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EXCEL - IDEA: XBRL DOCUMENT - CREATIVE VISTAS INC | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - CREATIVE VISTAS INC | v231659_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - CREATIVE VISTAS INC | v231659_ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - CREATIVE VISTAS INC | v231659_ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - CREATIVE VISTAS INC | v231659_ex31-1.htm |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-16819
CREATIVE VISTAS, INC.
(Exact name of registrant as specified in its charter)
Arizona
(State or other jurisdiction of
incorporation or organization
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6770
(Primary Standard Industrial
Classification Code Number)
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86-0464104
(I.R.S. Employer
Identification No.)
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2100 Forbes Street
Unit 8-10
Whitby, Ontario, Canada L1N 9T3
(905) 666-8676
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨
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Accelerated Filer ¨
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Non-Accelerated Filer ¨
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Smaller Reporting Company x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨Yes xNo
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
At August 15, 2011, the number of shares outstanding of the registrant’s common stock, no par value (the only class of voting stock), was 37,488,714.
PART I.
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||
FINANCIAL INFORMATION | ||
Item 1.
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Condensed Consolidated Financial Statements
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1
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Item 2.
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Management's Discussion And Analysis of Financial Condition and Results of Operations
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13
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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18
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Item 4.
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Controls and Procedures
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18
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PART II.
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||
OTHER INFORMATION
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Item 1.
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Legal Proceedings
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19
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Item 1A.
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Risk Factors
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19
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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19
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Item 3.
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Defaults upon Senior Securities
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19
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Item 4.
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Removed and Reserved.
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19
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Item 5.
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Other Information
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19
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Item 6.
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Exhibits
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19
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PART I. FINANCIAL INFORMATION
Item 1.
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Financial Statements
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Creative Vistas, Inc.
Condensed Consolidated Balance Sheets
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June 30, 2011
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December 31, 2010
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||||||
(Unaudited)
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||||||||
Assets
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||||||||
Current Assets
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||||||||
Cash and bank balances
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$ | 2,275,488 | $ | 2,030,707 | ||||
Accounts receivable, net of allowance for doubtful accounts of $178,582 (2010 - $253,714)
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3,744,378 | 3,039,739 | ||||||
Income tax receivable
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80,506 | 180,000 | ||||||
Inventory and supplies
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634,916 | 692,881 | ||||||
Prepaid expenses
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223,891 | 372,507 | ||||||
Total current assets
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6,959,179 | 6,315,834 | ||||||
Property, plant and equipment, net of depreciation and amortization
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3,471,401 | 4,407,739 | ||||||
Deposits
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214,406 | 228,434 | ||||||
Deferred financing costs, net
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151,755 | 225,107 | ||||||
Intangible assets, net
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41,468 | 56,316 | ||||||
Deferred income taxes
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37,788 | 37,430 | ||||||
$ | 10,875,997 | $ | 11,270,860 | |||||
Liabilities and Shareholders' (Deficiency)
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||||||||
Current Liabilities
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||||||||
Bank indebtedness
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$ | 1,076,799 | $ | 650,744 | ||||
Accounts payable and accrued liabilities
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4,344,779 | 3,990,875 | ||||||
Current portion of obligations under capital leases
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1,666,238 | 1,487,460 | ||||||
Deferred income
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44,463 | 110,485 | ||||||
Deferred income taxes
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25,858 | 25,858 | ||||||
Current portion of term notes
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14,001,128 | 14,051,128 | ||||||
Total current liabilities
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21,159,265 | 20,316,550 | ||||||
Term notes
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1,819,553 | 1,702,218 | ||||||
Notes payable to related parties
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1,500,000 | 1,500,000 | ||||||
Obligations under capital lease, net of current portion
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899,966 | 1,899,524 | ||||||
Due to related parties
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238,010 | 230,870 | ||||||
25,616,794 | 25,649,162 | |||||||
Shareholders' (deficiency)
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||||||||
Share capital
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||||||||
Preferred stock no par value, 50,000,000 shares authorized; none issued or outstanding
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||||||||
Common stock, no par value 100,000,000 shares authorized; 37,488,714 shares issued and outstanding
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||||||||
Common stock
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6,555,754 | 6,555,754 | ||||||
Additional paid-in capital
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14,334,030 | 14,314,354 | ||||||
Accumulated (deficit)
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(33,645,258 | ) | (33,638,922 | ) | ||||
Accumulated other comprehensive (losses)
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(1,985,323 | ) | (1,609,488 | ) | ||||
(14,740,797 | ) | (14,378,302 | ) | |||||
$ | 10,875,997 | $ | 11,270,860 |
The accompanying notes are an integral part of these financial statements
1
Creative Vistas, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
Three months ended
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Six months ended
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|||||||||||||||
June 30
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June 30
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|||||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
Contract and service revenue
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||||||||||||||||
Contract
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$ | 1,832,003 | $ | 1,662,091 | $ | 3,721,569 | $ | 2,776,818 | ||||||||
Service
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8,101,229 | 8,646,467 | 15,231,545 | 16,768,246 | ||||||||||||
Other
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904 | 1,287 | 1,459 | 2,395 | ||||||||||||
9,934,136 | 10,309,845 | 18,954,573 | 19,547,459 | |||||||||||||
Cost of sales (excluding depreciation and amortization))
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||||||||||||||||
Contract
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914,957 | 1,017,603 | 1,976,688 | 1,571,874 | ||||||||||||
Service
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6,590,189 | 6,522,220 | 12,200,451 | 12,870,947 | ||||||||||||
Project expenses
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294,458 | 234,088 | 587,082 | 463,887 | ||||||||||||
Selling expenses
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268,517 | 202,109 | 496,288 | 470,234 | ||||||||||||
General and administrative expenses
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954,865 | 1,364,203 | 1,956,621 | 2,587,835 | ||||||||||||
Depreciation expense
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429,078 | 584,338 | 907,370 | 1,183,204 | ||||||||||||
Amortization of intangible assets
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8,295 | 57,812 | 16,422 | 115,548 | ||||||||||||
9,460,359 | 9,982,373 | 18,140,922 | 19,263,529 | |||||||||||||
Income from operations
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473,777 | 327,472 | 813,651 | 283,930 | ||||||||||||
Interest and other expenses (income)
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||||||||||||||||
Net financing expenses
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509,721 | 577,403 | 1,021,412 | 1,171,771 | ||||||||||||
Amortization of deferred charges
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39,112 | 43,376 | 79,482 | 86,308 | ||||||||||||
Foreign currency translation (gain) loss
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1,092 | 353,849 | (280,907 | ) | 92,574 | |||||||||||
549,925 | 974,628 | 819,987 | 1,350,653 | |||||||||||||
(Loss) before income taxes
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(76,148 | ) | (647,156 | ) | (6,336 | ) | (1,066,723 | ) | ||||||||
Income taxes
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- | - | - | - | ||||||||||||
Net (loss)
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(76,148 | ) | (647,156 | ) | (6,336 | ) | (1,066,723 | ) | ||||||||
Other comprehensive (loss):
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||||||||||||||||
Foreign currency translation adjustment
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- | 472,246 | (375,835 | ) | 124,701 | |||||||||||
Comprehensive (loss)
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$ | (76,148 | ) | $ | (174,910 | ) | $ | (382,171 | ) | $ | (942,022 | ) | ||||
Basic and diluted weighted-average shares
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37,488,714 | 37,488,714 | 37,488,714 | 37,488,714 | ||||||||||||
Basic and diluted (loss) per share
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$ | (0.00 | ) | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.03 | ) |
The accompanying notes are an integral part of these financial statements
2
Creative Vistas, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaduited)
Six months ended June 30,
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||||||||
2011
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2010
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|||||||
Operating activities
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||||||||
Net cash provided by operating activities
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$ | 800,320 | $ | 455,005 | ||||
Investing activities
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||||||||
Proceeds from sales of property and equipment
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17,035 | 7,611 | ||||||
Purchase of property and equipment
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(28,915 | ) | (36,966 | ) | ||||
Net cash (used in) investing activities
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(11,880 | ) | (29,355 | ) | ||||
Financing activities
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||||||||
Proceeds from (repayment of) bank indebtedness
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384,727 | 76,503 | ||||||
Repayment of capital leases
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(752,717 | ) | (744,678 | ) | ||||
Repayment of term notes
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(50,000 | ) | (50,000 | ) | ||||
Net cash (used in) financing activities
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(417,990 | ) | (718,175 | ) | ||||
Effect of foreign exchange rate changes in cash
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(125,669 | ) | 41,013 | |||||
Net change in cash and cash equivalents
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244,781 | (251,512 | ) | |||||
Cash and cash equivalents, beginning of period
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2,030,707 | 2,441,204 | ||||||
Cash and cash equivalents, end of period
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$ | 2,275,488 | $ | 2,189,692 |
The accompanying notes are an integral part of these financial statements
3
Creative Vistas, Inc.
