vect10q.htm
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C.20549
VECTr
Systems Inc.
|
(Exact
name of small business issuer as specified in its
charter)
|
|
Nevada
|
|
20-2437159
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
252
N. Washington
Street, Falls
Church, VA 22046
|
(Address
of principal executive offices)
|
(888)
429-1438
|
(Issuer’s
telephone number)
|
|
(Former
name, former address and former fiscal year, if changed
since last report)
|
PART
I
Item
1. Financial Statements
Our
financial statements are stated in United States Dollars (US$) and are prepared
in accordance with United States Generally Accepted Accounting Principles.
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VECTr
SYSTEMS INC.
(Formerly
Navitrak International Corporation)
CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited
–
Expressed
in US dollars)
SEPTEMBER
30, 2007 and DECEMBER 31, 2006
VECTr
SYSTEMS INC. (Formerly Navitrak International Corporation)
CONSOLIDATED
INTERIM STATEMENTS OF OPERATIONS
(Unaudited
– Expressed in US dollars)
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Cash (Note 3)
|
|
$ |
217,571
|
|
|
$ |
54,624
|
|
Accounts receivable
|
|
|
-
|
|
|
|
24,417
|
|
Inventory (Note 4)
|
|
|
245,036
|
|
|
|
310,039
|
|
Prepaid expenses and deposits
|
|
|
323,059
|
|
|
|
84,736
|
|
|
|
|
785,666
|
|
|
|
473,816
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
169,724
|
|
|
|
213,897
|
|
Investment
in Invisa, Inc. (Note 5)
|
|
|
-
|
|
|
|
16,875
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
955,390
|
|
|
$ |
704,588
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND CAPITAL DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
282,889
|
|
|
$ |
331,772
|
|
Customer deposits
|
|
|
261,126
|
|
|
|
147,191
|
|
Payable to related parties (Note 6)
|
|
|
796,461
|
|
|
|
1,229,388
|
|
Advances payable (Note 7)
|
|
|
759,459
|
|
|
|
607,475
|
|
Bridge loans, shareholders
|
|
|
5,036
|
|
|
|
4,287
|
|
Current portion of long-term debt (Note 8)
|
|
|
2,642,387
|
|
|
|
1,910,418
|
|
|
|
|
4,747,358
|
|
|
|
4,230,531
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (Note 8)
|
|
|
-
|
|
|
|
214,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,747,358
|
|
|
|
4,444,721
|
|
Capital
deficit
|
|
|
|
|
|
|
|
|
Capital stock (Note 9)
|
|
|
|
|
|
|
|
|
Authorized
|
|
|
|
|
|
|
|
|
100,000,000 common shares, each with par value of $0.001
|
|
|
|
|
|
|
|
|
10,000,000 preferred shares, each with a par value of
$0.001
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
12,719,533 (December 31, 2006 – 319,533) common shares(a)
|
|
|
12,720
|
|
|
|
320
|
|
Additional paid-in capital(a)
|
|
|
59,281,821
|
|
|
|
15,145,996
|
|
Shares to be issued (Note 9)
|
|
|
1,493,750
|
|
|
|
862,500
|
|
Accumulated other comprehensive loss
|
|
|
(334,507) |
|
|
|
(3,780) |
|
Accumulated deficit
|
|
|
(64,245,752) |
|
|
|
(19,745,169) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,791,968) |
|
|
|
(3,740,133) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
955,390
|
|
|
$ |
704,588
|
|
(a)
Prior periods have been restated to reflect the 1 for 100 reverse stock split
on
May 21, 2007.
The
accompanying notes are an integral part of these consolidated
interim financial statements.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
CONSOLIDATED
INTERIM STATEMENTS OF OPERATIONS
(Unaudited
– Expressed in US dollars)
|
|
|
|
|
|
Three-Month
Period
Ended
September
30,
2007
|
Three-Month
Period
Ended
September 30, 2006
|
Nine-Month
Period
Ended
September
30,
2007
|
Nine-Month
Period
Ended
September
30,
2006
|
|
|
|
|
|
REVENUE
|
$
4,414
|
$
11,452
|
$
252,068
|
$ 160,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
COSTS AND
EXPENSES
|
|
|
|
|
Cost of sales
|
3,208
|
18,975
|
211,268
|
148,426
|
General and administrative (Note 10)
|
11,483,920
|
933,607
|
15,341,354
|
3,530,110
|
Depreciation
|
33,698
|
297,383
|
66,960
|
882,803
|
Product development
|
40,124
|
222,038
|
342,973
|
697,999
|
Selling
|
68,026
|
73,915
|
232,789
|
133,087
|
|
11,628,976
|
1,545,918
|
16,195,344
|
5,392,425
|
|
|
|
|
|
Loss
from
operations
|
(11,624,562)
|
(1,534,466)
|
(15,943,276)
|
(5,231,908)
|
|
|
|
|
|
OTHER
ITEMS
|
|
|
|
|
|
|
|
|
|
Write-down
of Investment in Invisa, Inc.
|
-
|
(6,750)
|
-
|
(6,750)
|
Loss
on sale of Investment in Invisa, Inc. (Note 5)
|
-
|
-
|
(2,329)
|
-
|
Gain
on sale of Investment in Maps a la Carte, Inc. (Note 5)
|
-
|
-
|
564,366
|
-
|
Foreign
exchange loss
|
(3,191)
|
(437)
|
(15,057)
|
(6,129)
|
Interest
income/(expense), net
|
1,349
|
(1,486)
|
(3,887)
|
(3,479)
|
Loss
on settlement of debt with issuance of shares (Note 9)
|
-
|
-
|
(29,100,400)
|
-
|
|
|
|
|
|
|
(1,842)
|
(8,673)
|
(28,557,307)
|
(16,358)
|
|
|
|
|
|
Net loss for the period
|
$
(11,626,404)
|
$ (1,543,139)
|
$(44,500,583)
|
$ (5,248,266)
|
Loss per share – basic and diluted (a)
|
$
(0.91)
|
$ (4.93)
|
$
(6.91)
|
$ (16.98)
|
Weighted average shares outstanding – basic and diluted (a)
|
12,719,533
|
312,868
|
6,442,327
|
309,034
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Prior periods have been restated to reflect the 1 for 100 reverse stock split
on
May 21, 2007.
The
accompanying notes are an integral part of these consolidated interim
financial statements.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
CONSOLIDATED
INTERIM STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited
– Expressed in US dollars)
|
|
Three-Month
Period
Ended
September
30,
2007
|
Three-Month
Period
Ended
September
30,
2006
|
Nine-Month
Period
Ended
September
30,
2007
|
Nine-Month
Period
Ended
September
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for
the period
|
$ (11,626,404)
|
$
(1,543,139)
|
$
(44,500,583)
|
$
(5,248,266)
|
|
|
|
|
|
|
Unrealized
gain on available-for sale investment
|
-
|
(37,500)
|
-
|
-
|
Foreign
currency translation loss
|
(141,836)
|
(12,262)
|
(330,727)
|
(58,296)
|
|
|
|
|
|
Comprehensive
loss for the period
|
$
(11,768,240)
|
$
(1,592,901)
|
$
(44,831,310)
|
$
(5,306,562)
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated
interim financial statements.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN CAPITAL DEFICIT
(Unaudited – Expressed in US dollars)
|
Common
Stock
|
|
|
|
|
|
|
Number
of
Shares(a)
|
Amount(a)
|
Additional
Paid-in
Capital(a)
|
Shares
to
be issued
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Loss
|
Total
|
Balance,
January 1, 2007
|
319,533
|
$
320
|
$ 15,145,996
|
$ 862,500
|
$ (19,745,169)
|
$ (3,780)
|
$ (3,740,133)
|
Shares issued for debt (Note
9)
|
12,350,000
|
12,350
|
30,437,650
|
-
|
-
|
-
|
30,450,000
|
Shares issued for consulting
services (Note 9)
|
50,000
|
50
|
119,950
|
-
|
-
|
-
|
120,000
|
Stock-based compensation (Note
9)
|
-
|
-
|
13,578,225
|
-
|
-
|
-
|
13,578,225
|
Shares to be issued (Note
9)
|
-
|
-
|
-
|
631,250
|
-
|
-
|
631,250
|
Net loss for the period
|
-
|
-
|
-
|
-
|
(44,500,583)
|
-
|
(44,500,583)
|
Foreign exchange
translation
|
-
|
-
|
-
|
-
|
-
|
(330,727)
|
(330,727)
|
Balance,
September
30, 2007
|
12,719,533
|
$ 12,720
|
$ 59,281,821
|
$ 1,493,750
|
$ (64,245,752)
|
$ (334,507)
|
$ (3,791,968)
|
(a) The above schedule has been adjusted on
a
retroactive basis to reflect the 1 for 100 reverse stock split on May 21,
2007.
