SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 JUNE 30, 2006
- 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)
100, 301 - 14th Street N.W., Calgary, Alberta Canada T2N 2A1
(Address of principal executive offices) (Zip Code)
2500, 520 - 5th Avenue S.W., Calgary, Alberta Canada T2P 3R7
(Former Address)
(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 Yes |X| No |_|
to 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.
Indicate by check mark whether the registrant is a shell Yes |_| No |X|
company (as defined in Rule 12b-2 of the Exchange Act)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 59,426,940 as of August 10, 2006.
Transitional Small Business Disclosure Format: Yes |_| No |X|
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Item 2. Management's Discussion and Analysis or Plan of Operations.........8
Item 3. Controls and Procedures...........................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................16
Item 3. Defaults Upon Senior Securities...................................17
Item 6. Exhibits..........................................................17
-i-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURAC CORP.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
ASSETS
June 30, December 31,
2006 2005
---------- ----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 43,189 $ 58,733
Accounts receivable, net 166,301 288,884
Notes receivable 16,904 16,904
Prepaid expenses and deposits 257,411 41,175
---------- ----------
Total Current Assets 483,805 405,696
---------- ----------
PROPERTY AND EQUIPMENT, net 29,585 38,823
---------- ----------
OTHER ASSETS
Notes receivable - related party 596,161 521,964
Intellectual property 803,205 803,205
Goodwill 91,000 91,000
---------- ----------
Total Other Assets 1,490,366 1,416,169
---------- ----------
TOTAL ASSETS $2,003,757 $1,860,688
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
SECURAC CORP.
Consolidated Balance Sheets (Continued)
(Expressed in Canadian Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2006 2005
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 787,105 $ 743,122
Accrued liabilities 524,117 286,393
Deferred revenue 133,604 218,131
Current portion of obligation under capital leases 1,485 1,485
Convetible debentures, net 837,314 266,061
Notes payable - related party 785,764 863,643
Notes payable 334,638 285,704
------------ ------------
Total Current Liabilities 3,404,027 2,664,539
------------ ------------
LONG-TERM DEBT
Obligations under capital leases 6,379 6,379
------------ ------------
Total Long-Term Debt 6,379 6,379
------------ ------------
Total Liabilities 3,410,406 2,670,918
------------ ------------
STOCKHOLDERS' EQUITY
Common stock , USD par value $0.01 per share (average
of $0.015 CDN par value); 200,000,000 shares authorized,
54,562,724 and 52,004,665 shares issued and
outstanding, respectively 790,485 749,808
Additional paid-in capital 15,611,709 14,698,337
Subscriptions receivable (1,047,400) (1,047,400)
Other comprehensive loss (273,978) (83,366)
Accumulated deficit (16,487,465) (15,127,609)
------------ ------------
Total Stockholders' Equity (1,406,649) (810,230)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 2,003,757 $ 1,860,688
============ ============
COMMITMENTS -- --
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
SECURAC CORP.
Consolidated Statements of Operations
(Unaudited)
(Expressed in Canadian Dollars)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES
License fees $ 17,505 $ 2,000 $ 61,237 $ 14,700
Annual Maintenenace 19,625 -- 29,041 --
Professional service and training fees 596,261 285,905 1,173,723 458,704
------------ ------------ ------------ ------------
Total Revenue 633,391 287,905 1,264,001 473,404
------------ ------------ ------------ ------------
OPERATING EXPENSES
Direct costs of service revenue 333,348 53,546 645,470 233,315
General and administration 240,178 3,153,944 391,562 3,459,890
Sales, marketing and investor relations 263,384 118,408 620,164 731,837
Research and development 200,853 114,839 350,853 522,402
Stock-based compensation 171,542 245,698 321,157 951,884
Amortization and depreciation 5,099 3,313 11,597 6,626
------------ ------------ ------------ ------------
Total Operating Expenses 1,214,404 3,689,748 2,340,803 5,905,954
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (581,013) (3,401,843) (1,076,802) (5,432,550)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Realized (loss) gain on foreign currency exchang (815) -- (3,714) --
Other income (expense) (55,700) -- (55,700) --
Interest expense (194,996) (600) (223,640) (3,371)
------------ ------------ ------------ ------------
Total Other Income (Expense) (251,511) (600) (283,054) (3,371)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX $ (832,524) $ (3,402,443) $ (1,359,856) $ (5,435,921)
Provision for Income Tax -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (832,524) $ (3,402,443) $ (1,359,856) $ (5,435,921)
============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (0.02) $ (0.07) $ (0.03) $ (0.11)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 53,047,570 49,045,805 52,004,665 47,590,701
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
SECURAC CORP.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in Canadian Dollars)
For the Six Months Ended
June 30,
---------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,359,856) $(5,594,327)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 10,197 6,626