Notes to Consolidated Condensed Financial Statements
June 30, 2011 (Unaudited)
1. Summary of Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated balance sheet as at June 30, 2011, and the consolidated condensed statements of operations and cash flows for the periods ended June 30, 2010 and 2011, include the accounts of Creative Vistas, Inc. (“CVAS”), Creative Vistas Acquisition Corp. (“AC Acquisition”), AC Technical Systems Ltd. (“AC Technical”), Cancable Holding Corp. (“Cancable Holding”), Cancable Inc., Cancable XL Inc., XL Digital Services Inc. (“XL Digital”), 2141306 Ontario Inc., Iview Holding Corp. (“Iview Holding”), Iview Digital Video Solutions Inc. (“Iview DSI”) and OSSIM View Inc (collectively the “Company”). All material inter-company accounts, transactions and profits have been eliminated. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The accompanying condensed consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for such periods are not necessarily indicative of the results expected for 2011 or for any future period. These financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission.
Liquidity and going concern
Our consolidated condensed financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. We have an accumulated deficit of $33,645,258, a stockholders’ deficit of $14,740,797 and a working capital deficit of $ 14,200,086 at June 30, 2011, and at such date have current maturities of term loans aggregating to $14,001,128. We do not currently have the ability to repay the notes in the event of a demand by the holder. Furthermore, we granted a security interest to Laurus and its related entities in substantially all of our assets and, accordingly, in the event of any default under our agreements with Laurus and its related entities, they could conceivably attempt to foreclose on our assets, which could cause us to terminate our operations. As of June 30, 2011, there were 15,644,983 shares of common stock issuable upon the exercise of warrants and 1,704,155 shares issuable upon the exercise of options (1,575,000 shares related to the Employee Stock Options (see Note 8 in the Financial Statements)). Also, included in the balance, 15,860,983 shares of common stock issuable upon the exercise of warrants and 129,155 shares issuable upon the exercise of options issued to Laurus Master Fund, Ltd and its related entities, Erato Corporation, Valens Offshore Fund and Valens U.S. Fund, LLC and PSource Structured Debt Limited (“Laurus”). Additionally, there were 49 shares of common stock of Cancable Holding issuable upon the exercise of options and 20 shares of common stock of Iview Holding issuable upon the exercise of options to Laurus and its related entities.
Management believes that its existing capital will be sufficient to sustain its operations if the Company can refinance our and/or restructure its debt due in 2011. Management plans to seek additional capital in the future to fund operations, growth and expansion through additional equity, debt financing or credit facilities. The Company has had early stage discussions with investors about potential investment in the Company at a future date. No assurance can be made that such financing would be available, and if available it may take either the form of debt or equity. In either case, the financing could have a negative impact on our financial condition and our shareholders. The Company has reduced general and administrative expenses to improve cash flow and has also increased its rates for services provided by AC Technical to improve gross margins. This is in line with our competitors. The Company also expects to see the benefits of its research and development efforts within the next 12 months as it starts to introduce its own line of customized products to the industry. These products and technologies are expected to improve gross margins. The Company believes that it will be eligible for research and development tax credits at year end for its research and development efforts during the year and these are additional sources of cash flow for the Company. Finally, the Company is also negotiating longer credit terms with its suppliers from 45 days to 60 to 75 days. For all the reasons mentioned above, we believe that we have adequate capital and short term borrowing capability and that we will be able to sustain our operations and continue as a going concern for a reasonable period of time, although there can be no assurance of this. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
4
Inventory
Inventory consists of parts, materials and supplies and is stated at the lower of cost or market. Cost is generally determined on the first in, first out basis. The inventory is net of estimated obsolescence ($100,000 at June 30, 2011 and December 31, 2010), and excess inventory based upon assumptions about future demand and market conditions.
Earnings (loss) per share
Basic earnings (loss) per share (“EPS”) is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common stock issuable upon exercise of stock options and warrants and conversion of debt using the treasury stock method. Adjustments to earnings per share calculation include reversing interest related to the convertible debts and changes in derivative instruments. During periods when losses are incurred dilutive common shares are not considered in the EPS computations as their effect would be anti-dilutive.
2. Deferred Financing Costs, Net
Deferred financing costs, net are associated with the Company’s term notes. For the six months ended June 30, 2011, the amortization of deferred financing cost was approximately $79,482 (2010 - $86,308).
Cost
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$ | 1,214,997 | ||
Accumulated amortization
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(1,063,222 | ) | ||
$ | 151,775 |
The estimated amortization expense for each of the next three fiscal years is as follows:
Year
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Amount
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|||
2011
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$ | 78,492 | ||
2012
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48,911 | |||
2013
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24,352 | |||
$ | 151,755 |
3.
|
Intangible Assets
|
Cost
|
Accumulated
amortization
|
Net book value
|
||||||||||
Customer relationships
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$ | 1,402,062 | $ | 1,360,594 | $ | 41,468 |
Amortization expense for the six months period ended June 31, 2011 amounted to $16,422 (2010-$115,548).
5
4. Bank Indebtedness
In 2008, the Company established credit facilities with a Canadian chartered bank to provide for borrowings by its subsidiaries, AC Technical and Cancable Inc. The credit facilities for AC Technical and Cancable were $500,000 and $3,500,000 respectively, and bear interest at the bank’s domestic prime rate plus 1.5% to 3.4% for Canadian dollar amounts. Interest is payable monthly. The facilities are secured by a first security interest in book debts, inventory, certain other assets and life insurance. As at June 30, 2011, the interest rate of the Canadian dollar amount was 4.0% to 5.9%. At June 30, 2011, the borrowings outstanding under both facilities were $1,076,799 and the average borrowing outstanding during the six months ended June 30, 2011 was $863,772. The agreements contain financial covenants pertaining to maintenance of tangible net worth and debt service coverage ratio. In the event of default, the bank could at its discretion cancel the facilities and demand immediate repayment of all outstanding amounts.
At June 30, 2011, the Company was contingently liable under an irrevocable letter of credit issued by our bank in November 2010 in the amount of $150,000 which will expire in November 2011. The letter of credit was issued to a customer as a security for the performance of a preventive maintenance contract awarded to AC Technical.
5.
|
Term Notes
|
In January 2006, concurrently with the closing of the acquisition of Cancable Inc., the Company entered into a series of agreements with Laurus whereby Cancable issued to Laurus a secured term note (the “Cancable Note”) in the amount of $6,865,000 and Cancable Holding issued to Laurus a related option to purchase up to 49 shares of common stock of Cancable Holding (up to 49% of the outstanding shares of Cancable Holding) at a price of $0.01 per share (the “Option”). The loan is secured by all of the assets of the Company, subject to the bank’s security interest.
The Cancable Note bears interest at the prime rate plus 1.75% with a minimum rate of 7%, and requires minimum monthly payments of $81,726 until the indebtedness is paid in full except that the Company is not obligated, except upon an event of default, to pay more than 25% of the original principal amount prior to December 31, 2011, at which time the debt matures.