The
accompanying notes are an integral part of these consolidated
interim financial statements.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited – Expressed in US dollars)
|
Nine-month
Period
Ended
September
30,
2007
|
Nine-month
Period
Ended
September
30,
2006
|
|
|
|
CASH FLOWS
FROM
OPERATING ACTIVITIES
|
|
|
Net
loss for the period
|
$
(44,500,583)
|
$
(5,248,266)
|
Adjustments to reconcile net loss for the period to cash
used in operating activities
|
|
|
Accrued interest on advances (Note 7)
|
1,984
|
2,992
|
Write-down of investment
|
-
|
6,750
|
Write-down of inventory
|
60,088
|
-
|
Gain on sale of investment (Note 5)
|
(562,037)
|
-
|
Loss on settlement of debt with issuance of shares
|
29,100,400
|
-
|
Shares issued to consultant for services
|
120,000
|
-
|
Depreciation and amortizatio
|
66,960
|
882,803
|
Stock-based compensation
|
13,578,225
|
1,767,332
|
Shares to be issued for services
|
431,250
|
593,750
|
Increase in prepaid expenses and deposits
|
(238,323)
|
(1,523)
|
(Increase) decrease in accounts receivable
|
24,417
|
(12,554)
|
(Increase) decrease in inventory
|
4,915
|
(170,943)
|
Decrease in accounts payable and accrued liabilities
|
(48,883)
|
(93,844)
|
Decrease in customer deposits
|
113,935
|
-
|
Cash
used in operating activities
|
(1,847,652)
|
(2,273,503)
|
|
|
|
CASH FLOWS
FROM
FINANCING ACTIVITIES
|
|
|
Repayment of long-term debt
|
(34,659)
|
(50,029)
|
Repayment of advances payable
|
(145,000)
|
-
|
Proceeds from advances payable
|
295,000
|
210,000
|
Proceeds from long-term debt
|
166,193
|
358,364
|
Proceeds from related party advances
|
916,673
|
686,655
|
Proceeds from shares issued and to be issued
|
200,000
|
648,000
|
Cash
provided by financing activities
|
1,398,207
|
1,852,990
|
|
|
|
CASH FLOWS
FROM
INVESTING ACTIVITIES
|
|
|
Purchase of equipment
|
(707)
|
(66,445)
|
Proceeds on sale of investments
|
578,912
|
-
|
Cash
provided by (used in) investing activities
|
578,205
|
(66,445)
|
|
|
|
Net
increase (decrease) in
cash
|
128,760
|
(486,958)
|
Cash,
beginning
of
period
|
54,624
|
521,987
|
Effect
of foreign exchange on cash
|
34,187
|
30,384
|
|
|
|
Cash, end
of the
period
|
$
217,571
|
$
65,413
|
|
|
|
|
|
|
Supplemental
Information:
Interest
paid
|
$
5,790
|
$ 1,145
|
Non-cash
investing and financing activities
|
|
|
Shares
issued for settlement of debt
|
$
1,349,600
|
$
-
|
|
|
|
The
accompanying notes are an integral part of these consolidated
interim financial statements.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited – Expressed in US dollars)
1.
COMPANY HISTORY AND NATURE OF OPERATIONS
The Company
(formerly Navitrak International Corporation) was incorporated in 1998 under
the
laws of the State of Nevada to engage in any lawful business or activity for
which operations may be organized under the laws of the state of Nevada. Through
a series of events and agreements, on November 12, 2004, the Company acquired
the net assets of Navitrak International Corporation through the issuance of
cash, notes payable and common shares. On May 21, 2007, the Company changed
its
name to VECTr Systems, Inc. Also on May 21, 2007, the Company had effected
a one (1) for one hundred (100) reverse stock split of its authorized as well
as
issued and outstanding common stock to all of the holders of its common shares
who were holders on record on May 21, 2007. The effect of the reverse split
has
been applied on a retroactive basis to all related disclosures and calculations
in these consolidated financial statements.
The
Company is actively engaged in the business of developing, marketing and
distributing advanced GPS-based navigation, mapping and tracking solutions
for
use by airborne and ground personnel in law enforcement, military, police,
fire-fighting, search and rescue and other applications. These navigation
systems provide real time positioning information through proprietary software,
moving map display technology and location-based information.
Until
recently, all of the Company's operational activities were conducted from its
facilities in Halifax, Canada. The Company now has an office in Falls
Church, Virginia, from which it conducts its U.S. operations.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
and
Ability to Continue as a Going Concern
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, and include
the
accounts of the Company and its wholly owned subsidiaries, VECTrEngineering
(Canada) Inc., VECTr Technologies Inc. and 0705951 BC Ltd. All significant
inter-company transactions have been eliminated on consolidation. Except
for VECTr Engineering (Canada) Inc., the Company’s other subsidiaries are
inactive.
These accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. As at September 30, 2007,
the
Company has a working capital deficit of $3,961,692 (December 31, 2006 -
$3,756,715), incurred a loss during the nine months ended September 30, 2007
of
$44,500,583 and has an accumulated deficit of $64,245,752 at September 30,
2007.
The continuation of the Company is dependent upon the successful marketing
and
distribution of navigation systems and related products, the continuing support
of creditors and stockholders as well as achieving and maintaining a profitable
level of operations. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The Company had cash on
hand of $217,571 at September 30, 2007. Management anticipates that it requires
approximately $3 million over the next twelve months ended September 30, 2008
to
continue operations. To the extent that cash needs are not achieved from
operating cash flow and existing cash on hand, the Company will raise necessary
cash through equity issuances and/or debt financing. Amounts raised will
be used to continue the development of the Company's products, roll out the
Company's products to market and for other working capital purposes.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
– Expressed in US dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Management cannot
provide any assurances that the Company will be successful in any of its plans.
However, management believes that the Company will be able to continue
operations in the future. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amounts of and classification of liabilities that might be necessary
in
the event the Company cannot continue in existence.
Interim
Financial
Statements
The interim
financial statements included herein have been prepared by the Company, without
audit, 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 pursuant to such rules
and
regulations, although the Company believes that the disclosures are adequate
to
make the information presented not misleading.
These statements
reflect all adjustments, consisting of normal recurring adjustments, which
in
the opinion of management are necessary for fair presentation of the information
contained therein. It is suggested that these interim financial statements
be read in conjunction with the audited financial statements of the Company
for
the years ended December 31, 2006 and December 31, 2005 included in its annual
report on Form 10-KSB. The Company follows the same accounting policies in
the preparation of interim reports.
Results
of operations for the interim periods are not indicative of annual
results.
New
accounting
pronouncements
In June 2006, the
Financial Accounting Standards Board (“FASB”) issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109 (FAS No. 109)” (“FIN 48”). This interpretation prescribes a recognition
threshold and measurement attribute for tax positions taken or expected to
be
taken in a tax return. This interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The evaluation of a tax position in
accordance with this interpretation is a two-step process. In the first step,
recognition, the Company determines whether it is more-likely-than-not that
a
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. The second step addresses measurement of a tax position that meets
the
more-likely-than-not criteria. The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized
upon
ultimate settlement. Differences between tax positions taken in a tax return
and
amounts recognized in the financial statements will generally result in a)
an
increase in a liability for income taxes payable or a reduction of an income
tax
refund receivable, b) a reduction in a deferred tax asset or an increase in
a
deferred tax liability or c) both a and b. Tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be recognized
in
the first subsequent financial reporting period in which that threshold is
met.
Previously recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first subsequent financial
reporting period in which that threshold is no longer met. Use of a valuation
allowance as described in FAS No. 109 is not an appropriate substitute for
the
de-recognition of a tax position. The requirement to assess the need for a
valuation allowance for deferred tax assets based on sufficiency of future
taxable income is unchanged by this interpretation. This Interpretation is
effective for fiscal years beginning after December 15, 2006.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
– Expressed in US dollars)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
New
accounting pronouncements
(continued)
On
January 1, 2007, the Company adopted FIN 48, regarding accounting for
uncertainty in tax positions. The Company remains subject to examination of
income tax filings in the United States and various state jurisdictions for
periods since its inception in 1998. The Company has also determined that
it is subject to examination in Canada for all prior periods due to the
Company’s continued loss position in such jurisdictions. Material tax positions
were examined under the more-likely-than-not guidance provided by FIN 48. If
interest and penalties were to be assessed, the Company would charge interest
to
interest expense, and penalties to general and administrative expense.
As a result of
the
FIN 48 assessment, the Company concluded that it has not taken any uncertain
tax
positions on any of its open tax returns that would materially distort the
Company’s financial statements. There was no material cumulative effect of
adopting FIN 48 on the Company’s financial statements as of January 1,
2007.
In
September 2006, FASB issued Statement of Financial Accounting Standard (“SFAS”)
No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. The provisions of FAS 157 are effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact of
the
provisions of FAS 157.
3.
CASH
Included in cash
is
$41,950 (December 31, 2006 - $52,918) denominated in Canadian dollars.
4.
INVENTORY
The following inventory was on hand at
September 30, 2007 and December 31, 2006:
|
September
30,
2007
|
December
31,
2006
|
Finished goods
|
$
102,377
|
$ 147,191
|
Raw Materials
|
122,752
|
154,424
|
Work-in-process
|
19,907
|
8,424
|
|
|
|
|
$ 245,036
|
$ 310,039
|
|
|
|
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
– Expressed in US dollars)
5.
INVESTMENTS
The Company sold
Invisa, Inc. shares for $14,546 in the first quarter of 2007 at a value of
approximately $0.04 per share, resulting in a loss of $2,329 (2006 - $Nil).