Beneficial conversion interest 571,253 --
Common stock issued for services rendered 90,170 962,982
Common stock issued for interest 132,431 --
Fair value of options and warrants 266,252 2,763,592
Changes in operating assets and liabilities:
Accounts receivable 122,583 53,001
Advances and other receivables -- (5,127)
Prepaid expenses and deposits (9,053) 2,861
Deferred revenue (84,527) (5,064)
Accounts payable and accrued liabilities 339,812 587,485
----------- -----------
Net Cash (Used in) Operating Activities 79,262 (1,227,971)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds to related party receivables (74,197) (5,885)
Purchases of property and equipment (960) (1,367)
----------- -----------
Net Cash Used in Investing Activities (75,157) (7,252)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable 48,934 243,460
Payments on notes payable (77,879) (94,436)
Proceeds from issuance of common stock 199,908 972,537
Cash received on subscriptions receivable -- 75,651
----------- -----------
Net Cash Provided by Financing Activities 170,963 1,197,212
----------- -----------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (190,612) 11,229
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,544) (26,782)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 58,733 254,860
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,189 $ 228,078
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest $ 28,644 $ 1,200
Income taxes $ -- $ --
NON-CASH FINANCING ACTIVITIES
Common stock issued for services rendered $ 90,170 $ 962,982
Common stock issued for retirement of payables $ 58,104 $ 145,879
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
SECURAC CORP. AND SUBSIDIARIES
Notes to the Condensed Financial Statements
June 30, 2006 and December 31, 2005
(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
include 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 December 31, 2005 Annual
Report on Form 10-KSB. Operating results for the three months and six
months ended June 30, 2006 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2006.
NOTE 2 - LOSS PER SHARE
Following is a reconciliation of the loss per share for the three months
and six months ended June 30, 2006 and 2005:
For the
Three Months Ended
June 30,
------------------------------
2006 2005
------------- ------------
Net (loss) available to
common shareholders $ (832,524) $ (3,560,849)
============= ============
Weighted average shares 53,047,570 49,045,805
============= ============
Basic loss per share (based
on weighted average shares) $ (0.02) $ (0.07)
============= ============
For the
Six Months Ended
June 30,
------------------------------
2006 2005
------------- ------------
Net (loss) available to
common shareholders $ (1,359,856) $ (5,594,327)
============= ============
Weighted average shares 52,004,665 47,590,701
============= ============
Basic loss per share (based
on weighted average shares) $ (0.03) $ (0.12)
============= ============
Weighted average shares issuable upon the exercise of stock options and
warrants were not included in the foregoing calculations because they are
antidilutive.
-6-
SECURAC CORP. AND SUBSIDIARIES
Notes to the Condensed Financial Statements
June 30, 2006 and December 31, 2005
(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 in an accumulated deficit
of $16,487,456 at June 30, 2006, a working capital deficit of
approximately $2,920,222, 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
During the three months ended June 30, 2006, the Company granted options
and warrant, to various employees for services rendered. Pursuant to these
option grants, the Company recorded additional interest expense totaling
CDN$107,476. In addition, the Company granted additional warrants to a
company in partial consideration for a bridge loan. Pursuant to these
warrants, the Company recorded additional interest expense totaling
CDN$18,761.
During the three months ended June 30, 2006, the Company entered into a
bridge loan agreement with a lending company. Pursuant to the terms of a
bridge loan agreement, the Lender provided funding to the Company in the
principal amount of US$500,000. The loan bears interest at 10% per annum
pursuant to a form of note granted in favor of the lender. Principal and
interest are due and payable on November 11, 2006. In addition, the
obligations of the Company under the loan agreement and note are secured
by a general security interest in all of the Company's assets, as well as
a pledge of an aggregate of 21,309,009 shares of its common stock, owned
by certain of its trust stockholders, the beneficiaries of which include
certain of the Company's directors and management. In connection with the
loan agreement, the Company also issued to the lender 87,500 restricted
shares of its common stock and caused an additional 87,500 shares to be
transferred to the lender by existing stockholders. The Company has
committed to provide the lender with additional issued shares in an amount
equal to US$175,000 worth of common stock (half of which shall be
restricted and half of which shall be salable under Rule 144) in the event
that the Note is not repaid in its entirety on or before July 31, 2006. In
connection with the loan, the Company issued to the Lender a warrant to
purchase 175,000 shares of its common stock at an exercise price of
US$0.14 per share. The warrant contains a cashless exercise provision and
is exercisable at any time until May 11, 2001.
