ADX: TSX
TORONTO, Sept. 28 /CNW/ - Advantex Marketing International Inc. (TSX:ADX), a leading specialist in merchant funding and loyalty marketing programs, today announced its results for the fiscal year ended June 30, 2007.
"Fiscal 2007 was an important transitional period for the company during which we underwent fundamental changes in senior management and operating methodology," said Kelly E. Ambrose, Advantex's new Chief Executive Officer and President. "We focused on strengthening our corporate structure, enhancing our technology backbone, and establishing a customer pipeline for future growth. All of these initiatives enabled us to deliver substantially better operating performance than last year and set the stage for continued improvements going forward."
The following are highlights of the Company's key accomplishments during Fiscal 2007:
(1) In November, 2006 the Company successfully completed a convertible
debenture financing. The term of the existing convertible debenture
was extended to December, 2011 and an additional $2.0 million of
convertible debenture was issued.
(2) In December, 2006 G. Randall Munger stepped down from his roles as
Chairman, Chief Executive Officer and director of the Company and
Kelly E. Ambrose was appointed Chief Executive Officer and President.
This change was followed by re-building of the senior management team
with new leadership in sales, marketing, and IT to ensure development
of processes, systems, and customer and client relationships that are
robust and scaleable.
(3) Expansion of the Advance Purchase Marketing product for merchants was
accelerated. Under the program, Advantex purchases future credit card
transactions at a discount from merchants, providing them with cash
in advance along with marketing, customer incentives and business
incentives. This expansion was rolled out using the Company's
proprietary pricing and risk management models. The program has
significant growth potential and the Company currently has a backlog
of merchants wishing to join this program.
Financial Performance
The positive impact of the initiatives implemented during fiscal 2006 and
2007 are reflected in the current year's performance and are expected to
continue to have a positive effect on future performance. As a consequence of
the above actions, the Company surpassed the previous year's performance:
- Revenue at $11.3 million was up 31.5% or $2.7 million
- Gross Profit at $7.1 million was up 21.3%
- Contribution from operations improved by $1.3 million to a
$0.2 million loss in current year compared to a loss of $1.5 million
in the previous year.
- Transaction Credits at June 30, 2007 were $5.4 million, up 37.6% or
$1.5 million from the previous year, reflecting growth of the Advance
Purchase Marketing program. Transaction Credits represent the
Company's rights to future designated credit card transactions at its
Merchant Partners and are a likely indicator of future revenue
growth. The Company is seeking additional funding to deploy in this
program which would further growth in Advance Purchase Marketing.
Revenue for fiscal 2007 was $11.3 million compared with $8.6 million in fiscal 2006, an increase of $2.7 million or 31.5%. Growth in the CIBC Advantex program was driven by the expansion of the Advance Purchase Marketing Program which accounts for 76% of fiscal 2007 revenue. Transaction fee revenue from the Company's Online Shopping Mall programs increased 22.4% in US dollars (17.6% in Canadian dollars) when compared with fiscal 2006. The Company earns its transaction fee revenue in US Dollars from its Online Shopping Malls which is reported in Canadian dollars on the consolidated financial statements.
Gross Profit was $7.1 million in fiscal 2007 compared to $5.8 million in fiscal 2006. This improvement reflects the growth in revenue, partially offset by the increase in direct expenses.
Contribution from operations in fiscal 2007 was a loss of $0.2 million compared to a loss of $1.5 million in fiscal 2006, an improvement of $1.3 million, reflecting the revenue growth in profitable core activities.
The Company's Net Loss was $2.6 million ($0.03 per share) compared with a loss of $2.5 million ($0.04 per share) in fiscal 2006. Fiscal 2007 was impacted by restructuring costs of $1.1 million and Fiscal 2006 reflected earnings from discontinued operations of $0.1 million. After adjusting for the abovementioned factors, there was a year-over-year $1.1 million improvement in results from operations; adjusted $1.5 million loss from operations in fiscal 2007 compared to a $2.6 million loss in operations in fiscal 2006.
The following presentation is not set out in accordance with Canadian generally accepted accounting principles (GAAP), but has been included to provide additional analysis for the reader.