The
Company sold its shares of Maps a la Carte, Inc., a private company, for
$564,366 in the second quarter of 2007 at a value of approximately $2.38 per
share. The shares were being carried at $Nil and thus resulted in a gain of
$564,366 (2006 - $Nil).
6.
PAYABLE TO RELATED PARTIES
|
September
30,
2007
|
December
31,
2006
|
Knight
Financial Ltd. (controlled by director)
|
$
415,785
|
$
114,316
|
G.M.
Capital Partners Ltd. (major shareholder, Note
9)
|
357,634
|
1,095,011
|
Express
Systems Corporation (common director)
|
3,000
|
3,000
|
Advances
from other shareholders
|
20,042
|
17,061
|
|
|
|
|
$
796,461
|
$
1,229,388
|
The above advances are unsecured, non-interest bearing and have no specific
terms of repayment.
7.
ADVANCES PAYABLE
|
September
30,
2007
|
December
31,
2006
|
1199684
Ontario Inc.,
advances and accrued interest
|
$
73,459
|
$
216,475
|
Daimler
Capital Partners
|
120,000
|
-
|
Tiger
Eye Holdings Ltd.
|
150,000
|
150,000
|
Kallur
Enterprises Ltd.
|
416,000
|
241,000
|
|
$
759,459
|
$
607,475
|
Of the initial advances received from
1199684 Ontario Inc, $50,000 bore interest at 8% per annum and $125,000
was non-interest bearing. The advances are unsecured and have no specific
terms of repayment. Accrued interest on the advances for the three and
nine months period ended September 30, 2007 totalled $Nil and $1,984 (2006
–
$1,007 and $2,992), respectively. The Company has made 3 payments in July and
August totalling $145,000 as per the settlement with 1199684 Ontario Inc. (Note
13).
The advances received from Daimler
Capital Partners bear interest at 6% per annum, are unsecured and have no
specific terms of repayment. The advances received from Tiger Eye Holdings
Ltd. and Kallur Enterprises Ltd. are non-interest bearing, unsecured and have
no
specific terms of repayment.
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
– Expressed in US dollars)
8.
LONG-TERM DEBT
|
September
30,
2007
|
December
31,
2006
|
|
|
|
Atlantic
Canada Opportunities Agency (“ACOA”) project funding loan,
unsecured. The loan was non-interest bearing unless payments were
past due, at which time interest was charged at the Bank of Canada
discount rate plus 3% per annum. Repayment of principal was deferred
to January 1, 2005, since then monthly principal payments were
approximately $1,967 (CDN $2,274). The loan was repaid in full in
May
2007.
|
$
-
|
$
9,757
|
|
|
|
ACOA
project funding loan unsecured. The loan is non-interest bearing
unless payments are past due, at which time interest is charged at
the
Bank of Canada discount rate plus 3% per annum. Repayment of
principal is due in monthly instalments of approximately $8,372
(CDN$8,313) commencing July 1, 2007. The amount of funds available
under this facility as at September 30, 2007 is approximately $502,300
(CDN$498,750). The Company is currently in default of certain of the
financial covenants and therefore the debt is considered as due on
demand.
|
477,199
|
270,002
|
|
|
|
ACOA
project funding loan, unsecured and non-interest bearing. The loan
is non-interest bearing unless payments are past due, at which time
interest is charged at the Bank of Canada discount rate plus 3% per
annum. The principal amount of the loan is repayable annually
commencing September 1, 2008 at a rate equal to 5.0% of gross
revenue. The maximum project funding under this facility is
approximately $2,115,000 (CDN $2,100,000). The Company is currently
in
default of certain of the financial covenants and therefore the debt
is
considered as due on demand.
|
1,903,515
|
1,620,371
|
|
|
|
Program
for Export Market Development (“PEMD”) project funding loan unsecured and
non-interest bearing. The loan is repayable at a rate equal to 4%
of sales
to the USA. Arrears of $34,800 (CDN$40,021) are repayable in 39 monthly
instalments of $892 (CDN$1,000) plus one instalment of $912 (CDN$1,021),
which commenced November 15, 2004. The Company started making quarterly
payments of $3,021 (CDN$3,000) in late December 2005 to repay the
loan. The Company is currently in default of the repayment terms and
therefore the debt is considered in arrears and due on
demand.
|
52,935
|
45,061
|
|
|
|
Industrial
Regional Assistance Program (“IRAP”) project funding loan, unsecured and
non-interest bearing. The loan is repayable quarterly in arrears
commencing January 1, 2005 at a rate equal to 1.25% of gross
revenue. The Company paid all payments in the first quarter of 2006
relating to 1.25% of gross revenue for 2004 and 2005. The Company is
currently in default of the repayment terms and therefore the debt
is
considered in arrears and due on demand.
|
208,738
|
179,417
|
|
2,642,387
|
2,124,608
|
Less:
current portion
|
2,642,387
|
1,910,418
|
|
$
-
|
$
214,190
|
Scheduled principal repayments until
maturity are due as follows:
Remaining
of
fiscal year 2007
|
$
321,293
|
2008
|
2,016,070
|
2009
|
112,555
|
2010
|
112,555
|
2011
|
79,914
|
|
$
2,642,387
|
VECTr
SYSTEMS INC. (Formerly Navitrak
International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
– Expressed in US dollars)
8.
LONG-TERM DEBT (continued)
Included in the
2007
scheduled principal repayments is the full repayment of the IRAP project-funding
loan. Principal repayments are based on 1.25% of gross revenue commencing
January 1, 2005. Included in the 2008 scheduled principal repayments is
the full repayment of the $1,903,515 ACOA project-funding loan. This loan
has undefined principal repayments as the repayments are based on a percentage
of sales, with the first payment commencing in the 2008 year.
The current portion
of the long-term debt noted above is in excess of the scheduled principal
repayments due in the next twelve months because all of the loans are currently
in default and have been classified on the Balance Sheet as current. All
of the above project funding is subject to project verification and audit by
the
lending agency.
9.
CAPITAL STOCK
In May 21, 2007,
the Company had effected a one (1) for one hundred (100) reverse stock split
of
its authorized and issued and outstanding common stock to all of the
holders of its common shares who were holders of record on May 21, 2007.
During
the period ended September 30, 2007 and the year ended December 31, 2006 the
Company completed the following share transactions not disclosed elsewhere
in
these consolidated financial statements:
The employment
agreement of an employee specifies that they are entitled to a bonus of 5,000
shares of common stock on each of June 30, 2006 (not yet issued), June 30,
2007
(not yet issued) and June 30, 2008 for a total of 15,000 shares so long as
he
continues to be employed by the Company at those dates. Compensation
expense associated with the bonus payments was determined based upon the quoted
market price of the underlying common stock on the grant date and was being
amortized on a straight-line basis over the requisite service period, which
is
the period from the date of grant to June 30, 2008. For the three and nine
months ended September 30, 2007, the Company has recognized $143,750 and
$431,250 (2006 - $143,750 and $593,750) in respect of shares to be issued
related to these bonus payments. As of September 30, 2007, there was $431,250
(December 31, 2006 - $862,500) of total unrecognized compensation cost related
to these bonus payments. This unrecognized compensation cost is expected to
be
recognized over the remaining requisite service period of nine months ending
June 30, 2008.
On February 27,
2007, the Company issued 350,000 common shares in settlement of $350,000 debt
of
the related party payable (Note 6) to G.M. Capital Partners Ltd. The transaction
was recorded at the quoted market price of $15 per share that resulted in a
loss
on settlement of debt of $4,900,000 in 2007.
On May 25, 2007,
the Company issued 12,000,000 common shares in settlement of $999,600 debt
of
the related party payable (Note 6) to G.M. Capital Partners Ltd. The transaction
was recorded at the quoted market price of $2.10 per share that resulted in
a
loss on settlement of debt of $24,200,400 in 2007.
On June 6, 2007,
the Company issued 50,000 common shares for consulting services as per agreement
with an investment banking firm. The common shares were recorded using the
quoted market value of $2.40 per share on the issuance date resulting in an
expense of $120,000.
In
September 2007, the Company received gross proceeds of $200,000 from signed
subscriptions for common shares. Subsequent to September 30, 2007, the Company
issued 200,000 common shares at a price of $1.00 per common share. Net of
transaction costs, cash received from the issuance of these common shares was
$199,958.
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
9.
CAPITAL STOCK (continued)
Stock options
On
May 22, 2007, the Company’s Board of Directors approved its 2007 Incentive Plan
pursuant to which the Company may grant an aggregate of up to 6,000,000 common
shares or options to purchase common shares to employees, consultants or
directors of our company or of any of our subsidiaries. It will continue
in effect until the earlier of (a) the date that all of the securities that
can
be issued pursuant to its terms have been granted or (b) May 22,
2017.
On
September 27, 2005, the Company’s Board of Directors approved its 2005 Incentive
Plan pursuant to which the Company may grant an aggregate of up to 40,000 common
shares or options to purchase common shares to employees, consultants or
directors of our company or of any of our subsidiaries. It will continue
in effect until the earlier of (a) the date that all of the securities that
can
be issued pursuant to its terms have been granted or (b) September 27,
2015.
