SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
SECURAC CORP.
(Name of small business issuer in its charter)
Nevada 7371 88-0210214
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(State or other Primary Standard Industrial (I.R.S. Employer
Jurisdiction of incorporation Classification Identification No.)
or organization) Code Number)
2500, 520 - 5th Avenue S.W., Calgary, AB T2P 3R7 403-225-0403
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(Address and telephone number of principal executive offices)
2500, 520 - 5th Avenue S.W., Calgary, AB T2P 3R7 403-225-0403
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(Address of principal place of business or intended principal place of business)
Paul Hookham, Chief Financial Officer
Securac Corp.
2500, 520 - 5th Avenue S.W.
Calgary, AB T2P 3R7
403-225-0403
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(Name, address and telephone number of agent for service)
Copy of all communications to:
Keith Moskowitz, Esq.
Eilenberg & Krause LLP
11 East 44th Street, 17th Floor
New York, New York 10017
(212) 986-9700
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
Title of Each Class of Amount to Proposed Maximum Offering Proposed Maximum Amount of
Securities to be Registered be Registered(1) Price per Share(US$) Aggregate Offering Price (US$) Registration Fee (US$)
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Common Stock, par value 69,164,855 shares(2) $0.44(3) $30,432,536 $3,581.91
US$.01 per share
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Common Stock 1,524,390 shares(4) $0.44(5) $ 670,732 $ 78.95
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Common Stock 181,819 shares(6) $0.44(5) $ 80,000 $ 9.42
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Common Stock 2,970,000 shares(6) $0.75(5) $ 2,227,500 $ 262.18
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Common Stock 350,000 shares(6) $0.50(5) $ 175,000 $ 20.60
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Common Stock 621,473 shares(6) $1.25(5) $ 776,841 $ 91.43
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TOTAL $ 35,317,779 $4,044.48
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(1) Pursuant to Rule 416(a) of the Securities Act of 1933, as amended (the "Act"), this registration
statement shall be deemed to cover additional securities that may be offered or issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
(2) Represents 43,490,915 shares held by existing stockholders and 25,673,940 shares, representing a
good faith estimate of the number of shares that may be issued to an investor pursuant to drawdowns by the
registrant at a presently indeterminable price under an existing investment agreement.
(3) Calculated in accordance with Rule 457(c) of the Act, based on the average of the bid and asked
prices as of a date within five business days prior to the filing date of this registration statement.
(4) Represents shares issuable upon conversion of debentures convertible into common stock.
(5) Calculated in accordance with Rule 457(g) of the Act, based on the higher of the conversion or
exercise price and the price calculated in accordance with Rule 457(c) of the Act.
(6) Represents shares issuable upon exercise of warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED OCTOBER 27, 2005
PROSPECTUS
SECURAC CORP.
74,812,537 Shares of Common Stock
This prospectus relates to the resale of up to 74,812,537 shares of our common
stock, of which
43,490,915 shares are held by existing stockholders of our Company;
4,123,292 shares are issuable upon exercise of currently outstanding
warrants;
1,524,390 shares are issuable upon conversion of a convertible debenture in
the principal amount of US$500,000 held by Dutchess Private Equities Fund
II, L.P., assuming all principal the redemption premium is converted into
common stock at the existing conversion rate of US$0.41 per share; and
25,673,940 shares represent the approximate number of shares issuable to
Dutchess Private Equities Fund, L.P. pursuant to drawdowns by us under an
Investment Agreement we entered into with that company (the "Investment
Agreement"), assuming we were to draw down the full amount of the
investor's commitment at the current market price of our stock under the
terms and conditions of the Investment Agreement.
We are not selling any securities in this offering and therefore will not
receive any proceeds from this offering. We will, however, receive proceeds from
any drawdowns under the Investment Agreement and option or warrant exercises. We
will bear all costs associated with registration of the shares offered hereby.
Our common stock is quoted on the OTC Bulletin Board under the symbol "SECU". On
October 27, 2005 the closing price of our common stock was US$0.45 per share.
Dutchess Private Equity Fund, L.P. is deemed an "underwriter" within the meaning
of the Securities Act of 1933, as amended, in connection with the resale of our
common stock under the Investment Agreement.
The selling stockholders may sell the shares from time to time at prevailing
market prices or at negotiated prices.
Investing in our common stock involves a high degree of risk. Please see "Risk
Factors" beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
SECURAC CORP.
No one (including any salesman or broker) is authorized to provide oral or
written information about this offering that is not included in this prospectus.
This prospectus is not an offer to sell common stock and is not soliciting an
offer to buy common stock in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . 1
THE OFFERING. . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY FINANCIAL DATA. . . . . . . . . . . . . . . . . . 1
FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . 2
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . 2
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . 10
DILUTION. . . . . . . . . . . . . . . . . . . . . . . . . 10
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY . . . . . 12
SELLING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . 12
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 19
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 26
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 36
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . 37
PRINCIPAL STOCKHOLDERS. . . . . . . . . . . . . . . . . . 38
CERTAIN TRANSACTIONS. . . . . . . . . . . . . . . . . . . 39
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . 40
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . 40
WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . 41
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . F-1
PROSPECTUS SUMMARY
This summary highlights information included elsewhere in this prospectus. You
should carefully review the more detailed information and financial statements
included in this prospectus. This summary is not complete and may not contain
all of the information you may need to consider before investing in our common
stock. We urge you to carefully read this prospectus, including the "Risk
Factors" section beginning on page 4 and the consolidated financial statements
and notes to those statements beginning on page F-1 of this prospectus. Please
note that throughout this prospectus, unless the context otherwise requires (i)
the words "we", "our" or "us" refer to Securac Corp. together with our
subsidiaries, Securac Inc. and Risk Governance Inc., and not to the selling
stockholders; (ii) all dollar references are to Canadian dollars; and (iii) all
share information gives retroactive effect to a 1:15 reverse stock split
effected in October, 2004.
About Us
We provide enterprise governance, risk and compliance (GRC) software and
services. Our GRC software solution 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.
Our integrated software platform, Acertus , provides users with a comprehensive
process-driven approach designed to offer a web-based roadmap for risk
mitigation, corporate security and compliance. Using the Acertus software,
users can input information regarding all of an organization's physical and
operational assets. This information is then processed and measured against
industry regulations and best practice standards. Based on the enterprise's risk
tolerance, our software determines the strengths and weaknesses in the
organization and assigns dollar values to all potential risks and
non-compliances. This information allows the organization to determine cost
saving solutions while improving efficiencies and providing an industry
advantage.
Part of our commercialization strategy involves alliances with leading global
software providers, system integrators and consulting organizations. To date, we
have entered into alliances with companies such as SAP, Deloitte & Touche, IBM,
Grant Thornton, and Compuware. These alliances are designed to facilitate
product acceptance and distribution of our risk management software to
customers. In 2005, we became a certified channel partner with SAP, a global
leader in Enterprise Resource Planning software, and the world's largest
inter-enterprise software company and third-largest independent software
supplier overall with 12 million users and 88,000 installations. As a result,
our Acertus software is certified under SAP's NetWeaver platform, allowing it
to integrate seamlessly to the core SAP application. With the completion of the
Acertus certification process, we have received access to the primary customers
of SAP NetWeaver along with the right to use the SAP tagline "Powered by SAP
NetWeaver ".
The initial application of our Acertus software first became available for
commercialization in mid-2004. Prior to that time, substantially all of our
revenue was attributable to GRC-related consulting services. Our customers
include, among others, Research in Motion, Canadian Imperial Bank of Commerce,
Cisco Systems, Celero Solutions, Mercer Consulting, Noranda, the Ontario
Ministry of Transportation, and the Canada Border Service Agency.
We license substantially all of the technology comprising our Acertus software
pursuant to two principal license agreements with licensor companies owned
indirectly and controlled by Messrs. Terry Allen, Paul Hookham and Bryce
Mitchell. We do not conduct our own research and development activities, and
rely substantially on the efforts of those companies for continued research and
development, which we fund on a time and materials basis pursuant to the
agreements.
Our headquarters are located at 2500, 520 - 5th Avenue S.W., Calgary, Alberta
T2P 3R7 and our telephone number is 403-225-0403. Our wholly-owned subsidiary,
Securac, Inc., maintains a website located at www.securac.net. The information
contained on the website is expressly not incorporated in this report.
Dutchess Financings
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. (collectively, "Dutchess"), under which Dutchess
established the Investment Agreement in our favour and 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 upon the
initial filing with the Securities and Exchange Commission of the registration
statement of which this prospectus forms a part.
Convertible Debt
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The debt bears interest at 10% per annum and is subject to a 25% redemption
premium. Principal, interest and the redemption premium are payable monthly
during the first year. The debt is currently convertible at the holder's option
into common stock at a conversion price equal to US$0.41, which was determined
as the lowest closing bid price of the common stock between the date of issuance
of the debt and the initial filing date of the registration statement of which
this prospectus forms a part. We sometimes refer to the shares issuable upon
conversion of the convertible debt as the "Debenture Shares". In connection with
the debt, we also issued to Dutchess a five-year warrant to purchase up to
181,819 shares of our common stock, exercisable at US$0.41 per share.
We will incur significant penalties in the form of liquidated damages and
otherwise for breaches and failure to comply with the commitments contained in
the various agreements, including, without limitation, our failure to file a
resale registration statement and to cause the same to be declared effective and
remain effective within agreed upon time periods. We have also agreed for a
certain period and under certain conditions not to engage in certain financings
without Dutchess' consent and to offer a right of first refusal to Dutchess in
respect of certain financings.
Investment Agreement
---------------------
We also entered into the Investment Agreement with Dutchess Private Equities
Fund, L.P., pursuant to which the investor committed to purchase, under certain
conditions, up to US$10,000,000 in aggregate purchase price of our 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
"Investment Agreement Registration"). Under the agreement, provided the
Investment Agreement Registration is effective, we are entitled to "put" shares
of our common stock to the investor from time to time, subject to a maximum
dollar amount for each put, at our election, of (i) US$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 US$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. We cannot initiate a new put until we close on any pending put.
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). 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),
we may withdraw the put notice.
Our ability to draw down on the Investment Agreement is subject to achieving and
maintaining an effective Investment Agreement Registration for the requisite
number of shares. The number of shares issuable under the Investment Agreement
is not presently known, as it is based upon the trading price of our common
stock at the time of each drawdown. At the recent closing bid price of US$0.41
per share, we would issue approximately 25,673,940 shares for the full amount of
the Investment Agreement. For the purpose of determining the number of shares to
be included in this prospectus, we have assumed that we will issue not more than
25,673,940 shares pursuant to the exercise of our put right under the Investment
Agreement, although the number of shares that we will actually issue pursuant to
that put right may be more than or less than 25,673,940, depending on the
trading price of our common stock. In the event that the closing bid price of
our common stock falls below US$0.41, we may not be able access the full amount
of our equity line pursuant to the Investment Agreement because we would be
required to issue more shares than we have registered. We currently have no
intent to exercise the put right in a manner that would result in our issuance
of more than 25,673,940 shares, but if we were to exercise the put right in that
manner, we would be required to file a subsequent registration statement with
the Securities and Exchange Commission and for that registration statement to be
deemed effective prior to the issuance. We sometimes refer to the shares
issuable under the Investment Agreement as the "Investment Agreement Shares".
Our ability to draw down on the Investment Agreement will be limited to the
extent the trading volume in our common stock is low and to the extent the
market price of our common stock is low.
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement to
Dutchess Private Equities, LP. That is, as our stock price declines, we would be
required to issue a greater number of shares under the Investment Agreement for
a given advance.
The Investment Agreement is generally terminable by us at any time provided
there is no outstanding balance under the convertible debentures.
The registration statement of which this prospectus forms a part is meant to
satisfy our registration obligations in respect of the shares issuable to
Dutchess in connection with the foregoing agreements.
THE OFFERING
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Maximum common stock offered
by the selling stockholders 74,812,537 shares.
Common stock outstanding as 50,830,487 shares; which does not
of the date of the prospectus include (i) 4,123,292 shares issuable
upon exercise of outstanding warrants,
(ii) the Debenture Shares, of which
1,524,390 shares are included for resale
in this prospectus and (iii) the
Investment Agreement Shares, of which
25,673,940 shares are included for
resale in this prospectus.
OTC Bulletin Board trading symbol SECU.OB
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Use of proceeds We will not receive any proceeds from
the resale of the common stock offered
by this prospectus. We will, however,
receive proceeds from any warrant
exercises and drawdowns under the
Investment Agreement. See "Use of
Proceeds".
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Plan of distribution Selling stockholders may sell their
shares on the OTC Bulletin Board, in
private transactions, through the
writing of options and/or through short
sales. Sales may be at prevailing market
prices or at negotiated prices. See
"Plan of Distribution".
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Risk factors The shares offered by this prospectus
involve a high degree of risk and should
not be purchased by anyone who cannot
afford the loss of their entire
investment. See "Risk Factors".
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SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data for our company.
You should read this information with the financial statements and notes to the
financial statements appearing elsewhere in this prospectus. The accounts of
Securac Inc., our wholly-owned subsidiary, are shown for 2003 and the interim
period in 2004 as our company engaged in a reverse acquisition with that company
subsequent to the end of the 2004 interim period, with Securac Inc. being deemed
the acquiring company for accounting purposes. See "Management's Discussion and
Analysis or Plan of Operations".
Audited Unaudited
Year Ended December 31 Six months ended June 30
Securac Inc. Securac Inc.
STATEMENT OF OPERATIONS DATA:. 2003 2004 2004 2005
---------------- -------------- ------------ ------------
Revenue. . . . . . . . . . . $ 527,096 $ 725,272 $ 231,263 $ 473,404
Cost of sales. . . . . . . . 387,866 209,392 171,953 354,495
---------------- -------------- ------------ ------------
Gross profit . . . . . . . . 139,230 515,880 59,310 118,909
Loss from operations . . . . (1,249,397) (3,274,273) (596,234) (5,590,956)
Other income (expense) . . . (15,333) (10,469) (3,647) (3,371)
Net loss . . . . . . . . . . (1,264,730) (3,284,742) (599,881) (5,594,327)
Net loss per share:. . . . . 0
Net loss per share . . . . ($0.04) ($0.09) ($0.02) ($0.12)
Total shares outstanding . 33,808,079 36,571,730 34,593,380 49,045,805
FORWARD-LOOKING INFORMATION
Some of the statements contained in this prospectus discuss our plans and
strategies for our business or state other forward-looking statements, as that
term is defined in the Private Securities Litigation Reform Act of 1995. The
words "anticipate", "believe", "estimate", "expect", "plan", "intend", "should",
"seek", "will", and similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying them.
These forward-looking statements reflect the current views of our management.
However, various risks, uncertainties and contingencies could cause our actual
results, performance or achievements to differ materially from those expressed
in, or implied by, these statements, including those identified under "Risk
Factors" and elsewhere in this prospectus.
We assume no obligation to update any forward-looking statements contained in
this prospectus, whether as a result of new information, future events or
otherwise.
RISK FACTORS
We are an early stage company with a limited history of operations, which makes
it difficult to anticipate our future performance.
We have a limited operating history and limited historical financial information
upon which to base your evaluation of our performance, particularly in light of
our shift in business focus from consulting to software applications.
Substantially all of our historical revenue has been generated from consulting
services, and our initial software application was first commercially introduced
to the market in July 2004. Our software business is in an early stage and we
have not yet generated significant revenue from software products and related
services. Consequently, we do not have an operating history upon which a
meaningful evaluation of our operations and prospects can be based. Our business
and prospects are subject to all of the risks inherent in the establishment of a
new business enterprise, and the likelihood of the success of our operations
must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
establishment of a new business.
We expect to continue to incur losses and experience negative cash flow in the
near term.
We have incurred operating losses since inception. We incurred a net loss of
approximately $3.3 million in 2004, and a net loss of approximately $1.3 million
in the prior year. As of June 30, 2005, we had a working capital deficit of
$1,193,057 and an accumulated deficit of $10,887,325. We have not generated
adequate revenue to support our operations and our activities to date have been
funded principally through equity and debt financings. We expect to continue to
incur losses and negative cash flow in connection with our plan of operations.
If we are unable to generate meaningful revenue to support our operations, we
may not be able to continue to fund our operations and would likely be forced to
scale back planned operations.
To achieve meaningful revenue for our software product applications, we will
need to overcome lack of market acceptance and long sales lead times.
Our software applications have not yet generated significant acceptance among
potential customers and will require a relatively long period of time to educate
potential customers as to the anticipated benefits as well as time, complexities
and costs of implementation. In addition, budgetary constraints and economic
slowdowns may further delay purchasing decisions by prospective customers. While
we have begun to establish strategic relationships to assist in this process, we
may not be able to successfully overcome these obstacles within anticipated time
frames or at all. Our failure to successfully address these challenges will
negatively impact our ability to achieve meaningful revenue and could cause us
to scale back planned operations.
We are investing significant resources in further developing and marketing new
and enhanced products and services. Demand and customer acceptance for recently
introduced products and services are subject to a high level of uncertainty as
these products and services involve a new approach to the conduct of business in
association with risk management. As a result, we have invested in, and intend
to continue to pursue, intensive marketing and sales efforts to educate
prospective customers regarding the uses and benefits of these products and
services in order to generate demand. Demand for these products and services may
not develop, or we may not develop acceptable solutions in a timely or
cost-effective manner. This could have a material adverse effect on our
business, financial position and results of operations or cash flows.
We are dependent on members of our senior management, none of whom are bound by
term employment agreements.
We are highly dependent upon our senior management. We have not entered into
term employment agreements with any of such individuals. Loss of the services of
any member of senior management may materially disrupt and harm our business.
Although we have "key man" life insurance in place covering members of senior
management, we cannot assure investors that such insurance will be maintained in
amounts adequate to cover potential loss or at all.
We do not presently have the right under material software licenses to expand
our software business beyond North America; potential conflicts of interest with
senior management relating to the software license could negatively impact our
business.
We license the core of our software technology from companies owned and
controlled by Messrs. Terry Allen and Paul Hookham, executive officers and
directors of our company, and Bryce Mitchell, a director of our company. As
such, there is a potential conflict between the interests of such individuals,
as licensor, and us, as licensee, should a disagreement arise under the license
agreement including disagreements relating to the amount or payment of
royalties, scope of the license or otherwise. In addition, the license is
limited in geographic coverage to North America. Should we choose to expand our
business beyond North America, we would need to negotiate a new arrangement with
the licensor. The licensor has no obligation to extend the license beyond North
America. We caution investors that a license may not be available to our
software technology beyond North America, if and when we decide to so expand,
and that the potential conflict of interest may impact the behavior of members
of our senior management in a way that is not in the best interests of our
shareholders.
If we do not continue to satisfy the terms and conditions of license agreements
covering our core software technology, we may lose our rights to such
technology.
We license our core software technology from companies owned and controlled by
Messrs. Terry Allen and Paul Hookham, executive officers and directors of our
company, and Bryce Mitchell, a director of our company. The terms of such
licenses provide for an exclusive, sub-licensable license for North America and
the royalty payments thereunder are payable to the licensor upon sales reaching
a specified target. Our failure to make required payments and to otherwise
satisfy our obligations under these licenses could result in a termination and
loss of our rights, which would in turn prevent us from exploiting the
technology. In addition, our rights to the Acertus Risk Assessment and
Compliance software will automatically become non-exclusive if we fail to have
our common shares listed on NASDAQ or a designated stock exchange by April 1,
2007, the third anniversary of the date of the license.
A significant increase in our customer base could strain and negatively impact
our ability to manage our operations.
Growth could strain our operations and may require us to incur costs to upgrade
our infrastructure and expand personnel. If our customer base grows
significantly, we cannot be sure that we will successfully manage our growth. In
order to manage any such growth successfully, we must:
- expand our management team, financial and information systems and
controls and operations team;
- maintain a high level of customer service and support; expand our
implementation and consulting resources internally and with third
parties;
- expand, train, manage and retain our employee base effectively; and
- manage costs for employees, hardware, software and networks in a
manner that will permit our business to scale.
