10KSB 1 c41897_10ksb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ------------- (Mark One) [X] Annual Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year ended December 31, 2005. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________to______________ Commission File No. 000-27773 PERFISANS HOLDINGS, INC. ------------------------ (Exact name of registrant as specified in its charter) Maryland 91-1869317 -------- ---------- (State or other jurisdiction (I.R.S. Employer of Incorporation) Identification No.) 7828 Kennedy Road, Unit #201, Markham, Ontario L3R 5P1 (Address of principal executive offices) Registrant's telephone number, including area code: (905) 943-9996 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each Exchange on which Registered ------------------- ----------------------------------------- Not Applicable None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value ------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter prior that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Yes No X -- -- The issuer's net sales for the most recent fiscal year were $17,242 The aggregate market value of the voting stock held by non-affiliates based upon the last sale price on April 16, 2006 was approximately $8,100,000 As of April 16, 2006 there were 44,030,740 shares of common stock, par value $0.001 per share, outstanding. TABLE OF CONTENTS ----------------- Page ---- PART I ............................................................... 1 Item 1. Business ........................................... 1 Item 2. Properties ......................................... 11 Item 3. Legal Proceedings .................................. 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II .............................................................. 13 Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ................................ 13 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 15 Item 7. Financial Statements ........................... F-1 to F-24 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 21 Item 8A. Controls and Procedures ............................ 21 PART III ............................................................. 22 Item 9. Directors and Executive Officers of the Registrant . 22 Item 10. Executive Compensation ............................. 25 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......... 27 Item 12. Certain Relationships and Related Transactions ..... 28 Item 13. Exhibits and Reports on Form 8-K ................... 28 Item 14. Principal Accountant Fees and Services ............. 29 PART I ITEM 1. BUSINESS COMPANY HISTORY We were incorporated in the State of Maryland on October 14, 1997 under the name Griffin Industries, Inc. We had no operations prior to the acquisition of Perfisans Networks Corporation. On December 3, 2003, we amended our Articles of Incorporation to change our name to Perfisans Holdings, Inc. Prior to the acquisition, Global Funding Corp. was our controlling shareholder and Paul Adams was our sole officer and director. Global Funding Corp. was controlled by Landon Barretta. THE PERFISANS ACQUISITION On December 19, 2003, we acquired all of the capital stock of Perfisans Networks Corporation, a Canadian company registered in the Province of Ontario. As a result of the acquisition, Perfisans Networks Corporation became a wholly owned subsidiary of ours. In connection with the acquisition, we issued an aggregate of 32,942,967 shares of our common stock and 5,627,493 warrants to purchase our common stock to the shareholders of Perfisans Networks Corporation in exchange for all the issued shares of Perfisans Networks Corporation. In connection with the acquisition, Perfisans Networks Corporation also paid an aggregate of $200,000 in cash which was used to pay off all of the outstanding obligations of Perfisans Holdings. In exchange, for such payment shareholders of Perfisans Networks Corporation were issued an additional 2,468,866 shares of our common stock, which was distributed to Perfisans Networks' pre-acquisition stockholders. Immediately following the acquisition, the shareholders of Perfisans Networks owned approximately 95% of our common stock. There were no other control persons prior to the acquisition. The terms of the transaction were established by arms-length negotiations between Perfisans Holdings, Inc., Global and Perfisans Networks Corporation. Global was 100% owned by Landon Barretta. We own 100% of the capital stock of Perfisans Networks Corporation, through which all of our operations are conducted. Perfisans is a technology company focused on the development of cost effective, high performance network processing and storage chips. Perfisans is now in the process of going through the testing and quality assurance of the chips manufactured. Perfisans has also started the marketing of the chips. As of the date hereof, Perfisans has not made any sales of its computer chips. THE TECHNOLOGY AND COMMUNICATIONS SYSTEMS ARE THE FOCUS OF PERFISANS' PRODUCT MARKETING. World commerce, government, scientific, military and other activities today rely on the rapid, reliable and accurate transfer of business information, scientific data, and correspondence between individuals and organizations. This sharing and transfer of data and other information occurs locally within organizations, between groups of organizations, within communities and countries, and internationally around the world. This sharing and transfer of information is done by means of internal and external systems known as networks. A network within an organization is typically known as a Local Area Network (LAN), or an Intranet, and an external network between organizations is generally referred to as a Wide Area Network (WAN). Similarly, a network operating in a city or other such community is often referred to as a Metropolitan Area Network, or MAN. The term Extranet is also used to denote networks used by companies to communicate with suppliers and customers. The data and other information are transmitted within and between these networks. In this explanation, the term "data" is used to denote business information, scientific data and correspondence. To enable this sharing of information within a LAN, an agreed language or convention or "standard" must be used so that the various computer systems can effectively communicate with each other. One commonly used such standard is known as "Ethernet", which has become the de-facto LAN standard. The rate, or speed, at which data is transferred, is a critical factor in determining the efficiency of the network. The data transfer speed is expressed in terms of the number of millions of bits of data, which are transferred per second, or "Mega bits per second". This is abbreviated to "Mbps". Typical speeds encountered are 10 Mbps and100 Mbps, with "10/100Mbps" being the common acronym. To meet the demand for faster data throughput, a speed of 1000Mbps is now targeted in the networking industry. 1000Mpbs is also known as "Gigabit". A network is basically a system comprising several computers which are connected either directly by cables or wireless, and through local, national and international telephone networks. A widely known communication system is the "Internet", or "World Wide Web". Communication between these computer systems is accomplished using devices and systems known as Network Interface Devices or Systems. Typically these Network Interfaces take the form of a printed circuit board known as a Network Interface Card (NIC). NICs are typically installed in personal computers, "routers" and "servers". As the name implies, a "router" is a device which directs, or routes, information across a network to the desired end location. A "server" is generally a powerful computer which, together with the interconnecting cables, telephone systems, etc., form the framework - or "backbone" - of networks. To ensure that data is transferred across networks and delivered to the correct end location, and with no errors in the information, it is necessary to process and manipulate the data in a complex way. This data processing and manipulation involves the adherence to internationally adopted rules, or "Protocols". These are typically referred to as the "Transmission Control Protocol" and the "Internet Protocol", which are generally abbreviated to the acronym "TCP/IP". The TCP/IP process requires that the data be split up into small groups of data called "packets", to which are added a considerable amount of "overhead" data which is used to ensure the correct routing of the data across the networks. The addition of the TCP/IP data is known as "overhead", since it results in an additional burden on the processors in the network components. The actual data that is desired to be transferred is known as "payload". With the growth of globalization and the advance of developing countries, etc., it is generally recognized that the amount of such data and other information that is being sent locally, nationally and around the world is continually growing, and in turn requires the continual enhancement of both the computer systems involved and the NIC technology. Management believes that it is this ongoing need for the enhancement of the NIC technology that presents growing business opportunities for the application and use of Perfisans Networks technology and products. The quality and efficiency of the technology utilized in such NICs is critical to the successful, rapid and reliable sharing and transmitting of data. Perfisans Networks technology and devices are designed to increase speed and the ability to share data. Perfisans delivers its technology in what Management believes to be a cost effective solution embodied in silicon chips, or semiconductors. The rate, or speed, at which data is transferred across networks, is critical since the growth of business and other activity results in an ever-increasing amount of data being transferred. In turn, the ability of the various computer, router and server components, that make up the networks, to "keep up" with this increasing traffic (also referred to as "bandwidth") in data is being stretched to the limits of the technology used in these various network component systems. This results in "bottlenecks" within the networks which ultimately slows down the transfer of data. This situation is further aggravated by the burden, referred to above, of managing the "TCP/IP overhead" in the data stream, which accounts for a large portion of the processing power available. The need therefore arises for NIC technology, which can alleviate this problem by eliminating the bottlenecks. Perfisans has designed a Gigabit Ethernet solution, which is designed to significantly reduce the need for the network processors to devote a large portion of their processing power to managing the TCP/IP overhead. This is known as "TCP/IP Off-Load", and the Perfisans chip is therefore known as a "TCP/IP Off-Load