On
December 6, 2004 the Company’s Board of Directors approved the 2004 Officer,
Director, Employee, Consultant and Advisor Stock Compensation Plan (“2004
Incentive Plan”) pursuant to which a total of 4,000,000 of our shares could be
issued. The plan is administered by the Board of Directors and expires in 10
years from its effective date.
Awards
under the above Incentive Plans will vest as determined by the
Company’s Board of Directors and as established in stock option agreements to be
entered into between the Company and each participant receiving an award.
Options granted under the above Incentive Plans will have a term of 10 years
from the date of grant but are subject to earlier termination in the event of
death, disability or the termination of the employment or consulting
relationship. The exercise price of options granted under the above Incentive
Plan shall be determined by the Company’s board of directors but shall not be
less than 85% of the fair market value of the Company’s common stock on the
grant date. (In the case of options granted to a holder of more than 10%
of the Company’s common stock, the option price must not be less than 110% of
the market value of the common stock on the grant date).
There
were no options granted in the year ended December 31, 2006.
For
the nine months ended September 30, 2007, 5,040,000 options were
granted to directors, employees and contractors under the Company’s 2007
Incentive Plan. 3,110,000 options vested when granted. One half of 545,000
options granted vested immediately and the remaining half of these options
granted vest on June 1, 2008. One quarter of 1,385,000 options granted vested
immediately and the remaining three quarters of these options granted vest
in
one quarter increments every six months thereafter.
Stock
option transactions and the number of stock options outstanding are
summarized as follows:
|
Number
of
Options
|
Weighted
Average
Exercise
Price ($USD)
|
Aggregate
Intrinsic Value
|
|
|
|
|
Balance,
December 31, 2005
|
47,200
|
$
67.00
|
|
Cancelled
|
(2,300)
|
46.00
|
|
Forfeited
|
(1,200)
|
85.00
|
|
|
|
|
|
Balance,
December 31, 2006
|
43,700
|
67.50
|
|
Granted
|
5,040,000
|
0.73
|
|
Cancelled
|
(4,200)
|
62.74
|
|
Forfeited
|
(400)
|
85.00
|
|
Balance
September 30, 2007
|
5,079,100
|
$
1.25
|
$
2.75
|
|
|
|
|
Options
exercisable, as at September 30, 2007
|
3,759,050
|
$
1.29
|
$
2.71
|
Options
exercisable, as at December 31, 2006
|
34,500
|
$
71.00
|
|
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
9.
CAPITAL STOCK (continued)
Stock options
(continued)
The following stock options were outstanding at September 30, 2007:
Expiry
date
|
Exercise
Price
|
Number
of
Options
|
December
6, 2014 for 2004 Incentive Plan
|
$ 42.50
|
19,700
|
August
31, 2010 for 2005 Incentive Plan
|
$
85.00
|
4,400
|
May
31, 2015 for 2005 Incentive Plan
|
$
96.00
|
15,000
|
May
11,2017 for 2007 Incentive Plan
|
$
0.25
|
2,155,000
|
May
29, 2017 for 2007 Incentive Plan
|
$
1.00
|
470,000
|
May
29, 2017 for 2007 Incentive Plan
|
$
1.10
|
2,415,000
|
A
summary of status of the Company’s unvested stock options as of
September 30, 2007 and changes during the nine-month period then ended is
presented below:
|
Number
of
Options
|
Weighted
Average
Exercise
Price ($USD)
|
Weighted
Average
Grant
Date Fair Value
|
|
|
|
|
Unvested
at
December 31, 2005
|
24,650
|
$
67.00
|
$
67.00
|
Vested
|
(14,250)
|
72.00
|
67.00
|
Forfeited
|
(1,200)
|
85.00
|
77.00
|
|
|
|
|
Unvested
at
December 31, 2006
|
9,200
|
56.00
|
65.00
|
Granted
|
5,040,000
|
0.73
|
2.40
|
Vested
|
(3,737,550)
|
0.75
|
2.33
|
Forfeited
|
(400)
|
85.00
|
77.00
|
Unvested
at
September 30, 2007
|
1,311,250
|
$
1.03
|
$
3.02
|
Warrants
On
December 1, 2004, the Company issued 40,000 share purchase warrants to a
consultant for financial public relation services and other consulting
services. 30,000 of these share purchase warrants initially vested on
January 15, 2006, while the remaining 10,000 were to vest on September 15,
2006. 20,000 of the share purchase warrants (“First Engagement Warrant”)
that vested on January 15, 2006 had an exercise price of $25 and were to expire
on November 30, 2006. The balance of the share purchase warrants (“Second
Engagement Warrant”) vested on January 15, 2006 with an exercise price of $50
and an expiration date of November 30, 2007. The 10,000 share purchase
warrants (“Third Engagement Warrant”) that were to vest on September 15, 2006
have an exercise price of $100 and expire on November 30, 2009.
Effective
September 16, 2006 the Company and the consultant entered into
an agreement to extend the life of the First Engagement Warrants and the Second
Engagement Warrants. As amended, the First Engagement Warrant gives the
warrant holder the right to acquire 20,000 shares of the Company’s common stock
at $25 per share for a period of one year from the date that the Securities
and
Exchange Commission declared the Company’s registration statement on Form SB-2
to be effective. That registration statement was declared effective
January 23, 2007. Therefore, the right to exercise the First Engagement
Warrant vested January 23, 2007.
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
9.
CAPITAL STOCK (continued)
Warrants (continued)
As
amended, the Second Engagement Warrant gives the warrant holder the
right to acquire 10,000 shares of the Company’s common stock at a price of $50
per share from the date that they vest (which is the date upon which the
consultant purchases the last of the 20,000 common shares underlying the First
Engagement Warrant) until November 30, 2008. Therefore, the right to
exercise the Second Engagement Warrant can vest only after the consultant has
purchased all 20,000 of the common shares underlying the First Engagement
Warrant.
On
September 1, 2007, the Company has extended its agreement with the
consultant (Note 10). The Company also agreed to issue the consultant the
following series of non-forfeitable warrants:
●
Series
A warrants, which vested on issue, that give the warrant holder
the right to acquire 1,000,000 shares of the Company’s common stock at $1.00 per
share until September 1, 2008,
●
Series
B warrants that give the warrant holder the right to acquire
1,000,000 shares of the Company’s common stock at a price of $2.00 per share
from the date that they vest (which is the date upon which the consultant
exercises the last of the Series A warrants) until September 1,
2009,
●
Series
C warrants that give the warrant holder the right to acquire
750,000 shares of the Company’s common stock at a price of $2.50 per share from
the date that they vest (which is the date upon which the consultant exercises
the last of the Series B warrants) until December 31, 2009, and
●
Series
D warrants that give the warrant holder the right to acquire
750,000 shares of the Company’s common stock at a price of $3.00 per share from
the date that they vest (which is the date upon which the consultant exercises
the last of the Series C warrants) until December 31, 2009.
Warrant
transactions and the number of warrants outstanding at September
30, 2007 are summarized as follows:
|
Number
of
Warrants
|
Weighted
Average
Exercise
Price
($USD)
|
|
|
|
Balance,
December 31, 2005
|
69,720
|
$
71.00
|
Issued
|
5,800
|
125.00
|
|
|
|
Balance,
December 31, 2006
|
75,520
|
74.00
|
Issued
|
3,500,000
|
2.04
|
Expired
|
(29,720)
|
100.00
|
Balance,
September 30, 2007
|
3,545,800
|
$
2.75
|
|
|
|
Warrants
exercisable, as at September 30, 2007
|
1,035,800
|
$
4.16
|
Warrants
exercisable, as at December 31, 2006
|
45,520
|
$
104.00
|
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
9.
CAPITAL STOCK (continued)
Warrants
(continued)
Number
of
Warrants
|
Exercise
Price
|
Expiry
Date
|
|
|
|
1,000,000
|
$
1.00
|
September
1, 2008
|
1,000,000
|
$
2.00
|
September
1, 2009
|
750,000
|
$
2.50
|
December
31, 2009
|
750,000
|
$
3.00
|
December
31, 2009
|
20,000
|
$ 25.00
|
January
22, 2008
|
10,000
|
$ 50.00
|
January
22, 2010
|
10,000
|
$ 100.00
|
November
30, 2009
|
4,800
|
$ 125.00
|
August
28, 2008
|
1,000
|
$ 125.00
|
July
24, 2008
|
Stock-based
compensation
Compensation
expense for options granted during the period is recognized
in accordance with SFAS No. 123(R) which requires all options granted to be
measured at fair value. Such compensation is amortized over the contract
services period or, if none exists, from the date of grant until the options
vest for non-employees. For employees, the compensation expense is
amortized over the requisite service period which approximates the vesting
period. Compensation associated with unvested options granted to
non-employees is remeasured on each balance sheet date using the Black-Scholes
option pricing model.
Expected
volatilities are based on historical volatility of the Company’s
stock using available data and other factors. The Company uses historical data
to estimate option exercise, forfeiture and employees termination within the
valuation model. For non-employees, the expected term of the options
approximates the full term of the options.
An
officer resigned from all of his positions with the Company, effective May
18,
2006 pursuant to an Agreement and Mutual Release which provides, among other
terms, that the stock options that were available to the officer on May 18,
2006
will continue to be available until they expire on December 31, 2010. The
modification of the options to the former officer resulted in additional
compensation of $157,621 during the nine months ended September 30,
2006.