Any failure to effectively meet the above requirements could adversely affect
our business. In addition, if our customer base grows significantly, there will
be additional demands on our customer service support, sales and marketing and
administrative resources as we try to increase our service offerings and expand
target markets. Any delay in the implementation of, or disruption in the
transition to, new or enhanced systems and controls could harm our ability to
accurately forecast demand for services, manage our billing of customers, manage
the sales cycle and implementation services and record and report management and
financial information on a timely and accurate basis. Moreover, any inability to
expand our product and service offerings and employee base commensurate with any
increase in demand could cause our revenues to decline.
Undetected errors or delays in new products and product enhancements may result
in increased costs and delayed demand for new products.
To achieve customer acceptance, our new products and product enhancements can
require long development and testing periods, which may result in delays in
scheduled introduction. Generally, first releases are licensed after a
validation process. Such new products and product enhancements may contain a
number of undetected errors or "bugs" when they are first released. As a result,
in the first year following the introduction of certain releases, we generally
anticipate devoting significant resources to working with early customers to
correcting such errors. There can be no assurance, however, that all such errors
can be corrected to the customer's satisfaction, with the result that certain
customers may bring claims for cash refunds, damages, replacement software or
other concessions. The risks of errors and their adverse consequences may
increase as we seek simultaneously to introduce a variety of new software
products.
Although we test each new product and product enhancement release before
introducing it to the market, there can be no assurance that significant errors
will not be found in existing or future releases of our software products, with
the possible result that significant resources and expenditures may be required
in order to correct such errors or otherwise satisfy customer demands. In
addition, the possibility cannot be excluded that customers may bring actions
for damages, make claims for replacement of software, or demand other
concessions from us. Significant undetected errors or delays in new products or
product enhancements may affect market acceptance of our software products.
We are subject to pricing pressure.
In response to the limited install base of our software, we have been required
in the past, and may be required in the future, to furnish additional discounts
to customers or otherwise modify our pricing practices. These developments have
and may continue to negatively impact our revenue and earnings. We intend to
license software applications on a "subscription" basis with an upfront license
pre-payment pursuant to an end user enterprise license agreement, which may be
renewed at the end of the subscription term. Changes in our pricing model or any
other future broadly-based changes to our prices and pricing policies could lead
to a decline or delay in software sales as our sales force and our customers
adjust to the new pricing policies.
In some cases, we license our software to customers on a per project basis
rather than an upfront license fee payment. Our project-based solutions have not
generated significant revenues and may never generate adequate, meaningful
revenue. The recent trend of outsourcing risk management solutions could result
in increased competition through the entry of consulting firms and other
application-hosting providers. We may be unable to offer an outsourcing model
that customers demand, or competitors may offer better, lower priced or more
desirable outsourcing models. In addition, the distribution of applications
through application service providers may reduce the price paid for our products
or adversely affect other sales of our products.
We may not be able to protect our intellectual property rights, which may cause
it to incur significant costs in litigation and erosion in the value of our
brands and products.
We rely on a combination of the protections provided by applicable trade secret,
copyright, license and non-disclosure agreements and technical measures to
establish and protect our rights in our products. Despite our efforts, there can
be no assurance that these protections will be adequate or that our competitors
will not independently develop technologies that are substantially equivalent or
superior to our technology. Despite our efforts, it may be possible for third
parties to copy certain portions of our products or reverse engineer or
otherwise obtain and use information that we regard proprietary. Accordingly,
there can be no assurance that we will be able to protect our proprietary
software against unauthorized third party copying or use, which could adversely
affect our competitive position. In addition, the laws of certain countries do
not protect our proprietary rights to the same extent as do the laws of the U.S.
or Canada.
In addition to our core technology licenses, we license certain third-party
software for inclusion in our products, and such software may not always be
available for our use or the loss of this technology could delay implementation
of our products or force it to pay higher license fees.
In addition to our Acertus core technology licenses, we license third-party
software to perform certain functions in our own software products. To date, we
have had a successful history of renewing or extending the required licenses
without interruption to our services, on terms we regard as satisfactory. It is
possible that in the future we may not be able to renew one or more of those
licenses on acceptable terms. If that were to occur, we may be forced to stop
shipping the affected product(s) until it could find or build a replacement for
the third-party software; this could materially and adversely affect our
operating results. While we believes that no such individual technology is
material to our business, changes in or the loss of licenses for such
third-party technology could lead to a material increase in the costs of
licensing or to Acertus software products becoming inoperable or their
performance being materially reduced, with the result that we may need to incur
additional development costs to ensure continued performance of our products.
Our failure to develop new relationships and enhance existing relationships with
third-party distributors, software suppliers, system integrators and value-added
resellers that help sell our services and products may adversely affect our
revenues.
We have supplemented our consulting and support services (in the areas of
product implementation, training and maintenance) through "alliance
partnerships" with third-party consulting groups including consulting groups
formerly associated with major accounting firms. Most of these agreements and
alliances are of relatively short duration and non-exclusive. In addition, we
have established relationships relating to the resale of our software products
by third parties including value-added resellers.
There can be no assurance that these third parties or business partners, most of
whom have similar arrangements with our competitors and some of whom also
produce their own standard application software in competition with us, will
continue to cooperate when such agreements or partnerships expire or are up for
renewal. In addition, there can be no assurance that such third parties or
partners will provide high-quality products or services or that actions taken or
omitted to be taken by such parties will not adversely affect the organization.
There can be no assurance that slow or weak economic recovery will not affect
such third parties or partners or the products and services that they provide
pursuant to the agreements with us. The failure to obtain high quality products
or services or to renew such agreements or partnerships could adversely affect
our ability to continue to develop product enhancements and new solutions that
keep pace with anticipated changes in hardware and software technology and
telecommunications, or could adversely affect the demand for our software
products.
If we are unable to keep up with rapid technological changes, it may not be able
to compete effectively.
Our future success will depend in part upon our ability to:
- continue to enhance and expand our existing products and services;
- provide best-in-class business solutions and services; and
- develop and introduce new products and provide new services that
satisfy increasingly sophisticated customer requirements, that keep
pace with technological developments and that are accepted in the
market.
We continue to seek to transform our suite of risk assessment applications to
identify, measure and manage enterprise-wide security risk solutions for our
customers. There can be no assurance that we will be successful in anticipating
and developing product enhancements or new solutions and services to adequately
address changing technologies and customer requirements. Any such enhancements,
solutions or services may not be successful in the marketplace or may not
generate increased revenue. We may fail to anticipate and develop technological
improvements, to adapt our products to technological change, change
country-specific regulatory requirements, react to emerging industry standards
and changing customer requirements or to produce high-quality products,
enhancements and releases in a timely and cost-effective manner in order to
compete with applications offered by our competitors.
If we acquire other companies, we may not be able to integrate our operations
effectively and, if we enter into joint ventures, we may not work successfully
with our alliance partners.
In order to complement or expand our business, we have made and expects to
continue to make acquisitions of additional businesses, products and
technologies, and has entered into, and expects to continue to enter into, a
variety of transactions, including alliance arrangements. Our current strategy
for growth includes, but is not limited to, the acquisition of companies as a
key element of future growth, especially acquisitions of smaller companies that
specifically aim at strengthening our geographic reach, broadening our offering
in particular industries, or complementing our technology portfolio.
Management's negotiations of potential transactions, including acquisitions or
alliances, and management's integration of acquired businesses, products or
technologies could divert our time and resources. In addition, risks commonly
encountered in such transactions include:
- inability to successfully integrate the acquired business;
- inability to integrate the acquired technologies or products with our
- current products and technologies;
- potential disruption of our ongoing business;
- inability to retain key technical and managerial personnel;
- dilution of existing equity holders caused by capital stock issuances
to the stockholders of acquired companies or capital stock issuances
to retain
- employees of the acquired companies;
- assumption of unknown material liabilities of acquired companies;
- incurrence of debt and/or significant cash expenditure;
- difficulty in maintaining controls, procedures and policies;
- potential adverse impact on our relationships with partner companies
or
- third-party providers of technology or products;
- regulatory constraints;
- impairment of relationships with employees and customers; and
- problems with product quality, product architecture, legal
contingencies, product development issues or other significant issues
that may not be detected through the due diligence process.
In addition, acquisitions of additional businesses may require large write-offs
of any in-process research and development costs related to companies being
acquired and amortization costs related to certain acquired tangible and
intangible assets. Ultimately, certain acquired businesses may not perform as
anticipated, resulting in charges for the impairment of goodwill and/or other
intangible assets. Such write-offs and amortization charges may have a
significant negative impact on operating margins and net income in the quarter
in which the business combination is completed and subsequent periods. In
addition, we have entered and expect to continue to enter into alliance
agreements for the purpose of developing new products and services. There can be
no assurances that any such products or services will be successfully developed
or that we will not incur significant unanticipated liabilities in connection
with such arrangements. We may not be successful in overcoming these risks or
any other problems encountered in connection with any such transactions and may
therefore not be able to receive the intended benefits of those acquisitions or
alliances.
Principal shareholders may be able to exert control over our future direction
and operations.
As of October 26, 2005, the beneficial holdings of our principal shareholders
(comprising trusts of which Messrs. Allen, Hookham, Mitchell and their family
members are beneficiaries), constituted in the aggregate approximately 41% of
our outstanding Common Stock. In addition, two other stockholders unaffiliated
with management own in the aggregate an additional approximately 10% of our
outstanding common stock as of that date. If these persons vote the shares held
by them in the same manner, it may have the effect of delaying, preventing or
facilitating a change in control or other significant changes to us or our
capital structure, which could in turn limit the value realizable for your
investment.
Our sales may be subject to fluctuations.
If and to the extent we are successfully generate meaningful revenue, we
anticipate that our revenue and operating results will be subject to variation.
Our revenue in general, and in particular our software revenue, is difficult to
forecast for a number of reasons, including:
- the relatively long sales cycles for our products;
- the size and timing of individual license transactions;
- the timing of the introduction of new products or product enhancements
by it or our competitors;
- the potential for delay of customer implementations of Acertus
software products;
- changes in customer budgets;
- seasonality of a customer's technology purchases; and
- other general economic and market conditions.
U.S. judgments may be difficult or impossible to enforce against us.
All of our executive officers and, with one exception, all members of our Board
of Directors are non-residents of the U.S. A substantial portion of the assets
of our company and such persons are located outside the U.S. As a result, it may
not be possible to effect service of process within the U.S. upon such persons
or it or to enforce against them or it judgments obtained in U.S. courts
predicated upon the civil liability provisions of the securities laws of the
U.S. In addition, awards of punitive damages in actions brought in the U.S. or
elsewhere may be unenforceable in Canada.
Stock Related Risks
Existing stockholders may experience significant dilution from the sale of our
common stock in connection with the Investment Agreement.
The sale or anticipated sale of our common stock to Dutchess pursuant to the
Investment Agreement may have a dilutive impact on our shareholders. As a
result, the market price of our common stock could decline. In addition, since
the purchase price of our common stock for each drawdown under the Investment
Agreement is based on the then prevailing market price, if our stock price
decreases, we will be forced to issue more shares in connection with drawdowns,
resulting in greater dilution to shareholders. If the full amount of the
Investment Agreement were drawn upon by us at a time when the stock price was
US$0.41 we would issue approximately the full 25,673,940 shares covered by this
prospectus in respect of the Investment Agreement.
The perceived risk of dilution may cause our stockholders to sell their shares,
which would contribute to a decline in the price of our common stock. Moreover,
the perceived risk of dilution and the resulting downward pressure on our stock
price could encourage investors to engage in short sales of our common stock. By
increasing the number of shares offered for sale, material amounts of short
selling could further contribute to progressive price declines in our common
stock.
Under the Investment Agreement, Dutchess will pay less than the then-prevailing
market price of our Common Stock.
The Common Stock issuable under the Investment Agreement will be purchased by
Dutchess at a 5% discount to the lowest closing bid price for the five trading
days immediately following notice by us of a drawdown. Accordingly, Dutchess
will have a financial incentive to lock in the profit between the discounted
price and the then market price by immediately selling shares. Actual sales or
the anticipation of actual sales will have a negative effect on the stock price.
As the stock price declines, the investor will have further incentive to sell,
which would add to the negative impact on the stock price.
Sales or the potential for sales of our common stock may cause our stock price
to decline.
Approximately 43,490,915 shares of our currently outstanding shares of common
stock are deemed "restricted securities" as that term is defined by Rule 144
under the Securities Act of 1933. Such shares will be eligible for public sale
only if registered under the Securities Act or if sold pursuant to an exemption
from registration such as that provided by Rule 144. Since most of our
outstanding "restricted securities" were acquired in connection with the reverse
merger of our Company with Securac Inc., at a time when our company was a public
shell company, holders of such securities may not be able to rely on Rule 144
for resale. The registration statement, of which this prospectus forms a part,
covers resale of all outstanding shares that are deemed "restricted securities",
in addition to 4,123,292 shares underlying warrants, 1,524,390 Debenture Shares
and 25,673,940 Investment Agreement Shares. As such, these shares will be freely
tradable beginning on the effective date of the registration statement, subject
to compliance with applicable contractual lock-up restrictions. The sale of
shares by selling stockholders from time to time, or even the potential of such
sale, may depress the price of our common stock.
There is only a limited trading market for our common stock and it is possible
that you may not be able to sell your shares easily.
Our common stock is quoted on the NASD Over-the-Counter Bulletin Board. Trading
in our stock has historically been sporadic and limited in volume. As a result,
investors have experienced and may continue to experience difficulty selling
their shares at desired times and price levels. We cannot assure investors that
a substantial trading market will develop or be sustained for our common stock.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock is likely to be volatile and could
fluctuate widely in response to many factors, including:
- announcements of new contracts or products or product versions by it
or our competitors;
- developments with respect to patents or proprietary rights;
- announcements of technological innovations by it or our competitors;
- actual or anticipated variations in our operating results due to the
level of development expenses and other factors;
- changes in financial estimates by securities analysts and whether our
earnings meet or exceed such estimates;
- conditions and trends in the software industry, as well as the
industries of our customers;
- new accounting standards;
- general economic, political and market conditions and other factors;
and
- the occurrence of any of the risks described in "Risk Factors".
Since our transition to an operating company from a shell company in October
2004, the price range of the closing bid prices for our common stock has ranged
between a high of US$2.75 and a low of US$0.37. In the past, following periods
of volatility in the market price of the securities of companies in our
industry, securities class action litigation has often been instituted against
those companies. If we face such litigation in the future, it would result in
substantial costs and a diversion of management attention and resources, which
would negatively impact our business.
Declines in our stock price might harm our ability to issue equity under future
potential financing arrangements. Since we would expect to issue shares in such
transactions at a price generally based on the market price of our common stock,
a decline in our stock price would result in our needing to issue a greater
number of shares to raise a given amount of funds or acquire a given amount of
goods or services. For this reason, a decline in our stock price might also
result in increased ownership dilution to our stockholders.
Future issuance of common stock upon exercise of convertible debt, stock options
and warrants may depress the price of our common stock.
As of October 27, 2005, we had 5,342,804 shares of common stock reserved for
issuance upon exercise of convertible debt and warrants as follows:
- 2,970,000 shares underlying exercisable until July 16, 2006 at US$0.75
per share;
- 350,000 shares underlying warrants exercisable until October 29, 2006
at US$0.50 per share;
- 477,474 shares underlying warrants exercisable until December 1, 2007
at US$1.25 per share;
- 143,999 shares underlying warrants exercisable until December 31, 2007
at US$1.25 per share;
- 181,819 shares underlying warrants exercisable until September 30,
2010 at US$0.41 per share; and
- 1,524,390 shares are issuable upon conversion of a convertible
debenture in the principal amount of US$500,000 held by Dutchess
Private Equities Fund II, L.P., assuming all principal the redemption
premium is converted into common stock at the existing conversion rate
of US$0.41 per share.
In addition, at that date, we were entitled to issue awards covering an
aggregate of 6,343,288 shares of common stock pursuant to our 2004 Incentive
Stock Plan, which awards may include options, SARs and stock grants.
During the respective terms of the options and warrants granted or to be granted
under our 2004 Incentive Stock Plan or otherwise, as well as the convertible
debt, the holders thereof are given an opportunity to benefit from a rise in the
market price of the common stock, with a resultant dilution of the interests of
existing stockholders. The existence of these securities could make it more
difficult for it to obtain additional financing while such securities are
outstanding. The holders may be expected to exercise their rights to acquire
common stock and sell at a time when we would, in all likelihood, be able to
obtain needed capital through a new offering of securities on terms more
favorable than those provided by these warrants and options.
Our common stock is deemed to be a "penny stock" which may make it more
difficult for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be a "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. With certain
exceptions, penny stocks are generally defined to mean stocks:
- with a price of less than US$5.00 per share;
- that are not traded on a "recognized" national exchange or NASDAQ; or
- of issuers with net tangible assets of less than $2.0 million (if the
- issuer has been in continuous operation for at least three years) or
$5.0 million if the issuer has been in continuous operation for less
than three years), or with average revenues of less than $6.0 million
for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for our shareholders to
sell shares to third parties or to otherwise dispose of them, which could have a
depressive effect on our stock price.
We do not intend to pay distributions on our capital stock in the foreseeable
future.
We have not paid cash distributions and do not anticipate paying cash
distributions in the foreseeable future. Pursuant to a security agreement
entered into with Dutchess in connection with the convertible debt financing, we
have agreed not to declare or pay any dividends on, or otherwise make a
distribution in respect of, our capital stock without Dutchess' prior consent.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive proceeds
from the sale of shares of common stock in this offering. However, we will
receive any proceeds from current exercises and sale of shares of common stock
to Dutchess under the Investment Agreement. The purchase price of the shares
purchased under the Investment Agreement will be equal to 95% of the lowest
closing bid prices of our common stock for the five days immediately following
the date of our notice of election to exercise our put. For illustrative
purposes, we have set forth below our intended use of proceeds for the range of
net proceeds indicated below to be received under the Investment Agreement. The
Gross Proceeds represent the total dollar amount that Dutchess is obligated to
purchase. The table assumes estimated offering expenses of $50,000 and placement
agent's fees of 7% for total estimated expenses of $750,000.
Proceeds if Proceeds if
100% 50%
($US) . . . . . . . . . . . . . . . sold sold
Gross Proceeds. . . . . . . . . . . $ 10,000,000 $ 5,000,000
Estimated expenses of the Offering. (750,000) (400,000)
------------- -------------
Net Proceeds. . . . . . . . . . . . $ 9,250,000 $ 4,600,000
============= =============
Sales . . . . . . . . . . . . . . . $ 2,775,000 $1,380,000
Marketing . . . . . . . . . . . . . 1,850,000 920,000
Ongoing R&D . . . . . . . . . . . . 1,850,000 920,000
Debt Reduction(1) . . . . . . . . . 1,017,500 506,000
General Working Capital . . . . . . 1,757,500 874,000
-----------------------------
$ 9,250,000 $4,600,000
=============================
(1) Includes accumulated trade payables and principal financial commitments. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Principal Financial Commitments".
Proceeds of the offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds and other high-grade,
short-term interest-bearing investments.
DILUTION
Our net tangible book value as of June 30, 2005 was (US$1,153,597), or (US$0.02)
per share of common stock. Net tangible book value is determined by dividing our
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of our common stock. Since this offering is being made
solely by the selling stockholders and none of the proceeds will be paid to us,
our net tangible book value will be unaffected by this offering. Our net
tangible book value, however, will be impacted by the common stock to be issued
to Dutchess. The amount of dilution will depend on the offering price of
Dutchess and number of shares to be issued. The following example shows the
dilution to new investors at an offering price of US$0.45 per share.