Engine", or "TOE". The markets for Perfisans' TOE devices are therefore all users of NIC cards, which includes manufacturers of laptop and desktop computers, routers, servers, Storage Area Networks (SAN). LAN, MAN, and WAN systems. An important additional market segment is the Small Business Home Office sector, known as "SOHO", which includes individual consumers. Perfisans intends to address all of these markets with what Management believes are competitively priced products. In addition to NIC cards, Perfisans chips will be installed directly on motherboards in desktop and laptop computers, thereby conserving space where it is at a premium, and in "host bus adapters". The "host" is the computer in which the NIC or Perfisans chip is installed, and incorporates the processor (CPU) which normally has the job of managing the entire data packet. Management believes that computer networking is a growing segment of the Information Technology (IT) industry. Although PC networking began to be used widely in the 1980s with the rise of client/server computing, a number of recent trends have greatly accelerated their adoption and expansion. As firms try to enhance efficiency and worker productivity to remain competitive, they are increasing their use of Intranets for shared applications and internal files, Extranets to connect to external suppliers and customers, and the Internet. In addition, the growing number of network users and the increasing average size of electronic files sent through them require networks with greater speed and bandwidth, driving users to upgrade or expand their networking technologies. Management believes that the current drive presents an opportunity for Perfisans to meet the demand for optimized network solutions by developing a family of products (chips) to address the Storage Area Network (SAN), LAN, MAN, and WAN. Management intends to use marketing strategies and tactics based on Perfisans capabilities and benefits to develop and maintain strong, sustainable competitive positions in the Consumers, SOHO, and Enterprise markets. A key component of our marketing strategy will be the development of partnerships with industry leading OEMs (original equipment manufacturers) and non-competing chipmakers, in order to gain exposure to maximum market share in the shortest possible time. Management believes that our TOE technology alleviates the growing bottleneck experienced by networks and significantly increases the data throughput speed in increasingly complex network applications in video-over-internet protocol, voice-over-internet protocol, SOHO applications and storage networking. Perfisans TOE technology, is designed to (a) conserve space in PCs by inserting our network chip in the "motherboard", and (b) avoid the cost of replacing or rebuilding existing network infrastructure due to our TOE chip's backward compatibility with 10/100Mbps systems. Perfisans has developed an additional technology, the System Network Accelerator (SNA). Our SNA is designed to provide a carefully balanced hardware and software implementation, partitioning and filtering of different network information, in a system where different network situations are handled by different paths in the chip architecture. We are in the process of registering a US patent on our SNA technology, and intend to market our technology to the niche market created through the rapid expansion of networking standards to Gigabit Ethernet technology. We believe that our relationships with various OEM groups and non-competing chipmakers in the Far East will assist us in marketing our technology. INDUSTRY OVERVIEW o Our Management estimates that the Gigabit Ethernet market has been projected to be a multi-billion dollar market, by the industry. o We believe that success in the semiconductor industry goes to the company which succeeds in being the first to market. Prime examples are ATI Technologies in the graphic chips market and Genesis Microchip in the flat panel display market. Our first product is presently under initial production (pilot) testing and Management anticipates shipping the product in the 2nd quarter of 2006. o We are targeting the SOHO market with our microchip and "Internet Small Computer Systems Interface" (iSCSI) products, particularly in the storage-networking segment, which is characterized by high volume, low cost semiconductor solutions. (iSCSI interfaces are an important component in current network interfaces for small computers.) Ethernet based communications is the de-facto technology for Local Area Networks (LAN) today. Ethernet was initially designed when networking speeds were much slower, and when host system Central Processing Unit (CPU) resources were considered more than ample. However, the inexorable rise in network throughput to today's Gigabit levels has not been accompanied by commensurate increases in host CPU resources. This scenario has created a serious and growing bottleneck in networks, with a consequent poor overall network performance. Processing network traffic overhead can now consume 80% of the CPU resources, thus leaving few resources for applications processing and sharply limiting network performance, speed, and scalability. As Internet applications continue consuming more CPU resources, such as in the case of popular applications such as File Transfer, Rich Media Streaming, Voice over Internet Protocol (VOIP), Video over IP, Storage Networking and Content Delivery Network, there will be an increasing need to off-load the processing of the TCP/IP protocol from the host CPU. As previously explained, the main reason for network bottlenecks is that the need for the host computer to process the TCP/IP overhead, in addition to processing the data payload, significantly slows down the effective network speed. The Technical Solution As previously explained, Management believes that Perfisans Gigabit Ethernet TOE products, embedded in the Network Interface Card (NIC) will yield significant increases in data throughput. Our technology significantly reduces drag on the network speed by freeing up the host computer processor to concentrate on processing the payload data. In addition, Perfisans TOE chip's backward compatibility with older 10/100 Mbps network systems is designed to eliminate the need for the operator to invest in costly system upgrades or replacements. The benefits accrued in breaking the bottleneck caused by TCP/IP processing in the host system lies in gaining the benefits of higher performance networking applications. This not only immediately benefits current server and desktop Gigabit Ethernet applications, but accelerates the two paradigm shifts in modern computing: (a) networked storage and (b) client/server-based computing. Management believes that as network throughputs further outpace processor speeds, the advantages of TOE will become even more indispensable as these trends accelerate. Management believes that the sharing of online information, data, and resources among multiple devices at home and in offices is becoming increasingly important. Management believes that Internet use by home and small businesses has increased dramatically over the past several years, and expects it to expand rapidly in the future as more consumers are able to access the Internet at broadband speeds. As networking grows in popularity, Ethernet network link speeds have been increasing. The growth of Ethernet data throughput from 10 Mbit/sec to 10 Gbit/sec has surpassed the increase in microprocessor performance in mainstream servers and central processing units (CPU) incorporated in the computer systems. The growth in the ready supply of network bandwidth and the proliferation of high performance fibre has resulted in Internet traffic that is increasingly dominated by rich-media content. Graphic intensive applications such as video-email, video conferencing, online presentations and desktop delivery of movies over the Internet, have become the norm. Management sees no signs that this growth in network data throughput and storage is declining. Management believes that the rapidly pressing need to alleviate the bottleneck caused by weak host CPU being thus increasingly burdened with both processing the ever faster payload transfer speeds, as well as the TCP/IP protocol, presents a growth business opportunity to Perfisans. STORAGE NETWORKING BASICS As described above, Management believes that current trends show that there are significant and continuing opportunities in the network data processing and storage industry. The necessity to process and store this growing amount of data securely is of critical concern, particularly for small businesses, home consumers, corporations and other organizations that all require more effective and efficient ways to transfer, store and maintain this information. Management believes that the marketplace demands simple, affordable storage in order to manage and store the burgeoning amount of data and that this demand will shape the way data storage is handled in the future as more and more information is passed between users across Global networks such as the Internet, and Local and Wide Area Networks. There are currently three main choices for storing information in the computing industry: DIRECT ATTACHED STORAGE (DAS) consists of a disk drive attached directly to a server. Information is transferred using small computer system interface (SCSI) commands that allow the computer and hard drive to communicate. Although effective, there are limitations to using DAS, including high management costs, distance limitations, and limited scalability. Furthermore, in order to increase storage capacity, more servers must be purchased and, due to the limitations of SCSI (network interfaces for small computers) devices, DAS must be located within 12 meters of the server. NETWORK ATTACHED STORAGE (NAS) is a file-based storage architecture with resources attached directly to the Local Area Network (LAN), this gives it tremendous flexibility. In order to store data, the information is transmitted over the network. The increased network traffic is a drawback as it can burden and degrade the performance of the LAN and scalability is therefore limited. This storage method is less expensive as storage management can be performed using existing information technology (IT) staff with minimal training in storage management. STORAGE AREA NETWORKS (SAN) are dedicated networks that connect servers to storage devices. This system allows the transport of data storage traffic without burdening the enterprise LAN. Several factors make SAN's attractive including performance, reliability, availability, scalability and ease of management. Typically, Fibre Channel is used for SAN networks, and this has results in very high implementation and maintenance costs. In addition, Fibre channel storage networks (FC-SAN) are also extremely difficult to install and maintain, due to the limited expertise of existing IT