In February 2006, the Company and its subsidiaries, Iview Holding and Iview DSI entered into a series of agreements with Laurus pursuant to a refinancing transaction whereby the Company issued to Laurus a secured term note (the “Company Note”) in the amount of $8,250,000 and Iview DSI issued to Laurus a secured term note (the “Iview Note”) in the amount of $2,000,000. Concurrently, the Company issued to Laurus a related warrant to purchase up to 2,411,003 shares of common stock of the Company (up to 7.5% of the outstanding shares of the Company) at a price of $0.01 per share (the “Warrant”) and Iview Holding issued to Laurus a related option to purchase up to 20 shares of common stock of Iview Holding (up to 20% of the outstanding shares of Iview Holding) at a price of $0.01 per share (the “Option”). The loans are secured by substantially all of the assets of the Company (exclusive of those under capital lease, which are subject to the obligor’s security interest in such assets) and its subsidiaries.
The options held by Laurus to acquire 49% of Cancable Holding and 20% of Iview Holding are accounted for as noncontrolling interests. Because the options have not been exercised and because Cancable Holding and Iview Holding have incurred losses, no noncontrolling interests have been recognized at June 30, 2011.
The Company Note bears interest at the prime rate plus 2% with a minimum rate of 7%. Interest is calculated on the basis of a 360-day year. Per the original terms of this note, the minimum monthly payments on the term note were $137,500 commencing March 1, 2007 to February 1, 2011, with a balance of $4,950,000 payable on the maturity date. However, as allowed by the debt agreement, since March 2007, the Company has deferred such monthly payments until maturity by issuing warrants to purchase up to 4,860,000 shares of common stock of the Company at per-share prices from $0.03 to $2.84. The Company extended the maturity date of this note to December 31, 2011, at which time the entire principal will be due.
The Iview Note bears interest at the prime rate plus 2% with a minimum rate of 7%. Interest is calculated on the basis of a 360-day year. Per the original terms of this note, the minimum monthly payments on the term note were $8,333 through the original maturity date (February 1, 2011), with the balance of $1,600,000 payable on such date. On August 13, 2011, the Company extended the maturity date to December 31, 2011.
In June 2008, the Company and its subsidiary, Cancable Inc., entered into a financing transaction whereby the Company issued to Valens Offshore SPV II, Corp. (“Valens Offshore”) and Valens U.S. SPV I, LLC (“Valens U.S.”) secured term notes in the amount of $1,700,000 and $800,000, respectively (collectively, the “Company Second Notes”). Valens Offshore and Valens U.S. are entities related to Laurus. The Company also issued to Valens Offshore and Valens U.S. warrants to purchase up to 1,333,333 and 627,451 shares, respectively, of common stock of the Company at a price of $0.01 per share. The loans are secured by substantially all of the assets of the Company, subject to the bank’s security interest.
6
Interest on the term notes for the six months ended June 30, 2011 was $789,484 (2010: $771,607).
June 30, 2011
|
||||
Cancable Note interest at prime plus 1.75% (minimum of 7%), due December 31, 2011
|
$ | 5,148,754 | ||
Company Note interest at prime plus 2% (minimum of 7%), due December 31, 2011
|
7,287,500 | |||
Iview Note interest at prime plus 2% (minimum of 7%), due on December 31, 2011
|
1,564,873 | |||
Company Second Notes. interest at 12%, due on June 24, 2013
|
2,500,000 | |||
Less: unamortized discount
|
(680,446 | ) | ||
15,820,681 | ||||
Less: current portion
|
14,001,128 | |||
$ | 1,819,553 |
Scheduled principal payments for the next three fiscal years are as follows:
Amount
|
||||
2011
|
$ | 14,001,128 | ||
2012
|
- | |||
2013
|
1,819,553 | |||
$ | 15,820,681 |
6. Net Financing Expenses
Six months ended June 30,
|
||||||||
2011
|
2010
|
|||||||
Capital leases
|
$ | 191,198 | $ | 306,552 | ||||
Interest on credit facility and term notes
|
789,484 | 771,607 | ||||||
Interest on deferred principal repayment of term note
|
13,507 | 67,191 | ||||||
Related parties
|
27,223 | 26,421 | ||||||
$ | 1,021,412 | $ | 1,171,771 |
7. Note Payable to Related Parties
Notes payable to related parties consists of two notes payable for $750,000, each bearing interest at 3% per annum and having no fixed terms of repayment. However, pursuant to the Laurus Financing, these notes have been subordinated to the Company’s obligations to Laurus and they are classified as non-current. The notes are due to Malar Trust Inc. (the Company’s chairman is the shareholder of Malar Trust Inc.).
Interest expense recognized for the six months period ended June 30, 2011 was $27,223 (2010 - $26,421).
8. Shareholders’ (Deficit)
Options
In conjunction with the issuance of the Cancable Note and Iview Notes in 2006, the Company had granted Laurus options to purchase up to 49% of Cancable Holding Corp. and 20% of Iview Holding Corp. The financial statements of Cancable Holding Corp. and Iview Holding Corp. have negative equity on a stand alone basis. At such time when these entities have positive equity and generate net income, the Company will account for the options granted to Laurus as non-controlling interests.
7
The Company’s Stock Option Plan is intended to provide incentives for key employees, directors, consultants and other individuals providing services to the Company by encouraging their ownership of the common stock of the Company and to aid the Company in retaining such key employees, directors, consultants and other individuals upon whose efforts the Company’s success and future growth depends and in attracting other such employees, directors, consultants and individuals.
The Plan is administered by the Board of Directors, or its Compensation Committee. The Plan allowed for the issuance of 4,000,000 options to purchase shares of common stock and shares of common stock covered by options which terminated or expired prior to exercise were available for further options under the Plan. The maximum aggregate number of shares of Stock that were allowed to be issued under the Plan as “incentive stock options” was 3,500,000 shares.
The Committee may, in its discretion, prescribe the terms and conditions of the options to be granted under the Plan, which terms and conditions need not be the same in each case, subject to the following:
a.
|
Option Price. The price at which each share of common stock covered by an option granted under the Plan may not be less than the market value per share of the common stock on the date of grant of the option. The date of the grant of an option shall be the date specified by the Committee in its grant of the option, which date will normally be the date the Committee determines to make such grant.
|
b.
|
Option Period. The period for exercise of an option shall in no event be more than five years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period.
|
c.
|
Exercise of Options. For the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize.
|
d.
|
Lock-Up Period. Without the consent of the Company, an Optionee may not sell more than fifty percent of the shares issued under the Plan for a period of two years from the date that the Optionee exercises the option. The Committee may also impose other terms and conditions, not inconsistent with the terms of the Plan, on the grant or exercise of options, as it deems advisable.
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, using the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock, and other factors. The Company uses historical data to estimate employee termination within the valuation model. The Company has assumed that the life of the options will be equal to one-half of the combined vesting period and contractual life (i.e., that employees will exercise the options at the midpoint between the vesting and expiry date of the options). The risk-free rates used to value the options are based on the U.S. Treasury yield curve in effect at the time of grant.
At June 30, 2011, options to purchase 1,575,000 shares of common stock were outstanding. These options vest ratably in annual installments, over the four year period from the date of grant. As of June 30, 2011, there was $17,314 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a remaining weighted average period of 1.04 years. At June 30, 2011, 1,387,500 options were vested. The cost recognized for the six months period ended June 30, 2011 was $6,169 (2010: $46,200) which was recorded as general and administrative expenses.