NOTE 5 - MATERIAL EVENTS
An action was brought against us in April, 2006 in the Court of Queen's
Bench, Judicial District of Edmonton, Alberta, for unpaid legal fees in
the amount of $122,999 by Parlee McLaws, a law firm which provided legal
services to us. Pursuant to a settlement agreement reached between the
parties, we have agreed to pay the amounts claimed over time.
An action was brought against us by Bryan Schltz, a former employee and
vendor of Brycol Consulting Ltd. (a company we acquired in March, 2004),
on March 28, 2006 in the Court of Queen's Bench, Judicial District of
Calgary, Alberta, for non-payment of employee related expenses and
non-payment of a portion of the purchase price related to the acquisition
and other related matters. The total amount claimed is $54,056. Pursuant
to a settlement agreement reached between the parties, we have agreed to
pay the amounts claimed over time.
-7-
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, 2005. 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. We undertake
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.
Overview
We provide enterprise governance, risk and compliance (GRC) software and
services. Our GRC software solution, Acertus(TM), enables organizations to
identify, measure and manage their information and physical risks and to assess
their compliance with expanding regulatory requirements and evolving "best
practices" standards.
The first commercial-ready version of our Acertus(TM) software was released in
July 2004. Prior to that point, we had invested in software development and our
revenue was substantially attributable to risk management consulting services.
Following market introduction of the initial Acertus software application, we
implemented our North American commercialization strategy. This involved three
key initiatives including, (a) a corporate reorganization and reverse merger
transaction, (b) investment in marketing and pre-sales activities, and (c)
continued investment in ongoing development and support of our software. In
January 2005, we also acquired the core Acertus(TM) Governance technology
through the acquisition of Risk Governance, Inc., the licensee of that
technology, in a share exchange. In 2005 we continued to enhance our software
and invest in sales and marketing. In July 2005 we introduced new versions of
our Acertus software applications. Accordingly, our financial performance in
2005 and continuing through 2006 reflects the investment and associated costs
involved with transitioning our company from a services and development
organization to a sales and marketing entity. While we believe our strategy has
positioned us to compete favourably in the North American market, it has
resulted and continues to result in significant expenditures, including large
non-cash charges, which have contributed to increasing losses and shortages in
working capital. Our ability to achieve profitability will depend, to a large
extent, on our ability to leverage our investments to date to maximize our
revenue through customer software licenses.
Reverse Takeover of Applewood's Restaurants, Inc.
On October 19, 2004, Applewood's Restaurants, Inc., the former name of our
company, consummated a share exchange with the shareholders of Securac, Inc., an
Alberta company. Pursuant to the share exchange, Applewood's Restaurants, Inc.
issued a total of 37,246,289 shares of common stock to the owners of Securac
Inc. and assumed warrants which now entitle the holders to purchase an aggregate
of 2,970,000 shares of our common stock at any time until July 16, 2006 at an
exercise price of US$0.75 per share. As a result of the transaction, Securac
Inc. became a wholly-owned subsidiary of our company, Securac, Inc. shareholders
became the owners of more than 90% of our outstanding common stock, management
of Securac Inc. became the management of our company and our company was
transformed from a shell company into a company with an operating business.
Accordingly, the transaction has been accounted for as a reverse takeover of our
company by Securac Inc., the deemed acquirer for accounting purposes, and the
historical financial statements of Securac, Inc. have been deemed the historical
financial statements of our company. In connection with and as a condition to
the share exchange, we completed a one-for-fifteen reverse split of our
outstanding shares of common stock effective October 21, 2004.
-8-
RGI Acquisition
On January 6, 2005, we acquired all of the outstanding stock of Risk Governance,
Inc., a private Delaware corporation ("RGI"), in exchange for stock of our
company valued at $1,147,722 for purposes of the transaction. The transaction
was effected pursuant to a share purchase agreement entered into on the same
date by our company with the shareholders of RGI. Pricing of the transaction was
fixed in connection with a letter of intent previously entered into between our
company and RGI. As a result of the acquisition, RGI is now a wholly-owned
subsidiary of our company. The principal asset 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. 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 the licensor.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis or Plan of Operations are based upon our
Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, with
the exception of fiscal 2003. These Consolidated Financial Statements were
prepared in accordance with Canadian generally accepted accounting principles,
which principles also conform in all material respects with the accounting
principles of the United States. 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
install the software at the client's site. 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.