staff. EMERGENCE OF THE INTERNET PROTOCOL STORAGE AREA NETWORK (IP-SAN): As previously mentioned, internet-related data (personal, business and commercial), which is typically multimedia, can potentially overwhelm existing storage backup systems. This has led to a rapidly emerging technology solution - INTERNET PROTOCOL-STORAGE AREA NETWORK (IP-SAN). INTERNET PROTOCOL-STORAGE AREA NETWORK (IP-SAN): The aim here is to "universalize" storage networking by getting both message/file and storage I/O (input/output) onto an Ethernet/IP network and ultimately "converging" networking and storage architectures. Ethernet has become the most popular networking protocol as it is inexpensive and offers simple and quick implementation. IP-based storage networking will simplify the management of, and reduce the total cost of, ownership, specifically by utilizing existing network administrators to manage both the local area network (LAN) and storage area networks (SAN). In IP-based network storage solutions, an Internet Small Computer System Interface (iSCSI) network interface card (commonly known as Host Bus Adapter) or network interface card (NIC) connects the storage resources over Ethernet. Core transport layers can then be managed using existing network management applications. This simple, yet powerful technology can help provide a high-speed, low-cost, long distance storage solution. (The TCP/IP data in the data packet previously referred to is basically arranged in a series of standard positions in the packet, called "layers". The layer referred to in this case is the position which deals with the transport of the data across the network.) Users of Internet Protocol Storage Area Network (IP-SAN): Internet Protocol Storage Area Networks are most suitable for organizations with a need for streaming data, or which require large amounts of data to be stored and/or transmitted over the network. These include: o Internet Service Providers (ISPs) and Storage Service Providers (SSP); o Organizations that need remote data replication and disaster recovery; o Geographically distributed organizations that require access to the same data on a real time basis; and o Businesses and institutions with limited IT resources, infrastructure and budget. PERFISANS' GIGABIT + TOE PRODUCTS: We have developed a series of low cost and high volume semiconductor Application Specific Integrated Circuits (ASIC) to handle offloading of the TCP/IP processing from the CPU. Management believes that Perfisans Gigabit + TOE products will contribute to the trend to replace existing, slower 10/100 Mbps network interface cards with faster cards with technology that facilitates data transfer speeds up to 10Gbps. These chips utilize the TOE technology to produce higher transfer speeds across networks using existing NIC architecture. Management believes that these chips will greatly address the needs of the emerging IP-SAN market and offer significant enhancements to the Gigabit Ethernet market. We have completed the design of a single port gigabit network interface controller ENA1001 and released the product to the market. The company has also commenced meeting prospective customers with samples of this product. We have also completed the design of a single port gigabit network interface adapter card ENA5031 using our single port gigabit network interface controller ENA1001. This adapter serves two purposes. One is as the demonstration vehicle for the ENA1001 controller. We will also sell this single port gigabit network interface adapter card ENA5031 to the computer system integrators. We have identified three market segments with potential need for our chips: o Consumer o Small Office Home Office (SOHO) o Enterprise (large organizations networking) Market. The markets for Perfisans TOE devices are all users of NIC cards, which includes manufacturers of laptop and desktop computers, routers, servers, Storage Area Networks (SAN). LAN, MAN, and WAN systems. In addition, an important additional market segment is the Small Business Home Office sector, known as "SOHO", which includes individual consumers. Perfisans intends to address all of these markets with competitively priced products. In addition to NIC cards, Perfisans chips will be installed directly on motherboards in desktop and laptop computers, thereby conserving space where it is at a premium, and in "host bus adapters", The "host" is the computer in which the NIC or Perfisans chip is installed, and incorporates the processor (CPU), which normally has the job of managing the entire data packet. PERFISANS TECHNOLOGY Perfisans technology utilizes System-On-A-Chip (SOC) designs and our chips require no software programming to be done by the customer. MANUFACTURING Although Perfisans believes that it has a choice of several leading semiconductor foundries for the manufacture of its chips, to date it has utilized OKI Semiconductor Company in Japan to manufacture its sample chips. Purchase orders will be made between us and foundries, which manufacture products of this type. The purchase orders typically will cover the cost and lead times of the products being produced. RESEARCH AND DEVELOPMENT We have invested significant resources towards research and development activities in order to develop our products. These expenses are expected to be 100% borne directly by customers. These costs will be built into the selling price of products. INTELLECTUAL PROPERTY Perfisans Networks Corporation's SNA (Storage Network Accelerator) Technology effectively addresses the network-processing bottleneck by processing the network protocol, including TCP/IP and iSCSI in the Perfisans chip, thereby sharply reducing host processor overhead. The technology is implemented by using a carefully balanced hardware and software implementation, partition and filtering of different network information. Different network situations are handled by different paths in the architecture. This approach is unique to Perfisans and Management filed a provisional patent application (Patent No. 60/495,518) covering this technology in August 2003. There can be no assurance that such patents and trademarks will be granted or if granted that they will successfully protect our proprietary technology and trade secrets. For branding purposes, management intends to trademark Perfisans' logo. COMPETITION The market for TCP/IP Offload engine products is characterized by rapid technological advances, frequent new product introductions, evolving industry standards and competitive pricing. Companies in the market compete based on price point and the ability to deliver innovative products. As this is an emerging market, management expects our competitive pressure to come from both start-ups and traditional network component vendors. Although the Network Processor Units (NPU) segment presently contains numerous start-ups, management believes that it has a wide enough head start to gain and hold 'mind share' and market share in this segment of the Network Processor Units arena. This is critical in the computing industry as Management believes that the company that launches its product first can easily capture a significant market share. Some of our competitors have positioned their products at the low end of the industry. This portion of the industry has the characteristics of a commodity market with minimal product performance, low and unpredictable average selling prices (ASPs), continual price pressure and consequent unpredictable gross margins. We had positioned our products at the high end of the industry with high guaranteed performance levels, in order to attract higher and more predictable ASPs and gross margins. In comparison to our primary competitors, Management believes that Perfisans possesses key competitive advantages, and that Perfisans strength lies in its ability to deliver highly integrated, and fully featured products, and in-depth support to our customers through their entire product development cycle in a partnership business relationship. This approach will ensure rapid times to market for our customers, while also enabling us to secure the edge in capturing new customer business ahead of our competition, and the potential to win repeat volume business at predictable and high ASPs and gross margins. We will employ this partnership business model to capture an increasing share of the strategic Original Equipment Manufacturers (OEMs) who serve the key SOHO and home networking markets. Management believes that other competitors in the TOE/Storage network processor market are primarily targeting the enterprise market. Management believes that our primary competitors are Aegis Broadband Inc. and Marvell Technology Ltd. Sustainable Competitive Advantage We have designed our initial portfolio of products (SNA1000 series and SNA3000 series) with what Management believes to be strong sustainable competitive advantages, including: Superior performance and design The SNA architecture delivers high performance data path optimization and a protocol engine with software flexibility and true wire speed delivery that maximizes the utilization of the wire bandwidth. There is no data replication or copying during data processing so data transfer speed is optimized. It easily scales to 10 Gbps and beyond through straightforward semiconductor process scaling. Cost leadership and price competitiveness Management has taken a comparative look at the products offered by our competitors and believes that our products have the best price/performance and are the most price competitive solutions in the entire TOE and iSCSI market. Our competitors charge around $199 for the TOE, while the iSCSI is priced at $399 in volume. Our initial product will attract volume business at prices below $50. Our cost structure will continue to yield good margins even as the ASP trends down, in the normal pattern of the semiconductor industry, to prices in the area of $10.00. Management believes that this enables us to secure increasing market share with healthy gross margins through the entire product life/ASP cycle. Higher Overall ROI for customers Customers using our products will benefit from fast times to market as a result of: o Significantly reduced product development cycles due to: o The simplicity of our hardware design, o The absence of a need for software programming, which translates into a much reduced development cycle. o Perfisans' System On Chip (SoC) methodology providing scalability. o Perfisans commitment to in-depth design and application support throughout the customer's product development cycle. PRODUCTS & SERVICES Perfisans offers products in the form of chips and/or printed circuit boards on which Perfisans chips are installed. Printed circuit board products will be offered to customers in the form of "reference designs" or "evaluation kits" to facilitate the customer's product development, and evaluation and approval of our chips. Board level products will also be offered in manufacturable form in those cases where customers lack either the design expertise and/or the design resources to produce their own board level products. In the latter cases, offering a manufacturable board level product is an effective marketing and sales tactic in that it can facilitate the sales process and can help in securing and retaining business with a customer. Perfisans will also offer routine design support services via Perfisans Field Application Engineers (FAEs) who will work closely with customer design staff to help them complete their designs, using Perfisans chips, in the shortest possible time. A description of Perfisans chip products follows: 1. Product 1 - NIC TOE Accelerator Chip - ENA1001: The first of its line of chips that offers TOE functionality, the ENA1001 chip has been launched to the market by the end of the 2nd quarter of 2004. The NIC TOE Accelerator Chip is designed to address the TCP/IP off-load requirements on both the host and target side of Internet Protocol (IP) storage networks, including Network Attached Storage (NAS). The chip consists of an IP protocol engine and a TCP protocol engine to handle the TCP/IP stacks in both hardware and embedded microprocessor cores. An application programming interface (API) is provided in this product to allow customized transport protocols and other applications, including internet Small Computer System Interface (iSCSI), Storage over Internet Protocol, virtual interface, Internet Protocol Security (IPSEC), Virtual Private Network (VPN), Voice over Internet Protocol, content classification, streaming media, or web caches. 