8
A summary of option activity under the Plan during the period ended June 30, 2011 and the six months ended June 30, 2011 is presented below:
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
|
Intrinsic
Value
|
|||||||||||||
Options
|
||||||||||||||||
Outstanding at December 31, 2009
|
2,005,000 | $ | 0.65 | 4.75 | - | |||||||||||
Granted
|
- | - | - | - | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Forfeited or expired
|
(405,000 | ) | $ | 0.63 | 0.96 | - | ||||||||||
Outstanding at December 31, 2010
|
1,600,000 | $ | 0.65 | 1.04 | - | |||||||||||
Granted
|
- | - | - | - | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Forfeited or expired
|
(25,000 | ) | $ | 0.63 | 0.25 | - | ||||||||||
Outstanding at June 30, 2011
|
1,575,000 | $ | 0.65 | 0.56 | - | |||||||||||
Exercisable at June 30, 2011
|
1,387,500 | $ | 0.65 | 0.21 | - |
As of June 30, 2011, the aggregate intrinsic value of all stock options outstanding and expected to vest was $0 and the aggregate intrinsic value of currently exercisable stock options was $0. The intrinsic value of each option is the difference between the fair market value of the common stock and the exercise price of such option to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.03 closing stock price of the common stock on June 30, 2011, the last trading day of the second quarter of fiscal 2010. There were no in-the-money options outstanding and exercisable as of June 30, 2011.
Since there were no options exercised during the year ended December 31, 2010 or the six months ended June 30, 2011, there was no intrinsic value of options exercised.
The total fair value of options granted during the six months ended June 30, 2011 and the year ended December 31, 2010 was $0 (none were granted in 2011 and 2010).
The following table summarizes information about fixed price stock options at June 30, 2011:
Exercise
Price
|
Weighted
Average Number
Outstanding
|
Weighted
Average
Contractual Life
|
Weighted
Average
Exercise Price
|
Number
Exercisable
|
Exercise
Price
|
||||||||||||||||
$ | 0.63 | 1,465,000 | 0.54 | $ | 0.63 | 1,280,000 | $ | 0.63 | |||||||||||||
$ | 0.90 | 100,000 | 0.67 | $ | 0.90 | 100,000 | $ | 0.90 | |||||||||||||
$ | 1.12 | 10,000 | 1.98 | $ | 1.12 | 7,500 | $ | 1.12 | |||||||||||||
1,575,000 | 1,387,500 |
The number and weighted average grant-date fair value of options non-vested at the beginning of the year, non-vested at the end of June 30, 2011 and granted, vested or canceled during the six month period ended June 30, 2011 was as follows:
Number of Options
|
Weighted-Average
Grant Date Fair Values
|
|||||||
Non-vested at January 1, 2011
|
217,500 | $ | 0.17 | |||||
Granted
|
- | - | ||||||
Vested
|
(30,000 | ) | $ | 0.22 | ||||
Canceled
|
- | - | ||||||
Non-vested at June 30, 2011
|
187,500 | $ | 0.14 |
9
Warrants
The Company uses the Black-Scholes option pricing model to value warrants issued to non-employees, based on the market price of our common stock at the time the warrants are issued. All outstanding warrants may be exercised by the holder at any time. During the six months ended June 30, 2011, in connection with financing, the Company issued warrants to purchase 648,000 shares of common stock. The fair value of the warrants of $13,506 was measured using the Black-Scholes option pricing model using the following assumptions: risk free interest rate of 1.17% to 1.78%, expected dividend yield of 0%, volatility of 140%, exercise prices of $0.02 to $0.03 and the life of the warrants 4 years.
As of June 30, 2011, we had the following common stock warrants outstanding:
Issue Date
|
Expiry Date
|
Number of
warrants
|
Exercise Price
Per share
|
Value-issue
date
|
Issued for
|
|||||||||||
09-30-2004
|
09-30-2016 | 2,250,000 | $ | 1.15 | $ | 1,370,000 |
Financing
|
|||||||||
03-31-2005
|
03-31-2012 | 100,000 | $ | 1.20 | $ | 60,291 |
Financing
|
|||||||||
04-30-2005
|
04-30-2017 | 100,000 | $ | 1.01 | $ | 44,309 |
Financing
|
|||||||||
05-31-2005
|
05-31-2012 | 100,000 | $ | 1.01 | $ | 56,614 |
Financing
|
|||||||||
06-22-2005
|
06-22-2017 | 313,000 | $ | 1.00 | $ | 137,703 |
Financing
|
|||||||||
06-30-2005
|
06-30-2017 | 100,000 | $ | 0.90 | $ | 50,431 |
Financing
|
|||||||||
07-31-2005
|
07-31-2012 | 100,000 | $ | 1.05 | $ | 56,244 |
Financing
|
|||||||||
08-31-2005
|
08-31-2012 | 100,000 | $ | 1.05 | $ | 22,979 |
Financing
|
|||||||||
09-30-2005
|
09-30-2012 | 100,000 | $ | 0.80 | $ | 36,599 |
Financing
|
|||||||||
10-31-2005
|
10-31-2012 | 100,000 | $ | 0.80 | $ | 27,367 |
Financing
|
|||||||||
11-30-2005
|
11-30-2012 | 100,000 | $ | 0.80 | $ | 16,392 |
Financing
|
|||||||||
12-31-2005
|
12-31-2012 | 100,000 | $ | 0.80 | $ | 10,270 |
Financing
|
|||||||||
02-13-2006
|
02-13-2016 | 1,927,096 | $ | 0.01 | $ | 1,529,502 |
Financing
|
|||||||||
03-01-2007
|
03-01-2016 | 108,000 | $ | 0.90 | $ | 39,519 |
Financing
|
|||||||||
04-01-2007
|
04-01-2016 | 108,000 | $ | 1.15 | $ | 50,529 |
Financing
|
|||||||||
07-01-2007
|
07-01-2011 | 108,000 | $ | 2.10 | $ | 93,307 |
Financing
|
|||||||||
08-01-2007
|
08-01-2011 | 108,000 | $ | 2.55 | $ | 112,117 |
Financing
|
|||||||||
09-01-2007
|
09-01-2011 | 108,000 | $ | 2.73 | $ | 118,647 |
Financing
|
|||||||||
10-01-2007
|
10-01-2011 | 108,000 | $ | 2.43 | $ | 105,362 |
Financing
|
|||||||||
11-01-2007
|
11-01-2011 | 108,000 | $ | 2.60 | $ | 111,868 |
Financing
|
|||||||||
12-01-2007
|
12-01-2011 | 108,000 | $ | 2.55 | $ | 107,284 |
Financing
|
|||||||||
01-01-2008
|
01-01-2012 | 108,000 | $ | 2.84 | $ | 108,331 |
Financing
|
|||||||||
01-22-2008
|
01-22-2058 | 812,988 | $ | 0.01 | $ | 1,470,687 |
Acquisition
|
|||||||||
01-22-2008
|
01-22-2058 | 1,738,365 | $ | 0.01 | $ | 3,144,685 |
Financing
|
|||||||||
01-30-2008
|
01-30-2058 | 506,250 | $ | 0.01 | $ | 1,001,909 |
Financing
|
|||||||||
01-30-2008
|
01-30-2058 | 292,500 | $ | 0.01 | $ | 578,880 |
Financing
|
|||||||||
02-01-2008
|
02-01-2012 | 108,000 | $ | 2.09 | $ | 85,612 |
Financing
|
|||||||||
03-01-2008
|
03-01-2012 | 108,000 | $ | 2.04 | $ | 80,253 |
Financing
|
|||||||||
04-01-2008
|
04-01-2012 | 108,000 | $ | 1.09 | $ | 162,748 |
Financing
|
|||||||||
05-01-2008
|
05-01-2012 | 108,000 | $ | 1.19 | $ | 103,180 |
Financing
|
|||||||||
06-01-2008
|
06-01-2012 | 108,000 | $ | 1.02 | $ | 88,114 |
Financing
|
|||||||||
06-23-2008
|
06-23-2018 | 627,451 | $ | 0.01 | $ | 560,736 |
Financing
|
|||||||||
06-23-2008
|
06-23-2018 | 1,333,333 | $ | 0.01 | $ | 1,211,168 |
Financing
|
|||||||||
02-01-2009
|
02-01-2013 | 108,000 | $ | 0.25 | $ | 22,728 |
Financing
|
|||||||||
03-01-2009
|
03-01-2013 | 108,000 | $ | 0.19 | $ | 17,277 |
Financing
|
|||||||||
04-01-2009
|
04-01-2013 | 108,000 | $ | 0.18 | $ | 15,868 |
Financing
|
|||||||||
05-01-2009
|
05-01-2013 | 108,000 | $ | 0.16 | $ | 14,557 |
Financing
|
|||||||||