(In millions of dollars)
2007 2006
---- ----
Revenue:
CIBC Advantex program
Advance Purchase Model $6.4 $5.2
Marketing Only Model 2.0 1.0
Online Shopping Malls 2.7 2.2
--- ---
Revenue from Core Activities 11.1 8.4
Other programs 0.2 0.2
--- ---
Total Revenue 11.3 8.6
Direct Expenses (4.2) (2.8)
----- -----
Gross Profit 7.1 5.8
Ongoing selling, general & administrative expenses (7.3) (7.3)
----- -----
Contribution from Operations (0.2) (1.5)
Restructuring/other one-time costs/
stock based compensation (1.3) (0.1)
----- -----
Loss before Amortization and Interest (1.5) (1.6)
Amortization (0.2) (0.3)
Interest on Convertible Debenture (0.9) (0.7)
----- -----
Loss from continuing operations (2.6) (2.6)
----- -----
Earnings from discontinued operations 0.0 0.1
--- ---
Net loss $(2.6) $(2.5)
As at June 30, 2007, the Company had Cash and Cash Equivalents of
$0.9 million compared to $1.8 million as at June 30, 2006. During fiscal 2007,
the Company raised $1.6 million in net proceeds from issuing additional
convertible debentures. The funds were used to accelerate the growth of its
Advance Purchase Marketing program (deployed in Transaction Credits).
A summary of fiscal 2007 cash flow is set out below:
(In millions of dollars) Working
-------
Cash Capital
---- -------
At start of Fiscal 2007 $1.8 $3.8
---- ----
Net proceeds from additional convertible debenture 1.6 1.6
Other working capital/capital asset items 0.8 (0.8)
Deployed in Transaction Credits (1.5) 1.5
Used in Operations (1.8) (1.8)
Decline in cash balances (0.9) (0.9)
----- -----
At end of Fiscal 2007 $0.9 $3.4
---- ----
The Company does not currently have a loan facility with a third party and does not participate in off-balance sheet financing arrangements.
Outlook
Fiscal 2007 was a transition year for the Company in its process of evolving into a stronger and more competitive company, with a clear focus on profitable growth in the programs and areas in which it enjoys a leadership position.
The Company is experiencing strong demand for its Advance Purchase Marketing Programs in the dining, golf, ski, hospitality, and spa categories, as evidenced by a backlog of merchants wishing to join its programs. Management expects to continue expanding this area of its business and expects to raise a debt facility to support growth in this program.
After delays during 2007 in finalizing the contract to allow the Company to offer its programs to retailers, Advantex now expects to have retail merchants participating in its Advance Purchase Marketing programs in calendar year 2008. There are approximately 100,000 retailers in the shopping categories that Advantex will be targeting (source: Statistics Canada).
Revenue from the Company's Online Shopping Malls is expected to continue its annual upward trend. A new management team with extensive experience in online marketing was put in place in Fiscal 2006, and is implementing improvements that have delivered results. Further growth is expected as the team builds momentum.
Importantly, the company deems it a priority to maintain its competitive advantages and will continue investing in its technology systems to stay pace with partner and marketplace standards.
About Advantex Marketing International Inc.
Advantex is a specialist in the marketing services industry, managing white-labelled rewards accelerator programs for major affinity groups through which their members earn bonus frequent flyer miles and/or other rewards on purchases at participating merchants. Under the umbrella of each program, Advantex provides merchants with marketing, customer incentives, and secured future sales through its Advance Purchase Marketing model. Advantex partners include more than 700 restaurants, online retailers, golf courses, small inns and resorts, and major organizations including CIBC, United Airlines, Delta Air Lines, The New York Times, Alaska Airlines and Lufthansa Airlines. Advantex is a public company, traded on the Toronto Stock Exchange under the symbol "ADX". For additional information on Advantex, please visit www.advantex.com.
This press release contains certain "forward-looking statements". All statements, other than statements of historical fact, that address activities, events or developments that the Company believes, expects or anticipates will or may occur in the future (including, without limitation, statements regarding financial and business prospects and financial outlook) are forward-looking statements. These forward-looking statements reflect the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to a number of risks, uncertainties and assumptions that may cause the actual results of the Company to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on the Company. Factors that could cause actual results or events to differ materially from current expectations include, among other things, changes in general economic and market conditions, changes to regulations affecting the Company's activities, uncertainties relating to the availability and costs of financing needed in the future, and delays in finalizing retail contract. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise. Although the Company believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
To our Shareholders:
The accompanying consolidated financial statements have been prepared by management and approved by the Board of Directors of the Company. Management is responsible for the information and representations contained in these consolidated financial statements and other sections of this Annual Report.