2. Product 2 - Dual Channel Gigabit network interface chip - ENA1002: This low cost, single chip Gigabit network interface chip with TOE will be targeted to replace existing 10/100 Mbit products. Management plans to market this product primarily to network card manufacturers who are marketing products geared toward the consumer market. This product is scheduled for release by the end of the 3rd quarter of 2006. 3. Product 3 - iSCSI Protocol Accelerator Chip - iTA1001: There is a growing movement toward the use of Internet Protocol (IP) for Storage Area Networks (SAN) as it addresses several challenges faced by companies operating SANs over Fibre Channel, including the issue of distance limitations. Management believes that the primary factor in the increasing demand for IP-SANs is that most enterprise customers, particularly SOHO and consumers, do not have the in-house expertise in Fibre Channel to construct, deploy, and maintain an FC-SAN. With IP in common use in corporate communications networks and interconnected systems, Management believes that the talent to operate an IP-SAN is either already on-site or easily accessible. Management believes that the iTA1001 is uniquely suited for the emerging IP-SAN market. The product also includes TOE functionality. It is targeted to the Internet Protocol (IP) Storage convergence market and provides a flexible, scalable, and high performance solution to the emerging iSCSI standard. Key attributes of the iTA1001 chip which Management believes will contribute to improved bottom line performance for operators include: o Accelerated traffic between the SCSI storage device and the internet; o Introduction of a new breed of iSCSI target storage box that offers comparable performance at a significantly lower price than the current Fibre channel storage box. MARKETING & SALES Sales and Marketing will be primarily split between North America and Asia, with attention also being given to design houses in Europe. Our strategy will be to employ a mix of direct sales, commissioned manufacturer's agents, and distributors, as dictated by local market conditions. We are developing partnership relationships with potential customers in the industry. Perfisans is in the process of seeking agreements with these entities, but there can be no assurance that any of the foregoing will be customers. Perfisans has chosen Taiwanese manufacturers to be the first target customer base for the following reasons: o Perfisans already enjoys existing strong business connections in this location. o These companies, and Taiwan companies in general, will typically benefit from and welcome our superior IC design expertise, and are prone to rapid adoption of new and better performing products. o The economic slowdown in North America has caused us to direct immediate attention to penetrating the Taiwanese market by leveraging the extensive experience and connection of our management team. As a component supplier to Network Infrastructure companies, it is important to develop strategic relationships with these companies. While we have not generated any sales to date, Management believes, although there can be no assurance, that the industry contacts available through our Management will bring a great deal of credibility to the entire organization, and will facilitate and expedite the forging of strong strategic alliances. The wider focus of the company is to target strategic original equipment manufacturers (OEMs) in the United States, Europe and Asia. We are currently engaged in negotiations with reps and distis in Canada and Taiwan. We do not as yet have signed agreements with any reps or distis in these regions. We also have not signed any sales contract with any of the entities listed. We are confident of concluding satisfactory rep &/or disti agreements to coincide with the launch of our products in Q2 2004. EMPLOYEES As of March 31, 2006, we had altogether 5 full-time employees and 10 contractors in Canada, US, Taiwan and China. DESCRIPTION OF PROPERTY Our headquarters are located at 7828 Kennedy Road, Suite 201, Markham, Ontario, L3R 5P1, in 3,200 square feet of office space leased from an unrelated party. Current rentals are $4,150 per month and the lease expires in December 2008. LEGAL PROCEEDINGS We are not a party to any material legal proceedings and there are no material legal proceedings pending with respect to our property. We are not aware of any legal proceedings contemplated by any governmental authorities involving either our property or us. None of our directors, officers or affiliates is an adverse party in any legal proceedings involving us or our subsidiaries, or has an interest in any proceeding which is adverse to us or our subsidiaries ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to our shareholders during the fourth quarter of 2005 PART II ITEM 5. MARKET FOR OUR COMMON STOCK Our shares of common stock are quoted on the NASD's OTC Bulletin Board under the symbol "PFNH" Listed below are the high and low sale prices for the shares of our common stock during the fiscal years ended December 31, 2004 and 2005 and through March 31, 2006, as adjusted to reflect the reverse split of our shares of common stock effectuated on December 3, 2003. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. Common Stock ------------ High Low ---- --- Fiscal 2004 ----------- First Quarter $1.95 $1.05 Second Quarter 2.20 1.80 Third Quarter 2.44 0.94 Fourth Quarter 1.49 0.40 Fiscal 2005 ----------- First Quarter $0.60 $0.27 Second Quarter 0.48 0.22 Third Quarter 0.39 0.15 Fourth Quarter 0.20 0.05 Fiscal 2006 ----------- First Quarter (through March 31, 2006) $0.29 $0.07 On March 31, 2006, there were approximately 300 holders of record of our 44,030,740 shares of common stock issued and outstanding. On March 31, 2006, the last sale price of the shares of our common stock as reported on the OTC Bulletin Board was $0.26. DIVIDEND POLICY We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our board of directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose. RECENT SALES of UNREGISTERED SECURITIES There were no issuances of unregistered Securities SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY PLANS On February 12, 2004, our board of directors adopted our 2004 Stock Option Plan (the "Option Plan"). The Option Plan provides for the grant of incentive and non-qualified stock options to selected employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The Option Plan authorizes the grant of options for 10,000,000 shares of our common stock. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion and analysis should be read in conjunction with the financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-QSB. This filing contains forward-looking statements. The words "anticipated," "believe," "expect, "plan," "intend," "seek," "estimate," "project," "could," "may," and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management's current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments. OVERVIEW On December 19, 2003, Perfisans Holdings, Inc., a Maryland corporation formerly known as Griffin Industries, Inc., acquired 100% of the capital stock of Perfisans Networks Corporation, an Ontario corporation. This transaction was accounted for as a reverse acquisition. We changed our name to Perfisans Holdings, Inc. in conjunction with the reverse acquisition. Because we have not generated sufficient revenue to date, we have prepared our financial statements with the assumption that there is substantial doubt that we can continue as a going concern. Our ability to continue as a going concern is dependent on our ability to affect our Plan of Operations. PLAN OF OPERATIONS We were incorporated in Maryland on October 14, 1997, to be a venture capital vehicle for investors. As such, we were qualified as a business development company under the Investment Company Act of 1940 and voluntarily complied with the Securities and Exchange Commission's public reporting requirements. As a business development company, we were eligible to make investments in qualifying companies and would have earned returns, if any, upon the sale of those investments. In the summer of 1998, we terminated our status as a business development company, and regulation under the Investment Company Act of 1940, due to our intention to acquire 100% of the assets or shares of heavy construction equipment companies. Due to a downturn in the private and public capital markets in late 1998 and early 1999, and in particular in the valuations of heavy construction equipment companies, we abandoned the acquisition plan and after conducting extensive research, our board of directors decided to pursue a business plan that called for the acquisition of companies that provide services via the Internet. Since 2000, we have explored a variety of potential business opportunities and did not actively conduct significant operations while complying with SEC reporting requirements in order to maintain our status as a public company until a suitable acquisition candidate was found. Consequently, after devoting years in various attempts to develop a profitable, ongoing business, and without realistic sources of additional financing in sight, our former management was receptive when approached by representatives of Perfisans Networks concerning a possible