Assumed public offering price per share. . . . . . . . $ 0.50
Net tangible book value per share before this offering ($0.02)
Net tangible book value after this offering. . . . . . $8,096,403
Net tangible book value per share after this offering. $ 0.11
Increase in net tangible book value per share. . . . . $ 0.09
If we assume that we were to issue 21,052,631 shares of common stock to Dutchess
at an assumed offering price of 95% of US$0.45 per share, less $750,000 of
offering expenses and placement agent fees, our net tangible book value as of
June 30, 2005 would have been US$8,096,403 or US$0.11 per share. This represents
an immediate increase in net tangible book value to existing shareholders of
US$0.09 per share.
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement to
Dutchess. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Investment Agreement for a given advance.
This inverse relationship is demonstrated by the table below, which shows the
number of shares to be issued under the Investment Agreement at various market
prices and the Dutchess percentage discounts to that price.
Market price . . . . . . . . . . . . . $ 0.50 $ 0.40 $ 0.30 $ 0.20 $ 0.10
Dutchess discount. . . . . . . . . . . 5% 5% 5% 5% 5%
Purchase price . . . . . . . . . . . . $ 0.48 $ 0.38 $ 0.29 $ 0.19 $ 0.10
Number of shares issued from treasury1 21,052,632 26,315,789 35,087,719 52,631,579 105,263,158
Shares outstanding prior to issuance . 51,739,577 51,739,577 51,739,577 51,739,577 51,739,577
Share outstanding after issuance2. . . 72,792,209 78,055,366 86,827,296 104,371,156 157,002,735
% increase in shares outstanding3. . . 29% 34% 40% 50% 67%
(1) Represents the number of shares of common stock to be issued at the
Purchase Price set forth in the table to generate US$10,000,000 in
gross proceeds.
(2) Represents the total number of shares of common stock outstanding
after the issuance of the shares, assuming no issuance of any other
shares of common stock.
(3) Represents the shares of common stock to be issued as a percentage of
the total number of shares of common stock outstanding (assuming no
exercise or conversion of any options, warrants or other convertible
securities).
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our Common Stock is traded on the OTC Bulletin Board under the symbol "SECU.OB".
The following sets forth the high and low bid prices for our Common Stock for
each quarter during the last two fiscal years and the current fiscal year
through September 30. Quotations reflect interdealer prices without retail
mark-up, mark-down or commission, and may not represent actual transactions.
High Low
Quarter Ended. . . (US$) (US$)
Year 2003
March 31, 2003 . . 0.24 0.24
June 30, 2003. . . 0.24 0.24
September 30, 2003 0.90 0.24
December 31, 2003. 0.75 0.18
Year 2004
March 31, 2004 . . 0.37 0.24
June 30, 2004. . . 0.37 0.30
September 30, 2004 2.55 0.25
December 31, 2004. 2.75 0.90
Year 2005
March 31, 2005 . . 2.25 0.90
June 30, 2005. . . 1.25 0.65
Sept 30, 2005. . . 0.98 0.37
The transfer agent and registrar for our Common Stock is American Stock Transfer
& Trust Company. Based upon information supplied from our transfer agent, as of
October 27, 2005 there were 468 holders of record of our common stock.
We have not paid any cash dividends on our common stock since our formation. The
payment of dividends, if any, in the future is within the discretion of our
board of directors and will depend on our earnings, capital requirements,
financial condition and other relevant factors. Our board of directors does not
presently intend to declare any dividends on our common stock in the foreseeable
future. We anticipate that all of our earnings and other resources, if any, will
be retained by us for investment in our business. Pursuant to the terms of a
security agreement entered into with Dutchess in connection with the convertible
debt, we have agreed not to declare or pay any dividends on or otherwise make a
distribution in respect of our capital stock without Dutchess' prior consent.
SELLING STOCKHOLDERS
In October 2004, we completed a reverse takeover of Securac Inc. in a share
exchange pursuant to which Securac Inc. became a wholly-owned subsidiary of our
company, we issued to the owners of Securac Inc. a number of shares of our
common stock equal to more than 90% of our common stock outstanding after the
transaction and the management and business of Securac Inc. became the
management and business of our company (the "RTO"). We issued a total of
37,246,289 shares and assumed warrants to purchase a total of 2,970,000 shares
in connection with the RTO. Following the RTO, we issued 525,000 shares of
common stock to former affiliates of Applewood's Restaurants, Inc. (the name of
our company pre-RTO) in connection with their continued assistance after the
RTO. From October 2004 through February 2005 we issued and sold a further
621,473 shares of common stock and warrants to purchase an additional 621,473
shares in a series of private transactions in which we raised gross proceeds of
US$663,104. In October 2004, we issued 350,000 shares of common stock and
warrants to purchase an additional 350,000 in connection with a loan conversion.
On September 30, 2005, we entered into a series of definitive agreements with
Dutchess, under which Dutchess established an equity line under the Investment
Agreement in our favor and 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 upon the initial filing with the
Securities and Exchange Commission of the registration statement of which this
prospectus forms a part. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity" for a more detailed description
of the transactions with Dutchess.
The shares of common stock offered pursuant to this prospectus have either (i)
been received by the selling stockholders pursuant to the foregoing transactions
or (ii) may be received (A) upon exercise or conversion of derivative securities
received by the selling stockholders pursuant to the foregoing transactions or
(B) by Dutchess pursuant to drawdowns under the Investment Agreement.
The term "selling stockholder" includes (i) each person and entity that is
identified in the table below (as such table may be amended from time to time by
means of an amendment to the registration statement of which this prospectus
forms a part) and (ii) any transferee, donee, pledgee or other successor of any
person or entity named in the table that acquires any of the shares of common
stock covered by this prospectus in a transaction exempt from the registration
requirements of the Securities Act of 1933 and that is identified in a
supplement or amendment to this prospectus.
We have listed below:
the name of each selling stockholder;
the number of shares of common stock beneficially owned by the selling
stockholder as of the date of this prospectus;
the maximum number of shares of common stock being offered by each of them
in this offering; and
the number of shares of common stock to be owned by the selling stockholder
after this offering (assuming sale of such maximum number of shares).
The footnotes to the table identify each selling stockholder that is a
registered broker-dealer. Each such selling stockholder acquired its securities
for investment purposes, and not as compensation for underwriting activities.
Each of these selling stockholders will be considered to be an underwriter,
within the meaning of the Act, with respect to any securities that it sells
pursuant to this prospectus. See "Plan of Distribution".
The footnotes to the table also identify each selling stockholder that is an
affiliate of a registered broker-dealer. Each of these selling stockholders (i)
purchased its securities in the ordinary course of business and (ii) at the time
of purchase, had no agreements or understandings, directly or indirectly, with
any person to distribute such securities.
Except as otherwise noted below, during the last three years, no selling
stockholder has been an officer, director or affiliate of our Company, nor has
any selling stockholder had any material relationship with our Company during
that period. Each selling stockholder represented at the closing of the private
placement that it did not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, pledge, hypothecate, grant any
option to purchase or otherwise dispose of any of the securities. The selling
stockholders purchased the securities in the ordinary course of business, to the
best of our knowledge.
The shares of common stock being offered hereby are being registered to permit
public secondary trading, and the selling stockholders are under no obligation
to sell all or any portion of their shares included in this prospectus. The
information contained in the following table is derived from our books and
records, as well as from our transfer agent and has been confirmed by each
shareholder. The following table assumes the sale of all securities included in
this prospectus.
After the offering, assuming all shares offered hereby are sold, none of the
selling stockholders will own one percent or more of the outstanding shares of
our common stock.
Shares Owned Shares Available Shares
Prior to this Pursuant to this Owned After
Selling Stockholder Offering(1) Prospectus(1) Offering
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577760 BC Ltd.(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Allan Parnitsky(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Arthur Tremblay(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,001 45,001 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Barbara MacRae-Kniel(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,998 17,998 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Bayeux Holdings Ltd. trustee of the Bayeux Trust (4) . . . . . . . . . . . . . 3,742,300 3,742,300 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Brent Herman(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,000 88,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Brett Marshall(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 72,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Bruce Riekman(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Bryan Schultz(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 240,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Canadian Western Trust ITF Howard Enns RRSP #24552 (5) . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Canadian Western Trust ITF Shirley Enns RRSP #24553 & 24554 (6). . . . . . . . 89,999 89,999 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Cheryl Mittelstadt(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000 34,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Chris Koebel(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,654 191,654 0
------------------------------------------------------------------------------ ----------------- --------------------------------
David G. Harris(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,000 108,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Don Wallace(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Doug Little(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,000 112,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Douglas Park Capital Ltd. (7). . . . . . . . . . . . . . . . . . . . . . . . . 700,000 700,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Dutchess Private Equities Fund II, L.P. (8). . . . . . . . . . . . . . . . . . 1,401,331 1,401,331 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Edward D. Chibri(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324,000 324,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Elaine Enns(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000 230,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Forest Nominees Limited (9). . . . . . . . . . . . . . . . . . . . . . . . . . 426,537 426,537 0
------------------------------------------------------------------------------ ----------------- --------------------------------
G.Li & Company Limited(10) . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
George Koebel(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,001 72,001 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Gordon Edward McCann(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,600 31,600 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Graham Busch(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,000 675,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Gregory James Hookham(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,000 675,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
GundyCo In Trust For Dawn Rigby RRSP# 562-31019-11 (11). . . . . . . . . . . . 180,000 180,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
GundyCo In Trust For Helena Lee RRSP# 552-05438-19 (12). . . . . . . . . . . . 90,000 90,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
GundyCo In Trust For Michael Lee RRSP# 552-05439-18(13). . . . . . . . . . . . 90,000 90,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Henry Green(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,870 11,870 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Henry M. Dick(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000 270,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Herman Enns(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,001 95,001 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Hexham Holdings Ltd. trustee of the Hexham Trust (14). . . . . . . . . . . . . 3,122,653 3,122,653 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Hilary Bairstow(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,740 23,740 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Hisahiro Kashida(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,860,000 4,860,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Howard Enns(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,500 210,500 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Jerry Rossiter(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,806 75,806 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Jody McNeill(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000 270,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Joshua Benjamin Prof. Corp. (17) . . . . . . . . . . . . . . . . . . . . . . . 89,999 89,999 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Katherine A. Denoudsten(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 33,750 33,750 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Keith Norris(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Kelly Regier(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,002 90,002 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Kevin Dewey(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,889 424,889 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Kingsnorth Ltd. trustee of the Kingsnorth Trust (18) . . . . . . . . . . . . . 3,789,553 3,789,553 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Kyle Rossiter(19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,806 75,806 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Leslie Allan Postnikoff(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,576,383 2,576,383 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Lyle Busch(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,000 432,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Marc Bourret(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,000 68,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Maren Trading Limited(20). . . . . . . . . . . . . . . . . . . . . . . . . . . 23,740 23,740 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Meir Weis(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,999 89,999 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Mercia Ltd. TTEE of the Mercia Trust (21). . . . . . . . . . . . . . . . . . . 3,742,303 3,742,303 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Michael Van Houdt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000 27,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
National Bank Financial In Trust for Walter V. Bychkowski (22) . . . . . . . . 764,249 764,249 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Murray C. Maclean(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
NBCN Clearing Inc FBO Armand Thibodeau & Claudette Thibodeau JTTEN(23) . . . . 120,000 120,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
NBCN Clearing Inc FBO Barry Wolf(24) . . . . . . . . . . . . . . . . . . . . . 400,000 400,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
NBCN Clearing Inc FBO Lynn Wolf(25). . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
NBCN Clearing Inc FBO Telecomsecurity Mgmt Com Ltd (26). . . . . . . . . . . . 540,000 540,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
NBCN Clearing Inc. FBO Wilfred & Angelina Leimser JTTEN (27) . . . . . . . . . 40,000 40,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Norman Enns(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000 216,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Peak Investment Services Inc. in trust for Bernie McNeill RRSP #7004860 (28) . 66,115 66,115 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Peak Investment Services Inc. ITF Larry Simister RRSP #7201419 (29). . . . . . 27,000 27,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Peak Investment Services Inc. ITF Pamela McNeill RRSP #7021239 (30). . . . . . 32,721 32,721 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Peak Investment Services Inc. ITF Robert MacRae RRSP# 7021622Robert MacRae(31) 189,899 189,899 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Plantagenet Holdings Ltd. TTEE of the Plantagenet Trust (32) . . . . . . . . . 3,789,550 3,789,550 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Randy Weins(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,000 47,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Raymond Necula(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742,400 742,400 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Reg & Linda Pankewitz(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Rene McKale(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Ric Irving(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,201 61,201 0
------------------------------------------------------------------------------ ----------------- --------------------------------
RLCC Holdings Ltd.(33) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,066 129,066 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Robert C. Stewart(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,335 259,335 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Rochelle Lambert(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 160,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Ruth Regier(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,001 45,001 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Steve Koper(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 90,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Swansea Holdings Ltd. Trustee of the Swansea Trust (34). . . . . . . . . . . . 3,122,650 3,122,650 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Sylvia S. Rempel (35). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000 270,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Toni Koebel(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,054 170,054 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Toshiaki Mashima(36) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080,000 1,080,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Vincent C. Fera (37) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,336 668,336 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Vivian Boyko(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,800 37,800 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Walter Enns(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,997 269,997 0
------------------------------------------------------------------------------ ----------------- --------------------------------
Warren Bengtson(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,447 77,447 0
------------------------------------------------------------------------------ ----------------- --------------------------------
William Haughton(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,000 675,000 0
------------------------------------------------------------------------------ ----------------- --------------------------------
(1) Information concerning the selling stockholders may change from time to time. Any such changed information will be set
forth in supplements or post-effective amendments to this prospectus if and when necessary.
(2) This selling stockholder is a non-public entity. Conrad Nunweiler, this selling stockholder's director, has voting and
investment control over the securities that this selling stockholder beneficially owns.
(3) This selling stockholder is a natural person.
(4) This selling stockholder is a trust whose beneficiary, Bryce Mitchell, is a director of our company. Investment and voting
decisions with respect to the securities are made jointly by three persons other than Mr. Mitchell, none of whom individually is
deemed to beneficially own the securities within the meaning of the Securities Exchange Act of 1934, as amended.
(5) This is a registered retirement savings plan. Howard Enns, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(6) This is a registered retirement savings plan. Shirley Enns, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(7) This selling stockholder is a non-public entity. Peter Rochow, this selling stockholder's director, has voting and
investment control over the securities that this selling stockholder beneficially owns. The number of shares includes 350,000
shares underlying warrants which are exercisable until October 29, 2006 at US$0.75 per share.
(8) This selling stockholder is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection
with the resale of our common stock under the Investment Agreement. The number of shares includes 181,819 underlying warrants
which are exercisable until September 30, 2010 at US$0.55 per share. Michael Novielli and Douglas Leighton are the managing
members of Dutchess Capital Management, LLC which is the general partner to Dutchess Private Equities Fund, II, LP.
(9) This selling stockholder is a foreign broker-dealer who holds the shares in a fiduciary capacity. Together Harry Vernon,
Shane LePrevost, John Davey and Frank LeMaistre have voting and investment control over the securities that this security holder
owns and it holds an 26,666 shares underlying warrants which are exercisable until December 31, 2007 at US$1.25 per share.
(10) This selling stockholder is a non-public entity. Greg Li, this selling stockholder's director, has voting and investment
control over the securities that this selling stockholder beneficially owns.
(11) This is a registered retirement savings plan. Dawn Rigby, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(12) This is a registered retirement savings plan. Helena Lee, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(13) This is a registered retirement savings plan. Michael Lee, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(14) This selling stockholder is a trust whose beneficiary, Terry Allen, is an executive officer and director of our company.
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.
(15) This selling stockholder is a natural person. The number of shares includes 2,430,000 shares underlying warrants which
are exercisable until July 16, 2006 at US$0.75 per share.
(16) This selling stockholder is a natural person. The number of shares includes 37,903 shares underlying warrants which are
exercisable until December 1, 2007 at US$1.25 per share.
(17) This selling stockholder is a non-public entity. Joshua Benjamin and Ariella Weis-Benjamin, this selling stockholder's
directors, have voting and investment control over the securities that this selling stockholder beneficially owns.
(18) This selling stockholder is a trust whose beneficiary, Paul Hookham, is an executive officer and director of our company.
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.
(19) This selling stockholder is a natural person. The number of shares includes 37,903 shares underlying warrants which are
exercisable until December 1, 2007 at US$1.25 per share.
(20) This selling stockholder is a non-public entity. Ron Ingarfield, this selling stockholder's director, has voting and
investment control over the securities that this selling stockholder beneficially owns.
(21) This selling stockholder is a trust whose beneficiary, Bryce Mitchell, is an executive officer and director of our
company. 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.
(22) This selling stockholder is a foreign broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Walter V. Bychkowski, has voting and investment control of the securities that this selling stockholder beneficially owns.
(23) This selling stockholder is a foreign broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Armand Thibodeau & Claudette Thibodeau, has voting and investment control of the securities that this selling stockholder
beneficially owns.
(24) This selling stockholder is a foreign broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Barry Wolf, has voting and investment control of the securities that this selling stockholder beneficially owns.
(25) This selling stockholder is a foreign broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Lynn Wolf, has voting and investment control of the securities that this selling stockholder beneficially owns.
(26) This selling stockholder is a foregin broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Telecomsecurity Mgmt. Company Ltd., Terry Hoffman, this beneficial owner's director, has voting and investment control of
the securities that this selling stockholder beneficially owns.
(27) This selling stockholder is a foreign broker-dealer holding the shares in trust for the beneficial owner. The beneficial
owner, Wilfred & Angelina Leimser, has voting and investment control of the securities that this selling stockholder beneficially
owns.
(28) This is a registered retirement savings plan. Bernie McNeill, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(29) This is a registered retirement savings plan. Larry Simister, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(30) This is a registered retirement savings plan. Pamela McNeill, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(31) This is a registered retirement savings plan. Robert MacRae, beneficiary of the selling stockholder, has voting and
investment control of the securities that this selling stockholder beneficially owns.
(32) This selling stockholder is a trust whose beneficiary, Paul Hookham, is an executive officer and director of our company.
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.
(33) This selling stockholder is a non-public entity. Ric Irving, this selling stockholder's director, has voting and
investment control over the securities that this selling stockholder beneficially owns. This shareholder also holds an additional
117,033 shares underlying warrants which are exercisable until December 31, 2007 at US$1.25 per share.
(34) This selling stockholder is a trust whose beneficiary, Terry Allen, is an executive officer and director of our company.
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.
(35) This selling stockholder is a natural person. The number of shares includes 135,000 shares underlying warrants which are
exercisable until December 1, 2007 at US$1.25 per share.
(36) This selling stockholder is a natural person. The number of shares includes 540,000 shares underlying warrants which are
exercisable until July 16, 2006 at US$0.75 per share.
(37) This selling stockholder is a natural person. The number of shares includes 266,668 shares underlying warrants which are
exercisable until December 1, 2007 at US$1.25 per share.
We have undertaken to maintain the registration current until the earlier of
either six (6) or nine (9) months from the effective date of the registration
statement of which this prospectus is a part, the date when all the securities
registered thereunder have been sold or the date when selling stockholders may
sell under Rule 144(k) under the Securities Act; provided, however, that our
obligation with respect to Dutchess is not limited except to the extent the
shares have either been sold under the registration statement or pursuant to
Rule 144. We have agreed to pay for all costs and expenses incident to the
issuance, offer, sale and delivery of the securities, including, but not limited
to, all expenses and fees of preparing, filing and printing the registration
statement and prospectus and related exhibits, amendments and supplements
thereto and mailing of such items. We will not pay transfer taxes, selling
commissions or underwriting discounts associated with any sales by the selling
stockholders. We have agreed to indemnify the selling stockholders against civil
liabilities, including liabilities under the Securities Act of 1933, arising
from certain statements, omissions or violations relating to this offering. The
selling stockholders have agreed to indemnify us and our directors and each
officer signing the registration statement against liabilities relating to the
information given to us by the selling stockholders in writing for inclusion in
the registration statement, including liabilities under the Securities Act.
