the years ended December 31, 2005 and 2004, respectively.
Litigation
A garnishee summons was filed against the Company in November, 2005 in the
Court of Queen's Bench, Judicial District of Calgary, Alberta, for unpaid
legal fees in the amount of $142,564, by a law firm which provided legal
services to the Company. Such garnishee summons was issued with respect to
a Consent Judgment which was filed in August, 2005 in the Court of Queen's
Bench, Judicial District of Calgary, Alberta; however, the Company was not
aware of such filing until served with the garnishee in November, 2005.
Pursuant to a settlement agreement reached between the parties, the
outstanding fees are being paid over a period of six months.
The Company is not a party to any other legal proceedings outside the
ordinary course of its business or to any other legal proceedings, which,
if adversely determined, would have a material adverse effect on its
financial condition or results of operations.
NOTE 11 - OTHER COMPREHENSIVE LOSS
The Company reports other comprehensive loss in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
in the financial statements all changes in equity during a period, except
those resulting from investments by and distributions to owners. The
cumulative effect of foreign currency translation adjustments to a cash
account held by the Company in United States dollars at December 31, 2005,
which is included in other comprehensive loss in the stockholders' equity
section, consisted of the following:
Balance, beginning of year $ (59,470)
Effect of currency exchange rate changes (23,896)
---------
Balance, end of year $ (83,366)
=========
NOTE 12 - BUSINESS ACQUISITIONS
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 $1,147,722 for purposes of
the transaction. The principal asset of RGI is a license to certain
corporate governance software technology owed and developed by Risk
Governance, Ltd. ("RGL"), a United Kingdom company under common control
with RGI. The license gives RGI the right to commercialize applications of
the software technology on an exclusive basis in North America in exchange
for royalty payment to RGL.
NOTE 13 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2005, the Company repaid a related
entity, whose officers/directors are shareholders of the Company the
amount of $200,022 for advances received during 2004.
F-22
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 14 - OUTSTANDING STOCK WARRANTS
During 2004, the Company granted a total of 350,000 warrants to purchase
shares of common stock for services rendered by an unrelated party at an
exercise price of $0.50US per share. The warrants have an exercise period
of two years. The Company calculated the fair value of the warrants as
$16,315 by using the Black-Scholes option pricing model. This amount has
been recorded in professional fees in the consolidated financial
statements for the year ended December 31, 2005
Also during 2004, the Company granted a total of 3,841,474 warrants to
purchase shares of common stock in connection for common stock issued for
cash at exercise prices ranging from $0.75US - $1.25US per share. The
warrants have an exercise period of two to three years.
During 2005, the Company granted a total of 181,819 warrants to purchase
shares of common stock for services rendered by an unrelated party at an
exercise price of $0.41 US per share. The warrants have an exercise period
of five years. The Company calculated the fair value of the warrants as
$58,000 by using the Black-Scholes option pricing model. This amount has
been recorded in stock-based compensation in the consolidated financial
statements for the year ended December 31, 2005.
At December 31, 2005, the Company had 4,123,292 outstanding warrants to
purchase shares of common stock.
A summary of the status of the Company's stock warrants as of December 31,
2005 and 2004 is presented below:
2005 2004
------------------------------- -----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
------------- ------------- ------------- -------------
Outstanding, Beginning of year 4,191,474 $ 0.97 -- --
Granted 181,819 0.02 4,191,474 0.97
Canceled/Expired (250,001) (0.09) -- --
Exercised -- -- -- --
------------- ------------- ------------- -------------
Outstanding, End of year 4,123,292 $ 1.10 4,191,474 $ 0.97
============= ============= ============= =============
Exercisable 4,123,292 $ 1.10 4,191,474 $ 0.97
============= ============= ============= =============
Outstanding Exercisable
---------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/05 Life Price at 12/31/05 Price
-------------- ---------------------------- ------------ ---------------------------
$ 0.87 2,970,000 0.31 $ 0.63 2,970,000 $ 0.63
0.58 350,000 0.42 0.05 350,000 0.05
1.46 477,474 1.92 0.17 477,474 0.17
1.46 143,999 2.00 0.05 143,999 0.05
0.48 181,819 4.83 0.02 181,819 0.02
-------------- ------------- ------------- ------------ ------------ ------------
$ 0.48 - 1.46 4,123,292 1.90 1.13 4,123,292 1.13
============== ============= ============= ============ ============ ============
NOTE 15 - OUTSTANDING STOCK OPTIONS
Periodically, the Company issues incentive stock options to employees and
officers and non-qualified options to directors and outside consultants to
promote the success of the Company and enhance its ability to attract and
retain the services of qualified persons.
During the year ended December 31, 2005, the Company granted 1,637,631
stock options to various employees, officers, directors and nonemployees
for services rendered. These options were issued with exercise prices
ranging from $0.43 - $1.87 per share. All of these options are vested one
year after the grant date for a period of one to five years.