business combination. Subsequent discussions led to the execution of the Acquisition Agreement in December 2003. As a consequence of the change in control of our company resulting from the transactions contemplated by the Acquisition Agreement, we have adopted a new plan of operations, as set forth immediately below. The company through its wholly owned subsidiary Perfisans Networks Corporation, an Ontario corporation, is engaged in development of integrated circuits that will accelerate the network and storage devices protocol processing. We have completed the design of a single port gigabit network interface controller ENA1001 and released the product to the market. The company has also commenced meeting prospective customers with samples of this product. We have also completed the design of a single port gigabit network interface adapter card ENA5031 using our single port gigabit network interface controller ENA1001. This adapter serves two purposes. One is as the demonstration vehicle for the ENA1001 controller. We will also sell this single port gigabit network interface adapter card ENA5031 to the computer system integrators. In reaction to the market and current funding and resources situation, the Company is in the process of re-structuring. Since our vendors and customers are in Asia, more focus has been put on the China and Taiwan operations. In July 2005, resources were reallocated from the Canadian operation to China and Taiwan; this move has resulted in lower operating costs. In responds to the re-structuring, the Company has moved to a smaller premises beginning November this year. We have also revised the product development plan accordingly. The Company products are focused on the network interface semiconductor integrated circuits. The design of following products will be finished and released upon receipt of additional funding: Dual Channel Gigabit network interface chip - Management plans to market this product to network card manufacturers who are marketing products geared toward the enterprise market. This product is planned to be released towards the end of 2006. iSCSI storage chip - This product will be targeted for high performance and cost sensitive markets. Management plans to market this product primarily to network card manufacturers who are marketing products geared toward the enterprise market. The Company plans to release this product beginning of 2007. The development of dual port PCI-Express products and RDMA products has been temporary slowed down according to the funding situation. For the next twelve months, the engineering team will be concentrating on the support and further development of the single port gigabit network interface controller. Along with Canada, Taiwan and China are key regions for us to penetrate to implement our plan of operation. Manufacturers Agents (known as "reps") and Distributors (known as "distis") will be contracted to market and sell Perfisans' chips. A disti buys, resells and maintains local inventories of the computer chips that the Company will provide. The disti is responsible for the costs of selling to customers, accounts receivables, collections and the maintenance of local inventories, that otherwise would fall on Perfisans. A rep earns commissions on the sales of Perfisans' chips. A rep is a separate, arms length company that negates or minimizes the need for Perfisans to staff its own field sales force, thereby minimizing Perfisans' cost of sales. In some cases the rep and disti will be one and the same company capable of acting in either rep or disti mode according to local market needs. In rep mode, the rep earns commissions on sales of our chips. In disti mode, the disti buys and resells our chips and maintains local inventories. The current industry trend is for reps and distis to be combined in one company. Our sales costs are: o Travel costs by the sales people to the market areas at intervals dictated by sales activity and priorities, o The commission that has to be paid for the reps which will be pegged at 10% to 15% of the selling price, and o The costs of locally based support staffs as determined by the needs of penetrating and maintaining specific strategic customers. We have signed up distributors in Canada, the US and China. In addition, we have identified Taiwan and China as key regions and will continue to search for appropriate candidates for the distribution of our products in these two geographical areas. Our Marketing and Product Development teams have collaborated on the planning of our new product roadmap, and sales and business development activity will be synchronized with the product introduction plans. Despite having limited revenue since inception, we believe that our management has developed a business plan that, if successfully implemented, could substantially improve the Company's operational results and financial conditions. The adequacy of cash resources over the next twelve months is primarily dependent on its operating results and the ability to obtain proceeds from the sales of securities. The projected cash requirement for the next twelve months will be $5 million. We have an agreement with SBI and Westmoreland for a $4 million funding. Seven hundred and fifty thousand dollars has been received by the company from SBI and Westmoreland. SBI and Westmoreland have signed promissory notes on the balance that has not yet been received. The Company believes that the possibility of getting the remaining funds is low. The Company is planning to write off the amount if funds are not received in the near future. We have executed convertible debenture agreements totaling $1.2 million as at March 21, 2005. Details of the agreement can be obtained through the 8K filing with SEC on March 23, 2005. We will have to secure the anticipated requisite remainder of funding through other means, such as sales of additional securities or other financing initiatives. We started to re-pay each month the principle of these convertible notes from August 17, 2005. The payments are done by issuing stocks. We plan to hire full time employees in Taiwan and China. We have contractors and consultants working for the company in Taiwan and China as of to date. The addition will be in engineering, sales and marketing. FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO DECEMBER 31, 2004 We have reported total revenue of $17,242 (prior year $1,095,526) with a gross loss of $74,304 (prior year gross profit $61,803) for the year ended December 31, 2005. The loss includes $73,805 specific charge for inventory write-off relating to inventory acquired during the last quarter of 2005 (Prior year: Nil). Total operating expenses decreased for the twelve-month period ending December 31, 2005, from $5,072,706 to $2,816,693 or 44% from the corresponding prior year period. This decrease was primarily due to the decrease in stock based compensation and the relocation of the operation to Asia during the period. General and Administration fees decreased for the twelve-month period ending December 31, 2005, from $2,575,435 to $2,159,155 or 16% from the corresponding prior year period, primarily as a result of the decrease in operations. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2005, we had an accumulated deficit of $14,217,656. For the year ended December 31, 2005, net cash used in operating activities amounted to $1,420,447, as compared to $1,584,303 for the year ended December 31, 2004. The increase in cash requirements for operating activities is primarily the result of increase in overhead expense and operating activities including SEC filings, auditing and legal services during the period. Since inception, we have relied principally on proceeds from the sale of securities to fund our activities. During the year ended December 31, 2005, we used $1,420,447 in cash for operating activities and $4,888 for investing activities which was provided by $1,515,673 from financing activities, resulting in a $29,578 increase in cash during the period. In March 2004, we borrowed $250,000 from an unaffiliated lender. The loan bears interest at 2% per month and is payable on July 3, 2004 or upon our receipt of at least $4,000,000 of proceeds from the sale of stock. In October 30, 2004 we increased the borrowed amount from the same lender to $392,208 which bears an interest at 3% per month. The total amount of the loan with principle and interest was $595,063 as at December 31, 2005. Management is working on the new terms. The new terms have not been finalized and agreed to by both sides. We are now in the process of extending the loan period. We intend to repay such loans out of proceeds from future additional funding raised by sale of stock. We currently have a balance of $358,704.80 to General Resources Company on such loans. We intend to repay such loans out of proceeds from future additional funding raised by sale of stock. During the second quarter of 2005, we received an additional loan of $70,000 from a shareholder, General Resources Company, at an interest of 3% per month. The repayment date has not yet been formalized. There was a shareholder loan of $90,000 we received during the year of 2005. At December 31, 2005, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. Additional capital could be required in excess of our liquidity, requiring us to raise additional capital through an equity offering or secured or unsecured debt financing. The availability of additional capital resources will depend on prevailing market conditions, interest rates, and our existing financial position and results of operations. We estimate that we will require approximately $10,000,000 in cash to fund our activities until revenues are sufficient to cover costs, which we will obtain principally through the sale of shares. We have no commitment from any person to acquire all or any of such securities or to provide funding through any other mechanism other than as disclosed in the prospectus related to the sale of the shares of our common stock to SBI and Westmoreland. We expect that additional capital will be required if we are unable to generate sufficient revenues from commercialization of our products within the next 18 months. OFF-BALANCE SHEET ARRANGEMENTS None. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: Contractual obligations as of December 31, 2005 are as follows: PAYMENTS DUE BY END OF PERIOD -------------------------------------------------------------------------------- CONTRACTUAL TOTAL LESS THAN 1 AFTER 1-3 3-5 OBLIGATIONS YEAR YEARS YEARS -------------------------------------------------------------------------------- BUILDING LEASES $116,820 $38,940 $77,880 $0 -------------------------------------------------------------------------------- EQUIPMENT LEASES -- -- -- -- -------------------------------------------------------------------------------- CONVERTIBLE TERM NOTE $837,473 $837,473 -- -- -------------------------------------------------------------------------------- PROMISSORY NOTE $595,063 $595,063 -- -- -------------------------------------------------------------------------------- TOTAL $1,549,356 $1,471,476 $77,880 $0 -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS: SFAS No. 149 - Amendment of statement 133 on derivative instruments and hedging activities. This statement amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB 133 accounting for derivative instruments and hedging activities. SFAS No. 150- Accounting for certain financial instruments with characteristics of both liabilities and equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 151 - "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, "Inventory Pricing," that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS 123 (Revised) - "Share Based Payment," which will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged. SFAS 152 - In December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67" ("SFAS 152"). This statement amends FASB Statement No. 66 "Accounting for Sales of Real Estate" to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 "Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-2"). SFAS 152 also amends FASB Statement No. 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects" to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005. SFAS 153 - In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required. SOFTWARE DEVELOPMENT COSTS Development costs related to software products are expensed as incurred until technological feasibility of the product has been established. Based on our product development process, technological feasibility is established upon completion of a working model. Costs incurred by us between completion of the working model and the point at which the product is ready for general release have not been significant. Accordingly, no costs have been capitalized to date. 20 [INSERT UPDATED FINANCIAL STATEMENTS FOR FYE 12/31/2005] ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On March 30, 2004, we filed an amendment to the Current Report on Form 8-K filed on January 5, 2004 regarding our acquisition of Perfisans Networks Corporation in which we also disclosed that we dismissed Dohan & Company ("Dohan"), our former independent auditor, in connection with the acquisition. The Form 8-K/A also reported that we retained Schwarz Levitsky Feldman in lieu of Dohan as a result of the determination we made that it would be in our best interest to maintain our relationship with the independent auditor for Perfisans Networks. There were no changes or disagreements with Dohan reportable pursuant to this Item 8 of our annual report of Form 10-KSB, though Dohan's report on our financial statements for the fiscal year ended December 31, 2002, did include an opinion expressing its substantial doubt as to our ability to continue as a going concern. The 8-K/A reporting the dismissal of Dohan is incorporated herein by reference. ITEM 8A. CONTROLS AND PROCEDURES. Based on an evaluation as of the date of the end of the period covered by this Form 10-KSB, our Chief Executive Officer and Principal Accounting Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Changes in Internal Controls There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Limitations on the Effectiveness of Controls We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Our officers and directors, and further information concerning them, are as follows: NAME AGE POSITION To-Hon Lam 46 CEO, President, Principle Accounting Officer & Chairman Bok Wong 43 VP of Operations, Business Development & Director Eric Wang 40 Director Each of the above officers and directors shall hold office until the next annual meeting of our shareholders or until a successor is elected and qualified. TO-HON LAM. To-Hon Lam co-founded Perfisans Networks in February 2001 and has acted as its President and CEO since inception. Prior to Perfisans, he successfully launched Matrox Toronto Design Center specializing in multi-million gate graphics and video processors. Mr. Lam has managed over 100 software and hardware projects. He was the co- founder and Director of Engineering with SiconVideo where he has employed from 1999 through February 2001. He also worked with ATI Technologies, where he designed several state of the art application specific integrated circuits (ASIC). ATI is currently a leader in the graphic chip design industry. Mr. Lam brings with him 21 years of engineering and design management experience with ASIC technologies. BOK WONG. Bok Wong co-founded Perfisans Networks in February 2001 and has acted as its Vice President of Operations and Business since inception. Previously he co-founded Intervis Corporation, a System On Chip design consulting company. Intervis is a multi million dollar company, which designed complex network ASICchips and network processors for companies such as 3COM, Nortel, and Cabletron. He was the principal consultant of Intervis from 1998 to 2000 and Trebia Director of ASIC Technology from 2000 to February 2001. Mr. Wong has also worked with ATI Technologies, Genesis Microchip, and Philips in Hong Kong. Eric Wang. A 12-year veteran of General Resources, Eric serving as Vice President & CFO of General Resources. In this position he had overall responsibility for Financial Controls & Planning. Prior to that he was the deputy manager of Shang-Ching United C.P.A. Firm Except as set forth herein, no officer or director of the Company has, during the last five years: (i) been convicted in or is currently subject to a pending a criminal proceeding; (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any Federal or state securities or banking laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) has any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy of for the two years prior thereto. CODE OF ETHICS Our board of directors adopted a Code of Ethics which covers all executive officers of our company and its subsidiaries. The Code of Ethics requires that senior management avoid conflicts of interest; maintain the confidentiality of information relating to our company; engage in transactions in shares of our common stock only in compliance with applicable laws and regulations and the requirements set forth in the Code of Ethics; and comply with other requirements which are intended to ensure that such officers conduct business in an honest and ethical manner and otherwise act with integrity and in the best interest of our company. All our executive officers are required to affirm in writing that they have reviewed and understand the Code of Ethics. AUDIT COMMITTEE FINANCIAL EXPERT We do not have an audit committee financial expert. COMPENSATION OF THE BOARD OF DIRECTORS Directors who are also our employees do not receive additional compensation for serving on the Board or its committees. Non-employee directors are not paid any annual cash fee. In addition, directors are entitled to receive options under our Stock Option Plan. All directors are reimbursed for their reasonable expenses incurred in attending Board meetings. We intend to procure directors and officers liability insurance. LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Maryland a director or officer is generally not individually liable to the corporation or its shareholders for any damages as a result of any act or failure to act in his capacity as a director or officer, unless it is proven that: 1. his act or failure to act constituted a breach of his fiduciary duties as a director or officer; and 2. his breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. As a consequence of this provision, stockholders of ours will be unable to recover monetary damages against directors or officers for action taken by them that may constitute negligence or gross negligence in performance of their duties unless such conduct falls within one of the foregoing exceptions. The provision, however, does not alter the applicable standards governing a director's or officer's fiduciary duty and does not eliminate or limit our right or any stockholder to obtain an injunction or any other type of non-monetary relief in the event of a breach of fiduciary duty. As permitted by Maryland law, our By-Laws include a provision which provides for indemnification of a director or officer by us against expenses, judgments, fines and amounts paid in settlement of claims against the director or officer arising from the fact that he was an officer or director, provided that the director or officer acted in good faith and in a manner he or she believed to be in or not opposed to our best interests. We have purchased insurance under a policy that insures both our company and our officers and directors against exposure and liability normally insured against under such policies, including exposure on the indemnities described above. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Under the securities laws of the United States, our directors, our executive (and certain other) officers, and any persons holding ten percent or more of our shares of common stock must report on their ownership of our shares of common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established. During the fiscal year ended December 31, 2005, based solely on a review of filings made with the SEC, we believe that all reports required to be filed by Section 16(a) were filed on a timely basis. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal years indicated, certain information concerning the compensation of our Chief Executive Officer and each other most highly compensated executive officers of our company whose aggregate compensation exceeded $100,000 during the years ended December 31, 2005, 2004, 2003 and 2002. SUMMARY COMPENSATION TABLE
SECURITIES NAME AND UNDERLYING PRINCIPAL OTHER ANNUAL OPTIONS LTIP ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION /SARS (#) PAYOUTS COMPENSATION -------- ---- ------ ---- ------------ --------- ------- ------------- TO-HON LAM 2005 200,000 0 0 0 0 0 Chairman, 2004 100,000 0 0 0 0 0 President 2003 0 0 0 0 0 0 and CEO 2002 0 0 0 0 0 0 BOK WONG 2005 200,000 0 0 0 0 0 Vice President 2004 100,000 0 0 0 0 0 of Operations 2003 0 0 0 0 0 0 & Business 2002 0 0 0 0 0 0 Development
OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL NAME AND PRINCIPAL # OF OPTIONS OPTIONS EXERCISE EXPRIATION POSITION GRANTED GRANTED PRICE DATE ------------------ ------------ ------- -------- ---------- TO-HON LAM 1,000,000 27.77 0.20 07/02/2015 Chairman, President and CEO BOK WONG 1,000,000 27.77 0.20 07/02/2015 Vice President of Operations & Business Development
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR [update]
SHARES ACQUIRED ON VALUE # OF SHARES UNDERLYING NAME AND PRINCIPAL POSITION EXERCISE REALIZED OPTIONS AT YEAR END --------------------------- -------------------- -------- ----------------------- TO-HON LAM 2,450,000 Chairman, President and CEO BOK WONG 2,000,000 Vice President of Operations & Business Development