PLAN OF DISTRIBUTION
The term "selling stockholder" includes the selling stockholders listed herein
and their pledgees, donees, transferees or other successors in interest. The
selling stockholders, acting independently of us in making decisions with
respect to the timing, manner and size of each sale, may sell the shares from
time to time:
- in transactions on the Over-the-Counter Bulletin Board or on any
national securities exchange or U.S. inter-dealer system of a
registered national securities association on which our common stock
may be listed or quoted at the time of sale;
- in private transactions and transactions otherwise than on these
exchanges or systems or in the over-the-counter market;
- at prices related to such prevailing market prices;
- in negotiated transactions;
- in a combination of such methods of sale; or
- any other method permitted by law.
Each of the selling stockholders, other than Dutchess, has agreed to limit sales
and other dispositions of their shares, whether pursuant to this prospectus or
otherwise during the 18-month period beginning on the effective date of the
registration statement of which this prospectus forms a part. Under the
agreement, the selling stockholders are entitled, during such period, to dispose
of up to 25% of their shares if the trading price of our Common stock is equal
to or greater than $1.00, a further 25% six months after the effective date, a
further 25% one year after the effective date and the final 25% 18 months after
the effective date of this Registration Statement. Dispositions by such
stockholders during such period are not otherwise permitted without our consent.
Pursuant to our agreements with Dutchess, we are prohibited from filing a
registration statement covering resale of third party shares, such as the
registration statement of which this prospectus forms a part, without Dutchess'
prior consent. Dutchess has consented to inclusion of the shares offered by all
selling stockholders herein subject to the stockholders' agreement to the
foregoing trading restrictions.
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security owners and
any of their affiliates. We have informed the selling stockholders that they may
not:
- engage in any stabilization activity in connection with any of the
shares;
- bid for or purchase any of the shares or any rights to acquire the
shares;
- attempt to induce any person to purchase any of the shares or rights
to acquire the shares other than as permitted under the Securities
Exchange Act; or
- effect any sale or distribution of the shares until after the
prospectus shall have been appropriately amended or supplemented, if
required, to describe the terms of the sale or distribution.
Dutchess and any broker-dealers who act in connection with the sale of its
shares are deemed to be "underwriters" within the meaning of the Securities Act,
and any discounts, concessions or commissions received by them and profit on any
resale of the shares as principal will be deemed to be underwriting discounts,
concessions and commissions under the Securities Act.
At the time a particular offer of the securities is made by or on behalf of a
selling stockholder, to the extent required, a prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for the shares purchased from
the selling stockholders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers, and the proposed selling price to the public.
Under the securities laws of certain states, the shares may be sold by selling
stockholders only through registered or licensed brokers or dealers. In
addition, in certain states the shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied with.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This section should be read in conjunction with Risk Factors, our audited
consolidated financial statements, interim consolidated financial statements and
related notes included herein. Unless otherwise stated, all dollar amounts are
stated in Canadian dollars.
Overview
We provide enterprise governance, risk and compliance (GRC) software and
services. Our GRC software solution, Acertus , 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 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 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 2004 and continuing
through 2005 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 favorably 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 Restaruants, 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 Restrauants, Inc.
issued a total of 37,246,289 shares of common stock to the owners of Securac
Inc. and assumed warrants whcih 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, the
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.
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. See "Business - Intellectual Property" for a
description of the license and "Certain Transactions" for a description of a
related transaction in which a company owned and control by members of our
management and board of directors simultaneously acquired the licensor company.
Separate audited financial statements of Risk Governance, Inc. for 2003 and
2004, as well as related pro forma financial statements are included elsewhere
herein. Other than the license, Risk Governance, Inc. has no material assets.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results 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, however, as disclosed in Note 2 under Summary of
Accounting Policies, these 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
Our software products are licensed to our clients under the terms of our End
User Enterprise License Agreement and Order Form, whereby consideration in the
form of License fees are based on a subscription for a fixed term. Since the
grant of the License is irrevocable and the License fee is non-refundable prior
to the expiry of the fixed term, the License Fees are recorded as earned
revenues when we invoice the client pursuant to the Order Form. Maintenance fees
are initially deferred as unearned revenues and ratably recognized over the
maintenance term. Implementation and professional services fees are recorded as
earned, generally on a time and materials basis.
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.
Incentive Compensation
Annual incentive bonuses are a significant part of Securac's compensation
philosophy. These cash and stock option bonuses are generally tied to achieving
certain firm-wide financial metrics and department level objectives. We
generally accrue estimated annual cash bonus costs evenly over the fiscal year,
with certain quarterly adjustments related to terminations and hiring and
changes in expected financial or operational results. Incentive bonuses related
to any fiscal year are generally paid on March 31 following the fiscal year end.
In September 2003, the CICA issued CICA 3870 revised transitional provisions for
"Stock-Based Compensation and Other Stock-Based Payments". This Section requires
fair value based method of accounting for stock-based compensation and other
stock-based payments. The recommendations of this Section have been applied
retroactively commencing in our fiscal year beginning January 1, 2004.
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 we intend to produce and market,
there must be a clearly defined market for the product and we must have the
resources, or access to the resources, necessary to complete the development. We
have not deferred any development costs to date.
Results of Operations
The following table shows our summarized operations data represented by items in
our consolidated statements of income for the years ended December 31 and six
months ended June 30.
Unaudited
Six months ended June 30
Securac Inc. Securac Inc.
STATEMENT OF OPERATIONS DATA:. . . . . . . . 2003 2004 2003 2004
-------------------------- -------------- ------------ ------------
Revenue. . . . . . . . . . . . . . . . . . $ 527,096 $ 725,272 $ 231,263 $ 473,404
Cost of sales. . . . . . . . . . . . . . . 387,866 209,392 171,953 354,495
-------------------------- -------------- ------------ ------------
Gross profit . . . . . . . . . . . . . . . 139,230 515,880 59,310 118,909
Operating expenses
General and administration . . . . . . . 561,576 297,170 213,576 575,118
Sales, marketing and investor relations. 419,865 803,523 154,704 731,837
Research and development . . . . . . . . 391,197 795,302 281,853 680,808
Professional fees. . . . . . . . . . . . - 734,378 - -
Stock based compensation.. . . . . . . . - 1,133,687 - 3,715,476
Amortization and depreciation. . . . . . 15,989 26,093 5,411 6,626
-------------------------- -------------- ------------ ------------
Loss from operations . . . . . . . . . . . (1,249,397) (3,274,273) (596,234) (5,590,956)
Other income (expense) . . . . . . . . . . (15,333) (10,469) (3,647) (3,371)
Net loss . . . . . . . . . . . . . . . . . (1,264,730) (3,284,742) (599,881) (5,594,327)
Net loss per share:. . . . . . . . . . . . 0
Total shares outstanding . . . . . . . . 33,808,079 36,571,730 34,593,380 49,045,805
Net loss per share . . . . . . . . . . . ($0.04) ($0.09) ($0.02) ($0.12)
Revenue
Revenue from our business consists of annual subscription based license fees to
our governance, risk assessment and compliance software products. Our licensing
revenue is augmented with related revenue in annual maintenance installation,
training and professional services.
We earned $725,272 in revenue in 2004, which represented a 27% increase over the
prior year revenue of $527,096. The increase was primarily attributable to a
software license sale to a major customer. Our first quarter 2005 revenue of
$185,499 increased by $44,588, or 32%, compared with $140,911 in the comparable
period in 2004. This increase is due primarily to growth in professional
services to new and existing customers. Revenue in the first six months of 2005
increased to $473,404 from $231,263 due to doubling licensing revenue and
increasing our professional services practice.
License Fees - This form of licensing allows customers to pay a minimum two-year
------------
subscription fee based on the number of users tied to a server. We generally
bill and collect these fees upon receipt of the Order form and recognize the
income when we invoice the client because the grant of the license is
irrevocable and the License Fee is non-refundable prior to the expiry of the
fixed term. As matter of policy, we book our Licensing Fees revenue to the
extent possible in US dollars.
License Fees increased by 100% in 2004 to $145,278, compared to nil in 2003. The
increase resulted primarily from the launch in July 2004 of the first commercial
ready version of the software. For the first quarter of 2005 compared to 2004,
License Fee revenue increased from $7,250 to $12,700 representing the sale of a
project based Acertus License Fee to a Canadian chartered bank through one of
our channel partners. This License was sold under a pilot project program that
will potentially lead to a full enterprise license upon successful completion of
the project. In the first six months of this fiscal year, licensing revenue
doubled as a result of us deploying our software into a series of pilot
projects.
Annual Maintenance - We anticipate that our customers will 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 plan to 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.
Though we anticipate recognizing Annual Maintenance fees later in 2005, we have
historically not recognized Annual Maintenance fees.
Installation and Training Fees - Installation and training fees are revenues
---------------------------------
related to services in connection with software installations. Installation and
Training Fees are recorded as earned, generally on a time and materials basis.
The timing of the recording of Installation Fees is governed by the terms of the
implementation contracts and other factors that can cause significant variations
from year to year. Installation and training amounted to nil in 2004 as it was
not required under our sales arrangements, and was $3,000 in 2003. In the three
and six months ended 2004 and 2005, installation and training fees were invoiced
or collected based on the project based nature of the licensing.
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
organization. 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 revenue
increased by 25% to $579,994 in the year ended 2004 from $463,789 in 2003 due to
the addition of a second billable resource with a major client. Professional
Services revenues increased to $172,799 in the first quarter of 2005 through an
extension of a contract with a major client compared to $133,661 in the same
period ended in 2004, and increased 105% to $274,005 in the six months ended
June 30, 2005, from $133,661 in the corresponding prior year period. The
increase was primarily attributable to more physical risk assessment engagements
and increasing our scope of work with a major client.
Cost of Sales
Cost of sales decreased by 46% to $209,392 in 2004 from $387,866 in 2003. The
decrease is primarily attributable to the decrease in the percentage of revenue
attributable to professional services in 2004. The cost of sales for
professional services is primarily the direct labor cost of carrying out our
professional engagements. Cost of sales increased from $92,038 in the first
quarter of 2004 to $179,769 in the first quarter of 2005 representing the direct
labour cost to Securac in carrying out its professional services activities. It
is important to note here that in the last quarter of 2004, there was a
deferment of $78,503 that was invoiced to us by a subcontractor in January, 2005
and subsequently recorded in the first quarter of 2005 resulting in abnormally
higher cost of sales and lower margin. We do not anticipate this happening
again in the foreseeable future. In the six months ended June 30, 2005, cost of
sales increased to $354,495 compared to $171,263 as a result of increased direct
labour required to carry out the engagements.
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 by 47% to
$297,170 in 2004 from $561,576 in 2003. The decrease was attributable to the
reclassification of professional fees into its own line item, as this was an
extraordinary expense directly related to the reverse merger transaction. G&A
increased to $305,946 in the first quarter of 2005 from $142,472 in the same
period in 2004 reflecting the increase of operational activity associated with
growing our business from straight R&D activities to full commercialization. For
the six months ended June 30, 2005, G&A increased by 63% to $575,118 from
$213,576 for the comparable prior year period as these two quarters represented
a significant increase in corporate activity compared to last year.
Marketing, Sales and Investor Relations - These expenses increased by 91% to
-------------------------------------------
$803,523 in 2004 from $419,865 in 2003. The increase was primarily attributable
to implementing an investor relations program as well as increased sales and
marketing activities. These expenses further increased to $613,429 in the first
quarter of 2005 from $51,887 in the same period in 2004. This increase
represents the travel, meals, and legal expenditures related to our private
placement equity financing and our increased sales and marketing activities as
we expanded into the United States. . During the six months ended June 30, 2005,
these expenses increased to $731,837 from the comparable prior year period
amount of $154,704, which increase is attributable to increased sales and
marketing activities following commercial launch of our software in July 2004.
Research and Development - Research and Development expenses ("R&D") are
--------------------------
expensed as incurred unless such costs meet the criteria necessary for deferral
and amortization. To qualify for deferral, the costs must relate to a
technically feasible, identifiable product that we intend to produce and market,
there must be a clearly defined market for the product and we must have the
resources, or access to the resources, necessary to complete the development. We
have not deferred any development costs to date. Since March 2004, substantially
all of our R&D activities have been conducted through Securac Technologies Inc.,
a company that is owned indirectly 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 pay for 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. Payment of R&D expenses is made
pursuant to a license agreement and is on a time and materials basis. See
"Business - Intellectual Property and Licenses" for a more detailed description
of the terms of these arrangements.
Securac focuses its 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.
R&D expenses increased by 103% in 2004 to $795,302 from $391,197 in 2003. The
increase was primarily attributable to increasing the number of our headcount as
a result of internalizing our research, development and testing staff and
completing our outsourced programming initiative R&D expenses increased
substantially in the first quarter of 2005 to $407,563 from $124,011 in the same
period in 2004, and in the six months ended 2005, our R&D expenses increased by
141.5% to $680,808 in 2005 from $281,853 in 2004.
Stock Based Compensation - Since Securac did not have a stock based compensation
------------------------
plan in fiscal 2002 and 2003, no expenditures were incurred. On August 3, 2004,
we issued 954,216 shares to an employee in connection with his severance. These
shares were deemed to be issued at their fair market value of US$0.58 per common
share, which was based on the sale of similar sized blocks of shares to arm's
length parties during the same time period. The resultant compensation in the
amount of $553,445 has been charged to Stock Based Compensation with a
corresponding credit to share capital. An additional issuance of 500,000 shares
to two former affiliates of Securac Corp. (pre-RTO) was recorded as a condition
of closing the reverse merger transaction resulting in a charge of $314,525. The
remaining balance in the Stock Based Compensation account consists of private
placement finder's fees, options and warrants valued using the Black-Scholes
option pricing model for a total of $265,717.
Stock based compensation for the three months ended March 30, 2005 was 706,186
compared to nil in the same quarter last year, and for the six months ended 2005
was $3,715,476 compared to nil in the same period last year.
Amortization And Depreciation - This consists of the amortization of a
-------------------------------
distribution right and the depreciation of computer equipment. The amortization
of the distribution right relates to a license agreement dated August 29, 2002,
pursuant to which we own a non-exclusive right and license to sell, lease,
service, maintain, operate and use the Risk Watch software in Canada for a
period of one year which was subsequently written down in 2004, as we ceased
promoting this software. In 2003 and year ended 2004 we amortized $15,989, and
$26,093 respectively. In the first quarter of 2005 we recorded $3,313 compared
to $4,339 in the same period last year. In the first six months of 2005 these
expenses were $3,371 compared to $3,647 as the declining balance formula begins
to take effect.
Income Taxes
At December 31, 2004, we had U.S. net operating loss carry-forwards of
approximately $950,000 that may be offset against future taxable income from the
year 2005 through 2024. 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. Since there was a change
of ownership arising from the reverse merger transaction, net operating loss
carryforwards may be limited as to use in the future years.
Foreign Currency
We realize a significant portion of our revenue in U.S. dollars. At present,
there is no policy in place to manage foreign currency risk.
Liquidity and Capital Resources
As of June 30, 2005, we had a working capital deficit of $1,193,057 and an
accumulated deficit of $10,887,325. We have incurred operating losses since
inception. For the six months ended June 30, 2005, we incurred a net loss of
$5,594,327, of which $3,722,102 was attributable to non-cash expenses. Our
activities have been funded principally through equity and debt financings.
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.
Principal Financial Commitments
As of June 30, 2005, our principal financial commitments consisted of trade
payables, obligations under office and capital leases and notes payable to
unrelated parties consisting of (a) $79,166.68 owing to the vendors of Brycol
Consulting Ltd. arising from the acquisition of all the outstanding common
shares on March 31, 2004 (see Note 10, Business Acquisitions of the 2004 Audited
Financial Statements) that is non-interest bearing, unsecured and payable in
equal monthly instalments commencing April 1, 2005; (b) US$243,460 owing to
Generation Capital Associates at a term interest rate of 6% payable on demand as
of May 31, 2005 that is jointly and severally guaranteed by Messrs. Terry Allen,
Paul Hookham and Bryce Mitchell; (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; and (d) $60,000 owing to an individual, that is due and payable on or
before July 31, 2005 together with $10,000 interest that has been subsequently
deferred with the consent of the holder until we receive sufficient financing to
repay the principal and interest.
Dutchess Financings
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. (collectively, "Dutchess"), under which Dutchess
established the Investment Agreement in our favour. Under the terms of the
Investment Agreement, Dutchess 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 upon the initial filing with the
Securities and Exchange Commission of the registration statement of which this
prospectus forms a part, and established what is commonly referred to as an
equity line of credit in our favor. The terms of these transactions are
summarized below.
Convertible Debt
-----------------
Pursuant to the terms of a subscription agreement and related debenture
agreement, Dutchess purchased US$300,000 principal amount of our newly issued
short-term convertible debentures and agreed to purchase an additional
US$200,000 in principal amount of such debentures upon our filing of a
contemplated resale registration statement with the Securities and Exchange
Commission (as described below; the "Registration Statement"). After expenses,
we received US$252,925 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. We have the right to redeem the debentures prior to maturity, and
are required to redeem the debentures if and to the extent we receive proceeds
from any subsequent financing in excess of US$500,000. 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
thereunder 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 US$0.55 per share and the lowest closing bid price of our common stock
between the issuance date of September 30, 2005 and 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 as a 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, we
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 US$54,345.18, commencing on November 1, 2005. An initial
US$4,125.96 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), we 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. We are
entitled to notice and an opportunity to redeem the debentures prior to
triggering any such penalties.
Our obligations under the debentures are secured by a general security interest
in all of our assets, as well as a pledge of shares (valued at 150% of the
funding amount) owned by certain of our trust stockholders, the beneficiaries of
whom include certain of our directors and management. The security agreement
contains, among other things, restrictions on our ability to incur additional
indebtedness, declare dividends and grant security interests in our assets.
In connection with the investment, and as contemplated by the subscription
agreement, we also issued to the investor a warrant to purchase 181,819 shares
of our common stock at an exercise price of US$0.55 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, we have agreed to file
this Registration Statement with the SEC within 30 days of the Closing Date, and
to use our best efforts to cause the same to be declared effective within 90
days of the filing date. This Registration Statement must cover the shares
underlying the debenture, as well as the shares underlying the warrant. We may
also include in this Registration Statement shares held by our existing
stockholders, provided that such stockholders agree to restrictions on resale
acceptable to the investor.
We will incur significant penalties in the form of liquidated damages and
otherwise for breaches and failure to comply with the commitments contained in
the various agreements, including, without limitation, our failure to file this
Registration Statement and to cause the same to be declared effective and remain
effective within the agreed upon time periods.
Until the earlier to occur of one year from the effective date of this
Registration Statement and repayment of the debentures, we have agreed not to
engage in certain equity-based financings without the consent of the holder of
the debentures. We have also granted the holder of the debentures a right of
first refusal with respect to certain financings during the 12 months following
the Closing Date or such longer period, if any, as the debentures remain
outstanding.
We were introduced to Dutchess through an agent who is a registered
broker-dealer. We have agreed to pay them 7% in respect of actual drawdowns
under the Investment Agreement described below and, in respect of the
convertible debt financing, 3% upon initial funding and an additional 4% if and
when converted into equity.
Investment Agreement
---------------------
We 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 US$10,000,000 in aggregate purchase price of our 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
"Investment Agreement Registration"). Under the agreement, provided the
Investment Agreement Registration is effective, we are entitled to put shares of
our common stock to the investor from time to time, subject to a maximum dollar
amount for each put, at our election, of (i) US$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 single put amount of US$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 (5) 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). We are not 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), we may
withdraw the put notice, at our sole discretion.
As noted above, our ability to draw down on the Investment Agreement is subject
to achieving and maintaining an effective Investment Agreement Registration for
the requisite number of shares. The number of shares issuable under the
Investment Agreement is not presently known, as it is based upon the trading
price of our common stock at the time of each draw down. Our ability to draw
down on the Investment Agreement will be limited to the extent the trading
volume in our common stock is low and to the extent the market price of our
common stock is low.