The Company maintains appropriate processes to ensure that relevant and reliable financial information is produced. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. The significant accounting policies which management believes are appropriate for the Company are described in note 1 to the consolidated financial statements.
The Board of Directors is responsible for reviewing and approving the consolidated financial statements and overseeing management's performance of its financial reporting responsibilities. An Audit Committee, the majority of whose members are non-management Directors, is appointed by the Board. The Audit Committee reviews the consolidated financial statements, adequacy and internal controls, the audit process and financial reporting with management and the external auditors. The Audit Committee reports to the Directors prior to the approval of the audited consolidated financial statements for publication.
PricewaterhouseCoopers LLP, the Company's external auditors, audited the consolidated financial statements in accordance with generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements.
(Signed) "Kelly E.Ambrose" (Signed) "Robert von der Porten"
Kelly E. Ambrose Robert von der Porten
Chief Executive Officer Interim Chief Financial Officer
and President
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2007 AND 2006
2007 2006
---- ----
ASSETS NOTE
Current:
Cash and cash equivalents $910,995 $1,807,042
Accounts receivable 737,485 909,158
Transaction credits 1(e) 5,390,412 3,916,302
Prepaid expenses and sundry assets 185,955 154,837
------- -------
7,224,847 6,787,339
--------- ---------
Long-term:
Property, plant and equipment
and other assets 2 775,733 623,831
Deferred financing charges 3 384,594 189,170
------- -------
1,160,327 813,001
--------- -------
TOTAL ASSETS $8,385,174 $7,600,340
---------- ----------
---------- ----------
LIABILITIES
Current:
Accounts payable and accrued
liabilities $3,707,243 $3,122,006
---------- ----------
Long-term:
Other liabilities 12 450,856 -
Convertible debenture payable 3 4,426,929 3,518,706
--------- ---------
4,877,785 3,518,706
--------- ---------
8,585,028 6,640,712
--------- ---------
SHAREHOLDERS' (DEFICIENCY) EQUITY
Capital Stock 4
Class A preference shares 3,815 3,815
Common shares 24,106,281 24,106,281
---------- ----------
24,110,096 24,110,096
Contributed surplus 4(d) 412,223 243,448
Equity portion of convertible
debenture 3 2,114,341 848,297
Deficit (26,836,514) (24,242,213)
------------ ------------
(199,854) 959,628
--------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIENCY) EQUITY $8,385,174 $7,600,340
---------- ----------
---------- ----------
(see accompanying notes)
Approved by the Board:
(Signed) "William Polley" (Signed) "Kelly E. Ambrose"
Director: Director:
-------------------- --------------------
William Polley Kelly E. Ambrose
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF LOSS
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
---- ----
NOTE
REVENUE $11,346,359 $8,626,688
Direct expenses 4,259,543 2,785,216
--------- ---------
GROSS PROFIT 7,086,816 5,841,472
--------- ---------
OPERATING EXPENSES
Selling and marketing 3,494,907 2,898,667
General and administrative 3,784,564 4,464,916
--------- ---------
7,279,471 7,363,583
--------- ---------
CONTRIBUTION FROM OPERATIONS (192,655) (1,522,111)
Restructuring costs 12 1,088,657 -
Stock-based compensation 168,775 59,756
------- ------
LOSS BEFORE AMORTIZATION AND INTEREST (1,450,087) (1,581,867)
Amortization of property, plant
and equipment 240,848 293,274
Interest expense
Stated interest on convertible
debenture 542,180 408,082
Accretion charge on convertible
debenture and amortization of
deferred financing charges 361,186 312,685
------- -------
LOSS FROM CONTINUING OPERATIONS (2,594,301) (2,595,908)
Earnings from discontinued operations 5 - 100,000
------- -------
NET LOSS FOR THE YEAR $(2,594,301) $(2,495,908)
------------ ------------
------------ ------------
LOSS PER COMMON SHARE 7
Continuing operations $(0.03) $(0.04)
Discontinued operations 0.00 0.00
---- ----
NET LOSS PER COMMON SHARE $(0.03) $(0.04)
------- -------
------- -------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF DEFICIT
YEAR ENDED JUNE 30, 2007 AND 2006
2007 2006
---- ----
BALANCE AT THE BEGINNING OF THE YEAR $(24,242,213) $(21,746,305)
Net loss for the year (2,594,301) (2,495,908)
----------- -----------
BALANCE AT THE END OF THE YEAR $(26,836,514) $(24,242,213)
------------- -------------
------------- -------------
(see accompanying notes)
ADVANTEX MARKETING INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
---- ----
NOTE
OPERATING ACTIVITIES
Net loss from continuing operations $(2,594,301) $(2,595,908)
Items not affecting cash