06-01-2009
|
06-01-2013 | 108,000 | $ | 0.27 | $ | 24,105 |
Financing
|
|||||||||
07-01-2009
|
07-01-2013 | 108,000 | $ | 0.27 | $ | 24,105 |
Financing
|
|||||||||
08-01-2009
|
08-01-2013 | 108,000 | $ | 0.25 | $ | 22,786 |
Financing
|
|||||||||
09-01-2009
|
09-01-2013 | 108,000 | $ | 0.16 | $ | 14,567 |
Financing
|
|||||||||
10-01-2009
|
10-01-2013 | 108,000 | $ | 0.12 | $ | 10,921 |
Financing
|
|||||||||
11-01-2009
|
11-01-2013 | 108,000 | $ | 0.15 | $ | 13,656 |
Financing
|
|||||||||
12-01-2009
|
12-01-2013 | 108,000 | $ | 0.08 | $ | 7,275 |
Financing
|
|||||||||
01-01-2010
|
01-01-2014 | 108,000 | $ | 0.08 | $ | 7,292 |
Financing
|
|||||||||
02-01-2010
|
02-01-2014 | 108,000 | $ | 0.12 | $ | 10,925 |
Financing
|
|||||||||
03-01-2010
|
03-01-2014 | 108,000 | $ | 0.08 | $ | 25,484 |
Financing
|
|||||||||
04-01-2010
|
04-01-2014 | 108,000 | $ | 0.09 | $ | 8,461 |
Financing
|
|||||||||
05-01-2010
|
05-01-2014 | 108,000 | $ | 0.07 | $ | 8,457 |
Financing
|
|||||||||
06-01-2010
|
06-01-2014 | 108,000 | $ | 0.07 | $ | 6,572 |
Financing
|
|||||||||
07-01-2010
|
07-01-2014 | 108,000 | $ | 0.07 | $ | 6,566 |
Financing
|
|||||||||
08-01-2010
|
08-01-2014 | 108,000 | $ | 0.07 | $ | 6,562 |
Financing
|
|||||||||
09-01-2010
|
09-01-2014 | 108,000 | $ | 0.05 | $ | 4,615 |
Financing
|
|||||||||
10-01-2010
|
10-01-2014 | 108,000 | $ | 0.05 | $ | 4,613 |
Financing
|
|||||||||
11-01-2010
|
11-01-2014 | 108,000 | $ | 0.04 | $ | 1,844 |
Financing
|
|||||||||
12-01-2010
|
12-01-2014 | 108,000 | $ | 0.04 | $ | 3,200 |
Financing
|
|||||||||
12-31-2010
|
12-31-2014 | 200,000 | $ | 0.03 | $ | 5,051 |
Consulting
|
|||||||||
01-01-2011
|
01-01-2015 | 108,000 | $ | 0.03 | $ | 3,200 |
Financing
|
|||||||||
02-01-2011
|
02-01-2015 | 108,000 | $ | 0.03 | $ | 3,200 |
Financing
|
|||||||||
03-01-2011
|
03-01-2015 | 108,000 | $ | 0.03 | $ | 3,200 |
Financing
|
|||||||||
04-01-2011
|
04-01-2015 | 108,000 | $ | 0.03 | $ | 1,302 |
Financing
|
|||||||||
05-01-2011
|
05-01-2015 | 108,000 | $ | 0.03 | $ | 1,302 |
Financing
|
|||||||||
06-01-2011
|
06-01-2015 | 108,000 | $ | 0.02 | $ | 1,302 |
Financing
|
|||||||||
15,644,983 |
10
9. Major Customers
During the six months ended June 30, 2011, the Company derived 62.5% (2010:62.9%) of its revenue from two customers. The accounts receivable from these customers comprise 35.6% (2010: 44.7%) of the total trade receivable.
10. Segment Information
We determine and disclose our segments in accordance with the “Segment Reporting” topic of the Financial Accounting Standards Board Standards Codification, which uses a “management” approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the reportable segments. Our management reporting structure provides for the following segments:
Cancable
Cancable Inc. and its wholly owned subsidiaries XL Digital Services, Inc. and 2141306 Ontario Inc are Canadian based entities. Cancable, Inc. is a US based entity which is also the wholly owned subsidiary of Cancable Inc. (collectively, “Cancable”). Cancable is in the business of providing deployment and servicing of broadband technologies in both residential and commercial markets. The Cancable service offering, network deployment, IT integration, and support services, enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. Cancable’s clients rely on Cancable’s knowledge and expertise to rapidly deploy the latest technologies to support advanced cable services, cable broadband Internet access and DSL. Services provisioned include new installations, reconnections, disconnections, service upgrades and downgrades, inbound technical call center sales and trouble resolution for cable Internet subscribers, and network servicing for broadband video, data, and voice services for residential, business, and commercial marketplaces.
AC Technical
A.C. Technical Systems Ltd. (“AC Technical”), a corporation incorporated under the laws of the Province of Ontario, is engaged in the engineering, design, installation, integration and servicing of various types of security systems.
Iview DSI
Iview Digital Video Solutions Inc. (“Iview DSI”) and its wholly owned subsidiary OSSIM View Inc., corporations incorporated under the laws of the Province of Ontario, provide video surveillance products and technologies to the market.
June 30, 2011
|
June 30, 2010
|
|||||||
Sales:
|
||||||||
Cancable
|
$ | 14,508,050 | $ | 15,933,108 | ||||
AC Technical
|
4,393,063 | 3,576,632 | ||||||
Iview
|
52,040 | 36,320 | ||||||
Creative Vistas, Inc.
|
1,420 | 1,399 | ||||||
Consolidated Total
|
$ | 18,954,573 | $ | 19,547,459 | ||||
Depreciation and amortization:
|
||||||||
Cancable
|
$ | 866,316 | $ | 1,142,055 | ||||
AC Technical
|
21,210 | 20,946 | ||||||
Iview
|
19,844 | 20,203 | ||||||
Consolidated Total
|
$ | 907,370 | $ | 1,183,204 | ||||
Interest expense:
|
||||||||
Cancable
|
$ | 668,633 | $ | 771,837 | ||||
Iview
|
55,570 | 49,844 | ||||||
AC Acquisition
|
27,223 | 26,421 | ||||||
Creative Vistas, Inc.
|
269,986 | 323,669 | ||||||
Consolidated Total
|
$ | 1,021,412 | $ | 1,171,771 | ||||
Net (Loss):
|
||||||||
Cancable
|
$ | (171,230 | ) | $ | (765,194 | ) | ||
AC Technical
|
277,858 | 202,836 | ||||||
Iview
|
(48,206 | ) | (51,644 | ) | ||||
AC Acquisition
|
58,894 | (26,421 | ) | |||||
Corporate (1)
|
(123,652 | ) | (426,300 | ) | ||||
Consolidated Total
|
$ | (6,336 | ) | $ | (1,066,723 | ) | ||
Total Assets
|
||||||||
Cancable
|
$ | 6,047,403 | $ | 8,798,549 | ||||
AC Technical
|
3,532,067 | 3,193,054 | ||||||
Iview
|
526,214 | 757,445 | ||||||
Creative Vistas, Inc.
|
770,313 | 1,353,033 | ||||||
Consolidated Total
|
$ | 10,875,997 | $ | 14,102,081 | ||||
Property, plant and equipment
|
||||||||
Cancable
|
$ | 2,693,900 | $ | 4,547,587 | ||||
AC Technical
|
774,927 | 745,622 | ||||||
Iview
|
2,574 | 40,779 | ||||||
Consolidated Total
|
$ | 3,471,401 | $ | 5,333,988 | ||||
Property, Plant and Equipment Expenditures
|
||||||||
Cancable
|
$ | 25,259 | $ | 30,592 | ||||
AC Technical
|
3,656 | 6,374 | ||||||
Iview
|
- | - | ||||||
Consolidated Total
|
$ | 28,915 | $ | 36,966 |
11
(1)
|
Corporate expenses primarily include certain stock-based compensation for consulting and advisory services, which we do not internally allocate to our segments because they are related to our common stock and are non-cash in nature.
|
Revenues by geographic destination and product group were as follows:
June 30, 2011
|
June 30, 2010
|
|||||||
Contract
|
$ | 3,721,569 | $ | 2,776,818 | ||||
Service
|
15,231,545 | 16,768,246 | ||||||
Others
|
1,459 | 2,395 | ||||||
Total sales to external customers
|
$ | 18,954,573 | $ | 19,547,459 |
For the six months ended June 30, 2011, revenue generated by the Company in Canada and the United States was $16,997,443 (2010:$16,489,613) and $1,957,130 (2010: $3,057,846), respectively.