For
options granted in 2007, stock based compensation was calculated using the
Black
Scholes Option Pricing Model using the following weighted average assumptions:
dividend yield of 0%, expected volatility of 198%, risk-free interest rate
of
4.79% and an expected life of 10 years. In respect to the options granted in
2004, 2005 and 2007, during the three and nine months ended September 30, 2007,
the Company charged to stock based compensation expense $6,264,000 and
$8,829,935 (2006 - $373,341 and $1,034,850).
Options
granted to non-employees that were unvested are subsequently remeasured at
each
balance sheet and vesting date using the fair value method. As of
September 30, 2007, there was $2,193,994 (December 31, 2006 - $197,928) of
total
unrecognized compensation cost related to unvested share-based compensation
awards in 2004, 2005 and 2007. The total grant-date fair value of options vested
during the nine-month period ended September 30, 2007 and 2006 was $8,389,688
and $702,975 respectively.
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
9.
CAPITAL STOCK (continued)
Stock-based
compensation
(continued)
Warrants
No
compensation expense is required for the warrants issued during the year ended
December 31, 2006 and 2005. Compensation expense for warrants issued in
December 2004 was recognized in accordance with SFAS No. 123 (prior to the
adoption of SFAS 123(R)) which requires such warrants to be measured at fair
value using the Black-Scholes option pricing model. Such compensation is
being amortized over the contract services period or, if none exists, from
the
date of grant until the options vest.
As
discussed above, in September 2006 the Company and the consultant entered into
an agreement to modify the vesting and expiration dates of the warrants.
Additional compensation expense of $17,000 was recognized in the year ended
December 31, 2006 in respect of the modification based on the incremental
increase in value of the warrants as a result of the modification. Such
compensation relating to the incremental increase was recognized immediately
upon modification. The fair value of the modified warrants was
estimated at the date of modification using the fair value method prescribed
in
SFAS 123(R) with the following weighted average assumptions: dividend yield
of
0%, expected volatility of 173%, risk-free interest rate of 4.06% and an
expected life of 1.7 years. Such compensation will be re-measured and charged
to
the Consolidated Statement of Operations on a quarterly basis until the warrants
vest.
For
warrants granted in 2007, stock based compensation was calculated using the
Black Scholes Option Pricing Model using the following weighted average
assumptions: dividend yield of 0%, expected volatility of 200%, risk-free
interest rate of 4.59% and an expected life of 1.78 years.
The
total stock-based compensation recognized and charged to expense under the
fair
value method in respect of all warrants during the three and nine months ended
September 30, 2007 was $4,734,000 and $4,748,290 (2006 - $240,521 and
$732,482).
10.
RELATED
PARTY
TRANSACTIONS
Related
party transactions not disclosed elsewhere in these consolidated interim
financial statements include:
a)
Management
fees were accrued during the three and nine months period ended September 30,
2007 of $15,000 and $45,000 (2006 - $15,000 and $45,000) to two companies
controlled by a director.
b)
On
September
1, 2007, the Company had extended its Consulting Agreement with G.M. Capital
Partners, Ltd. pursuant to the Consulting Agreement, G.M. Capital Partners,
Ltd.
has agreed to provide corporate counseling and advice. The term of the
agreement is for a period of 24 months, though either party may terminate the
agreement with five days’ notice. The Company agreed to pay G.M. Capital
Partners, Ltd. a monthly payment of $10,000. During the three and nine
months period ended September 30, 2007 under the previous agreement, $30,000
and
$90,000 (2006 - $30,000 and $90,000) in consulting fees were accrued to G.M.
Capital Partners Ltd. The Company also agreed to issue G.M. Capital
Partners, Ltd. warrants as described in Note 9.
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
10.
RELATED
PARTY
TRANSACTIONS (continued)
In
addition to these set payments, the Company has agreed to pay G.M. Capital
Partners, Ltd. performance-based fees for different services that they have
agreed to provide the Company. These services and fees
include:
●
for
acquisition consulting services, a percentage of the value of any merger,
acquisition, joint partnership or similar transaction resulting from such
services in the amount of 5% of the first $1,000,000 of the transaction, 4%
for
the second $1,000,000 of the transaction, 3% of the third $1,000,000 of the
transaction, 2% of the fourth $1,000,000 of the transaction and 1% of all value
in excess of $5,000,000
●
for
assistance in securing debt or equity financing, a cash ‘success fee’ equal to
10% of the gross proceeds of any financing resulting from such
assistance.
In
the
three and nine months ended September 30, 2007, the Company received $60,000
and
$465,000 (2006 - $720,000 and $1,490,000) in related party advances from G.M.
Capital Partners Ltd. During the three and nine months ended September 30,
2007,
the Company recorded finder’s fees for $6,000 and $46,500 (2006 - $72,000 and
$149,000) to consulting fees for GM Capital Partners Ltd. in respect of these
advances.
c)
A
director of
the Company resigned all of his positions with the Company effective May 18,
2006. Pursuant to the Agreement and Mutual Release between the Company and
this ex-director, which became effective on May 18, 2006, the Company agreed
to
pay the ex-director the sum of $131,685 (CDN $147,500). The amount still
owing of $47,201 (CDN $50,000) as of September 30, 2007 was accrued in these
consolidated interim financial statements (December 31, 2006 - $64,300 (CDN
$75,000)).
The
above transactions are in the normal course of operations and are
recorded at amounts established and agreed to between the related
parties.
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
11.
SALES
INFORMATION
Management has determined that it operates in one industry segment.
For the three and nine months ended September 30, 2007 and 2006, the Company’s
sales were distributed as follows:
|
Three-Months
Ended
September
30,
2007
|
Three-Months
Ended
September
30,
2006
|
Nine-Months
Ended
September
30,
2007
|
Nine-Months
Ended
September
30,
2006
|
|
|
|
|
|
Canada
|
$
4,414
|
$
-
|
$ 252,068
|
$
-
|
United
States
|
-
|
11,452
|
-
|
160,517
|
|
|
|
|
|
|
$
4,414
|
$
11,452
|
$ 252,068
|
$ 160,517
|
For
the
three and nine months period ended September 30, 2007 sales were derived from
one customer. No amounts were included in accounts receivable as at September
30, 2007. For the three and nine months period September 30, 2006 sales
were derived from one US government agency.
12.
COMMITMENTS
(a)
The Company has two lease agreements for offices in
Halifax and Washington. Minimum lease payments under the leases (excluding
operating expenses) over the next five years are as follows:
Twelve
months ended
September
30
|
|
|
2008
|
$
|
14,028
|
The
Company has exercised the option to terminate the Halifax lease on July 1,
2007
within a six months period; therefore the lease will be terminated December
31,
2007. The Washington lease operates on a month-to-month basis and, therefore,
has no long-term commitment.
(b)
For certain of the Company’s employees, their employment
agreement specifies that they are entitled to severance pay upon termination
based on a pre-determined number of months salary. As at September 30,
2007, the obligation for the severance payments should they be terminated was
approximately $18,000 (CDN $18,100) and $228,000 denominated in USD (September
30, 2006 - $224,000 (CDN $249,500) and $225,000 denominated in
USD).
VECTr
SYSTEMS INC.
(Formerly Navitrak International Corporation)
NOTES
TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(Unaudited
–
Expressed
in US dollars)
13.
LAWSUIT
On
November 29, 2006, a statement of claim was filed against the Company in the
Ontario Superior Court of Justice by 1199684 Ontario Inc. and Ken Sawatzky
alleging that they are owed money by the Company in respect of previous
advances. The Company has previously recognized such advances as owing to
1199684 Ontario Inc. (Note 7) and has made payments on these advances
accordingly. The amount claimed, which includes the amount already recognized
by
the Company, is $187,000.
On
July
19, 2007, the above parties settled this dispute and have agreed that the
Company shall pay $200,000. Subsequent to September 30, 2007, the Company
made the final payment relating to the settlement agreement of $55,000 on
October 4, 2007. Subsequent to the payment on October 4, 2007, a mutual
release was signed formally discharging the company from its obligations under
the settlement agreement.
This
quarterly report contains forward-looking
statements. Forward-looking statements are statements that relate to
future events, future financial performance or are otherwise projections
of
future results. In some cases, you can identify forward-looking statements
by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”,
“believes”, “estimates”, “predicts”, “potential” or “continue” or the negative
of these terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks in the section of this quarterly report on Form
10-QSB entitled “Risk Factors”, that may cause our company’s or our industry’s
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements.
We market, sell and support
airborne moving map and real-time video and electronic sensor control systems
that acquire, fuse and dynamically display map, sensor and other geo-referenced
data. These systems are used by the airborne surveillance community to increase
situational awareness and to achieve more efficient task management via a
combination of software, hardware and geographic information datasets. These
systems provide real time information on geographic position and directional
orientation through proprietary software, moving map display technology and
location-based information. We also have developed interfaces to manage and
control airborne cameras and other sensors. These systems are primarily deployed
on rotary and fixed wing aircraft and sold primarily to government agencies
including law enforcement, search and rescue organizations, paramilitary
agencies and the military.