Amortization of property, plant
and equipment 240,848 293,274
Accretion charge on convertible
debenture 3 271,045 209,011
Amortization of deferred
financing charges 90,141 103,674
Issuance of shares - 35,000
Stock-based compensation 168,775 59,756
Accrued restructuring 450,856 -
------- -------
(1,372,636) (1,895,193)
Changes in non-cash working
capital items
Accounts receivable 171,673 329,561
Transaction credits (1,474,110) (1,552,874)
Prepaid expenses and sundry assets (31,118) 70,232
Accounts payable and accrued
liabilities 585,237 (722,255)
------- ---------
(748,318) (1,875,336)
(2,120,954) (3,770,529)
----------- -----------
FINANCING ACTIVITIES
Proceeds from convertible debenture 1,617,657 -
Share issue proceeds - 2,550,032
--------- ---------
1,617,657 2,550,032
INVESTING ACTIVITIES
Net proceeds on sale of business 5 - 100,000
Purchase of property, plant
and equipment (392,750) (43,088)
--------- --------
(392,750) 56,912
DECREASE IN CASH AND CASH
EQUIVALENTS DURING THE YEAR (896,047) (1,163,585)
Cash and cash equivalents at
the beginning of the year 1,807,042 2,970,627
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $910,995 $1,807,042
-------- ----------
-------- ----------
ADDITIONAL INFORMATION
Interest paid $595,000 $412,500
-------- --------
-------- --------
(see accompanying notes)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30, 2007
1. SIGNIFICANT ACCOUNTING POLICIES
a. Nature of business
Advantex Marketing International Inc. (Advantex or the Company) is
a public company with common shares listed on the Toronto Stock
Exchange (trading symbol ADX.TO). Advantex operates in the
marketing services industry. The Company develops and manages
loyalty programs for financial institutions, airlines and other
major organizations through which their customers earn frequent
flyer miles or points on purchases at a wide selection of
participating merchants. Under the umbrella of each program,
Advantex provides merchants with marketing, customer incentives
and secured future sales through its Advance Purchase Marketing
model.
b. Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Advantex Dining
Corporation, Advantex Marketing Corporation, Advantex Marketing
International Inc. (US), Advantex Marketing (Maryland) Inc.,
1600011 Ontario Limited, Advantex Systems Limited Partnership and
Advantex GP Inc.
c. Revenue recognition
Advantex provides marketing services to participating
establishments and provides awards to customers who make purchases
at participating establishments. There are two types of agreements
with participating establishments:
(i) The Company acquires the rights to future designated credit
card transactions at a discount from the face value from
participating establishments. The Company records as revenue
the spread between credit card transaction and its costs to
acquire the rights (cost of transaction credits).
(ii) The Company provides marketing and loyalty services to
participating establishments and records as revenue the fee
charged for services. Fee is a percentage of customer
purchases made at participating establishments.
The revenue is recognized at the time that a consumer makes a
designated credit card purchase from participating establishments
enrolled in these programs.
The reported revenues consist of the following:
2007 2006
---- ----
Gross revenues $85,829,805 $68,678,621
Cost of purchasing transaction credits 74,483,446 60,051,933
---------- ----------
Revenues $11,346,359 $8,626,688
d. Cash and cash equivalents
Cash and cash equivalents include highly liquid investments
redeemable at any time and are stated at cost, which approximates
market value.
e. Transaction credits
The Company purchases the rights to receive future cash flows
associated with designated credit card purchases at a discount
from participating establishments. The Company continuously
reviews its transaction credits and records an estimated allowance
for amounts deemed uncollectible.
f. Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
amortization. Amortization is provided for at the following annual
rates and methods:
Computer equipment - 30% using the declining balance
method
Furniture and equipment - 20% using the declining balance
method
Leasehold improvements - Straight-line over the term of the
lease
Computer software - 3 to 5 years straight-line
Property, plant and equipment are tested for impairment when
evidence of a decline in value exists. If it is determined that
the carrying value of the property, plant and equipment is not
recoverable, a write-down to fair value is charged to earnings in
the year that such a determination is made.
g. Deferred financing charges
Deferred financing charges are amortized over the term of the
convertible debenture payable.