11.
|
Contingency
|
By Notice of Application issued in the Federal Court of Appeal on September 17, 2010 by our Subsidiary, XL Digital Services Inc. (“XL Digital”), as applicant against Communications, Energy and Paperworkers Union of Canada (“CEP”) as respondent, XL Digital applied to the Federal Court of Appeal for judicial review of the decision of the Canada Industrial Relations Board (the “Board”) dated August 23, 2010 wherein the Board concluded that it had jurisdiction over XL Digital, and found CEP to be a trade union within the meaning of the Canada Labour Code, and certified CEP to be the bargaining agent for all employees of XL Digital working in and out of its London, Ontario office. The application for judicial review was heard by the Federal Court of Appeal on May 18, 2011 and the judge dismissed the application for judicial review requested by XL Digital. The Company expects there may be a financial impact as a result of CEP becoming the bargaining agent of the London, Ontario employees of XL Digital and the operations of the London, Ontario employees being under federal jurisdiction but it is impossible to quantify the impact at this time.
12
Item 2.
|
Management's Discussion And Analysis of Financial Condition and Results of Operations
|
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed therein. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties related to the need for additional funds, the rapid growth of our operations and our ability to operate profitably a number of new projects. Except as required by law, we do not intend to publicly release the results of any revisions to those forward-looking statements that may be made to reflect any future events or circumstances.
Results of Operations
Comparison of Three Month Period Ended June 30, 2011
to Three Month Period Ended June 30, 2010
For purposes of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we compared the three month period ended June 30, 2011 to the comparable period in 2010.
Sales: Sales for the three months ended June 30, 2011 decreased 3.6% to $9,934,100 from $10,309,800 for the three months ended June 30, 2010. The decrease in revenue was mainly due to the decline in service revenue of the Cancable Segment to $7,763,900 for the three month period ended June 30, 2011 from $8,256,000 for the corresponding period in 2010. The decline in revenue from the Cancable segment was offset with the growth of revenue from the AC Technical Segment.
(a) Cancable Segment – This segment includes Cancable Inc., Cancable, Inc., XL Digital and 2141306 Ontario Inc. (collectively, the “Cancable Group”). The principal activity is provisioning the deployment and servicing of broadband technologies in both residential and commercial markets. The Cancable Group’s service offering, network deployment, IT integration, and support services enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. The total revenue from the Cancable segment was $7,763,900 for the three months ended June 30, 2011, compared to $8,256,000 for same period in 2010, representing a decrease of $492,100 or 5.9%. The decrease in revenue was primarily due to the decrease in revenue generated from our customer Rogers Cable Inc. Rogers Cable Inc. is Cancable Group’s largest customer and the revenue from this customer for the three months ended June 30, 2011 was $5,395,400 or 69.5% of total Cancable revenue compared to $5,614,300 or 68.0% for same period in 2010. Total revenue generated in the United States for the three months ended June 30, 2011 was $1,017,500 compared to $1,466,600 for same period in 2010. The decline in revenue was primarily due to Cancable’s exit from two markets located in Louisiana. Revenue generated from the two exited markets was $913,300 for the three months ended June 30, 2010. The company has plans to expand to other stronger markets in the United States. (b) AC Technical segment - Total revenue of the AC Technical segment was $2,154,800 for the three months ended June 30, 2011 compared to $2,029,400 for the corresponding period in 2010. The increase in revenue primarily resulted from the increase in contract revenue to $1,817,500 for the three months ended June 30, 2011 compared to $1,638,900 for same period in 2010. The service revenue was $337,300 for the three months ended June 30, 2011, compared to $390,400 for same period in 2010.
Direct Expenses (excluding depreciation and amortization): Direct expenses for the three months ended June 30, 2011 was $7,505,200 or 75.5% of revenues compared to $7,539,800 or 73.1% of revenues for same period in 2010.
(a) Cancable Segment – Direct expenses of this segment were $6,422,600 for the three months ended June 30, 2011, comprised principally of labor expenses of $4,900,700, vehicle expenses of $597,100 and material cost of $395,800. The direct expenses for the three months ended June 30, 2010 were comprised principally of labor expenses of $4,975,100, vehicle expenses of $528,100 and material cost of $455,600. The decrease since last year was primarily due to the decrease in revenue.
(b) AC Technical Segment – Direct expenses of this segment were $1,082,500. The material cost was $671,700 or 31.2% of the AC Technical revenue for the three months ended June 30, 2011 compared to $515,600 or 25.4% of revenues in the same period of fiscal 2010. The increase in percentage of material costs was primarily a result of certain contracts having greater material needs. On the other hand, the labor and subcontractor cost increased to $394,500 or 18.3% of AC Technical revenues for the three months ended June 30, 2011 compared to $586,800 or 28.9% of AC Technical revenues for the corresponding period of fiscal 2010. The decrease in labor and subcontractor cost resulted primarily from certain contracts having less labor needs in the second quarter of fiscal 2011.
13
Project expenses: Project expenses increased to $294,500 or 3.0% of revenue for the three months ended June 30, 2011, compared to $234,100 or 2.3% for the same period in 2010. These expenses were mainly related to the AC Technical segment. The balance mainly includes the salaries and benefits of indirect staff amounting to $178,900 in the second quarter of fiscal 2011 compared to $158,700 for the same period of fiscal 2010 with no material fluctuation. In addition, automobile and travel expenses increased to $85,500 for the three months ended June 30, 2010 compared to $55,800 for the same period of fiscal 2010. The increase was primarily due to the increase in gas prices.
Selling expenses: Selling expenses were $268,500 or 2.7% of revenues for the second quarter of fiscal 2011 compared to $202,100 or 2.0% of revenues for the same period in 2010. Selling expenses were mainly related to the AC Technical segment. The balance for the three months ended June 30, 2011 is mainly comprised of salaries and commission to salespersons of $138,000 compared to $87,400 for the same period of fiscal 2010. Advertising and promotion and trade show expenses were $36,900 in the second quarter of 2011 compared to $29,200 for the same period of fiscal 2010.
General and administrative expenses: General and administrative expenses were $954,900 or 9.6% of revenues for the second quarter of fiscal 2011 compared to $1,364,200 or 13.2% for the same period in 2010. For the three months ended June 30, 2011 these costs were mainly comprised of $187,100 of professional fees related to preparation of quarterly reports and other corporate and legal matters, compared to $123,500 for the same period in 2010. In addition, investor relations expenses amounted to $20,000 for the second quarter of fiscal 2010 and there was no such expense for the same period of fiscal 2011. Total salaries and benefits to administrative staff were $496,000 for the second quarter of fiscal 2011 compared to $545,800 for the corresponding period of 2010. The decrease in balance was mainly due to higher headcount in 2010.
Depreciation: Total depreciation of property plant and equipment was $429,100 for the second quarter of fiscal 2011 compared to $584,400 for the same period in 2010. The decrease in the balance was primarily due to certain assets acquired in 2006 and 2007 being fully amortized.