STOCK OPTIONS Pursuant to the acquisition agreement whereby we acquired all of the capital stock of Perfisans Networks Corporation, all existing options and/or warrants to purchase capital stock of Perfisans Networks Corporation were converted to options and/or warrants to purchase our common stock. Accordingly, we issued employees of Perfisans Networks Corporation an aggregate of 7,600,000 options. Our executive officers and directors received an aggregate of 4,750,000 of such options. Our chief executive officer, To-Hon Lam received 2,450,000 of such options and our Vice President of Operations and Business Development received 2,300,000 of such options. 27,500 of options have been exercised as at December 31, 2005. On February 12, 2004, the Board of Directors adopted the Perfisans Holdings, Inc. 2004 Stock Option Plan. The Option Plan provides for the grant of incentive and non-qualified stock options to selected employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The Option Plan is administered by the Board of Directors and authorizes the grant of options for 4,000,000 shares. The Board of Directors determines the individual employees and consultants who participate under the Plan, the terms and conditions of options, the option price, the vesting schedule of options and other terms and conditions of the options granted pursuant thereto. EMPLOYMENT AGREEMENTS Each of To-Hon Lam, President and Chief Executive Officer and Bok Wong, Vice President of Operations and Business Development, has entered into employment agreements with us. Such agreements are effective upon the effectiveness of the registration statement the first draft of which was filed on February 12, 2004. Mr. Lam's employment agreement has an initial term of two years with subsequent one-year renewal periods. His employment agreement may be terminated by us for cause or upon his death or disability. In the event of the disability of Mr. Lam, termination of his employment agreement by us following a change in control or termination of his employment agreement by him for good reason, Mr. Lam is entitled to receive (I) the unpaid amount of his base salary earned through the date of termination; (ii) any bonus compensation earned but not yet paid; and(iii) a severance payment equal to one (1) year of his then current salary. In addition, Mr. Lam will be immediately vested in any options, warrants, retirement plan or agreements then in effect. Good reason means (i) a material change of Mr. Lam's duties, (ii) a material breach by us under the employment agreement, or (iii) a termination of Mr. Lam's employment in connection with a change in control. As used in Mr. Lam's employment agreement, "change in control" means (1) our merger or consolidation with another entity where the members of our Board, do not, immediately after the merger or consolidation, constitute a majority of the Board of Directors of the entity issuing cash or securities in the merger or consolidation immediately prior to the merger or consolidation, or (2) the sale or other disposition of all or substantially all of our assets. In the event of termination for cause, all of Mr. Lam's unexercised warrants and options, whether or not vested, will be canceled, and Mr. Lam will not be eligible for severance payments. In the event of voluntary termination, all of Mr. Lam's unbelted warrants and options will be canceled and he will have three(3) months from the date of termination to exercise his rights with respect to the unexercised but vested options. He will not be eligible for severance payments. Mr. Lam's employment agreement provides for an annual salary of $200,000 per year with a $50,000 annual bonus in each subsequent year in the event that we achieve $8 million of revenues in fiscal 2004, $36 million of revenues in fiscal 2005 and $90 million of revenues in fiscal 2006. Mr. Wong has an identical employment agreement to that of Mr. Lam. In the event of termination for cause, all unexercised warrants and options held by the applicable employee, whether or not vested, will be canceled and the employee will not be eligible for severance payments. In the event of voluntary termination, all unbelted warrants and options will be canceled and the employee will have three (3) months from the date of termination to exercise his rights with respect to the unexercised but vested options. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 31, 2006, our authorized capitalization consisted of 150,000,000 shares of common stock, par value $.001 per share. As of March 31, 2006, there were 44,782,699 shares of our common stock outstanding, all of which were fully paid, non-assessable and entitled to vote. Each share of our common stock entitles its holder to one vote on each matter submitted to the shareholder. The following table sets forth, as of March 31, 2006, the number of shares of our common stock owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned. NUMBER OF SHARES PERCENTAGE OF SHARES NAME OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED (3) --------------------- -------------------- ---------------------- To-Hon Lam 7,000,000 15.63% Bok Wong 7,000,000 15.63% General Resources Co. 5,000,000 11.17% (1) Unless otherwise indicated, the address of each person listed below is c/o Perfisans Holdings, Inc., at 7828 Kennedy Road, Suite 201, Markham, Ontario L3R 5P1. (2) Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table. (3) Figures may not add up due to rounding of percentages. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We currently have a balance of $358,704.80 to General Resources Company, a company whose chairman is Chris Chen, on such loans which we intend to repay such loans out of proceeds from future additional funding raised by sale of stock. During the second quarter of 2005, we received an additional loan of $70,000 from a shareholder, General Resources Company, at an interest of 3% per month. The repayment date has not yet been formalized. There was a director loan of $90,000 we received during the year of 2005. Other than the foregoing, there have been no transactions between our company and any of our officers, directors, 10% shareholders or any other affiliates required to be reported hereunder. ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K (a) Exhibits 3.1.1 Articles of Incorporation (1) 3.1.2 Amendment to the Articles of Incorporation (1) 3.2 Bylaws (1) 10.1 Acquisition Agreement by and between Perfisans Holdings, Inc. and Perfisans Networks Corporation (1) 10.2 Stock Purchase Agreement by and between the Registrant and SBI Brightline Consulting, LLC. dated February 12, 2004 (1) 10.3 Stock Purchase Agreement by and between the Registrant and Trilogy Capital Partners, Inc. dated February 12, 2004 (1) 10.4 Amendments to Stock Purchase Agreement by and between the Registrant, SBI Brightline, LLC and Trilogy Capital Partners, Inc. both dated June 25, 2004 (1) 10.5 Services Agreement by and between the Registrant and Trilogy Capital Partners, Inc. (1) 10.6 Employment Agreement with To-Hon Lam(1) 10.7 Employment Agreement with Bok Wong(1) 14 Code of Ethics (1) 21 Subsidiaries of the registrant (1) 31 Rule 13a-14(a)/15d-14(a) Certification. (2) 32 Certification by the Chief Executive Officer & Principal Accounting Officer Relating to a Periodic Report Containing Financial Statements. (2)* (1) Previously filed. (2) Filed herewith. * The Exhibit attached to this Form 10-KSB shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing. (b) Reports on Form 8-K. There were no reports filed on Form 8-K during the last quarterly period covered by this report. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Aggregate fees billed to our company by our principal accountant Schewartz Levitsky Feldman llp for the fiscal year ended December 31, 2004 and December 31, 2005 are as follows: 2005 2004 Audit-Related Fees $5,000 - 10QSB 3/31/05 $3750 - 10QSB 3/31/04 $4,000 - 10QSB 6/30/05 $2500 - 10QSB 6/30/04 $4,700 - 10QSB 9/30/05 $3333 - 10QSB 9/30/04 $32,000 - 10KSB 12/31/04 $2,000 - 10KSB/A 12/31/04 All Other Fees $1,500 $13,500 Total $15,200 $57,083 We do not have an audit committee. Since our management recently changed as a result of the acquisition of Perfisans Networks, we were not able to identify and appoint a suitable nominee in time for this annual report. Our management is currently diligently pursuing such a candidate and will appoint an audit committee promptly. PERFISANS HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 TOGETHER WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (AMOUNTS EXPRESSED IN US DOLLARS) TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm 1 Consolidated Balance Sheets as of December 31, 2005 and 2004 2 - 3 Consolidated Statements of Operation for the years ended December 31, 2005 and 2004 4 Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 5 - 6 Consolidated Statements of Changes in Stockholders' Deficiency for the years ended December 31, 2005 and 2004 7 Notes to Consolidated Financial Statements 8 - 27 SCHWARTZ LEVITSKY FELDMAN LLP CHARTERED ACCOUNTANTS TORONTO, MONTREAL, OTTAWA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Perfisans Holdings, Inc. We have audited the accompanying consolidated balance sheets of Perfisans Holdings, Inc. as at December 31, 2005 and 2004 and the related consolidated statements of operations, cash flows and stockholders' deficiency for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perfisans Holdings, Inc. as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the year ended December 31, 2005 and 2004 in accordance with generally accepted accounting principles in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in note 2(a) to the consolidated financial statements, the Company has incurred losses since inception and has no established source of revenues. These conditions raise substantial doubt about its ability to continue as going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. "SCHWARTZ LEVITSKY FELDMAN LLP" Toronto, Ontario, Canada April 12, 2006 Chartered Accountants | | 1167 Caledonia Road | Toronto, Ontario M6A 2X1 | Tel: 416 785 5353 | Fax: 416 785 5663 | | 1 PERFISANS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ ASSETS CURRENT ASSETS Cash and cash equivalents 46,741 17,163 Accounts receivable (note 7) 81,111 67,618 Prepaid expenses and deposits 1,157 32,137 ------- ------- 129,009 116,918 PROPERTY, PLANT AND EQUIPMENT (note 8) 137,289 214,062 INTELLECTUAL PROPERTY (note 9) 1 1 ------- ------- 266,299 330,981 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. APPROVED ON BEHALF OF THE BOARD Director ------------------------------------- Director ------------------------------------- 2 PERFISANS HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities (note 11) 1,791,814 958,189 Current portion of long-term debt (note 12) -- 26,345 Promissory note payable (note 21) 595,063 415,740 Convertible term notes (note 15) 