Allowance for Doubtful Accounts
We evaluate the collectability of our trade receivables using 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.
-9-
Incentive Compensation
Annual incentive bonuses are a significant part of our company 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.
We currently apply the intrinsic-value-based method of accounting for employee
stock-based compensation prescribed by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations. Under this method we recognize compensation expense
only if awards are granted with an exercise price that is not fixed or below the
fair value of our ordinary shares on the date of grant. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") and SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure, an amendment of FASB Statement No. 123," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. In December 2004, the
Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004),
Share-Based Payment (SFAS 123R). SFAS 123R requires that compensation cost
related to share-based employee compensation transactions be recognized in the
financial statements. Share-based employee compensation transactions within the
scope of SFAS 123R include stock options, restricted stock plans,
performance-based awards, stock appreciation rights and employee share purchase
plans. As previously mentioned, we presently account for any stock-based
employee compensation under Accounting Principles Board (APB) Opinion No. 25.
However, the provisions of SFAS 123R are effective as of the first interim
period that begins after December 15, 2005. Accordingly, any share-based
employee compensation after December 15, 2005 will be recognized in the
financial statements.
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. We provide 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. We have 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.
-10-
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:
For the Three Months Ended
June 30,
(unaudited)
Statement of Operations Data: 2006 2005
------------ ------------
Revenue $ 633,391 $ 287,905
Cost of sales 333,348 53,546
------------ ------------
Gross profit 300,043 234,359
Operating expenses
General and administration 240,178 3,153,944
Sales, marketing and investor relations . 263,384 118,408
Research and development 200,853 114,839
Stock based compensation 171,542 245,698
Amortization and depreciation 5,099 3,313
------------ ------------
Loss from operations (581,013) (3,401,843)
Other income (expense) (251,511) (600)
------------ ------------
Net loss (832,524) (3,402,443)
============ ============
Net loss per share:
Total shares outstanding 53,047,570 49,045,805
Net loss per share ($0.02) ($0.07)
Comparison of Quarters ended June 30, 2006 and 2005
Revenue
Second quarter revenue of $633,391 increased by $345,486 or 120%, compared with
$287,905 in the comparable period in 2005. For the six months ended, revenue
increased 167% to $1,264,001 compared to $473,704 in Q2 of 2005. The increase is
due primarily to growth in professional services to new and existing customers,
and licensing revenue and maintenance fees from contracts booked in prior
periods. 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 revenue when we install the software at the client's site 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 receive our
Licensing Fees revenue in the functional currency of the country in which we do
business.
For the second quarter of 2006, License Fee revenue was $17,505 compared to
$14,700 in the prior period, representing application service provider ("ASP")
hosting fees pursuant to licensing agreements with our clients executed in prior
periods and booked under deferred revenue. For the six months ended, License Fee
revenue increased to $61,237 in 2006 compared to $14,700 in 2005.
-11-
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 second quarter
of 2006 we earned $19,625 in Annual Maintenance that had previously been
included in deferred revenue consistent with the terms of the license agreements
with our clients. For the six months ended 2006, Annual Maintenance Fees were
$29,041, compared to nil in the comparable period in 2005, as no Annual
Maintenance Fees were recorded in revenue as they were not yet earned.
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 is included in our aggregate
Professional Services and Training Fees revenue that is set out in our income
statement.
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 109% to $596,261 in the second quarter of 2006 through additional
contracts with new clients and an extension of a contract with a major client
compared to $285,905 in the same period ended in 2005. For the six months ended
2006, Professional Services revenue increased to $1,173,723 compared to $458,704
in the comparable period in 2005.
Cost of Sales
Cost of sales increased from $53,546 in the second quarter of 2005 to $333,348
in 2006 representing the direct labour cost to our company in carrying out its
professional services activities. Even with this 523% increase, our increased
sales activity caused our gross margin to increase 28% from $234,359 in the
second quarter of 2005 to $300,043 representing increased margin on our
incremental professional services revenue. For the six months ended 2006, our
cost of sales increased to $645,470 compared to $233,315 in the prior period,
still representing a 158% increase in gross margin.