h. Income taxes
The Company provides for income taxes using the liability method
of income tax allocation. Under this method, future income tax
assets and liabilities are determined based on deductible or
taxable temporary differences between financial statement values
and the corresponding income tax values of assets and liabilities
using enacted income tax rates expected to be in effect for the
year in which the differences are expected to reverse. The Company
establishes a valuation allowance against future income tax assets
if, based on available information, it is more likely than not
that some or all of the future income tax assets will not be
realized.
i. Stock option plan
The Company has a stock option plan which is described in note
4(d). The Company uses the Black-Scholes option pricing model to
determine the fair value of stock options.
j. Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at exchange rates in effect
at the consolidated balance sheet dates. Non-monetary assets and
liabilities are translated at rates of exchange at each
transaction date. Revenue and expenses are translated at the
average rate of exchange for the year. Gains or losses on foreign
currency translation are included in loss.
k. Use of estimates
The preparation of these consolidated financial statements, in
accordance with Canadian generally accepted accounting principles,
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ
from those estimates.
2. PROPERTY, PLANT AND EQUIPMENT
Accumulated Net
Cost Amortization Book Value
---- ------------ ----------
June 30, 2007
-------------
Computer equipment $2,893,587 $2,589,076 $304,511
Furniture and equipment 1,112,293 972,185 140,108
Leasehold improvements 504,773 504,773 -
Computer software 1,667,455 1,584,128 83,327
Assets-in-progress 247,787 - 247,787
------- ------- -------
$6,425,895 $5,650,162 $775,733
---------- ---------- --------
---------- ---------- --------
June 30, 2006
-------------
Computer equipment $2,812,686 $2,465,228 $347,458
Furniture and equipment 1,108,921 937,694 171,227
Leasehold improvements 504,647 504,647 -
Computer software 1,606,801 1,501,655 105,146
Assets-in-progress - - -
--------- --------- -------
$6,033,055 $5,409,224 $623,831
---------- ---------- --------
---------- ---------- --------
Since July 2006, the Company has commenced development of new
processing systems for its Canadian credit card loyalty programs. The
costs incurred to date on this project approximate $247,787 and are
included in property, plant and equipment. Amortization will commence
when these systems are in use.
3. CONVERTIBLE DEBENTURES PAYABLE AND DEFERRED FINANCING CHARGES
In 2003, the Company issued $4,000,000 of senior convertible
debentures (the convertible debentures) for net proceeds of
$3,542,498, after issuance costs of $457,502. The conversion price of
the debentures was $0.17 per common share. In accordance with The
Canadian Institute of Chartered Accountants Handbook Section 3855
"Financial Instruments" (CICA 3855), the convertible debentures were
bifurcated into debt and equity portions. The amount allocated to the
equity portion of the convertible debentures, net of allocated
financing costs of $70,457, was $546,315. The debt portion of the
convertible debentures is being accreted to its face value at
maturity over the term of the debt by way of a charge to interest
expense.
In December 2003, in exchange for an amendment to the convertible
debenture agreement, the conversion price of the convertible
debentures was reduced to $0.15 per common share. As a result of this
amendment, an additional $333,993, net of $35,100 of financing costs,
was allocated to the equity portion of the convertible debentures.
In July 2004, the Company issued an additional $125,000 of
convertible debentures with the same terms as the previously issued
convertible debentures, except that the conversion price was
$0.13 per common share.
In March 2006, $150,000 of the convertible debentures were converted
at the exercise option price of $0.15 per share for 1,000,000 common
shares of the Company. A proportionate amount, $32,011, was
transferred from the equity portion of convertible debentures to
capital stock related to this conversion.
In November 2006, the Company issued an additional $2,025,000 of
convertible debentures and revised the terms of the convertible
debentures. The term of the convertible debentures was extended to
December 2011 and the conversion price was reduced to $0.10 per
common share. In addition, the Company is now allowed, under certain
conditions, to obtain additional secured debt financing.
Costs related to the revision of the convertible debentures terms and
issuance of additional convertible debentures totalled $407,343 and
included $10,000 for 500,000 compensation warrants issued to the
financing agent of the transaction.
The convertible debentures bear interest at 10% per annum payable
semi-annually in arrears in June and December of each calendar year,
mature on December 9, 2011 and are secured by a general security
interest over assets of the Company and its subsidiaries. The
significant financial covenants of the convertible debentures require
the Company to meet a defined level of working capital at each
quarter and interest coverage commencing the quarter ending on
March 31, 2008. On May 11, 2007, the working capital covenant was
amended, from fiscal quarter-end commencing on March 31, 2007, to a
current asset test. Management expects to meet these covenants. If
the Company is in breach of any of the covenants over the term of the
subordinated debt, management intends to work with the lenders to
obtain a waiver or renegotiate the terms of the covenants. The
Company met its covenants during the year ended June 30, 2007.