Amortization of intangible assets: Amortization of customer relationships and trade name was $8,300 for the three months ended June 30, 2011 compared to $57,800 for the same period of fiscal 2010. The decrease was mainly due to the trade name, which was acquired in 2006, being fully amortized.
Interest and other expenses (income): Interest and other expenses for the three months ended June 30, 2011 were $549,900 or 5.5% of revenues compared to interest and other income of $974,600 or 9.5% of revenues for the same period in 2010. The balance for the three months ended June 30, 2011 was primarily comprised of net financing expenses of $509,700 or 5.1% of revenues compared to $577,400 or 5.6% of revenues for the same period of 2010. The interest due with respect to the Company’s credit facilities was $401,200 for the three months ended June 30, 2011 compared to $394,900 for the same period in 2010. Additionally, the foreign currency translation loss for the quarter ended June 30, 2011 was $1,100 compared to a foreign currency translation loss of $353,800 for the same period of 2010. The change was related to the foreign currency translation of term notes which resulted from the Canadian dollar trading higher than the U.S. dollar at June 30, 2011 as compared to the same period of 2010.
Income taxes: No income taxes were paid and/or owed during the three months ended June 30, 2011 and 2010, which was mainly due to the Company’s losses carried forward to offset all income generated by the Company. Because of this and because we have fully reserved our deferred income tax assets, there was no provision and/or benefits for income taxes.
Net Income/Loss: Net loss for the second quarter of fiscal 2011 was $76,100 compared to a net loss of $647,200 for the same period in 2010. The Company’s operating income was $473,800 for the three months ended June 30, 2011 compared to $327,500 for the corresponding period of 2010. The year-over-year increase in operating income primarily reflected a focused cost reduction program across the Company.
Results of Operations
Comparison of Six Month Period Ended June 30, 2011
to Period Ended June 30, 2010
For purposes of this “Management’s Discussion and Analysis of Results of Operations”, we compared the six months ended June 30, 2011 to the corresponding period in 2010.
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Sales: Sales for the six month period ended 2011 decreased 3.0% to $18,954,600 from $19,547,500 for the six month period ended 2010. The decrease in revenue was mainly due to the decrease in service revenue of the Cancable segment to $14,508,100 for the six month period ended 2011 from $15,933,100 for the same period in 2010.
(a) Cancable Segment – This segment includes, but is not limited to, Cancable Inc., XL Digital Services, Inc. and 2141306 Ontario Inc. (collectively, the “Cancable Group”). The principal activity is provisioning the deployment and servicing of broadband technologies in both residential and commercial markets. The Cancable Group’s service offering, network deployment, IT integration, and support services, enable the cable television and telecommunications industries to deliver a high quality broadband experience to their customers. The total revenue from the Cancable segment was $14,508,100 for the six months ended June 30, 2011, compared to $15,933,100 for same period in 2010. The decrease in revenue was primarily due to the decrease in revenue generated from our customer Rogers Cable Inc. Rogers Cable Inc. is Cancable Group’s largest customer and the revenue from this customer for the six months ended June 30, 2011 was $9,890,800 or 52.2% of total Cancable Group’s revenue compared to $10,332,300 or 64.8% of total Cancable Group’s revenue for same period in 2010. Total revenue generated in the United States for the six months ended June 30, 2011 was $1,957,100 compared to $3,057,800 for same period in 2010.
(b) AC Technical segment - Total revenue of the AC Technical segment was $4,393,100 for the six months ended June 30, 2011 compared to $3,576,600 for the corresponding period in 2010. The increase in revenue was mainly due to the increase in contract revenue which was $3,721,600 for the six months ended June 30, 2011 compared to $2,776,800 for same period in 2010. The service revenue was $727,700 for the six months ended June 30, 2011, compared to $823,000 for same period in 2010.
Direct Expenses (excluding depreciation and amortization): Cost of sales for the six months ended June 30, 2011 was $14,177,100 or 75.8% of revenues compared to $14,442,800 or 73.9% of revenues for same period in 2010.
(a) Cancable segment – Cost of sales of this segment was $11,792,300 or 81.3% of Cancable Group’s revenue for the six months ended June 30, 2011 compared to $12,616,200 or 79.2% for the six months ended June 30, 2010. Cost of sales is comprised principally of labor expenses of $9,119,400, vehicle expenses of $1,105,400 and material cost of $666,800. For the six months ended June 30, 2010, cost of sales was comprised principally of labor expenses of $9,754,200, vehicle expenses of $1,057,900 and material cost of $840,300.
(b) AC Technical segment – Direct expenses of this segment were $2,342,500. The material cost was $1,583,200 or 36.0% of the AC Technical revenue for the six months ended June 30, 2011 compared to $944,700 or 26.4% of revenues in the same period of fiscal 2010. The increase in percentage of material costs was primarily a result of some contracts requiring more material. On the other hand, labor and subcontractor cost decreased to $719,100 or 16.4% of AC Technical revenues for the six months ended June 30, 2011 compared to $832,100 or 23.3% of AC Technical revenues for the same period of fiscal 2010. The decrease in labor and subcontractor cost was mainly due to some contracts requiring less labor hours.
Project expenses: Project expenses increased to $587,100 or 3.1% of revenue for the six months ended June 30, 2011, compared to $463,900 or 2.4% of revenue for the same period in 2010. These expenses were mainly related to the AC Technical segment. The balance mainly includes the salaries and benefits of indirect staff amounting to $346,900 in the six months ended June 30, 2011 compared to $306,500 for the same period of fiscal 2010. Automobile and travel expenses increased to $174,700 for the six months ended June 30, 2011 compared to $118,900 for the same period of fiscal 2010. The increase in automobile and travel expenses was due to the increase in gas prices and travel by the staff.
Selling expenses: Selling expenses were $496,300 or 2.6% of revenues for the six months ended June 30, 2011 compared to $470,200 or 2.4% of revenues for the same period in 2010. Selling expenses were mainly related to the AC Technical segment. The balance for the six months ended June 30, 2011 is mainly comprised of salaries and commissions to salespersons of $253,700 compared to $196,900 for the same period of fiscal 2010. Advertising, promotion and trade show expenses were $58,600 for the six months ended June 30, 2011 compared to $96,200 for the same period of fiscal 2010.
General and administrative expenses: General and administrative expenses were $1,956,600 or 10.3% of revenues for the six months ended June 30, 2011 compared to $2,587,800 or 13.2% for the same period in 2010. The balance for the six months ended June 30, 2011 was mainly comprised of $340,700 of professional fees related to preparation of quarterly reports and other corporate matters compared to $258,600 for the same period in 2010. The increase in professional fees was primarily due to the increase in legal cost for corporate matters. In addition, investor relations expenses of $50,000 for the six months ended June 30, 2010 and there was no such expense for the same period of fiscal 2011. Total salaries and benefits to administrative staff of $979,700 for the six months ended June 30, 2011 compared to $1,119,400 for the corresponding period of 2010. The decrease in general and administrative expenses was primarily the result of cost reduction initiatives.
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Depreciation: Total depreciation of property plant and equipment was $907,400 for the six months ended June 30, 2011 compared to $1,183,200 for the same period in 2010. The decrease in the balance was primarily due to certain assets acquired in 2006 and 2007 being fully amortized.
Amortization of intangible assets: Amortization of customer relationships and trade name was $16,400 for the six months ended June 30, 2011 compared to $115,500 for the same period of fiscal 2010. The decrease was mainly due to the trade name acquired in 2006 being fully amortized.
Interest and other expenses (income): Interest and net other expenses for the six months ended June 30, 2011 were $820,000 or 4.3% of revenues compared to $1,350,700 or 6.9% of revenues for the same period in 2010. The balance for the six months ended June 30, 2011 was primarily comprised of net financing expenses which decreased to $1,021,400 or 5.4% of revenues compared to $1,171,800 or 6.0% of revenues for the same period of 2010. The interest due with respect to the Company’s credit facilities was $789,500 for the six months ended June 30, 2011 compared to $771,600 for the same period in 2010. Additionally, the foreign currency translation gain for the six months ended June 30, 2011 was $280,900 compared to a foreign currency translation loss of $92,600 for the same period of 2010. The change was related to the foreign currency translation of term notes which resulted from the Canadian dollar trading higher than the U.S. dollar at June 30, 2011 as compared to the same period of 2010.