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement to
Dutchess. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Investment Agreement for a given advance. For
example, if our share price were to stay at US$0.45 during the term of the
Investment Agreement, we would have to issue 23,391,813 shares of common stock
to fully access the Investment Agreement. The Investment Agreement is generally
terminable by the Company at any time provided there is no outstanding balance
under the convertible debentures.
We have agreed to file the Investment Agreement Registration with the SEC within
30 days of the Closing Date, and to use our 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.
BUSINESS
General
We are engaged in development and commercialization of enterprise governance,
risk and compliance (GRC) software and services. Our GRC software solution
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 initial application of our Acertus software first became available for
commercialization in mid-2004. Prior to that time, substantially all of our
revenue was attributable to GRC-related consulting services. Our customers
include, among others, Research in Motion, Canadian Imperial Bank of Commerce,
Cisco Systems, Celero Solutions, Mercer Consulting, Noranda, the Ontario
Ministry of Transportation, and the Canada Border Service Agency.
Our integrated software platform, Acertus , provides users with a comprehensive
process-driven approach designed to offer a web-based roadmap for risk
mitigation, corporate security and compliance. Using the Acertus software,
users can input information regarding all of an organization's physical and
operational assets. This information is then processed and measured against
industry regulations and best practice standards. Based on the enterprise's risk
tolerance, our software determines the strengths and weaknesses in the
organization and assigns dollar values to all potential risks and
non-compliances. This information allows the organization to determine cost
saving solutions while improving efficiencies and providing an industry
advantage.
Part of our commercialization strategy involves alliances with leading global
software providers, system integrators and consulting organizations. To date, we
have entered into alliances with companies such as SAP, Deloitte & Touche, IBM,
Grant Thornton, and Compuware. These alliances are designed to facilitate
product acceptance and distribution of our risk management software to
customers. In 2005, we became a certified channel partner with SAP, a global
leader in Enterprise Resource Planning software, and the world's largest
inter-enterprise software company and third-largest independent software
supplier overall with 12 million users and 88,000 installations. As a result,
our Acertus software is certified under SAP's NetWeaver platform, allowing it
to integrate Acertus seamlessly to the core SAP application. With the
completion of the Acertus certification process, we have received access to the
primary customers of SAP NetWeaver along with the right to use the SAP tagline
"Powered by SAP NetWeaver ".
We license substantially all of the technology comprising our Acertus software
pursuant to two principal license agreements with licensor companies owned
indirectly and controlled by Messrs. Terry Allen, Paul Hookham and Bryce
Mitchell. We do not conduct our own research and development activities, and
rely substantially on the efforts of those companies for continued research and
development, which we fund on a time and materials basis pursuant to the
agreements. See "Business - Intellectual Property and Licenses" for a more
detailed description of the terms of these arrangements.
Our headquarters are located at 2500, 520 - 5th Avenue S.W., Calgary, Alberta
T2P 3R7 and our telephone number is 403-225-0403. Our wholly-owned subsidiary,
Securac, Inc., maintains a website located at www.securac.net. The information
contained on the website is expressly not incorporated in this report.
Corporate history
We are a Nevada corporation, organized in June 1985. For less than one year in
the mid 1980s we owned and operated a restaurant business. Thereafter, we were
dormant with no operating business, until we engaged in the RTO with Securac,
Inc., an Alberta corporation organized in March 2002. Prior to the RTO, the
name of our company was Applewoods Restaurant's Inc. In connection with the
RTO, Securac, Inc. became a wholly-owned subsidiary of our company, shareholders
of Securac Inc. acquired control of our company, the business and management of
Securac Inc. became the business and management of our company, we changed the
name of our company to Securac Corp.and we effected a 1:15 reverse split of our
common stock. See "Selling Stockholders" and "Management's Discussion and
Analysis or Plan of Operations- Reverse Takeover of Applewoods Restaurant's
Inc." for a description of the RTO.
In August 2004, we acquired 100% of the assets of Telecom-securitymanagement.com
Ltd. o/a Hoffman and Company ("Hoffman"). This acquisition provided us with the
opportunity to leverage Hoffman's existing client base and traction in eastern
Canada which increased our presence in this market (see Note 10, Business
Acquisitions in the 2004 Audited Financial Statements).
In January 2005, we acquired all of the outstanding stock of Risk Governance,
Inc., a Delaware company that licenses software technology we use in Acertus
Governance, in a share exchange transaction, and a company owned and controlled
by members of our management and board of directors acquired the licensor of
such technology. See "Certain Transactions".
Our Industry
Risk is inherent in all organizations. Organizations participating in today's
environment are exposed to an ever-increasing amount and variety of risks. Types
of risk include:
Strategic . . Information Technology
Political . . Transaction
Cultural. . . Regulatory and Compliance
Economic. . . Information
Environmental Privacy
Operational . Physical Security
Project . . . Investment
Financial . . Credit
Currency. . . Market
Product . . . Reputation
Our business is focused on risk management and, more particularly, enterprise
risk management. Enterprise risk management is generally defined as a process
implemented by and throughout an organization designed to (i) identify potential
events that may affect the organization, its operation and assets, (ii) manage
risks to be within levels deemed acceptable, and (iii) help assure that the
organization's objectives are achieved.
We believe that governance, risk assessment and compliance comprise the core
elements of an effective enterprise risk management program. As such, we use the
terms "GRC management" and "enterprise risk management" interchangeably in this
prospectus. Organizations use governance to set strategies and objectives, the
tone of the organization, policies, risk appetites and accountability.
Governance assists organizations in monitoring performance. Risk assessment is
used to identify and assess the risks that may affect an organization's ability
to achieve its objectives and determine risk response strategies and control
activities. Compliance completes the process by helping to ensure that
organizations operate in accordance with their own objectives, internal policies
and guidelines, as well as applicable laws and regulations.
The goals of establishing a GRC management program include:
- improving confidence in operational and financial integrity;
- maintaining accurate and timely information that enhances visibility,
measurement, management and sharing of risk;
- accurately measuring risk through a consistent and systematic
approach, as opposed to disparate views that are reactively managed;
- measuring risks not only at the system or project level, gives
visibility from the business-process and business-unit level, as well
as from the organization wide view of risk management;
- providing consistency in terminology, measurement, compliance and risk
tolerance; and
- quantifying and justifying risk decisions to support accurate response
and decision making.
GRC management programs and practices vary widely within and among
organizations. While standards are evolving, the United States Sentencing
Commission and the Office of Inspector General have established a 7-step
guideline for organizations seeking to implement an effective GRC management
program:
- Define and document policies, procedures and controls.
- Demonstrate a commitment from the top of the organization including
high-level oversight of compliance programs.
- Use due care in delegating authority throughout the organization.
- Effectively communicate and prioritize compliance policies, procedures
and controls.
- Audit, monitor and report ongoing efforts including the establishment
of a whistleblower system.
- Uniform enforcement and remediation.
- Ongoing process improvement to prevent further/future offenses.
Current Approach to Risk Management
---------------------------------------
Elements of risk management have long been practiced by organizations.
Identifying and prioritizing risks, either in anticipation of future events or
in hindsight following negative events, has long been a standard management
activity. Treating risks by transfer, through insurance or other financial
products, has become common practice, as has been contingency planning and
crisis management.
Historically and continuing through today, organizations have generally
attempted to address and manage the wide-ranging risks in an individual and
isolated manner. Organizations typically rely on internal personnel within
various departments in combination with outside consultants to support their
risk management activities. To a large extent, these activities have been
supported by manual processes. Organizations that have developed their internal
technology enough to use automated processes are still limited to specific
applications in which risks are often not efficiently integrated with one
another. While management of certain types of risk, such as credit or currency
risk, involve established disciplines, management of most other risks, which are
broadly categorized as operational risks, do not involve clear guidelines. As a
result, risk management activities vary widely in scope, degree and methodology
among and within an organization's departments
Our Strategy
Our objective is to become the leading GRC software solution provider in North
America. Set forth below are key elements of our strategy.
Leverage Strategic Relationships
----------------------------------
We have established and expect to continue to establish alliances with leading
companies to drive sales growth through reseller arrangements and joint
projects. These consist of independent software vendors, system integrators,
audit firms and specialized consulting firms with expertise in a variety of
aspects of GRC management. Together with our channel partners, who include SAP,
Deloitte & Touche, IBM, Grant Thornton and Compuware, we are able to provide
end-to-end solutions and services to our customers.
Introduce New Application Specific Modules and Enhance Software Functionality
--------------------------------------------------------------------------------
Our Acertus software includes special knowledge databases and questions sets, or
application-specific GRC modules, which are tailored to the needs of specific
applications. For example, we currently have modules available for the following
applications: physical security, information security, ISO 17799 and BS7799,
Basel II Accord, Information Technology, Education, and Occupational Health &
Safety. We are developing a module designed specifically for compliance with the
Sarbanes-Oxley Act of 2002 and related rules. In the future we intend to develop
additional modules for other relevant sectors and to otherwise continually
improve and enhance the functionality of our software to meet the needs of our
customers.
Increase Our Sales Force
---------------------------
We plan to increase the size of our direct sales force in strategic areas in the
United States and Canada. We anticipate supporting the continued growth and
productivity of our sales force by implementing new hire screening and
evaluation processes, as well as with our in-house established professional
sales process and externally delivered professional sales training. Our ability
to grow our direct sales force, in particular, will depend on the availability
of sufficient financing.
Focus on Acertus Implementation Plan
----------------------------------------
Our implementation plan is designed to facilitate rapid and complete adoption of
our Acertus software by our customers. The implementation process includes a
detailed clarification and planning session which involves the customer in
identifying areas of key focus. We have designed this process to maximize the
user implementation experience, promote behavioral change at all levels and
increase the success of the process. Our implementation plan incorporates proven
project management principles including change management, user adoption and
adult learning to create self-sufficiency and ensure that customer's investments
in our solutions are well managed and achieve their financial and operational
objectives.
Pursue Strategic Acquisitions
-------------------------------
Our current growth strategy includes the acquisition of smaller companies that
specifically aim at deepening our technology and that enhance our product
offerings, strengthen our geographic reach and broaden our offering in
particular industries. We acquired a private company which provided the
technology included in the governance functionality of our software. We also
acquired a technology and risk consulting firm, specializing in physical risk
management solutions. These acquisitions added to our product and service
offering and further grew our technology base
Products and Services
Our Acertus software solution is comprised of two principal applications:
Acertus Governance and Acertus Risk Assessment and Compliance. Our solution is
an analytic decision support tool that assists organizations in implementing a
comprehensive GRC management solution.
Acertus Technology
Our Acertus software incorporates a number of technologies including:
- specialized risk analysis algorithms;
- comprehensive knowledge databases and predefined risk analysis
templates;
- proven risk assessment methodology and sophisticated analytics, as
opposed to disassociated spreadsheets, word processing and paper-based
processes that conform to multiple methodologies;
- examination of internal and external knowledge bases in order to
produce the information needed by executives to properly govern and
protect their organization's assets
- reporting capabilities that assist organization in assessing their
current risk posture;
- a powerful survey engine to show areas of vulnerability and
compliance;
- Asset Annual Loss Expectancy, containing detailed empirical
information and the associated cost/benefit of potential safeguards
and controls.
Acertus Governance
Acertus Governance assists organizations in setting strategic risk targets,
action plans and accountability to various regulatory and industry frameworks.
Organizations implementing Acertus Governance are given an overall view of the
organization's strategic risks. This visualization is achieved through a
graphical dashboard-like interface showing the complete risk portfolio at a
glance, and allowing de-centralized risk assessment and accountability
throughout the organization. Potential threats can be subjectively measured and
action plans can be created and tracked to address each threat. The application
includes comprehensive reporting of risks, action plans, audit trails, control
registers and trend reports, among others. It provides visual alerts and emails
to promote early warning of non-compliance and deteriorating risks.
Accountability for each risk, control and action plan can be assigned and
readily viewed. Information is presented graphically in a spider diagram with
drill-down capabilities, enabling users to conveniently access detailed
information about risks and the controls that are being used to manage them. For
example, each leg of a spider diagram represents a domain and contains all
information regarding risks, action plans, audit trails, control registers and
trend reports, among others. By clicking a specific leg, the diagram expands to
display the areas that are in relation to the parent but with more detailed
information. Users can continue to drill-down until they have reached the
beginning of one particular risk path. The source would be the department or
individual responsible for that area/risk and any action/mitigation plans or
controls that are in place.
Users can select modules for their particular needs. For example, this may
include Basel II and ISO 17799. The application then becomes parameter-driven by
keeping the user within the constraints of the selected module but still allows
for customization without sacrificing data integration integrity.
Acertus Risk Assessment and Compliance
Acertus Risk Assessment and Compliance is designed to provide a complete and
comprehensive view of all risks as they pertain to the objectives and assets of
an organization. It helps users assess the threats and vulnerabilities of an
organization's assets, by guiding users through a seven-stage data entry
process. Throughout the process, users are prompted to assign levels of
importance and monetary value to each asset. A detailed report is then produced.
The report is itemized based on an asset's level of importance, function and
monetary value. The report lists all assets, complete with all potential risks
and the quantified monetary impact a specific risk could have on a specific
asset.
Risk Assessment and Compliance also permits users to enter data regarding
controls that have been adopted to protect against asset threats and to ensure
compliance with regulations, internal policies and guidelines. The software
includes an email survey feature which allows users to send standard or
customized surveys to predefined participants to monitor level of compliance
with controls.
Acertus Risk Assessment and Compliance includes special knowledge databases and
questions sets, or application-specific GRC modules, which are tailored to the
needs of specific GRC applications. The following application-specific GRC
modules are currently available:
Physical Security - automates risk analysis for physical security reviews,
------------------
audits and vulnerability assessments of facilities and personnel. It is ideally
suited for enterprises with multiple facilities, buildings or campuses. Security
threats addressed include crimes against property or people (CAP), equipment or
systems failure, terrorism, natural disasters, fire and bomb threats.
Information Security, ISO 17799 and BS7799 - automates risk analysis for
---------------------------------------------
security reviews, audits and vulnerability assessments of information technology
systems and applications. If an information security management system (ISMS) is
in place, it assesses how effective it is. If an ISMS is not in place, it
assists in the setting up of controls surrounding an ISMS. Security threats
include unauthorized access, malicious code, hardware and software failures,
misuse of data, as well as fire and other threats to data facilities.
Information Technology - automates risk analysis for the assessment and gap
----------------------
analysis associated with information assets including hardware and the
environment that they reside in.
Basel II Accord - automates risk analysis, assessment, gap analysis and
-----------------
management requirements associated with internal and external regulatory
requirements for Basel II Accord compliance by banking and other financial
institutions.
Education - automates risk analysis, assessment, gap analysis and
---------
management requirements associated with internal and external regulatory
requirements based on the Safe Schools Best Practices and other regulations and
legislation put in place by the state/jurisdiction in which the institution
resides, as well as, federal regulations.
Occupational Health and Safety (OH&S) - automates risk analysis, gap
analysis, audits and reporting associated with regulatory and corporate
requirements for health and safety. Areas of focus include management leadership
and organizational commitment; hazard identification, control and assessment;
qualification, orientation and training; emergency response; inspections,
internal audits, accident and incident investigation; and program
administration.
We intend to release from time to time additional application-specific GRC
modules for Acertus Risk Assessment and Compliance. Initially we plan to release
a module for compliance with Sarbanes-Oxley Act of 2002 and related regulatory
initiatives. Other modules we may consider introducing include Health Insurance
Portability and Accountability (HIPAA), various Privacy Acts, Patient Safety,
Customs Trade-Partnership Against Terrorism (CT-PAT) and Airport Security.
Product Enhancements
We continuously seek to improve the performance and enhance the functionality of
our software. Accordingly, from time to time we anticipate releasing new product
versions. Acertus Risk Assessment and Compliance 2005-A and Acertus Governance
2005-A, which were released in Summer 2005, included the following enhancements:
- multi-lingual capability;
- improved audit trail implementation;
- updating the graphical user interface;
- updating the offline workshop tool and improving the ability to import
information from or export results into XML files; and
- complete integration between Acertus Governance and Acertus Risk
Assessment and Compliance.
With the latest versions of Acertus recently released, we are currently
researching further future enhancements. This research involves gathering
feedback from our clients, sales team and development team, as well as
continuous monitoring of the market place to identify emerging trends.
Professional Services
We offer a full range of implementation, training and consulting services to our
customers and systems integrators.
Implementation Services
Our implementation services include the installation of our software either
remotely from our support center or onsite by one of our installation
consultants. We offer implementation services on a time-and-materials basis.
Training Services
We offer customers and systems integrators a full range of training and
education services for our software, including classroom, onsite, shadowing and
web-based training.
Consulting Services
We offer a variety of consulting services to organizations in order to help them
use our software more efficiently and effectively. For example, some of the
consulting services we offer are in the area of compliance and audit assessments
such as Basel II, BS7799 and ISO 17799 assessments. We also provide risk
assessments in the areas of physical risk, business continuity planning,
performance measurement and information security auditing. Additionally, we
offer numerous other IT professional services options such as quality assurance
and quality control, project management, business analysis and software
development.
Maintenance and Technical Support
We offer maintenance and technical support on a centralized basis from our
headquarters in Calgary, Alberta. Our Customer Maintenance and Technical Support
include the following:
Ongoing Support Services
Our ongoing Support Services ensures that our services are available and
optimally configured for our customers. Through continuous remote monitoring we
can analyze system and user behavior when appropriate and intervene to make
adjustments to prevent anticipated problems from occurring. This ensures all
essential services are available to our customers when they need them. We
currently offer full maintenance and support to all customers. With our Support
Services program, customers have both telephone and online access to our support
center. Through this direct contact, customers can gain access to technical
support as well as software updates and maintenance.
Customer Support Monitoring
We continuously monitor our internal system performance to ensure our customer's
expectations are being met. Our support team produces monthly performance
metrics such as incident speed of response, storage capacity and projected
utilization. These reports are reviewed with senior management in scheduled
monthly review meetings to address any areas of concern and future budget
requirements.
Customers
We have established a number of customer relationships with companies who are
leaders in their respective fields as a means to build brand awareness and
continued success. These organizations include:
- Barrie City Police
- Canada Border Services Agency
- Celero Solutions. . . . . . . . . . . . - MCubed Inc.
- Cisco Systems, Inc. . . . . . . . . . . - Mercer Human Resource Consulting
- City of Edmonton. . . . . . . . . . . . - Noranda
- Coca Cola HBC . . . . . . . . . . . . . - Ontario Ministry of Transportation
- Deloitte & Touche LLP . . . . . . . . . - Public Works & Government Services Canada
- Diamond Schmitt Architects Incorporated - SNC LAVALIN Profac
- Government of Saskatchewan. . . . . . . - Toronto Catholic School Board
- Humber College. . . . . . . . . . . . . - WestJet Airlines Ltd.
- Lea Consulting Ltd. . . . . . . . . . . - York Regional School Board
The following examples are brief customer illustrations of the different ways
our customers have implemented our Acertus software and services solutions to
assist in solving their GRC management needs.
Large Publicly Traded Technology Company
A large publicly traded technology company, which has world-wide offices and an
extensive worldwide distribution network, implemented our Acertus Risk
Assessment and Compliance software to perform a detailed risk assessment on
their IT infrastructure. The company is subject to the BS 7799 standard, and
required a software that would satisfy the requirements of that standard. The
assessment was designed to reveal any threats and/or vulnerabilities that
existed in their IT domain. The results of the assessment triggered the
initiation or deployment of appropriate controls or safeguards in the
organization to mitigate the risk exposure to their IT infrastructure, which
formed the backbone of their operations.