Our predecessor company,
the
Canadian VECTr Systems Incorporated (Formerly Navitrak International
Corporation), had experienced declining sales over the years leading up to
our
acquisition of the business. This decline has continued during the two years
since we acquired the business. We believe that this decline was and continues
to be due primarily to the lack of camera integration and control functions
in
our early systems and to the failure of these systems to perform well in
the
rugged work environments where they were deployed. In addition, these early
systems were essentially software only systems that required extensive
customization for each application. Our earlier systems were the product
of our
effort to produce a proprietary system that would provide all of the required
functionality from proprietary (or highly modified) components. Since our
acquisition of the business, we have realized that our historical focus on
developing a system comprised solely of proprietary components has limited
our
ability tocompete. Early in 2005, we realized that if we
were to compete in the market we would need to shift away from a system
comprised entirely of proprietary products in favor of a system that would
integrate our most functional and reliable component – our proprietary software
- with functional and reliable components made by other companies. This shift
has resulted in the development of our current AeroNavitraker system, which
integrates our software with selected sensors and other ‘off-the-shelf’ computer
hardware manufactured by third parties. While we believe that our current
system
is more reliable in the field, more easily configured to our customers'
airframes and avionics, requires far less on-site and job specific engineering
and includes additional functionality, our sales have continued to be sluggish
in the face of strong competition and our history of poor functionality and
reliability.
In addition to our efforts
to
improve our proprietary system by utilizing ‘off-the-shelf’ components
manufactured by third parties, we have also been positioning our company
to act
as a distributor or dealer for companies that sell components and entire
systems
that are similar to our own product line.
On September 25, 2006, we
entered
into a non-exclusive agreement with Deep Development Corp., a division of
Gatekeeper Systems Inc., in which they granted us a non-exclusive right to
act
as a dealer for their products. Gatekeeper manufactures digital video flight
recorder systems that are deployed primarily on both rotary and fixed-wing
aircraft. They market and sell their products primarily to our target customers
as well as to commercial customers engaged in aerial survey work. While this
agreement is currently in effect, we have had limited success in marketing
this
product. We do not have any financial or material obligation for
non-performance under the agreement.
On December 15, 2006, we
entered
into a distribution agreement with EuroAvionics Navigationssysteme GmbH &
Co. KG, a German company with a facility in Stuttgart, Germany. In this
distribution agreement, EuroAvionics granted to our company the exclusive
right
to sell and service its EuroNav and EuroNav M line of products under our
new
VECTr brand in a territory comprising North America, Central America, South
America (with the exception of Venezuela) and all Caribbean countries that
are
not colonies of a European country (except Cuba). Certain EuroAvionics accounts
with customers in our exclusive territory are excluded from this
agreement.
EuroAvionics manufactures
digital
moving map and flight management systems similar to our AeroNavitraker but
with
a reputation for superior performance and reliability. We began to market
the
EuroAvionics systems at an industry event in March of 2007 under the “VECTr MG”
product name. In August 2007, we received our first order for our MG 100
Navigation and Map Generation System. This order came from a non-U.S.
foreign military customer at a value of approximately $420,000. We
anticipate beginning delivery of this system in the coming months. We anticipate
that, over the next six months this system will completely supplant our legacy
proprietary system.
Cash
Requirements
During
the nine months ended September 30, 2007, our
board of directors unanimously approved the sale of 1,000,000 shares of common
stock at $1.00 per share, of which 700,000 shares would be sold pursuant
to
Regulation S and 300,000 shares would be sold pursuant to Regulation D.
Subsequent to September 30, 2007, the Company issued 200,000 common shares
at a
price of $1.00 per common share. Net of transaction costs, cash received
from the issuance of these common shares was $199,958.
Net
cash provided
by financing activities for the nine months ended September 30, 2007 was
$1,398,207
compared to
$1,852,990 net
cash provided by
financing activities for the nine months ended September 30, 2006, a decrease
of
$454,783.
The decrease is attributable to the company’s
inability to attract additional financing for operations. As of September
30, 2007, we had $217,571 cash
on hand compared to $54,624
cash on hand
as at December 31, 2006, an increase of $162,947.
Net
cash provided
by our investing activities for the nine months ended September 30,
2007
was $578,205
compared
to $66,445 net cash used in our investing activities for the
nine months ended September 30, 2006, an increase of
$644,650.
The increase relates to the the sale of the shares of Maps a la Care which
previously had been written off.
Three
and nine month
periods ended September 30, 2007 compared to the three and nine month periods
ended September 30, 2006 of our company, VECTr Systems.
The following discussion relates
to
the operations of our company for the three and nine month periods ended
September 30, 2007 as compared to the operations of our company for the three
and nine month periods ended September 30, 2006.
Our net loss for the three-month
period ended September 30, 2007 was $11,626,404 as compared to $1,543,139
for
the three-month period ended September 30, 2006, an increase of
$10,083,265. This increase is primarily attributable to the Stock Option
Incentive Plan provided to employees of the Company in May 2007.
Our net loss for the nine-month
period
ended September 30, 2007 was $44,500,583 as compared to $5,248,266 for the
nine-month period ended September 30, 2006, an increase of $39,252,317. This
increase is primarily attributable to loss on settlement of debt with issuance
of shares and the Stock Option Incentive Plan provided to employees of the
Company in May 2007.
Our company had revenue of $4,414 and $252,068 during
the
three and nine month periods ended September 30, 2007, respectively, as compared
to revenue of $11,452 and $160,517 for the three and nine month periods ended
September 30, 2006, respectively, a decrease of $7,038, or 61% for the
three-month period and an increase of $91,551 or 57% for the nine-month period.
Our cost of sales for the three-month period ended September
30, 2007 was $3,208, as compared to our cost of sales for the three-month
period
ended September 30, 2006 of $18,975, a decrease of $15,767, or 83%. This
decrease is due primarily to our selling product for a third party rather
than
manufacturing the product ourselves.
The cost of sales for the nine-month period ended September
30, 2007 was $211,268, as compared to our cost of sales for the nine month
period ended September 30, 2006 of $148,426, an increase of $62,842 or
42%. This increase is due primarily to higher material and labor costs of
the product that we sold in 2007.
During the three-month period
ended
September 30, 2007, our company had general and administrative expenses of
$11,483,920 compared to $933,607 for the three-month period ended September
30,
2006, an increase of $10,550,313 or 1130%. This increase is primarily
attributable to the Stock Option Incentive Plan provided to employees of
the
Company in May 2007.
During the nine-month period ended September 30, 2007,
our
company had general and administrative expenses of $15,341,354, compared
to
$3,530,110, an increase of $11,811,244 or 335%. This increase is primarily
attributable to the Stock Option Incentive Plan provided to employees of
the Company in May 2007.
Depreciation and amortization
for the
three-month period ended September 30, 2007 was $33,698 as compared to $297,383
for the three-month period ended September 30, 2006, a decrease of $263,685
or
88.7%. Depreciation and amortization for the nine-month period ended
September 30, 2007 was $66,960, as compared to $882,803 for the nine-month
period ended September 30, 2006, a decrease of $815,843 or 92.4%. The
decrease is attributable to the amortization of software acquired that was
fully
depreciated by the fourth quarter of 2006.
During the three-month period ended September 30, 2007,
our
company had product development expenses of $40,124 compared to $222,038
for the
three-month period ended September 30, 2006, a decrease of $181,914 or 81.9%.
The decrease is primarily due to our change in roles from manufacturing to
distribution of third party products. During the nine-month period ended
September 30, 2007, our company had product development expenses of $342,973
compared to $697,999 for the nine-month period ended September 30, 2006,
a
decrease of $355,026 or 50.8%. The decrease is primarily due to our
change in roles from manufacturing to distribution of third party
products.
During
the
three-month period ended September 30, 2007, our company had selling expenses
of
$68,026 compared to $73,915 for the three-month period ended September 30,
2006,
an decrease of $5,889 or 8%. The change in the two periods is not a material
difference. During the nine-month period ended September 30, 2007, the
selling expenses totalled $232,789 as compared to $133,087 for the nine-month
perioded ended September 30, 2006, an increase of $99,702 or 75%. This
increase is primarily due to our strong marketing efforts to market our new
product developed by EuroAvionics.
During
the
nine-month period ended September 30, 2007, we recognized a gain from the
sale
of investments of $564,366 as compared to $nil for the nine-month period
ended
September 30, 2006. The Company sold its shares of Maps a la Carte Inc.,
to a private company, for $564,366 in the second quarter of 2007 at a value
of
approximately $2.38 per share. The shares were being carried at $Nil and
thus
resulted in a gain of $564,366 (2006 - $Nil).
During
the
nine-month period ended September 30, 2007, we recognized a loss on settlement
of debt with issuance of shares for $29,100,400 as compared to $nil for the
nine-month period ended September 30, 2006, a loss of $29,100,400 was reflected
in the Statement of Operations. On May 25, 2007, the Company issued 12,000,000
common shares as settlement of $999,600 debt of the related party payable
to
G.M. Capital Partners Ltd. The transaction was recorded at the quoted market
price of $2.10 per share that resulted in a loss on settlement of debt of
$24,200,400 in 2007.
Going
Concern
In
June 2006, the
Financial Accounting Standards Board (“FASB”) issued
interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FAS No. 109)” (“FIN 48”). This
interpretation prescribes a recognition threshold and measurement
attribute for tax positions taken or expected to be taken in a tax return.