The Company has 1,747,750 options outstanding as of December 31, 2005
pursuant to the 2005 Stock Option Plan (the "Plan"), and could issue an
additional aggregate of 5,871,042 options and shares. The Plan permits
stock grants to employees, officers, directors and consultants at prices
at the fair market value of the Company's common stock on the date of
issuance. The Company has no outstanding stock options issued outside the
Plan. Options issued under the Plan will have variable terms based on the
services provided and will generally vest over a five-year period.
The Company applies SFAS No. 123 for options issued to employees and
nonemployees, which requires the Company to estimate the fair value of
each option issued at the grant date. The Company estimates the fair value
of each stock award at the grant date by using the Black-Scholes option
pricing model with the following assumptions used for grants during 2005:
dividend yield of zero percent; expected volatility between 0.71% and
2.76%; risk free interest rate of 4.00%, and an expected life of five
years. During the year ended December 31, 2005, the Company recognized
additional costs of $111,567 as a result of applying SFAS No. 123 to the
employee options. The Company did not recognize any other costs for stock
options granted to employees and nonemployees during the years ending
December 31, 2005 and 2004.
F-23
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 15 - OUTSTANDING STOCK OPTIONS (Continued)
A summary of the status of the Company's stock options as of December 31,
2005 and changes during the year is presented below:
2005 2004
----------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------ ---------- -----
Outstanding, Beginning of year 3,341,666 $0.91 360,000 0.50
Granted 1,902,631 0.87 3,206,666 0.68
Canceled/Expired (2,416,547) (0.76) (225,000) (0.50)
Exercised (1,080,000) (0.37) -- --
---------- ----- ---------- -----
Outstanding, End of year 1,747,750 $0.65 3,341,666 $0.67
========== ===== ========== =====
Exercisable 1,014,000 $0.41 706,255 $0.12
========== ===== ========== =====
Outstanding Exercisable
---------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/05 Life Price at 12/31/05 Price
-------------------- ----------------- --------------- ------------ ------------ --------------
$ 0.43 10,000 3.16 $ 0.002 10,000 $ 0.002
0.44 30,000 4.58 0.008 10,000 0.002
0.58 1,455,000 4.03 0.484 885,000 0.299
0.87 178,750 4.13 0.091 95,000 0.048
1.28 10,000 4.07 0.007 10,000 0.007
1.47 60,000 4.07 0.050 - -
1.87 4,000 4.16 0.005 4,000 0.005
-------------------- ----------------- --------------- ------------ -------------- --------------
$ 0.43 - 1.87 1,747,750 4.02 $ 0.65 1,014,000 $ 0.41
==================== ================= =============== ============ ============== ==============
NOTE 16 - STOCKHOLDERS EQUITY
During 2004, the Company issued 4,279,027 shares of common stock for cash
and stock subscriptions receivables at prices ranging from $0.58 - $1.50
per share. Total cash received was $3,625,592 (less stock offering costs
of $105,544) and the stock subscription receivable amounted to $617,708.
During 2004, the Company issued 658,400 shares of common stock for
services rendered on behalf of the Company at prices ranging from $0.63 -
$0.65 per share. The total dollar amount of the services received amounted
to $417,984.
F-24
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2005 and 2004
(Expressed in Canadian Dollars)
NOTE 16 - STOCKHOLDERS EQUITY (Continued)
During 2004, the Company issued 350,000 shares of common stock for the
conversion of notes payable at a price of $0.61 per share. The total value
of the conversion to the Company was $214,235.
During 2004, the Company issued 177,778 shares of common stock to acquire
Brycol Consulting Ltd., at a price of $2.26 per share or $266,667.
During 2004, the Company issued 200,000 shares of common stock to acquire
Telecomsecuritymanagement.com, Ltd., at a price of $0.58 per share or
$116,000.
During 2005, the Company issued 2,295,444 shares of common stock to
acquire Risk Governance Inc., at a price of $1.24 per share or $2,839,694.
During 2005, the Company issued 3,380,000 shares of common stock for cash
and stock subscriptions receivable at prices ranging from $0.60 - $0.62
per share. Total cash received was $2,106,014 (less stock offering costs
of $21,579) and the stock subscription receivable amounted to $1,260,039.
During 2005, the Company issued 155,732 shares of common stock for cash in
a private placement at a price of $0.93 per share or $154,159.
During 2005, the Company issued 164,355 shares of common stock in lieu of
accounts payable and services rendered on behalf of the Company at prices
ranging from $1.55 to $1.86 per share or $302,329.
During 2005, the Company issued 300,000 shares of common stock for
services rendered on behalf of the Company at a price of $1.87 per share.
The total dollar amount of the services received amounted to $560,835.
During 2005, the Company issued 400,000 shares of common stock for
services rendered on behalf of the Company at a price of $1.87 per share.
The total dollar amount of the services received amounted to $4,898.
During 2005, the Company issued 1,177,966 shares of common stock for
services rendered on behalf of the Company at prices ranging from $0.50 to
$0.93 per share. The total dollar amount of the services received amounted
to $744,418.
During 2005, the Company filed an S-8 registration statement to register
approximately 6.3 million shares of common stock at a maximum offering
price of $1.425 per share for issuance pursuant to awards under the
Company's 2004 Incentive Stock Plan.
F-25