In accordance with CICA 3855, the fair value of the new convertible
debentures was bifurcated into debt and equity portions and a fair
value adjustment was applied to the conversion option of the existing
convertible debentures. Accordingly, $1,387,822 was allocated to the
equity portion of the convertible options. In addition, financing
costs of $121,778 were allocated to the equity portion of the
convertible debentures.
The Black-Scholes option pricing model was used to determine the fair
value of the conversion feature in the convertible debentures. The
following assumptions were used in the Black-Scholes option pricing
model:
Common share price: $0.05
Exercise price of conversion option $0.10
Expected life of conversion option 5 years
Expected volatility 89%
Risk-free interest rate 3.75%
A summary of the debt and equity portions of the convertible
debentures and the related balance of deferred financing charges is
as follows:
Deferred
Debt Equity financing
portion portion costs
------- ------- -----
Balance June 30, 2005 3,459,695 880,308 292,844
Amortization of issuance costs - - (103,674)
Conversion of debenture (150,000) (32,011) -
Accretion charge 209,011 - -
------- ------ -------
Balance June 30, 2006 3,518,706 848,297 189,170
Issuance of additional debt 637,178 1,387,822 -
Issuance costs - (121,778) 285,565
Amortization of issuance costs - - (90,141)
Accretion charge 271,045 - -
------- ------- ------
Balance June 30, 2007 4,426,929 2,114,341 384,594
--------- --------- -------
--------- --------- -------
$6,000,000 will be repayable on maturity of the convertible debenture
on December 9, 2011.
4. CAPITAL STOCK
(a) Authorized
Class A preference - 500,000 shares non-voting, non-
participating, redeemable (at stated capital amount),
8% (of stated capital amount) non-cumulative dividend rate
Class B preference - Unlimited number of shares, issuable in
series with rights, privileges, restrictions and conditions
determined by the Board of Directors at time of issue
Common - Unlimited number of shares
(b) Issued Class A preference shares
2007 2006
---- ----
459,781 shares $3,815 $3,815
------ ------
------ ------
(c) Issued common shares
Number Amount
------ ------
Balance as at June 30, 2006
and 2007 97,030,868 $24,106,281
---------- -----------
---------- -----------
(d) Stock options
The Company has a stock option plan for directors, officers,
employees and consultants. The stock options are non-assignable;
the stock option price is to be fixed by the Board of Directors
(but may not be less than the closing price on the day
immediately preceding the date of the grant of the stock option);
the term of the stock options may not exceed five years, and
payment for the optioned shares is required to be made in full on
the exercise of the stock options. The stock options are subject
to various vesting provisions, determined by the Board of
Directors, ranging from immediately to four years. On January 26,
2006, the Company received approval from the shareholders to
amend its stock option plan from a fixed maximum number of common
shares issuable to a rolling maximum number of common shares
issued and outstanding (calculated on a non-diluted basis).
A summary of the status of the Company's stock option plan as at
June 30, 2007 and 2006, and changes during the years then ended
is presented below:
2007 2006
---------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- ----------
Outstanding at the
beginning of the year 5,267,500 $0.10 2,927,500 $0.40
Granted 3,000,000 0.06 4,735,000 0.09
Forfeited and expired (287,500) 0.11 (2,395,000) 0.43
---------------------------------- -----------
Outstanding at the
end of the year 7,980,000 0.08 5,267,500 $0.10
--------- ---------
--------- ---------
---------------------------------- -----------
Options exercisable at
the end of the year 6,510,833 4,500,000
---------------------------------- -----------
During the year, 2,625,000 stock options were issued to certain
directors at an exercise price of $0.055 and vested immediately.
The exercise price was fixed at the closing price on the day
immediately preceding the date of the grant.