This
interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The evaluation of a tax position in accordance with this
interpretation is a two-step process. In the first step, recognition, the
Company determines whether it is more-likely-than-not that a tax position
will
be sustained upon examination, including resolution of any related appeals
or
litigation processes, based on the technical merits of the position. The
second
step addresses measurement of a tax position that meets the more-likely-than-not
criteria. The tax position is measured at the largest amount of benefit that
is
greater than 50 percent likely of being realized upon ultimate settlement.
Differences between tax positions taken in a tax return and amounts recognized
in the financial statements will generally result in a) an increase in a
liability for income taxes payable or a reduction of an income tax refund
receivable, b) a reduction in a deferred tax asset or an increase in a deferred
tax liability or c) both a and b. Tax positions that previously failed to
meet
the more-likely-than-not recognition threshold should be recognized in the
first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first subsequent financial
reporting period in which that threshold is no longer met. Use of a valuation
allowance as described in FAS No. 109 is not an appropriate substitute for
the
de-recognition of a tax position. The requirement to assess the need for
a
valuation allowance for deferred tax assets based on sufficiency of future
taxable income is unchanged by this interpretation. This Interpretation is
effective for fiscal years beginning after December 15, 2006.
As a
result
of the FIN 48 assessment, the Company concluded that it has not taken any
uncertain tax positions on any of its open tax returns that would materially
distort the Company’s financial statements. There was no material cumulative
effect of adopting FIN 48 on the Company’s financial statements as of
January 1, 2007.
In
September 2006, FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements. The provisions of FAS 157 are effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of the provisions of FAS 157.
Application
of Critical
Accounting Policies
Revenues
are primarily derived from sales of products
and the provision of consulting services. Accounting for revenue recognition
is
complex and affected by interpretations of guidance provided by several sources,
including the Financial Standards Accounting Board (“FASB”) and the Securities
and Exchange Commission (“SEC”). This guidance is subject to change. We follow
the guidance established by the SEC in Staff Accounting Bulletin No. 104,
as
well as generally accepted criteria for revenue recognition, which require
that,
before revenue is recorded, there is persuasive evidence of an arrangement,
the
fee is fixed or determinable, collection is reasonably assured, and delivery
to
our customer has occurred. Applying these criteria to certain of our revenue
arrangements requires us to carefully analyze the terms and conditions of
our
agreements. Revenue from our software license agreements is generally recognized
at the time we enter into a contract and provide our customer with the licensed
software. We believe that this is the point at which we have performed all
of
our obligations under the agreement; however, this remains a highly interpretive
area of accounting and future license agreements may result in a different
method of revenue recognition. Revenue from the sale of GPS systems, which
includes hardware and software, are deferred and recognized when the whole
system is delivered. Amounts collected prior to satisfying the above revenue
recognition criteria are reflected as customer deposits.
RISK
FACTORS
Much
of the information included in this quarterly report includes or is based
upon
estimates, projections or other “forward-looking statements”. Such
forward-looking statements include any projections or estimates made by us
and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based,
are
made in good faith and reflect our current judgment regarding the direction
of
our business, actual results will almost always vary, sometimes materially,
from
any estimates, predictions, projections, assumptions, or other future
performance suggested herein. We undertake no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of such statements.
We
incurred a net loss of $11,626,404
and
$44,500,583 for the three and nine months ended September 30, 2007,
respectively, and $1,543,139
and
$5,248,266 for the three and nine months ended September 30, 2006,
respectively. At September 30, 2007, we had an accumulated deficit of
$64,245,752,
compared to $19,745,169 at
December 31, 2006, and a working capital deficit of
$3,961,692.
Our
company has had negative cash flows from
operations. For the nine months ended September 30, 2007, we earned
revenue from product sales of $252,068 compared to $160,517 during the nine
months ended September 30, 2006. To date, we have incurred significant
expenses in product development and administration in order to ready our
products for market. As at September 30, 2007,we had cash of $217,571, and
our current resources, including cash and loan proceeds that have been committed
over the next few months by Atlantic Canada Opportunities Agency, are sufficient
to fund our operations only until November 30, 2007. There is no assurance
that our actual cash requirements will not exceed our estimates, and in any
case
we will require additional financing to bring our products into commercial
operation, finance working capital and pay for operating expenses and capital
requirements until we achieve a positive cash flow. In particular, additional
capital may be required in the event that:
One
of the primary sources for funding upon which we
have depended in the past, and upon which we believe we will continue to
depend
for funding during the next 12 months, is the Atlantic Canada Opportunities
Agency. This agency is focused on supporting the growth of companies like
ours
as part of its overall effort to stimulate growth in the economy of the Atlantic
region of Canada. We currently have two outstanding loans from the Atlantic
Canada Opportunities Agency, each of which was made with respect to a specific
project. The loan agreements provide that payments do not commence until
some period of time after the specific project has been completed but the
lender
has the right to accelerate all sums due under these loans if we are in default
of any of the material covenants included in the loan agreements. From September
30, 2005 until December 1, 2005, we were in default of one of these loans
due to
our failure to complete the specified project by September 30, 2005, as required
by the loan agreement. This default was cured on December 1, 2005, when we
amended the loan agreement to extend the project’s completion date to September
30, 2006. From March 31, 2006 until May 18, 2006, we were in default of another
of these loans due to our failure to complete that specified project by March
31, 2006, as required by the loan agreement. This default was cured on May
18,
2006, when we amended the loan agreement to extend the project’s completion date
to March 31, 2007.
We
have
not yet completed the specified project and thus are in default again as
at
September 30, 2007. We are currently negotiating another extension with the
creditor.
We have
scheduled a meeting with management of the Atlantic Canada Opportunities
Agency
the week of November 11, 2007 to discuss the status of the loans for potential
relief.
Although
we are current in making any periodic
payments required under our loan agreements with the Atlantic Canada
Opportunities Agency, we are currently in default of a covenant, contained
in
these loan agreements, that we maintain a minimum level of “Equity”. Because we
are in default of this covenant to maintain a minimum level of “Equity”, the
Atlantic Canada Opportunities Agency currently has the right to accelerate
all
sums due under these loans upon delivery to us of written notice. At September
30, 2007, we owed Atlantic Canada Opportunities Agency an aggregate amount,
under all two of our loans from them, of $2,380,714. Payments to
the largest loan are not due until
September 1, 2008, unless this loan is accelerated as the result of our failure
to attain the required level of “Equity”. If the Atlantic Canada
Opportunities Agency were to demand immediate payment on all of these loans
because of our failure to attain the required level of Equity, we would then
be
obligated to pay $2,380,714 promptly. If we failed to pay this amount promptly
after demand, the Atlantic Canada Opportunities Agency could initiate one
or
more actions to collect it. In addition, the Atlantic Canada Opportunities
Agency could refuse to make any new loans to our company. If either of
these should occur, our business could be adversely affected.
Our
other two loans are from the Program for Export Market Development (PEMD)
and
the Industrial Regional Assistance Program (IRAP) with balances of $52,935
and
$208,738, respectively, at September 30, 2007. The Company is currently in
default of certain financial covenants, and both debts are considered as
due on
demand. If we failed to pay this amount promptly after demand, PEMD and IRAP
could initiate one or more actions to collect it. In addition, PEMD and
IRAP could refuse to make any new loans to our company. If either of these
should occur, our business could be adversely affected.
Our
past operations were, and our future success is,
highly dependent on sales to the U.S. government and associated federal,
state
and local government agencies. During the year ended December 31, 2006, we
completed one sale to a U.S. government agency. During the year ended December
31, 2005, we completed one sale to the City of Philadelphia Police
Department. During the period from January 1, 2004 to November 11, 2004,
and the year ended December 31, 2003, approximately 91 percent and 67 percent
of
our predecessor’s revenues, respectively, were derived from sales to the U.S.
government. Any significant disruption of or deterioration in our
relationship with the U.S. government and related federal, state and local
government agencies would significantly reduce our revenues and could cause
our
business to fail.
Our
research and development is performed in Canada.
A majority of our current directors and a majority of our current shareholders
are neither U.S. citizens nor U.S. residents. Companies like ours, whose
management or operations may be influenced, directly or indirectly, by foreign
interests, are considered by the U.S. government to be under “Foreign Ownership,
Control or Influence”, or “foreign ownership”. Companies that are under foreign
ownership may find it difficult or even impossible to obtain access to
classified materials. These companies may, as a result, find it difficult
or
impossible to qualify for government contracts, especially for the U.S. military
community. In order to obtain a security clearance from the U.S. government,
we
will need to mitigate any risks presented by foreign ownership in order to
assure the U.S. government that there will be no possibility of unauthorized
access to, or an adverse effect upon, U.S. government classified material.
We
may not be able to obtain a security clearance from the U.S. Government because
we may not be able to mitigate the effects of foreign
ownership.