Income taxes: No income taxes were paid and/or owed during the six months ended June 30, 2011 and 2010, which was mainly due to the Company’s losses carried forward to offset all income generated by the Company. Because of this and because we have fully reserved our deferred income tax assets, there was no provision and/or benefits for income taxes.
Net Income/Loss: Net loss for the six months ended June 30, 2011 was $6,300 compared to a net loss of $1,066,700 for the same period in 2010. The Company’s operating income was $813,700 for the six months ended June 30, 2011 compared to an operating income of $283,900 for the same period of 2010. The year-over-year increase in operating income primarily reflected a focused cost reduction program across the Company.
Liquidity and Capital Resources
Since our inception, we have financed our operations through bank debt, loans and equity from our principals, loans from third parties and funds generated by our business. At June 30, 2011, we had $2,275,488 in cash. We have an accumulated deficit of $33,645,258, a stockholders’ deficit of $14,740,797 and a working capital deficit of $14,200,086 at June 30, 2011, and at such date we have current maturities of term loans aggregating $14,001,128. We believe that cash from operations and our credit facilities with Laurus will continue to be adequate to satisfy our ongoing working capital needs as we do not expect Laurus to demand acceleration of the loans extended to the Company. We do not currently have the ability to repay the notes in the event of a demand by the holder. Furthermore, we granted a security interest to Laurus and its related entities in substantially all of our assets and accordingly, in the event of any default under our agreements with Laurus and its related entities, they could conceivably attempt to foreclose on our assets, which could cause us to terminate our operations. During Fiscal Year 2011, our primary objectives in managing liquidity and cash flows will be to ensure financial flexibility to support growth and entry into new markets and improve inventory management and to accelerate the collection of accounts receivable.
In addition, we have reduced general and administrative expenses to improve cash flow. We have also increased our rates for services provided by AC Technical to improve gross margins. This is in line with our competitors. Finally, we expect to realize additional benefits of our research and development efforts within the next 12 months as we start to introduce our own line of customized products to the industry in Iview DSI. These products and technologies are expected to improve gross margins. We plan to seek additional capital in the future to fund operations, growth and expansion through additional equity, debt financing or credit facilities. We have had early stage discussions with investors about potential investment in our company at a future date however no assurance can be made that such financing would be available, and if available that it would be on terms acceptable to us.
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Net Cash Provided by Operating Activities. Net cash provided by operating activities amounted to $800,300 for the six months ended June 30, 2011 compared to $455,000 for the corresponding period of 2010. The changes were primarily a result of a decrease in net loss as well as factors discussed below.
Comparison of the balance sheet as at June 30, 2011 to December 31, 2010
Accounts Receivable
Our accounts receivable increased by approximately $704,600 compared to the balance as at December 31, 2010. Accounts receivable of the Cancable segment were $2,137,500 as at June 30, 2011 compared to $1,909,800 as at December 31, 2010. The increase was attributable to the timing of payments from our customers. Accounts receivable of AC Technical segment were $1,531,400 as at June 30, 2011 compared to $1,207,800 as at December 31, 2010. The fluctuation in balance was mainly due to the increase in revenue.
Inventory
Inventory at June 30, 2011 was $634,900 compared to $692,900 as at December 31, 2010. The inventory of the Cancable segment as at June 30, 2011 was $213,100 compared to $215,900 as at December 31, 2010. The inventory of AC Technical segment as at June 30, 2011 was $421,900 compared to $476,900 as at December 31, 2010.
Accounts Payable and Accrued Liabilities
Accounts payable increased to approximately $4,344,800 as at June 30, 2011 from $3,990,900 as at December 31, 2010. The increase was mainly due to fluctuations in the timing of payments to our suppliers.
Deferred Income
Deferred income revenue decreased to $44,500 as at June 30, 2011 compared to $110,500 as at December 31, 2010. Deferred revenue primarily relates to payments associated with contracts which are paid in advance and for which revenue is recognized over the term of the contract.
Net Cash Used in Investing Activities. Net cash used by investing activities was $11,900 for the six months ended June 30, 2011, compared to net cash used by investing activities of approximately $29,400 for the six months ended June 30, 2010.
Net Cash Provided By Financing Activities. Net cash used in financing activities was approximately $418,000 for the six months ended June 30, 2011 compared to $718,200 for the six months ended June 30, 2010. The change was primarily the result of net inflows of $384,700 for the six months ended June 30, 2011 from our line of credit, compared to $76,500 in 2010. Our capital lease repayments during the period ended June 30, 2011 were $752,700, compared to $744,700 in 2010.
Recent Accounting Pronouncements – From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the company’s consolidated financial statements upon adoption.
Off Balance Sheet Arrangements
None
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified the following critical accounting estimates: accounts receivable allowances, contract revenues, inventory reserves, stock-based compensation and financial instruments. See our Form 10-K for the year ended December 31, 2010, for a discussion of our critical accounting estimates.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements about our company that are not historical facts but, rather, are statements about future expectations. When used in this document, the words “anticipates,” “believes,” “expects,” “intends,” “should” and similar expressions as they relate to us, or to our management, are intended to identify forward-looking statements. However, forward-looking statements in this document are based on management’s current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond our control, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include impact of general economic conditions in North America, changes in laws and regulations, fluctuation in interest rates and access to capital markets.
Our actual results or performance could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, we cannot predict whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on our results of operations and financial condition.
For further information about these and other risks, uncertainties and factors, please review the disclosure included in our December 31, 2010 Annual Report on Form 10-K under the caption “Risk Factors.”
You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements or risk factors, whether as a result of new information, future events, changed circumstances or any other reason after the date of this quarterly report.
Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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This item is not applicable to the Company because we are a smaller reporting company.
Item 4.
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Controls and Procedures
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Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow timely decisions regarding required disclosure. As of June 30, 2011, the end of the period covered by this quarterly report on Form 10Q, our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our disclosure controls and procedures, as such terms are defined under rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this assessment, our management concluded that our disclosure controls and procedures were effective as of the end period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our second fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.
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Legal Proceedings
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By Notice of Application issued in the Federal Court of Appeal on September 17, 2010 by our Subsidiary, XL Digital Services Inc. (“XL Digital”), as applicant against Communications, Energy and Paperworkers Union of Canada (“CEP”) as respondent, XL Digital applied to the Federal Court of Appeal for judicial review of the decision of the Canada Industrial Relations Board (the “Board”) dated August 23, 2010 wherein the Board concluded that it had jurisdiction over XL Digital, and found CEP to be a trade union within the meaning of the Canada Labour Code, and certified CEP to be the bargaining agent for all employees of XL Digital working in and out of its London, Ontario office. The application for judicial review was heard by the Federal Court of Appeal on May 18, 2011 and the judge dismissed the application for judicial review requested by XL Digital. The Company expects there may be a financial impact as a result of CEP becoming the bargaining agent of all of the London, Ontario employees of XL Digital and the operations of the London, Ontario employees being under federal jurisdiction but it is impossible to quantify the impact at this time.
Item 1A.
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Risk Factors
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This item is not applicable to the Company because we are a smaller reporting company.
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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None.
Item 3.
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Defaults upon Senior Securities
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None.
Item 4.
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[Removed and Reserved]
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Not applicable.
Item 5.
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Other Information
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During the period covered by this quarterly report, there has been no material change in the nomination process for directors.
Exhibits
31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CREATIVE VISTAS, INC.
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By:
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/s/ Dominic Burns
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Dominic Burns, CEO
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By:
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/s/ Heung Hung Lee
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Heung Hung Lee, CFO
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Dated: August 15, 2011
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