Large Publicly Traded Shipping Company
As a large publicly traded shipping company, this organization was faced with
managing risks, governance and compliance in all areas of its operation. One of
its executive was charged with collating and ensuring that policies and
procedures were being followed and that all risks, vulnerabilities and/or
non-compliance were identified and managed. The main problem that this executive
encountered was that the aggregation and comprehensive view of the situation was
very difficult. Each reporting entity within the organization had a unique way
of measuring and managing risk, vulnerabilities and/or non-compliance and a
consolidated corporate-wide report would be meaningless.
Our Acertus Governance module enabled the organization to have optimal
visibility of the risks to their businesses and provided tangible evidence of
their desire to adopt a strong corporate governance standard. This was achieved
through a graphical executive "dashboard" showing the complete risk portfolio at
a glance, entrenching accountability and intelligent risk-taking throughout the
organization.
Marketing and Sales
We rely on a combination of our own sales force and channel partner
relationships to market and sell our software and services. Our direct sales
force presently consists of a team of nine account executives and professional
services consultants. Our sales team is based out of Calgary, Alberta. Subject
to availability of financing, we intend to expand our sales force in North
America. Our sales professionals possess comprehensive technology and domain
expertise that allow them to educate potential clients on the benefits of our
GRC solutions. Our professional services consultants work in tandem with the
account executives to provide technical and product expertise in support of the
sales process.
Our channel partners include global, national and regional software vendors and
suppliers, consisting of independent software vendors (ISVs), system
integrators, audit firms and specialized consulting firms with content expertise
in physical risk, operational risk, security, safety, compliance and corporate
performance and governance. Among our channel partners are SAP, Deloitte &
Touche, IBM, Grant Thornton and Compuware. With the completion of the Acertus
certification process, we have received access to the primary customers of SAP
NetWeaver along with the right to use the SAP tagline "Powered by SAP NetWeaver
". Together, with our strategic channel partners, we are able to complement each
other and provide the best end-to-end solution and services to our customers.
None of these relationships are exclusive and our channel partners may enter
into similar relationships with our competitors. In contrast to our direct sales
force, we have little control over the efforts of our channel partners and the
resources they allocate to marketing and selling our software and services,
Our marketing initiatives include market research, public relations activities,
direct mail and relationship marketing programs, seminars and industry trade
shows, as well as cooperative marketing with customers and partners. Our
marketing team seeks to build awareness of our GRC solutions by developing
product-oriented materials such as brochures, data sheets, white papers,
presentations and other marketing tools, which are supplemented by product
demonstrations. In addition, our marketing team also generates awareness through
print advertising in select trade magazines, seminars and direct customer and
partner events.
Competition
The market for GRC management products and services in general, and GRC
management software in particular, is rapidly changing and becoming highly
competitive.
We believe that the principal competitive factors in this market include:
- product performance and functionality;
- ease of implementation and use;
- product integration;
- platform coverage and scalability;
- company reputation;
- technical support; and
- price.
We believe that we compete favorably with respect to these factors, although,
with respect to company reputation, we are young and not well-known. Our
competitors include software companies, system integrators, audit firms and
consulting firms. We have entered into strategic relationships with some firms
who might otherwise compete with us. These relationships do not generally
prohibit competitive activities by us or the other parties. Many of our
competitors have greater financial, technical, marketing and other resources
than we do, as well as greater name recognition and larger installed customer
bases. In addition, some of these competitors have research and development
capabilities that may allow them to develop new or improved products that may
compete with our products. In addition to competition from other software
companies, we may face competition from consulting firms of various sizes,
including consulting firms with whom we have entered into strategic marketing
relationships. Our success will depend on our ability to adapt to these
competing forces, to develop or otherwise acquire rights to more advanced
products with superior features more rapidly and less expensively than our
competitors, and to educate potential customers as to the benefits of using our
products rather than developing products of their own or using our competitors'
products.
Intellectual Property and Licenses
Our intellectual property rights are important to our business. We rely on a
combination of copyrights, trademarks, trade secrets and confidentiality
provisions in our agreements to protect our intellectual property and seek to
ensure that our licensors do the same. Our technology is not covered by any
patents. We require employees and independent contractors to enter into
confidentiality agreements and assignments of intellectual property rights upon
the commencement of their employment and commercial relationships with us.
We license substantially all of the technology comprising our Acertus software
pursuant to two principal license agreements with licensor companies owned
indirectly and controlled by Messrs. Terry Allen, Paul Hookham and Bryce
Mitchell. We do not conduct our own research and development activities, and
rely substantially on the efforts of those companies for continued research and
development, which we fund on a time and materials basis pursuant to the
agreements.
The agreement governing the Acertus Governance software is dated October 10,
2003 with a United Kingdom company called Risk Governance Limited ("RGL") and
the agreement governing Acertus Risk Assessment and Compliance is dated April 1,
2004 with an Alberta company called Securac Technologies, Inc. ("STI"). Under
the agreements, we generally have the right to commercially exploit the Acertus
Governance in countries that are party to the North American Free Trade
Agreement and Acertus Risk Assessment and Compliance software in the United
States of America and Canada,in each case in exchange for royalties. The STI
license agreement is perpetual, exclusive and irrevocable by the licensor,
provided we satisfy our obligations thereunder including the obligation to pay
royalties when due. The RGL license covering Acertus Governance is exclusive
provided we satisfy our obligations thereunder including the obligation to pay
royalties when due. The RGL license requires no upfront payment, and bases the
amount of the royalty on the level of license fees received by our company:
License Fees Collected ($US) Royalty
----------------------- --------
0-500,000. . . . . . . 0%
500,001-$1,000,000 . . 5%
1,000,001-$3,000,000 . 7.5%
3,000,001-$5,000,000 . 10%
5,000,001 or more. . . 15%
In consideration for the STI license governing Acertus Risk Assessment and
Compliance, we delivered to STI a promissory note in the principal amount of
$786,600 (US$600,000) and agreed to pay a maintenance fee of $120,000 per annum
and royalties equal to 6% of gross revenues realized by us, provided that no
royalty shall be owing for any fiscal quarter unless gross revenue for that
quarter exceeds US$ 300,000. The upfront royalty paid by us was valued at US$
600,000. In addition to the $120,000 annual maintenance fee, we also, on a time
and materials basis, fund research and development activities of STI on an
ongoing basis pursuant to the license agreement. Under the STI agreement, if our
common stock is not listed on either the NASDAQ, AMEX or NYSE stock exchanges as
of the third anniversary of the agreement, the exclusivity granted to us shall
automatically cease and the rights granted therein shall become non-exclusive
throughout North America for the balance of the term of the agreement.
Properties
Our headquarters are located in Calgary, Alberta, where we share approximately
8,076 square feet of office space with STI and another private company, Securac
Pacific Ltd. (formerly Brycol Consulting Ltd.), both of which are owned and
controlled by Messrs. Allen, Hookham and Mitchell. We occupy approximately half
of the space, and although we are not party to the lease, we share 50% of the
cost of the lease. See "Certain Transactions - Lease of Office Space". We also
maintain sales offices in other locations in the United States and Canada. We
believe that our headquarters facility is adequate for our foreseeable needs. It
is also anticipated that if required, suitable additional or alternative space
will be available on commercially reasonable terms to accommodate expansion of
the operations.
Human Resources
We have 12 full-time employees and one part-time employee. Of our employees,
four are in marketing and sales, five are in administration/investor
relations/legal and three are in professional services.
Legal Proceedings
We are not currently a party to any material litigation and we are not aware of
any pending or threatened litigation against us that could have material adverse
effect on our business, operating results or financial condition.
MANAGEMENT
Name. . . . . . . . Age Title
------------------- --- -----------------------------------------------------------
TerryW. Allen . . . 44 Chief Executive Officer, Chairman of the Board and Director
------------------- --- -----------------------------------------------------------
Paul J. Hookham . . 28 Chief Financial Officer, Treasurer, Secretary and Director
------------------- --- -----------------------------------------------------------
Bernie McNeill. . . 45 Executive Vice President, Marketing and Sales
------------------- --- -----------------------------------------------------------
Bryce R. Mitchell . 42 Director
------------------- --- -----------------------------------------------------------
Kenneth Denich, PhD 52 Director
------------------- --- -----------------------------------------------------------
Terry W. Allen has served as our Chief Executive Officer and Chairman of the
Board since October, 2004, the date of the RTO. Prior thereto and since March,
2002, Mr. Allen served as chief executive officer for Securac Inc. From
September 2001 to February 2002, he served as vice president-sales for Knowledge
Impact, a company engaged in providing computer-based training services. From
May, 1999 to August, 2001, he served as executive vice president-sales for
Compusoft (Canada) Inc., a company traded on the TSX Venture Exchange.
Paul J. Hookham has served as our Chief Financial Officer, Secretary, Treasurer
and director since October, 2004, the date of the RTO. Prior thereto and since
March, 2002, Mr. Hookham served as chief financial officer for Securac Inc.
Prior to joining Securac Inc. and since April 2001, Mr. Hookham served as chief
financial officer of New Era Nutrition Inc., a specialized health foods company.
From May 2000 to March 2001, he served as chief financial officer of Compusoft
(Canada) Inc.
Bernie McNeill has served as our Senior Vice President, Marketing and Sales
since January 2005. Prior thereto and since 1991, Mr. McNeill served as
Vice-President, Marketing and Sales, at Achieve Global where he provided sales
and marketing services across Canada. A number of his clients included AT&T,
World Bank and Toyota. Prior to 1991, Mr. McNeill held senior sales and
marketing positions with Johnson & Johnson Products and RJR Nabisco. Mr. McNeill
is a frequent lecturer and consultant on sales/marketing strategy
implementation, operational excellence and customer intimacy.
Bryce R. Mitchell has served as our Executive Vice-President, Sales from October
2004 to April 2005, and as director since October 2004, the date of the RTO.
From March 2002 to October 2004, Mr. Mitchell served as executive vice president
- sales for Securac Inc. From January 2000 to March 2002, he served as director
of sales for Knowledge Impact, a company engaged in providing computer-based
training services.
Kenneth Denich, PhD has served as director of our company since October 2004,
the date of the RTO. Since April 2002 Dr. Denich has served as director of
business development of MannKind Corporation, a company traded on the NASDAQ.
From November 2000 to March 2002, Dr. Denich was Vice President, Research and
Development for Cytovax Biotechnologies Inc., a company traded on the TSX
Venture Exchange.
Audit Committee
We do not have a separate audit committee. Our entire board of directors acts as
our audit committee and they perform the duties and functions of the audit
committee. While some of our members of our board of directors are financially
literate and/or have a background in finance or accounting, no member of our
board of directors would qualify as a "financial expert" under the criteria
established by the Securities and Exchange Commission. Due to our limited
resources and limited revenue, and in light of the financial literacy of some of
our board members, our board of directors has concluded not to retain a
"financial expert" as a board member at this time.
EXECUTIVE COMPENSATION
None of the individuals who served as our CEO or acted in a similar capacity
during 2004 were paid or accrued compensation for services at any time during
the last three fiscal years. No executive officer earned a salary or bonus in
excess of $100,000 in 2004. None of such individuals (collectively, "Named
Executive Officers") have been granted options to purchase our common stock or
stock appreciation rights during 2004, nor have any of such individuals
exercised any of such rights during 2004.
Employment Agreements
Executive Officer Compensation
We do not have an employment agreement with either Terry Allen, who serves as
our Chief Executive Officer, or Paul Hookham, who serves as our Chief Financial
Officer, each on an at-will basis. Neither Mr. Allen nor Mr. Hookham has a
severance arrangement upon a change of control of our company, other than our
customary severance policy applicable to all employees. This severance policy
provides for up to two months severance in the event of termination of
employment without cause, depending on the number of years of service.
Key Employee Compensation
We have entered into an employment agreement with Bernie McNeill effective
January 25, 2005 calling for annual salary of CDN$130,000, inclusion in the
employee benefit plan, reimbursement of reasonable expenses and contains
provisions for up to two months severance in the event of termination of
employment without cause. Mr. McNeill is eligible for an annual bonus of
CDN$20,000 based upon annually set sales targets and criteria.
We have entered into an employment agreement with Ms. Deanna McKenzie effective
June 21, 2004 calling for annual salary of CDN$150,000, inclusion in the
employee benefit plan, reimbursement of reasonable expenses and contains
provisions for up to two months severance in the event of termination of
employment without cause. Ms. McKenzie is eligible for an annual bonus of
CDN$30,000 based upon annually set sales targets and criteria.
Director Compensation
We do not pay fees to our directors for their service on the board of directors
or for their attendance at board meetings or meetings of any committee of the
board of directors on which they may serve. Those directors that also are
employed by us may be eligible for option grants under employee stock option
plans.
PRINCIPAL STOCKHOLDERS
The following table summarizes certain information as of October 27, 2005 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 2004 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 7.32%
-------------------------------------------- ------------------------------------------ ---------------------
Kingsnorth Trust(2). . . . . . . . . . . . . 3,789,553 7.32%
-------------------------------------------- ------------------------------------------ ---------------------
Bayeux Trust(3). . . . . . . . . . . . . . . 3,742,300 7.23%
-------------------------------------------- ------------------------------------------ ---------------------
Mercia Trust(4). . . . . . . . . . . . . . . 3,742,303 7.23%
-------------------------------------------- ------------------------------------------ ---------------------
Swansea Trust(5) . . . . . . . . . . . . . . 3,122,650 6.04%
-------------------------------------------- ------------------------------------------ ---------------------
Hexham Trust(6). . . . . . . . . . . . . . . 3,122,653 6.04%
-------------------------------------------- ------------------------------------------ ---------------------
Leslie Allan Postnikoff. . . . . . . . . . . 2,576,383 4.98%
-------------------------------------------- ------------------------------------------ ---------------------
Hisahiro Kashida . . . . . . . . . . . . . . 4,860,000(7) 9.39%
-------------------------------------------- ------------------------------------------ ---------------------
Terry W. Allen . . . . . . . . . . . . . . . 0(8) 0.0%
-------------------------------------------- ------------------------------------------ ---------------------
Paul J. Hookham. . . . . . . . . . . . . . . 0(8) 0.0%
-------------------------------------------- ------------------------------------------ ---------------------
Bryce R. Mitchell. . . . . . . . . . . . . . 0(8) 0.0%
-------------------------------------------- ------------------------------------------ ---------------------
Kenneth Denich, PhD. . . . . . . . . . . . . 0 0.0%
-------------------------------------------- ------------------------------------------ ---------------------
Executive Officers and directors as a group
(4 persons)(8) . . . . . . . . . . . . . . . 0 0.0%
-------------------------------------------- ------------------------------------------ ---------------------
(1) Paul Hookham, executive officer and director, 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 its address is PO Box 3140, Romasco
Place, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands
(2) ( Paul Hookham, executive officer and director, 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 its address is PO Box 3140, Romasco Place,
Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.
(3) Bryce Mitchell, director, 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 its
address is PO Box 3140, Romasco Place, Wickhams Cay 1, Road Town,
Tortola, British Virgin Islands.
(4) Bryce Mitchell, director, 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 its address is PO
Box 3140, Romasco Place, Wickhams Cay 1, Road Town, Tortola, British
Virgin Islands.
(5) Terry Allen, executive officer and director, 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 its address is PO Box 3140, Romasco Place,
Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.
(6) Terry Allen, executive officer and director, 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 its 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 warrants
exercisable until July 16, 2006 at US$0.75 per share.
(8) For each of Terry Allen, Paul Hookham and Bryce Mitchell, does not
include shares held by trusts of which they are beneficiaries. See
notes 2 through 7.
CERTAIN TRANSACTIONS
Lease of Office Space
Our headquarters are located in Calgary, Alberta, where we share approximately
8,076 square feet of office space with STI and another private company, Securac
Pacific Ltd. (formerly Brycol Consulting Ltd.), both of which are owned and
controlled by Messrs. Allen, Hookham and Mitchell. We occupy approximately half
of the space, and although we are not party to the lease, we share 50% of the
cost of the lease. Securac Pacific Ltd. is party to the lease, which is dated
June 30, 2003. The total monthly rental, including operating costs, is
CDN$20,735.84. The lease expires on December 31, 2008, subject to a right of
first refusal to extend the term of the lease upon mutually agreeable terms.
License of Acertus Software; R&D
We license substantially all of the Acertus software and related intellectual
property utilized by us from private companies indirectly owned and controlled
by Messrs. Allen, Hookham and Mitchell. Substantially all of our research and
development activities are conducted through one of these companies, STI. We
paid STI cash totaling $391,197 in 2003, $795,302 in 2004 and $843,936 in 2005
through September 30 in respect of these arrangements. In addition, we
transferred a promissory note in the principal amount of approximately
$US374,000 and issued a new promissory note in the principal amount of
approximately $US228,000 to STI as an upfront royalty payment in 2004. See
"Business - Intellectual Property and Licenses" for a more detailed description
of the terms of these arrangements.
Advances; Guarantee
Securac Holdings Inc., an Alberta corporation owned and controlled by Messrs.
Terry Allen, Paul Hookham and Bryce Mitchell, executive officers and directors
of our company, provided us with working capital advances aggregating $80,596.
In consideration therefor, on January 1, 2005 we issued to that company a
non-interest bearing, unsecured, promissory note due on demand in like principal
amount . As of the date hereof, no payments have been demanded under or made on
the note.
On March 30, 2005, we borrowed US$243,460 from Generation Capital Associates,
the proceeds of which were used for general working capital. The loan bears
interest at a term interest rate of 6% payable on demand as of May 31, 2005, and
is evidenced by a promissory note issued by our company in favour of the lender
that is jointly and severally secured with personal guarantees of three
directors of the company. As of the date hereof, interest has been paid to the
lender however the principal remains unpaid.
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 ("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"), parent of STI from
whom we license our Acertus(TM) software technology, acquired all of the
outstanding stock of RGL in exchange for an equity interest in Holdings. The
value of the consideration paid by Holdings was agreed for purposes of the
agreement to be equal to $1,147,722, the agreed value of the stock paid by our
company for RGI. Holdings is controlled and substantially owned by Messrs.
Allen, Mitchell and Hookham.
LEGAL MATTERSLEGAL MATTERS
The validity of the shares of common stock offered hereby has been passed upon
by Eilenberg & Krause, LLP, New York, New York. A member of that firm owns an
option to purchase up to 150,000 shares of our common stock.
EXPERTSEXPERTS
The audited consolidated financial statements of Securac have been audited by
Chisholm, Bierwolf & Nilson, LLC and PricewaterhouseCoopers, LLP, both
independent certified public accountants, for the periods and to the extent
indicated in their report appearing elsewhere herein and its subsidiary, Securac
Inc., audited consolidated financial statements included herein have been
audited by PricewaterhouseCoopers LLP, independent certified public accountants,
for the periods and to the extent indicated in their report appearing elsewhere
herein. Such audited consolidated financial statements have been so included in
reliance on the report of such firm given upon their authority as experts in
auditing and accounting.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our directors and officers are indemnified by our bylaws against amounts
actually and necessarily incurred by them in connection with the defense of any
action, suit or proceeding in which they are a party by reason of being or
having been directors or officers of our Company. Our articles of incorporation
provide that none of our directors or officers shall be personally liable for
damages for breach of any fiduciary duty as a director or officer involving any
act or omission of any such director or officer. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
permitted to such directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by our Company of expenses incurred or paid by such director,
officer or controlling person in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATIONWHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock offered by this prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, please refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected without
charge at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's regional offices located at the Woolworth Building,
233 Broadway, New York, New York 10279 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials may also
be obtained from the SEC's Public Reference at 450 Fifth Street, N.W., Room
1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement, including all exhibits and schedules
and amendments, has been filed with the SEC through the Electronic Data
Gathering, Analysis and Retrieval system, and is publicly available through the
SEC's Website located at http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT OF CHISHOLM, BEIRWOLF & NILSON, LLC . . . . . . . . . . . . . . . . . . F-2
INDEPENDENT AUDITORS' REPORT OF PRICEWATERHOUSECOOPERS LLP . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as of December 31, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Operations for year ended December 31, 2004 and 2003. . . . . . . . . . . . F-5
Consolidated Statements of Consolidated Loss for year ended December 31, 2004 and 2003. . . . . . . . F-7
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for year ended December 31, 2004 and 2003 F-8
Consolidated Statements of Cash Flows for year ended December 31, 2004 and 2003 . . . . . . . . . . . . . . . F-10
Notes to the Consolidated Financial Statements for year ended December 31, 2004 and 2003 . . . . . .. . .. . F-12
Consolidated Balance Sheet as of June 30, 2005. . . . . . . . . . . . . . . . . . . .. . .. . .. . .. . .. . F-25
Consolidated Statement of Operations for six months ended June 30, 2005. . . . . . . . . . . . . . .. . .. . F-27
Consolidated Statement of Cash Flows for six months ended June 30, 2005. . . . . . . . . . . . . . .. . . . . F-28
Notes to the Consolidated Financial Statements for June 30, 2005 and December 31, 2004 . . . . . . .. . . . . F-29
F1
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, 2004 and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive loss, and cash
flows for the year ended December 31, 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 Public Company
Accounting Oversight Board (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, 2004 and the consolidated results of
their operations and their cash flows for the year ended December 31, 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, 2004.