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
support our R&D, sales, and marketing initiatives. G&A decreased significantly
from $3,153,944 in Q2 of 2005 to $240,178 in the second quarter of 2006 as we
continued our plan set out in 2006 to reduce expenditures not associated with
generating direct sales revenue. For the six months ended 2006, G&A decreased to
$391,562 compared to $3,459,890 in the prior period, as a result of management
trimming expenditures in Q1 and Q2 of the fiscal year to date.
Sales, Marketing, and Investor Relations - These expenses increased by 122% to
$263,384 in the second quarter of 2006 from $118,408 in the same period in 2005.
This Q2 increase is attributable to us not having significant sales and
marketing staff in the comparable period in the prior fiscal year. However, for
the six months ended 2006, our sales, marketing and investor relations expenses
decreased to $620,164 compared to $731,837 representing the completion of our
marketing collateral in the previous fiscal year, and the reduction in the
number of sales professionals employed by us as we shift our direct sales
strategy to a line-of-business model, using billable subject matter experts as
practice leaders to generate services engagements, and subsequent licensing
opportunities through the demonstration of our software on these engagements.
Furthermore, we are experiencing a reduction in lead times in the sales cycle as
the market for our software and services continues to mature, and we are
focusing our remaining sales professionals to supporting our channel partner
strategy.
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Research and Development - . Since March, 2004, substantially all of our R&D
activities have been conducted through Securac Technologies Inc., a
privately-owned company that is owned and controlled by Messrs. Terry Allen,
Paul Hookham and Bryce Mitchell, and is considered a Canadian Controlled Private
Corporation ("CCPC") for Canadian tax purposes. While we are committed to pay
for certain of the R&D activities incurred by the CCPC, the costs are
significantly less than if the R&D activities were incurred directly by us, 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 in the second quarter of 2006 to $200,853 from $114,839
in the same period in 2005 as additional resources were retained to assist in
the completion of our Acertus(TM) Assessment 2005-A3 enhancements. For the six
months ended 2006, R&D decreased to $350,853 compared to 522,402 as a result of
the completion of the integration of the Acertus(TM) Governance software arising
from our acquisition in January, 2005 with our Acertus(TM) Risk Assessment
software, which was a major initiative involving additional cost. In 2006, we
continue to focus our research and development efforts on improving and
enhancing its existing solution offerings as well as developing new solutions.
The research and development organization's responsibilities include product
management, product development, and software maintenance and solution release
management.
Stock Based Compensation - Our Stock Based Compensation account consists of
non-cash charges including employee options, private placement finder's fees,
and warrants valued using the Black-Scholes option pricing model for a total of
$171,542 in the second quarter of 2006 compared to $321,157 in the comparable
period in 2005. The amount in the second quarter of 2006 consisted primarily of
stock based expenses associated with our financing with CAMOFI Master LDC. Stock
Based Compensation decreased significantly from the six months ended 2005 of
$951,884 to $321,157 in the comparable period of 2006, as management has taken
the approach of granting employee options equal to fair market value at the time
of the grant.
Amortization and Depreciation - This consists of the depreciation of computer
equipment and capital assets. In the second quarter of 2006 we recorded $5,099
compared to $3,313 in the same period last year. For the six months ended 2006,
we recorded 11,597 compared to $6,626 in the prior period, representing the
increase in capital assets on our balance sheet.
Interest Expense - In Q2 of 2006, this account increased significantly to
$194,996 from $600 in the prior comparable period, primarily as a result of
issuing common stock to Generation Capital to whom we are indebted for
US$197,138, in partial consideration for extending the repayment terms of our
outstanding Note Payable pursuant to a forbearance agreement.
Foreign Currency
We receive our revenue in the functional currency of the country that we do
business in. We recognize and book the revenue in Canadian dollars. At present,
there is no policy in place to manage foreign currency risk.
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Liquidity and Capital Resources
The following table shows our summarized balance sheet data represented by items
in our consolidated balance sheet as of June 30, 2006:
As of
Balance Sheet Data: June 30, 2006
-------------
Cash and cash equivalents $ 43,189
Accounts and Notes receivable 183,205
Prepaids 257,411
Property and equipment 29,585
Goodwill 894,205
Total assets 2,003,757
Total liabilities 3,410,406
Total shareholders equity (deficiency) (1,406,649)
As of June 30, 2006, we had a working capital deficit of $2,920,222 and an
accumulated deficit of $16,487,465, the latter being primarily attributable to
the consolidation of Securac Inc. and Securac Corp.'s existing accumulated
deficit pursuant to the reverse merger transaction in October of 2004. 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 us 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.