The following table summarizes information about stock options
outstanding as at June 30, 2007:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
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0.055-0.150 7,580,000 3.3 $0.07 6,350,833 $0.07
0.155-0.250 400,000 3.9 0.20 160,000 0.20
------- ------- ----
7,980,000 3.3 $0.08 6,510,833 $0.07
--------- ---------
--------- ---------
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The number of stock options available for future issuance as at
June 30 is as follows:
2007 2006
---- ----
Maximum number reserved for issuance 9,703,087 9,703,087
Less: Outstanding at end of year (7,980,000) (5,267,500)
----------- -----------
Number of options available for
future issuance 1,723,087 4,435,587
--------- ---------
--------- ---------
The Company calculated the fair value of the stock options issued
during 2007 using the Black-Scholes option pricing model and
determined their value to be $113,045 (2006 - $210,907); $168,775
of stock option expense for the year ended June 30, 2007 was
recorded in these consolidated financial statements, and is
reflected as increase in the contributed surplus. The assumptions
used in the model were:
2007 2006
---- ----
Expected life of stock option 1 to 5 years 1 to 5 years
Expected volatility of common
share price 74 to 100% 74 to 100%
Risk-free rate of return 5.0%-5.5% 5.5%
(e) Shareholders' rights plan
Under the shareholders' rights plan, certain rights become
exercisable and permit shareholders to purchase common shares
from the Company at 50% of the then current market price if any
entity or person acquires or announces an intention to acquire
20% or more of the common shares, other than with the approval of
the Board of Directors or pursuant to the "permitted bid"
procedures, as defined by the shareholders' rights plan. The
shareholders' rights plan expires on July 10, 2007. The Company
intends to renew this plan.
(f) Incentive Warrants
On February 6, 2001, the Company agreed to issue up to 55,000,000
incentive warrants to Air Canada and CIBC, allocated on a 50:50
basis. A total of 175,974 incentive warrants was issued under the
agreement. The Incentive Warrants expired between January 2, 2006
and January 2, 2007.
On July 12, 2005, the Company and CIBC signed a supplementary
agreement in which CIBC waived its right to any additional
incentive warrants.
5. DISCONTINUED OPERATIONS
The Company sold its Samplex business in fiscal 2005 by way of an
asset sale as it was determined not to be core to the Company's
objectives. Under the terms of the sale agreement, the purchaser
acquired substantially all of the net assets of Samplex including
accounts receivable, inventory and accounts payable and accrued
liabilities. The Company was entitled to receive additional
consideration during the year ended June 30, 2006 based on the
occurrence of certain events. During the year ended June 30, 2006, a
net amount of $100,000 was received and classified as earnings from
discontinued operations in the consolidated statement of loss, and
was classified as net proceeds on sale of business in the
consolidated statement of cash flows.
6. FINANCIAL INSTRUMENTS
(a) Credit risk
Credit risk arises from the possibility that counterparties will
be unable to discharge their obligations. The Company routinely
assesses the financial strength of its merchants and, as a
consequence, believes that risk exposure is limited in its
accounts receivable and transaction credits.
(b) Currency risk
The Company is exposed to foreign exchange risk as a portion of
its revenue is earned in US dollars and it has assets and
liabilities that will be settled in US dollars. Foreign exchange
risk arises due to fluctuations in foreign currency rates, which
could affect the Company's financial results.
Included in the undernoted accounts are the following:
2007 2006
-----------------------
Cash and cash equivalents $365,113 $428,791
Accounts receivable 522,665 458,370
Accounts payable and accrued
liabilities 455,476 239,362
(c) Fair value
The carrying values of cash and cash equivalents, accounts
receivable, transaction credits, accounts payable and accrued
liabilities approximate their fair values due to the short-term
maturity of these instruments.
The stated value of the convertible debenture payable
approximates its fair value, as its interest rate is
representative of current market rates for loans with similar
terms, conditions and maturities.
(d) Interest rate risk
The Company is exposed to price risk on the convertible
debentures payable, as this amount is subject to a fixed interest
rate.
7. LOSS PER COMMON SHARE
Loss per share is calculated on the basis of net loss divided by the
weighted average number of common shares outstanding for the year.
Diluted loss per share is calculated using the treasury stock method,
giving effect to the exercise of all dilutive instruments. Diluted
loss per share information has not been presented, as the effect of
potential exercise of the convertible debenture, stock options and
warrants would be anti-dilutive.