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
April 9, 2005
F2
INDEPENDENT AUDITORS' REPORT
December 13, 2004
Auditors' Report
To the Shareholders of Securac Inc.
We have audited the consolidated balance sheets of Securac Inc. as at December
31, 2003 and the consolidated statements of operations, deficit and cash flows
for the year ended December 31, 2003. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31,
2003and the results of its operations and its cash flows for the year ended
December 31, 2003 in accordance with Canadian generally accepted accounting
principles.
PricewaterhouseCoopers LLP
Chartered Accountants Edmonton, Canada
F3
SECURAC CORP.
Consolidated Balance Sheet
December 31, 2004
(Expressed in Canadian Dollars)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 254,860
Accounts receivable, net of allowance of $267. . . . . . . 332,006
Advances and other receivables . . . . . . . . . . . . . . 56,385
Prepaid expenses and deposits. . . . . . . . . . . . . . . 25,216
------------
Total Current Assets . . . . . . . . . . . . . . . . . . 668,467
------------
PROPERTY AND EQUIPMENT, Net (Notes 1 and 3). . . . . . . . . 51,096
------------
OTHER ASSETS
Goodwill (Notes 1 and 10). . . . . . . . . . . . . . . . . 91,000
------------
Total Other Assets . . . . . . . . . . . . . . . . . . . 91,000
------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $ 810,563
============
The accompanying notes are an integral part of these consolidated financial statements.
F4
CONSOLIDATED BALANCE SHEET (CONTINUED)
Consolidated Balance Sheet (Continued)
December 31, 2004
(Expressed in Canadian Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 561,646
Accrued liabilities. . . . . . . . . . . . . . . . . . . . 122,315
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 34,657
Current portion of obligation under capital lease (Note 5) 5,088
Due to related company (Note 6). . . . . . . . . . . . . . 200,022
Note payable (Note 7). . . . . . . . . . . . . . . . . . . 280,596
------------
Total Current Liabilities. . . . . . . . . . . . . . . . 1,204,324
------------
LONG-TERM LIABILITIES
Obligation under capital lease (Note 5). . . . . . . . . . 6,379
------------
Total Long-Term Liabilities. . . . . . . . . . . . . . . 6,379
------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . 1,210,703
------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS EQUITY (DEFICIT)
Common stock; $0.01 USD par value (average of
$0.015 CDN par value), 200,000,000 shares authorized,
43,546,990 shares issued and outstanding. . . . . . . . . 658,478
Additional paid-in capital . . . . . . . . . . . . . . . . 4,911,558
Stock subscription receivable. . . . . . . . . . . . . . . (617,708)
Other comprehensive loss (Note 9). . . . . . . . . . . . . (59,470)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (5,292,998)
------------
Total Stockholders Equity (Deficit) . . . . . . . . . . . (400,140)
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT). . . . . . . . . . . . . . . . . . . $ 810,563
============
The accompanying notes are an integral part of these consolidated financial statements.
F5
SECURAC CORP.
Consolidated Statements of Operations
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
Securac Inc.
2004 2003
--------------------- ------------
REVENUES
License fees. . . . . . . . . . . . . . . . $ 145,278 $ -
Professional service fees . . . . . . . . . 579,994 527,096
--------------------- ------------
Total Revenues. . . . . . . . . . . . . . 725,272 527,096
COST OF SALES . . . . . . . . . . . . . . . . 209,392 387,866
--------------------- ------------
GROSS MARGIN. . . . . . . . . . . . . . . . . 515,880 139,230
--------------------- ------------
OPERATING EXPENSES
Depreciation and amortization . . . . . . . 26,093 15,989
General and administrative. . . . . . . . . 297,170 561,576
Stock-based compensation. . . . . . . . . . 1,133,687 -
Professional fees . . . . . . . . . . . . . 734,378 -
Research and development. . . . . . . . . . 795,302 391,197
Sales and marketing . . . . . . . . . . . . 803,523 419,865
--------------------- ------------
Total Operating Expenses. . . . . . . . . 3,790,153 1,388,627
--------------------- ------------
LOSS FROM OPERATIONS. . . . . . . . . . . . . (3,274,273) (1,249,397)
--------------------- ------------
OTHER INCOME (EXPENSE)
Interest income . . . . . . . . . . . . . . - 477
Interest expense. . . . . . . . . . . . . . (10,296) (1,785)
Realized loss on foreign currency exchange. - (13,867)
Other income (expense). . . . . . . . . . . (173) -
Loss on disposal of assets. . . . . . . . . - (158)
--------------------- ------------
Total Other Income (Expense). . . . . . . (10,469) (15,333)
--------------------- ------------
NET LOSS. . . . . . . . . . . . . . . . . . . $ (3,284,742) $(1,264,730)
===================== ============
BASIC LOSS PER COMMON SHARE (Note 1). . . . . $ (0.09) $ (0.04)
===================== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING . . . . . . . . . . . . . 36,571,730 33,808,079
===================== ============
The accompanying notes are an integral part of these consolidated financial statements.
F6
SECURAC CORP.
Consolidated Statements of Comprehensive Loss
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
Securac Inc.
2004 2003
--------------------- ------------
NET LOSS. . . . . . . . . . . . . . . . . . . . $ (3,284,742) $(1,264,730)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments. . . (59,470) -
--------------------- ------------
Total Other Comprehensive Income
(Loss) (Note 8). . . . . . . . . . . . . . (59,470) -
--------------------- ------------
NET COMPREHENSIVE LOSS. . . . . . . . . . . . . $ (3,344,212) $(1,264,730)
===================== ============
The accompanying notes are an integral part of these consolidated financial statements.
F7
SECURAC CORP.
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, December 31, 2002 . . . . 33,550,845 $529,897 $(379,797) $ - $ - $ (129,228)
Common stock issued for cash
at $1.42 per share. . . . . . . . 510,273 8,059 714,685 - - -
Net loss for the year ended
December 31, 2003 . . . . . . . . - - - - - (1,264,730)
------------ -------- ---------- ------------ ------------- -----------
Balance, December 31, 2003 . . . . 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 acquisition of
Brycol Consulting Ltd. at $2.26 per share 177,778 2,325 264,342 - - -
Common stock issued in acquisition 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 - - -
------------ -------- ---------- ------------ ------------- -----------
Balance forward. . . . . . . . . . 43,546,990 $658,478 $5,000,787 $ (617,708) $ - $(2,008,256)
------------ -------- ---------- ------------ ------------- -----------
The accompanying notes are an integral part of these consolidated financial statements.
F8
SECURAC CORP.
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 forward. . . . . . . . . . 43,546,990 $658,478 $5,000,787 $ (617,708) $ - $(2,008,256)
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) $(5,292,998)
============ ======== ========== ============ ============== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F9
SECURAC CORP.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
Securac Inc.
2004 2003
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . .$(3,284,742) $(1,264,730)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization . . . . . . . . . 26,093 15,989
Common stock issued for services. . . . . . . . 417,983 -
Fair value of options and warrants. . . . . . . 162,259 -
Loss on disposal of assets. . . . . . . . . . . - 158
Changes in operating assets and liabilities:
Accounts receivables. . . . . . . . . . . . . . 138,278 (100,354)
Advances and other receivables. . . . . . . . . (56,385) -
Prepaid expenses and deposits . . . . . . . . . 38,476 (59,084)
Accounts payable and accrued liabilities. . . . 388,196 243,668
Deferred revenue. . . . . . . . . . . . . . . . 28,657 6,000
----------- ----------
Net Cash Used In Operating Activities . . . ..(2,141,185) (1,158,353)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . (27,418) (9,382)
Proceeds from the sale of property and equipment. - 2,329
----------- ----------
Net Cash Used In Investing Activities . . . . . (27,418) (7,053)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholder . . . . . . . . . . . . (206,990) 206,990
Proceeds from common stock issuance . . . . . . .3,625,592 722,744
Stock subscription receivable . . . . . . . . . . (617,708) -
Stock offering costs. . . . . . . . . . . . . . . (105,544) -
Loss distributed to shareholders. . . . . . . . . (614,298) -
Due to related company. . . . . . . . . . . . . . 200,022 -
Proceeds from notes payable . . . . . . . . . . . 282,098 227,852
Payments on notes payable . . . . . . . . . . . . (115,119) -
Proceeds from capital leases. . . . . . . . . . . 4,950 6,514
Principal payments on capital leases. . . . . . . (4,748) (3,163)
----------- ----------
Net Cash Provided By Financing Activities . . .2,448,255 1,160,937
----------- ----------
The accompanying notes are an integral part of these consolidated financial statements.
F10
SECURAC CORP.
Consolidated Statements of Cash Flows (Continued)
(Expressed in Canadian Dollars)
For the Years Ended
December 31,
Securac Inc.
2004 2003
----------- ----------
EFFECT OF CURRENCY EXCHANGE RATE
CHANGES ON CASH AND CASH EQUIVALENTS. . . . . . . (59,470) -
----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . . . . . . . 220,182 (4,469)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR . . . . . . . . . . . . . . . . 34,678 39,147
----------- ----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR . . . . . . . . . . . . . . . . . . . $254,860 $34,678
=========== ==========
CASH PAID FOR:
Interest . . . . . . . . . . . . . . . . . . . . $ 10,296 $ 1,785
Income taxes . . . . . . . . . . . . . . . . . . $ - $ -
NON-CASH FINANCING ACTIVITIES:
Conversion of note payable for common stock. . . $214,235 $ -
Common stock issued for services . . . . . . . . $417,983 $ -
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.
F11
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(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
services. 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 (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.
F12
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(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, a small 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
Revenues are recognized when professional services are provided to the client
and in accordance with license agreements.
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,
-----------------------------------
2004 2003
----------------- ----------------
Net loss - (numerator) . . . . . . $ (3,284,742) $ (1,264,730)
Weighted average number of shares
outstanding - (denominator) . . . 36,571,730 33,808,079
----------------- ----------------
Basic Loss per Common Share. . . . $ (0.09) $ (0.04)
================= ================
The Company's outstanding common stock options and warrants totaling 7,581,474
shares 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, 2004, the Company had U.S. net operating loss carryforwards of
approximately $950,000 that may be offset against future taxable income from the
year 2005 through 2024. No tax benefit has been reported in the December 31,
2004 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount. At December 31, 2004, the Company also
had Canadian non-capital loss carryforwards and investment tax credit
carryforwards totaling approximately $1,656,000.
F13
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(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,
---------------------
2004 2003
------ ------
Net loss . . . . . . . . . . . . . . . . . . . . $(3,284,742) $(1,264,730)
Foreign losses . . . . . . . . . . . . . . . . . 3,284,742 1,264,730
------------ ------------
Net tax provision. . . . . . . . . . . . . . . $ - $ -
============ ============
Net deferred tax assets (liabilities) at December 31, 2004 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. 121, 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. At December 31, 2004 and 2003, no impairments were recognized.
k. 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.
F14
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangibles consist of distribution rights which are being amortized over their
estimated useful life of three years.
l. Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
accounts payable and accrued expenses, and long-term debt approximate their
market values as of December 31, 2004 and 2003. The Company has no investments
in derivative financial instruments.
m. 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, 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.
Cash and Cash Equivalents
----------------------------
Financial instruments that potentially subject Securac Corp. (the Company) to
concentrations of credit risks consist of cash and cash equivalents. The
Company places its cash and cash equivalents at well-known, quality financial
institutions.
n. 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.
o. General and Administrative Costs
General and administrative expenses include fees for office space, insurance,
office expenses and office salaries.
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.
F15
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
p. Newly Adopted Pronouncements (Continued)
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.
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 nonmonetrary
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.
The implementation of the provisions of these pronouncements is not expected to
have a significant effect on the Company's consolidated financial statement
presentation.
F16
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
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.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consisted of the following:
Office equipment. . . . . . . . $ 32,104
Computer equipment and software 31,750
Artwork . . . . . . . . . . . . 4,100
---------
Totals. . . . . . . . . . . . . 67,954
Less: accumulated depreciation. (16,858)
---------
Property and Equipment - Net. $ 51,096
=========
Depreciation expense for the years ended December 31, 2004 and 2003 was $13,027
and $2,923, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at December 31, 2004 consisted of the following:
Distribution rights. . . . . . . . . . . . . . . . . . . . . . $ 39,198
Less: accumulated amortization . . . . . . . . . . . . . . . . (39,198)
---------
Intangible Assets - Net. . . . . . . . . . . . . . . . . . . $ -
=========
Amortization expense for the years ended December 31, 2004 and 2003 was $13,066
and $13,066, respectively.
F17
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 5 - OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment with lease terms through 2007. 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, 2004 consisted of the
following:
Capital lease payable to a leasing company,
interest at 24% per annum, principal and
Interest payments of $326 due monthly, matures
on December 9, 2005 with a purchase option of
$578 at maturity, secured by computer equipment. $ 1,641
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. 2,353
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. 2,051
Capital lease payable to a leasing company,
interest at 24% per annum, principal and
Interest payments of $135 due monthly, matures
on October 20, 2007 with a purchase option of
$310 at maturity, secured by computer equipment. 3,063
Capital lease payable to a leasing company,
interest at 24% per annum, principal and
Interest payments of $100 due monthly, matures
on February 1, 2008 with a purchase option of
$250 at maturity, secured by computer equipment. 2,359
--------------------------
Total capital leases payable. . . . . . . . . . . 11,467
Less: current portion . . . . . . . . . . . . . . (5,088)
--------------------
Total long-term capital leases. . . . . . . . . . $ 6,379
====================
F18
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(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,
--------------
2005. . . . . . . . . . . . . . . . . . . . . $ 5,628
2006. . . . . . . . . . . . . . . . . . . . . 4,529
2007. . . . . . . . . . . . . . . . . . . . . 2,929
2008. . . . . . . . . . . . . . . . . . . . . -
2009. . . . . . . . . . . . . . . . . . . . . -
Thereafter. . . . . . . . . . . . . . . . -
--------------
Total future minimum lease payments . . 13,086
Less: amount representing interest (1,619)
--------------
Total . . . . . . . . . . . . . . . $ 11,467
==============
Equipment held under these capital leases are included in property and equipment
and had a cost of $20,774 and accumulated depreciation of $14,155 at December
31, 2004. The Company recorded depreciation expense of $4,247 for the year ended
December 31, 2004 for the vehicles and equipment under these capital leases.
NOTE 6 - DUE TO RELATED COMPANY
At December 31, 2004, the Company owed a related company, whose
officers/directors are shareholders of the company, in the amount of $200,022.
The amount is unsecured, non-interest bearing and has no specified terms of
repayment.
F19
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 7 - NOTES PAYABLE
Notes payable at December 31, 2004 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 February 2005. $ 100,000
Note payable to an individual, bearing interest at
12% per annum, unsecured, due in March 2005. . . . . . 100,000
Note payable to a company, non-interest bearing,
unsecured, due on demand.. . . . . . . . . . . . . . . 80,596
----------
Total Notes Payable . . . . . . . . . . . . . . . . . . 280,596
Less: current portion . . . . . . . . . . . . . . . . . (280,596)
----------
Total Long-Term Notes Payable . . . . . . . . . . . . . $ -
==========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
----------------------
The Company has an ongoing relationship with its officers and 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 two months
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, which includes its
pro-rata share of operating expenses and taxes. The lease commenced on July 1,
2004 and expires on October 30, 2008.
Office Leases (Continued)
---------------------------
The future minimum lease payments, excluding operating expenses and taxes, are
as follows:
For the
Years Ending
December 31,
-------------
2005. . . . . . . . . . . . . . . . . . . $ 125,178
2006. . . . . . . . . . . . . . . . . . . 125,178
2007. . . . . . . . . . . . . . . . . . . 125,178
2008. . . . . . . . . . . . . . . . . . . 104,315
2009. . . . . . . . . . . . . . . . . . . -
2010 and thereafter . . . . . . . . -
-------------
Total future minimum lease payments $ 479,849
=============
The Company recognized rent expense of $135,502 related to these leases for the
year ended December 31, 2004.
F20
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 9 - 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, 2004, which is included in other comprehensive
loss in the stockholders' equity section, consisted of the following:
Balance, beginning of year $ -
Effect of currency exchange rate changes (59,470)
----------------------------
Balance, end of year . . . . . . . . . . $ (59,470)
============================
NOTE 10 - BUSINESS ACQUISITIONS
During 2004, the Company acquired the following businesses:
Brycol Consulting Ltd.
------------------------
Effective March 31, 2004, the Company acquired all of the outstanding common
shares of Brycol Consulting Ltd., an unrelated company. The purchase price of
$466,667 was satisfied by the payment of $100,000 cash, the issue of a note
payable in the amount of $100,000 and by the Company issuing 177,778 common
shares at a deemed price of $1.50 per share. The acquisition was an arm's length
transaction and has been accounted for using the purchase method.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The purchase price
allocation is based upon management's best estimate of the relative fair value
of the identifiable assets acquired and liabilities assumed.
Net Assets Acquired
Current assets . . . . . . . . $ 416,375
Property and equipment . . . . 11,647
Intangible assets and goodwill 291,497
Current liabilities. . . . . . (252,852)
---------------------
Acquisition Price. . . . . . $ 466,667
=====================
Sale of Brycol Consulting Ltd.
----------------------------------
Effective on the close of business on March 31, 2004, the Company sold all of
its shares in Brycol Consulting Ltd. ("Brycol") a wholly owned subsidiary, to
Securac Holdings Inc. ("Holdings"), a company under common control.
Consideration for the sale consisted of $466,667 for the shares of Brycol. As
the transaction was between related parties, all amounts were transferred at
book values. No gain or loss was incurred on the sale of Brycol, which was
acquired March 31, 2004 as described in Note 10.
F21
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 10 - BUSINESS ACQUISITIONS (Continued)
Telecomsecuritymangement.com, Ltd.
-----------------------------------
Effective August 17, 2004, the Company acquired the business and certain related
assets of Telecomsecuritymanagement.com Ltd., an unrelated company. The purchase
price was satisfied by the Company issuing 200,000 common shares at an estimated
fair value of $0.58 per share. The acquisition was an arm's length transaction
and has been accounted for using the purchase method.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The purchase price
allocation is based upon management's best estimate of the relative fair values
of the identifiable assets acquired and liabilities assumed.
Net Assets Acquired
Property and equipment $ 25,000
Goodwill . . . . . . . 91,000
--------------------
Acquisition Price. . $ 116,000
====================
NOTE 11 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004, the Company repaid one of its
shareholders the amount of $206,990 for advances received during 2003.
During the year ended December 31, 2003, the Company paid $38,000 to one of its
directors for commissions on the issuance of common stock. The transaction has
been recorded at the exchange amount, which is considered to represent fair
value.
On March 31, 2004, the Company completed a corporate reorganization to further
protect its intellectual property and to more effectively organize its business
units.