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Principal Financial Commitments
As of June 30, 2006, 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) $52,500 owing to the
vendors of Brycol Consulting Ltd. that is non-interest bearing, unsecured and
payable in equal monthly instalments commencing April 1, 2005; (b) $223,151
owing to Generation Capital Associates at a term interest rate of 18% payable on
demand as of May 31, 2005, that is jointly and severally secured with personal
guarantees of three directors; (c) $30,000 owing to a former employee at an
annual interest rate of 12% to be repaid with principal and interest on October
31, 2005 that has been subsequently deferred with the verbal consent of the
holder until we receive sufficient financing to repay the principal and
interest; (d) CDN$55,000 owing to an individual, that is due and payable on or
before July 31, 2005 together with CDN$10,000 interest that has been
subsequently deferred with the verbal consent of the holder until we receive
sufficient financing to repay the principal and interest; and (e) on June 1,
2006, we assumed a loan agreement for and on behalf of Securac Technologies
Inc., a privately-owned company that is owned and controlled by Messrs. Allen,
Hookham and Mitchell, executive officers and directors of our company, in the
amount of CDN$100,000 owing to an individual, that is due and payable on October
1, 2006 together with monthly interest payments of 10%, in exchange for reducing
accrued amounts owing from Securac Inc. to Securac Technologies Inc. arising
from ongoing R&D charges incurred but not paid.
On September 30, 2005, we entered into a series of definitive agreements with
two affiliated funds, Dutchess Private Equities Fund, L.P. and Dutchess Private
Equities Fund II, L.P., under which the funds provided us with US$300,000 in
principal amount of short-term convertible debt and agreed to provide us with an
additional US$200,000 principal amount of such debt and established what is
commonly referred to as an equity line of credit in our favour for a maximum
amount of US$10 million. The terms of these transactions are summarized in our
Report on 8-K filed on October 6, 2005 which is publicly available through the
SEC's website located at http://www.sec.gov.
On May 11, 2006, we entered into a series of definitive agreements with CAMOFI
Master LDC, under which the lender provided us with $500,000 in principal amount
of short-term debt. The terms of this transaction is summarized in our Report on
8-K filed on June 16, 2006, which is publicly available through the SEC's
website located at http://www.sec.gov.
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ITEM 3. CONTROLS AND PROCEDURES
As previously reported in our Annual Report for the year ended December 31,
2005, 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") have concluded that as of the Evaluation
Date, our Disclosure Controls were not 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.
Since our Annual Report for the year ended December 31, 2005, we have
implemented Disclosure Controls that contain procedures to ensure proper
accounting and financial reporting activities and are continuing to review these
procedures.
In connection with the evaluation referred to above, we have identified no
change in our internal control of financial reporting that occurred during the
quarter ended June 30, 2006 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 our 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 our 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 1. LEGAL PROCEEDINGS
(a) An action was brought against us in April, 2006 in the Court of Queen's
Bench, Judicial District of Edmonton, Alberta, for unpaid legal fees in
the amount of $122,998.77 by Parlee McLaws, a law firm which provided
legal services to us. Pursuant to a settlement agreement reached between
the parties, we have agreed to pay the amounts claimed over time.
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(b) An action was brought against us by Bryan Schultz, a former employee and
vendor of Brycol Consulting Ltd. (a company we acquired in March, 2004),
on March 28, 2006 in the Court of Queen's Bench, Judicial District of
Calgary, Alberta, for non-payment of employee related expenses and
non-payment of a portion of the purchase price related to the acquisition
and other related matters. The total amount claimed is $54,055.66.
Pursuant to a settlement agreement reached between the parties, we have
agreed to pay the amounts claimed over time.
We are not a party to any other legal proceedings outside the ordinary course of
our business or to any other legal proceedings, which, if adversely determined,
would have a material adverse effect on our financial condition or results of
operations. We may be subject to legal action in the future, particularly in
light of our shortages in working capital and our inability to satisfy debts as
they become due.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As previously reported in our Annual Report for the year ended December 31,
2005, on April 4, 2006, we received a Notice of Default (the "Notice") from
Dutchess Private Equities Fund, II, LP (the "Holder") under the Debenture
Agreement dated as of September 30, 2005, (the "Debenture"). The notice asserted
that we failed to make principal and interest payments on the Debenture for
March and April, 2006.
The Notice also advised us that the Holder declared the remaining principal
balance, interest and liquidated damages immediately due and payable.
As of August 11, 2006, the aggregate amount of USD$969,642.63 the Holder claimed
to be due and owing.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
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: August 14, 2006
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