8. INCOME TAXES
The Company has $19,324,000 (2006 - $20,005,000) of non-capital
losses available to be applied against future taxable income. The
losses expire as follows:
Year ending June 30, 2008 - $3,869,000
2009 - 1,959,000
2010 - 2,344,000
2011 - 1,154,000
2015 and thereafter - 9,998,000
---------
$19,324,000
-----------
-----------
The income tax effect of these losses and other temporary differences
give rise to future income tax assets against which a valuation
allowance has been applied as follows:
2007 2006
---- ----
Income tax effect of:
Non-capital losses carried
forward $6,980,000 $7,328,000
Property, plant and equipment (103,000) 9,000
Deferred financing charges (9,000) 88,000
Research and development 65,000 65,000
Other 27,000 27,000
------ ------
6,960,000 7,517,000
Valuation allowance (6,960,000) (7,517,000)
Future income taxes $ - $ -
---------- ----------
---------- ----------
9. LEASE COMMITMENTS
The Company is committed to minimum rental payments under existing
leases for equipment and premises for the next five years as follows:
Year ending June 30, 2008 215,928
2009 48,521
2010 9,638
10. RELATED PARTY TRANSACTIONS
The following transactions are in the normal course of business and
are measured at the exchange amount of consideration established and
agreed to by the related parties:
(i) On January 17, 2006, the Company entered into an agreement
appointing Notre-Dame Capital Inc. (Notre-Dame) to act as its
exclusive agent in connection with a series of financing
transactions. In addition, Notre-Dame was appointed as the
Company's exclusive financial advisor for a period of two years
from January 17, 2006. The agreement was terminated by the
Company effective February 5, 2007. The agreement allowed the
agent to earn a commission on issuance of common shares and
debentures plus, in case of common shares, stock options
corresponding to 10% of the common shares sold. On March 14,
2006, the Company issued 37,037,037 common shares by way of a
private placement and in its capacity as agent for the private
placement, Notre-Dame earned and was paid commission of
$287,770 and received 3,552,716 stock options exercisable at
the offering price of 8.1 cents per share for a period of 24
months from the closing date of the placement. In its capacity
of financial adviser, Notre-Dame was paid a monthly fee of
$3,000. The president and managing partner of Notre-Dame has
been a director of the Company since January 26, 2006.
(ii) As at June 30, 2007, the following related parties are holders
of the convertible debentures described in note 3:
Principal
Title Amount
------
Chief Executive Officer $ 50,000
Directors $290,000
Interim CFO $ 40,000
(iii) During the fiscal 2006, a director of the Company was a partner
with the law firm engaged by the Company to provide legal and
tax services. During 2006, the Company paid $129,680 for
services provided by this firm.
11. ECONOMIC DEPENDENCE
A significant portion of the Company's current revenue is dependent
upon its offline value-added loyalty program agreement with CIBC
under which Aeroplan Miles are awarded to holders of certain CIBC
Visa credit cards. The Company purchases Aeroplan Miles from CIBC,
which in turn purchases Aeroplan Miles from Aeroplan LP, a subsidiary
of ACE Aviation Holdings Inc.
The agreement with CIBC was renewed in July 2005, for an additional
term ending on December 31, 2009. The agreement may be renewed for a
further three years upon mutual agreement. If CIBC terminates its
offline value-added loyalty program agreement with the Company, this
could materially and adversely affect the Company. However, CIBC can
only terminate such agreement with the Company if the Company is in
material breach thereof. In the event that the agreement expires or
is terminated by the Company as a result of a breach by CIBC, CIBC is
not entitled to offer a similar offline program to its Visa
cardholders for a period of six months and the Company will be
entitled to offer such cardholders a similar replacement program on
the Company's behalf.
As part of Air Canada's restructuring under the Companies' Creditor
Arrangement Act in 2004, Air Canada and CIBC entered into a new
contract under which CIBC is entitled to purchase Aeroplan Miles,
which will be available to support the CIBC Aerogold ADVANTEX BENEFIT
program respecting restaurants, golf courses, and small inns and
resorts. If Aeroplan Miles cease to be available for award in respect
of purchases by holders of CIBC Visa credit cards, the Company has
agreed to offer to such cardholders the same rewards as CIBC offers
to them as a replacement for Aeroplan Miles, so long as the per unit
cost of such rewards to the Company is the same or less than the
Company's per unit cost of Aeroplan Miles.
12. RESTRUCTURING COSTS
Restructuring costs of $1,088,657 are primarily severance payments
due to former employees, of which $450,856 (2006 - $ nil) is payable
one year after June 30, 2007 and is disclosed as long-term other
liabilities on the balance sheets.
13. COMPARATIVES
Certain of the comparative figures have been reclassified to conform
to consolidated financial statement presentation adopted in the
current year.
%SEDAR: 00004122E