Sale of Securac Technologies Inc. and Related Software License and Services
--------------------------------------------------------------------------------
Agreement
---------
Effective on the close of business on March 31, 2004, the Company sold all of
its shares in Securac Technologies Inc. ("Technologies"), a wholly owned
subsidiary, to Securac Holdings Inc., a company under to common control. As the
transaction was between related parties, all amounts were transferred at book
values with no gain or loss recorded. Net liabilities of $172,302, which were
assumed by Holdings on the sale of Technologies were credited to additional
paid-in capital.
The Company subsequently entered into a software license and services agreement
with Technologies whereby Technologies granted to the Company the exclusive,
irrevocable and perpetual license to use and distribute the software application
known as "Acertus" Enterprise Risk & Compliance Software in Canada and the
United States of America. Consideration paid by the Company to Technologies
consisted of a note payable in the amount of $786,600. As the transaction was
between related parties, the license agreement was recorded by the Company at
its book value of zero. The net debit of $786,600 has been charged to
contributed capital with the acquisition price of $172,302 which has been offset
against the sale price of Technologies and a loss distributed to the
shareholders of $614,298. In addition, the Company will pay Technologies a
maintenance fee of $120,000 per annum and a royalty of 6% of Gross Revenues, as
defined in the agreement, generated by the Company from the licensing and
distribution of the software once Gross Revenues for a fiscal quarter of the
Company exceed US$300,000.
F22
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 11 - RELATED PARTY TRANSACTIONS (Continued)
Sale of Securac Technologies Inc. and Related Software License and Services
--------------------------------------------------------------------------------
Agreement
---------
During the year ended December 31, 2004, the Company also paid $795,302 to
Technologies to further develop the Acertus software. These payments have been
recorded at the exchange amount, which is considered to be fair value and are
included in research and development expenses.
NOTE 12 - OUTSTANDING STOCK WARRANTS
During 2004, the Company granted a total of 350,000 warrants, related to
conversion of a note payable with common stock, to purchase shares of common
stock for services rendered by an unrelated party at an exercise price of $0.50
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 $0.75 - $1.25 per share. The warrants have an
exercise period of two to three years.
At December 31, 2004, the Company had 4,191,474 outstanding warrants to purchase
shares of common stock.
NOTE 13 - 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, 2004, the Company granted 3,255,000 stock
options to various employees, officers, directors and nonemployees for services
rendered. These options were issued with exercise prices ranging from $0.37 -
$1.25 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 3,390,000 options outstanding as of December 31, 2004 pursuant
to the 2004 Stock Option Plan (the "Plan"), and could issue an additional
aggregate of 2,953,288 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 2004: dividend yield of
zero percent; expected volatility between 0.10% and 0.22%; risk free interest
rate of 4.00%, and an expected life between one and five years. During the year
ended December 31, 2004, the Company recognized additional costs of $129,534 as
a result of applying SFAS No. 123 to the employee options. The Company did not
recognized any other costs for stock options granted to employees and
nonemployees during the years ending December 31, 2004 and 2003.
F23
SECURAC CORP.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in Canadian Dollars)
NOTE 13 - OUTSTANDING STOCK OPTIONS (Continued)
A summary of the status of the Company's stock options as of December 31, 2004
and changes during the year is presented below:
Weighted
Average
Exercise
Shares Price
---------- -------
Outstanding, Beginning of year 360,000 $ 0.50
Granted. . . . . . . . . . . 3,255,000 0.68
Canceled/Expired . . . . . . (225,000) (0.50)
Exercised. . . . . . . . . . - -
---------- -------
Outstanding, End of year . . . 3,390,000 $ 0.67
========== =======
Exercisable. . . . . . . . . . 1,722,500 $ 0.24
========== =======
Outstanding Exercisable
----------- -----------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/04 Life Price at 12/31/04 Price
----------- ----------- ------------ --------- ------------ --------
$ 0.37 10,000 4.16 $ 0.001 10,000 $ 0.001
0.50 2,460,000 3.30 0.36 1,690,000 0.23
0.75 220,000 4.98 0.05 22,500 0.005
1.25 700,000 4.47 0.24 - -
----------- ----------- ------------ --------- ------------ --------
$0.37-1.25 3,390,000 . 3.65 $ 0.67 1,722,500 $ 0.24
=========== =========== ============ ========= ============ ========
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to December 31, 2004, 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.
Also subsequent to December 31, 2004, 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.
F24
SECURAC CORP.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
ASSETS
------
June 30, December 31,
2005 2004
(Unaudited)
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 228,078 $ 254,860
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . 279,005 332,006
Advances and other receivables . . . . . . . . . . . . . . . . . 61,512 56,385
Due from related company . . . . . . . . . . . . . . . . . . . . 5,885 -
Prepaid expenses and deposits. . . . . . . . . . . . . . . . . . 22,355 25,216
-------------- --------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . 596,835 668,467
-------------- --------------
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . . . . . . . . 45,838 51,096
-------------- --------------
OTHER ASSETS
Intellectual property. . . . . . . . . . . . . . . . . . . . . . 2,839,694 -
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,000 91,000
-------------- --------------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . 2,930,694 91,000
-------------- --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,573,367 $ 810,563
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F25
SECURAC CORP.
Consolidated Balance Sheets (Continued)
(Expressed in Canadian Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2005 2004
(Unaudited)
-------------- --------------
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 962,244 $ 561,646
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 146,879 122,315
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . 29,593 34,657
Current portion of obligation under capital leases . . . . . . . 1,485 5,088
Due to related company and individuals . . . . . . . . . . . . . 216,467 200,022
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . 433,223 280,596
-------------- --------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . 1,789,891 1,204,324
-------------- --------------
LONG-TERM DEBT
Obligations under capital leases . . . . . . . . . . . . . . . . 6,379 6,379
-------------- --------------
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . 6,379 6,379
-------------- --------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . 1,796,270 1,210,703
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock , USD par value $0.01 per share (average of $0.015
CDN par value); 200,000,000 shares authorized, 50,590,921
and 43,546,990 shares issued and outstanding, respectively . . 745,991 658,478
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 13,768,768 4,911,558
Subscriptions receivable . . . . . . . . . . . . . . . . . . . . (1,802,096) (617,708)
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . (48,241) (59,470)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (10,887,325) (5,292,998)
-------------- --------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . 1,777,097 (400,140)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,573,367 $ 810,563
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F26
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,
---------------------------------- --------------------------
2005 2004 2005 2004
----------------- --------------- ------------ ------------
REVENUES
License fees . . . . . . . . . . . . . . $ 2,000 $ - $ 14,700 $ 7,250
Professional service and training fees . 285,905 90,352 458,704 224,013
----------------- --------------- ------------ ------------
Total Revenue. . . . . . . . . . . . . 287,905 90,352 473,404 231,263
----------------- --------------- ------------ ------------
OPERATING EXPENSES
Direct costs of service revenue. . . . . 174,726 79,925 354,495 171,953
General and administration . . . . . . . 382,935 71,104 575,118 213,576
Sales, marketing and investor relations. 118,408 102,817 731,837 154,704
Research and development . . . . . . . . 273,245 254,088 680,808 281,853
Stock-based compensation . . . . . . . . 2,895,527 - 3,715,476 -
Amortization and depreciation. . . . . . 3,313 1,072 6,626 5,411
----------------- --------------- ------------ ------------
Total Operating Expenses . . . . . . . 3,848,154 509,006 6,064,360 827,497
----------------- --------------- ------------ ------------
LOSS FROM OPERATIONS . . . . . . . . . . . (3,560,249) (418,654) (5,590,957) (596,234)
----------------- --------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense . . . . . . . . . . . . (600) (1,073) (3,371) (3,647)
----------------- --------------- ------------ ------------
Total Other Income (Expense) . . . . . (600) (1,073) (3,371) (3,647)
----------------- ---------------- ------------ ------------
NET LOSS . . . . . . . . . . . . . . . . . $ (3,560,849) $ (419,727) $(5,594,327) $ (599,881)
================= =============== ============ ============
BASIC LOSS PER COMMON SHARE. . . . . . . . $ (0.07) $ (0.01) $ (0.12) $ (0.02)
================= =============== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING . . . . . . . . 49,045,805 34,593,380 47,590,701 34,593,380
================= =============== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F27
SECURAC CORP.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in Canadian Dollars)
For the Six Months Ended
June 30,
--------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (5,594,327) $ (599,881)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . 6,626 5,411
Common stock issued for services rendered . . . . . 962,982 -
Fair value of options and warrants. . . . . . . . . 2,763,592 -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 53,001 21,100
Advances and other receivables. . . . . . . . . . . (5,127) -
Prepaid expenses and deposits . . . . . . . . . . . 2,861 6,790
Deferred revenue. . . . . . . . . . . . . . . . . . (5,064) -
Accounts payable and accrued liabilities. . . . . . 587,485 388,850
------------ ------------
Net Cash (Used in) Operating Activities . . . . . (1,227,971) (177,730)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds to related party receivables . . . . . . . (5,885) -
Purchase of intangibles . . . . . . . . . . . . . . - (786,600)
Purchases of property and equipment . . . . . . . . (1,367) -
------------ ------------
Net Cash Used in Investing Activities . . . . . . (7,252) (786,600)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable . . . . . . . . . . . . . 243,460 100,000
Payments on capital leases and notes payable. . . . (94,436) (22,259)
Proceeds from issuance of common stock. . . . . . . 972,537 975,004
Cash received on subscriptions receivable . . . . . 75,651 -
------------ ------------
Net Cash Provided by Financing Activities . . . . 1,197,212 1,052,745
------------ ------------
EFFECT OF CURRENCY EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS. . . . . . . . . . . . 11,229 -
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. (26,782) 88,415
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . 254,860 34,678
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 228,078 $ 123,093
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR:
Interest. . . . . . . . . . . . . . . . . . . . . $ 1,200 $ 3,647
Income taxes. . . . . . . . . . . . . . . . . . . $ - $ -
NON-CASH FINANCING ACTIVITIES
Common stock issued for services rendered . . . . $ 962,982 $ -
Common stock issued for retirement of payables. . $ 145,879 $ -
The accompanying notes are an integral part of these consolidated financial statements.
F28
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005 and December 31, 2004
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, 2004 Annual Report on Form 10-KSB. Operating
results for the three months and six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
NOTE 2 - LOSS PER SHARE
Following is a reconciliation of the loss per share for the three months and six
months ended June 30, 2005 and 2004:
For the
Three Months Ended
June 30,
--------------------------
2005 2004
------------ ------------
Net (loss) available to
common shareholders . . . . $(3,560,984) $ (419,727)
============ ============
Weighted average shares. . . 49,045,805 34,593,380
============ ============
Basic loss per share (based
on weighted average shares) $ (0.07) $ (0.01)
============ ============
For the
Six Months Ended
June 30,
--------------------------
2005 2004
------------ ------------
Net (loss) available to
common shareholders . . . . $(5,594,327) $ (599,881)
============ ============
Weighted average shares. . . 47,590,701 34,593,380
============ ============
Basic loss per share (based
on weighted average shares) $ (0.12) $ (0.02)
============ ============
Weighted average shares issuable upon the exercise of stock options and warrants
were not included in the foregoing calculations because they are antidilutive.
F29
SECURAC CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005 and December 31, 2004
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 $10,728,919 at June 30, 2005, a working
capital deficit of approximately $1,035,000, and limited internal financial
resources. These factors combined, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of this uncertainty. It is the
intent of management to raise additional equity capital and increase revenues
and reduce costs to sustain operations.
NOTE 4 - MATERIAL EVENTS
On January 6, 2005, the Company acquired all of the outstanding stock of Risk
Governance, Inc., a private Delaware corporation ("RGI"), in exchange for
2,295,444 shares of common stock of the Company valued at $2,839,694, or $1.24
per share (based on the 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 in the next paragraph.
The principal asset acquired through the acquisition of RGI is a license to
certain corporate governance software technology owned and developed by Risk
Governance Ltd., a United Kingdom company under common ownership with RGI prior
to the acquisition ("RGL"). The license gives RGI the right to commercialize
applications of the software technology on an exclusive basis in North America
in exchange for royalty payments to RGL. Contemporaneous with and as a condition
to the acquisition of RGI, Securac Holdings Inc., a private Alberta corporation
("Holdings") of which Securac Corp. licenses its Acertus 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.
On January 21, 2005, the Company filed a Form S-8 with the Securities and
Exchange Commission to register a total of 6,343,288 shares of common stock
pursuant to a 2004 Incentive Stock Plan.
During the three months ended June 30, 2005, the Company granted options to
various employees for services rendered. Pursuant to these option grants, the
Company recorded additional compensation expense totaling $2,649,829 included in
general and administrative expenses.
F30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The articles of incorporation of Securac Corp. (the "Registrant") provide for
the indemnification of the directors, officers, employees and agents of the
Registrant to the fullest extent permitted by the laws of the State of Nevada.
Section 78.7502 of the Nevada General Corporation Law permits a corporation to
indemnify any of its directors, officers, employees or agents against expenses
actually and reasonably incurred by such person in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (except for an action by or in right
of the corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, provided that it is determined
that such person acted in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Section 78.751 of the Nevada General Corporation Law requires that the
determination that indemnification is proper in a specific case must be made by
(a) the stockholders, (b) the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit or proceeding
or (c) independent legal counsel in a written opinion (i) if a majority vote of
a quorum consisting of disinterested directors is not possible or (ii) if such
an opinion is requested by a quorum consisting of disinterested directors.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the SEC registration fee.
Type of Expense. . . . Amount
---------------------- ----------
SEC Registration Fee . $ 4,046.83
---------------------- ----------
Legal Fees . . . . . . $35,000.00
Accounting Fees. . . . $ 5,000.00
Miscellaneous Expenses $ 5,953.17
Total. . . . . . . . . $50,000.00
II-2
Item 26. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities within the last three years,
except for the following:
On October 19, 2004, we consummated a share exchange with shareholders of
Securac Inc. pursuant to which we issued 2.7 of our shares of common stock in
exchange for each common share of Securac Inc. held by its shareholders (the
"Share Exchange"). We issued a total of 37,246,285 shares of our common stock in
the Share Exchange. In connection with the Share Exchange we assumed warrants
held by investors in Securac Inc., which warrants will 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. The Share
Exchange was made pursuant to share exchange agreements entered into by us in
September 2004.
Our issuance of the shares and assumption of the warrants were made without
registration under the Securities Act of 1933, as amended, in reliance on
Regulation S promulgated thereunder. Each of the shareholders and warrantholders
of Securac Inc. represented, among other things, that such person is not a US
Person within the meaning of Regulation S, appropriate legends were placed on
the offering documents and no selling efforts were made in the United States.
On May 5, 2005 we issued 500,000 shares of common stock to two former affiliates
of Securac Corp. pre-RTO in consideration for post-RTO assistance. The issuance
of such shares was contemplated in connection with the RTO. We relied on the
exemption provided by Section 4(2) of the Securities Act for the offer and sale
of such shares.
During December 2004, we issued a total 477,474 shares of our common stock
pursuant to subscriptions received from investors. In connection with these
subscriptions we issued warrants which will entitle the holders to purchase
477,474 shares of our common stock at any time until December 1, 2007 at an
exercise price of US$1.25 per share. During February 2005 we issued a further
143,999 shares of our common stock pursuant to subscriptions received from
additional investors. In connection with this second round of subscriptions, we
issued warrants which will entitle the holders to purchase 143,999 shares of our
common stock at any time until December 31, 2007 at an exercise price of US$1.25
per share. We relied on the exemption provided by Section 4(2) and Regulation S
of the Securities Act for the offer and sale of such shares.
On September 30, 2005, we entered into a series of definitive agreements with
two affiliated funds, Dutchess Private Equities, L.P. and Dutchess Private
Equities II, L.P., under which the funds provided us with $300,000 in principal
amount of short-term convertible debt and agreed to provide us with an
additional $200,000 principal amount of such debt and established an Investment
Agreement of credit in our favor for a maximum amount of $10 million. The number
of shares of our common stock issuable upon conversion of the convertible
debentures and pursuant to draw downs under the Investment Agreement is not
presently known, as the number of shares will depend on the market price of our
common stock after the date hereof. We relied on the exemption from registration
under the Securities Act provided by Section 4(2) thereof. Each of the investors
has represented that it is an accredited investor within the meaning of the
Securities Act and the rules and regulations promulgated thereunder, the
offering was limited to two affiliated investors and no general solicitation was
made by or on behalf of our company.
Item 27. Exhibits
The following exhibits are filed with this Registration Statement:
Exhibit No. Description
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2.1 Form of Share Exchange Letter dated September 2, 2004 between Securac Inc. and each of the shareholders of Risk Governance,
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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)
3.1 Amended and Restated Articles of Incorporation. (3)
3.2 By-Laws. (4)
5.1 Opinion of Eilenberg & Krause LLP (9)
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 the 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 Propert
10.5 Consent to Sublease, dated June 14, 2004, between Consolidated Properties, Paradigm and Securac Pacific Ltd. (formerly Bry
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 s
10.9 Debenture Agreement dated September 30, 2005 granted in favour of Dutchess Private Equity Funds II, LP (7)
10.10 Debenture Registrations Rights Agreement dated September 30, 2005 between Securac Corp. and Dutchess Private Equity Funds
10.11 Security Agreement dated September 30, 2005 between Securac Corp. and Dutchess Private Equity Funds II, LP (7)
10.12 Subscription Agreement dated September 30, 2005 granted in favour of Dutchess Private Equity Funds II, LP (7)
10.13 Warrant Agreement dated September 30, 2005 granted in favour of Dutchess Private Equity Funds II, LP (7)
10.14 Investment Agreement dated September 30, 2005 granted in favour of Dutchess Private Equities Fund, LP (7)
10.15 Registration Rights Agreement (for Investment Agreement) (7)
10.16 Amendment Agreement to Investment Agreement (8)
10.17 Escrow Agreement between Securac Corp., Private Equities Fund II, LP and the escrow agent (7)
10.18 Form of Lock-up Agreement together with the Lock-Up Reinstatement Letter (8)
10.19 Offer of Employment Letter and Employee Confidential Information and Inventions Agreement dated January 7, 2005 for Berni
10.20 Offer of Employment Letter and Employee Confidential Information and Inventions Agreement dated May 17, 2004 for Deanna M
21.1 List of Subsidiaries: Securac Inc. and Risk Governance Inc. (5)
23.1 Consent of Chisholm, Bierwolf & Nilson (8)
23.2 Consent of PricewaterhouseCoopers (8)
24.1 Powers of Attorney (included on the signature page of this registration statement)
_________________________________
(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 Report on 8-K filed on October 6, 2005.
(8) Filed herewith.
(9) To be filed by amendment.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(a) Include any prospectus required by section 10(a)(3) of the Act;
(b) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(c) Include any additional or changed material information on the plan of
distribution.
2. For determining liability under the Act, treat each post-effective
amendment as a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of offering.
4. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
5. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Calgary,
Province of Alberta, on October 27, 2005.
SECURAC CORP.
/s/ TERRY ALLEN.
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Terry Allen
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Paul Hookham and Terry Allen, acting singly his true
and lawful attorney-in-fact and agent, with full power of substitution, for him
and in his name, in any and all capacities, to sign all amendments (including
post-effective amendments) to the registration statement to which this power of
attorney is attached, and to file all those amendments and all exhibits to them
and other documents to be filed in connection with them, including any
registration statement pursuant to Rule 462 under Securities Act of 1933, with
the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature . . . . . . . Title Date
/s/Terry Allen
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Terry Allen . . . . Chief Executive Officer and Chairman of the Board of Directors October 27, 2005
/s/Paul Hookham
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Paul Hookham . . . . Chief Financial Officer, Director, Treasurer and Secretary October 27, 2005
/s/Bryce Mitchell
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Bryce Mitchell . . . Director October 27, 2005
/s/Kenneth Denich, PhD
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Kenneth Denich, PhD Director October 27, 2005