We
may have to resort to litigation to enforce our
intellectual property rights, protect our trade secrets, determine the validity
and scope of the proprietary rights of others, or defend ourselves from claims
of infringement, invalidity or unenforceability. While there currently are
no
outstanding infringement claims pending by or against us, we cannot assure
you
that third parties will not assert infringement claims against us in the
future,
that assertion by such parties will not result in costly litigation, or that
they will not prevail in any such litigation. In addition, we cannot assure
you
that we will be able to license any valid and infringed patents from third
parties on commercially reasonable terms or, alternatively, be able to redesign
products on a cost-effective basis to avoid infringement. Litigation can
be
prohibitively expensive and can divert resources even if we win. We may not
have
the financial resources to fight a protracted legal battle to defend our
patents. Any litigation could have a material adverse effect on our business,
financial condition and operating results.
Our
business plan anticipates a significant increase
in the number of our strategic partners, manufacturers, dealers, distributors
and customers. This growth will place significant strain on our current
personnel, systems and resources. We expect that we will be required to hire
qualified employees to help us manage our growth effectively. We believe
that we
will also be required to improve our management, technical, information and
accounting systems, controls and procedures. We may not be able to maintain
the
quality of our operations, control our costs, continue complying with all
applicable regulations and expand our internal management, technical information
and accounting systems in order to support our desired growth. If we fail
to
manage our anticipated growth effectively, our business could be adversely
affected.
If
we issue additional shares or decide to enter into
joint ventures with other parties in order to raise financing or acquire
other
businesses through the sale of equity securities, investors' interests in
our
company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold.
As at September 30, 2007, there are outstanding common shares to be issued
and
common share purchase warrants and options exercisable into obligations to
issue
6,384,900 common
shares, including
those that may arise upon the issuance of bonus shares and the exercise of
outstanding common share purchase warrants and options, which, if issued,
would
represent approximately 33%
of our issued and outstanding shares. If all
the bonus shares are issued and all of these warrants and options are exercised
and the underlying shares are issued, such issuance will cause a reduction
in
the proportionate ownership and voting power of all other shareholders. The
dilution may result in a decline in the price of our shares or a change in
the
control of our company.
The
nature of our business, our ability to continue
our development of new and innovative products and to develop a competitive
edge
in our marketplace depends, in large part, on our ability to attract and
maintain qualified key personnel. Competition for such personnel is intense,
and
there can be no assurance that we will be able to attract and retain them.
Our
development now and in the future will depend on the efforts of key management
figures, such as Robert Knight, our President, Randall Cohn, our Vice President
of Marketing and Program Management, Herbert Lustig, our General Manager,
and
Adam Wolinski, our Director of Technology, Research and Development. The
loss of
any of these key people could have a material adverse effect on our business.
We
do not currently maintain key-man life insurance on any of our key
employees.
RISKS
ASSOCIATED WITH OUR
BUSINESS
- Identify emerging technological trends in our target
markets;
- Develop, market, sell and maintain competitive
products;
- Enhance our products by adding innovative features that
differentiate our products from those of our competitors; and
- Bring cost-effective products to market quickly.
The
Securities and Exchange Commission has adopted
regulations which generally define "penny stock" to be any equity security
that
has a market price (as defined) less than $5.00 per share or an exercise
price
of less than $5.00 per share, subject to certain exceptions. Our securities
are
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and "accredited investors". The term "accredited investor" refers
generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000
or
$300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction
and
monthly account statements showing the market value of each penny stock held
in
the customer's account. The bid and offer quotations, and the broker-dealer
and
salesperson compensation information, must be given to the customer orally
or in
writing prior to effecting the transaction and must be given to the customer
in
writing before or with the customer's confirmation. In addition, the penny
stock
rules require that prior to a transaction in a penny stock not otherwise
exempt
from these rules; the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive
the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade
our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
Item
3. Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under
the
Exchange Act is recorded, processed, summarized and reported, within the
time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including our President and Chief
Executive Officer and our Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
the
disclosure controls and procedures, management recognized that any controls
and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As
required by Rule 13a-15(b) under the Exchange Act, we have carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the quarter covered by this report
(being September 30, 2007). Based upon that evaluation, our President and
Chief
Executive Officer and our Chief Financial Officer concluded that as of the
end
of the quarter covered by this report, our disclosure controls and procedures
were effective to provide reasonable assurance that information relating
to us
and our subsidiaries that we are required to disclose in the reports that
we
file or submit to the SEC is recorded, processed, summarized and reported
with
the time periods specified in the SEC’s rules and forms. There has not been any
change in our internal control over financial reporting identified in connection
with the foregoing evaluation that occurred during our quarter ended September
30, 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER
INFORMATION
On
July 19, 2007, the above parties settled this dispute and have agreed that
the
Company shall pay $200,000 ($25,000, $60,000, $60,000 and $55,000 on July
19,
2007, July 31, 2007, August 19, 2007; and September 29, 2007,
respectively). In the event that the Company fails to make a payment as
described above, it will be liable to pay the accrued amount of
$73,459.
Subsequent to September 30,
2007,
the company made the final payment relating to the settlement agreement of
$55,000 on October 4, 2007. The payment was made pursuant to the
settlement agreement and thus no penalty was accrued. Subsequent to the
payment on October 4, 2007, a mutual release was signed formally discharging
the
company from its obligations under the settlement agreement.
Except as set forth above, we know of no material,
active or pending legal proceedings against us, nor are we involved as a
plaintiff in any material proceedings or pending litigation. There are no
proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial shareholders are an adverse party or have a material
interest adverse to us.
On September 1, 2007, we entered into a Consulting Agreement
with G.M. Capital Partners, Ltd. Pursuant to the Consulting
Agreement, G.M. Capital Partners, Ltd. has agreed to provide corporate
counseling and advice. The term of the agreement is for a period of 24
months, though either party may terminate the agreement with five days’
notice. We agreed to pay G.M. Capital Partners, Ltd. a monthly payment of
$10,000. We also agreed to issue G.M. Capital Partners, Ltd. the following
series of warrants:
●
Series
A warrants that give the warrant holder
the right to acquire 1,000,000 shares of our common stock at $1.00 per share
until September 1, 2008,
●
Series
B warrants that give the warrant holder
the right to acquire 1,000,000 shares of our common stock at a price of $1.50
per share from the date that they vest (which is the date upon which the
G.M.
Capital Partners, Ltd. exercises the last of the Series A warrants) until
December 31, 2009,
●
Series
C warrants that give the warrant holder
the right to acquire 750,000 shares of our common stock at a price of $2.00
per
share from the date that they vest (which is the date upon which the G.M.
Capital Partners, Ltd. exercises the last of the Series B warrants) until
December 31, 2009, and
●
Series
D warrants that give the warrant holder
the right to acquire 750,000 shares of our common stock at a price of $2.500
per
share from the date that they vest (which is the date upon which the G.M.
Capital Partners, Ltd. exercises the last of the Series C warrants) until
December 31, 2009.
G.M.
Capital Partners, Ltd. is not a U.S. person, and the transaction was
negotiated and completed outside of the United States. In issuing these
securities we relied on Section 4(2) of the Securities Act of 1933 and/or
on
Regulation S promulgated thereunder.
On
August 13, 2007, 300,000 options were granted to a consultant under
the Company’s 2007 Incentive Plan. The options are priced as follows: 200,000
units at $1.00 per share; and 100,000 units at $0.25 per share. In issuing
these securities we relied on Section 4(2) of the Securities Act of 1933
and/or
on Regulation S promulgated thereunder.
Because
of our defaults on the loans from the Atlantic Canada
Opportunities Agency, the Atlantic Canada Opportunities Agency currently
has the
right to accelerate all sums due under these loans upon delivery to us of
written notice. At September 30, 2007, we owed Atlantic Canada Opportunities
Agency an aggregate amount, under all two of our loans from them, of $
2,380,714. Payments to the largest loan are not due until September 1,
2008, unless this loan is accelerated as the result of our failure to attain
the
required level of “Equity”. If the Atlantic Canada Opportunities Agency
were to demand immediate payment on all of these loans because of our failure
to
attain the required level of Equity, we would then be obligated to pay
$2,380,714 promptly. If we failed to pay this amount promptly after demand,
the
Atlantic Canada Opportunities Agency could initiate one or more actions to
collect it. In addition, the Atlantic Canada Opportunities Agency could
refuse to make any new loans to us. If either of these should occur, our
business could be adversely affected.
Our
other two loans are from the Program for Export Market Development (PEMD)
and
the Industrial Regional Assistance Program (IRAP) with balances of $52,935
and
$208,738, respectively, at September 30, 2007. The Company is currently in
default of certain financial covenants, and both debts are considered as
due on
demand. If we failed to pay this amount promptly after demand, PEMD and IRAP
could initiate one or more actions to collect it. In addition, PEMD and
IRAP could refuse to make any new loans to our company.
Item
6. Exhibits.
Exhibit
Number
|
Description
|
10.1
|
G.M.
Capital Partners Ltd. Consulting Agreement, dated September 1,
2007 (incorporated herein by reference to Exhibit 10.1 to our Current
Report on Form 8-K filed on September 4, 2007)
|
31.1*
|
Section
302 Certification of the Sarbanes-Oxley Act of 2002
|
31.2*
|
Section
302 Certification of the Sarbanes-Oxley Act of 2002
|
32.1*
|
Section
906 Certification of the Sarbanes-Oxley Act of 2002
|
32.2*
|
Section
906 Certification of the Sarbanes-Oxley Act of 2002
|
* Filed herewith
SIGNATURES
VECTr
SYSTEMS
INC.