551,304 -- Loan from shareholders (note 13) 458,563 377,743 ----------- ----------- 3,396,744 1,778,017 ----------- ----------- COMMITMENTS AND CONTINGENCIES (notes 17 and 18) STOCKHOLDERS' DEFICIENCY CAPITAL STOCK (note 14) 43,305 38,105 COMMON STOCK SUBSCRIBED 3,250,000 3,250,000 STOCK SUBSCRIPTIONS RECEIVABLE (3,250,000) (3,250,000) ADDITIONAL PAID-IN CAPITAL 11,376,095 9,111,045 ACCUMULATED OTHER COMPREHENSIVE LOSS (332,189) (201,433) ACCUMULATED DEFICIT (14,217,656) (10,394,753) ----------- ----------- (3,130,445) (1,447,036) ----------- ----------- 266,299 330,981 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 3 PERFISANS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ REVENUE 17,242 1,095,526 Cost of goods sold (Note 4) 91,546 1,033,723 ----------- ----------- GROSS PROFIT (LOSS) (74,304) 61,803 ----------- ----------- OPERATING EXPENSES Stock-based compensation -- 2,079,317 General and administration 2,159,155 2,575,435 Interest 172,068 47,450 Management salaries 400,000 300,000 Amortization 85,470 70,504 ----------- ----------- TOTAL OPERATING EXPENSES 2,816,693 5,072,706 ----------- ----------- OPERATING LOSS (2,890,997) (5,010,903) Interest income, research and development tax credit and other income (note 6) 250,441 480,699 Beneficial conversion cost expensed (note 15) (394,548) -- Discount on warrants expensed (note 15) (594,283) -- Convertible term notes issue expense (193,000) -- ----------- ----------- NET LOSS BEFORE TAX (3,822,387) (4,530,204) Income tax 516 -- ----------- ----------- NET LOSS (3,822,903) (4,530,204) ----------- ----------- Loss per share, basic and diluted (0.10) (0.12) =========== =========== Weighted average shares outstanding 39,878,718 37,883,194 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 4 PERFISANS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS)
2005 2004 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net loss (3,822,903) (4,530,204) Items not requiring an outlay of cash: Amortization 85,470 70,504 Issue of shares for professional services 550,000 120,000 Management salaries contributed -- 100,000 Stock-based compensation -- 2,079,317 (Increase) in accounts receivable (13,493) (17,223) Decrease in prepaid expenses and deposits 30,980 33,533 Increase in accounts payable and accrued liabilities 833,625 559,770 Beneficial conversion cost expensed 394,548 -- Discount on warrants expensed 594,283 -- Issue of shares in lieu of interest on term notes 848 -- Inventory write-off (Note 4) (73,805) -- ---------- ---------- NET CASH USED IN OPERATING ACTIVITES (1,420,447) (1,584,303) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bank loans (26,345) (15,367) Proceeds from promissory note payable 179,323 415,740 Proceeds from (Repayment of) loan from a shareholder 80,820 85,338 Proceeds from issuance of shares (net of share issue costs) -- 695,000 Gross proceeds from issue of convertible term notes (note15) 1,275,000 -- Proceeds from exercise of stock options 6,876 -- ---------- ---------- NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 1,515,673 1,180,711 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES (Purchase of) property, plant and equipment (12,728) (61,029) Sale of property, plant and equipment 7,840 -- ---------- ---------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (4,888) (61,029) ---------- ---------- EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES (60,760) (3,064) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE YEAR 29,578 (467,685) Cash and cash equivalents, beginning of year 17,163 484,848 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR 46,741 17,163 ========== ==========
5 PERFISANS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS) 2005 2004 $ $ Cash and cash equivalents are comprised as follows: Cash 46,741 17,163 Short-term investments -- -- ------ ------ CASH AND CASH EQUIVALENTS, END OF YEAR 46,741 17,163 ====== ====== INCOME TAXES PAID 516 -- ====== ====== INTEREST PAID 11,040 1,571 ====== ====== The accompanying notes are an integral part of these consolidated financial statements. 6 PERFISANS HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (AMOUNTS EXPRESSED IN US DOLLARS)
Common Accumulated stock Common Common Additional Other other number of Stock stock paid-in Comprehensive comprehensive shares amount subscribed capital Deficit Loss loss ---------- ------ ---------- ---------- ----------- ------------- ------------- $ $ $ $ $ $ ---------- ------ --------- --------- ----------- ---------- -------- Balance as of December 31, 2003 37,670,189 37,670 -- 6,117,163 (5,864,549) (94,459) ---------- Issue of shares for cash 375,000 375 -- 694,625 -- -- -- -- Issue of shares for services 60,000 60 -- 119,940 -- -- -- Capital stock subscribed -- -- 3,250,000 -- -- -- -- Management salaries contributed -- -- -- 100,000 -- -- -- Stock-based compensation -- -- -- 2,079,317 -- -- -- Foreign currency translation -- -- -- -- -- (106,974) (106,974) Net loss for the year -- -- -- -- (4,530,204) (4,530,204) -- ---------- ------ --------- --------- ----------- ---------- -------- Balance as of December 31, 2004 38,105,189 38,105 3,250,000 9,111,045 (10,394,753) (4,637,178) (201,433) --------- ---------- Exercise of stock options 27,500 28 6,848 Issue of shares on conversion of convertible notes 450,370 450 151,550 Issue of shares in lieu of interest on convertible notes 2,512 3 845 Beneficial conversion for notes (note 15) 508,730 Fair value of warrants issued (note 15) 766,270 Issue of shares on conversion of convertible notes 873,261 873 165,730 Issue of shares for professional services 2,700,000 2,700 537,300 Issue of shares on conversion of convertible notes 1,097,015 1,096 117,827 Issue of shares for professional services 50,000 50 9,950 Foreign currency translation (130,756) (130,756) Net loss for the year (3,822,903) (3,822,903) ---------- ------ --------- --------- ----------- ---------- -------- Balance at December 31, 2005 43,305,847 43,305 3,250,000 11,376,095 (14,217,656) (3,953,659) (332,189) ========== ====== ========= ========== =========== ========== ========
The accompanying notes are an integral part of these consolidated financial statements. 7 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 1. SECURITIES EXCHANGE AGREEMENT AND REVERSE ACQUISITION On December 19, 2003, Griffin Industries, Inc. ("Griffin"), a publicly traded company, entered into a Securities Exchange Agreement with Perfisans Networks Corporation, a Canadian corporation ("Perfisans"). In exchange for the acquisition of the 100% interest in Perfisans, the shareholders of Perfisans were issued a total of 32,942,967 Common shares of Griffin. Following the share exchange, the former shareholders of Perfisans held 87.5% of the 37,670,189 shares of common stock of Griffin outstanding at the time. Consequently, even though Griffin was the legal acquirer, this transaction was treated as an acquisition of Griffin by Perfisans and as a recapitalization by Perfisans for accounting purposes. As part of the above transaction, the company changed its name from Griffin Industries, Inc. to Perfisans Holdings, Inc. 2. GOING CONCERN AND NATURE OF OPERATIONS a) Going Concern Certain principal conditions and events are prevalent which indicate that there is substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time. These include: 1) Recurring operating losses 2) Stockholders deficiency 3) Working Capital deficiency 4) Breach of financial covenants (note 12) 5) Non renewal of licenses (note 9) Management has initiated certain plans, which it believes will mitigate and alleviate these conditions and events including: 1) Expanding its customer base 2) Exploring alternative sources of financing as to be able to continue its research and development. 3) Implementation of cost-cutting measures 4) Renegotiating the terms of its payables b) Nature of operations Perfisans Holdings, Inc. (the "Company") is a technology development company. The principal activity of the Company is the design and development of integrated circuits for commercial purposes. The Company was previously in the development stage and commenced earning revenue during the first quarter of 2004. The Company has funded its operations to date mainly through the issuance of shares. 8 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) The Company released one product to the market in 2004. The Company has also revised the product development plan based on the market and the current funding and resources situation. These products are focused on the network interface semiconductor integrated circuits. Product 1 - Gigabit Network interface chip. The Company released this network interface chip in the second quarter of 2004. The chip is being tested by the potential customers . A network interface card (NIC) is also produced using this Gigabit Network interface chip. Product 2 - Dual Channel Gigabit network interface chip. Management is marketing this product primarily to network card manufacturers who are marketing products geared toward the enterprise market. The Company plans to release this product in the third quarter of 2006. Product 3 - iSCSI storage chip. This product will be targeted for high performance and cost sensitive market. Management plans to market this product primarily to network card and storage server manufacturers who are marketing products geared toward the enterprise market. The Company plans to release this product towards the end of the first quarter of 2007. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Use of Estimates These financial statements have been prepared in accordance with generally accepted accounting principles in the United Stated of America. Because a precise determination of assets and liabilities, and correspondingly revenues and expenses, depends on future events, the preparation of financial statements for any period necessarily involves the use of estimates and assumption. Actual amounts may differ from these estimates. These financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below. b) Basis of consolidated Financial Statements The consolidated financial statement as of December 31, 2005 includes the accounts of Perfisans Holdings, Inc, and its wholly-owned subsidiaries, Perfisans Networks Corporation and Perfisans Networks (Taiwan) Corporation. All material inter-company balances and transactions have been eliminated. c) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due to banks, and any other highly liquid investments with a maturity of three months or less. The carrying amounts approximate fair values because of the short-term maturity of those instruments. 9 9 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) d) Other Financial Instruments The carrying amount of the Company's accounts receivable and accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments. e) Revenue Recognition Sales represent the invoiced value of goods supplied to customers. Revenues are recognized upon the passage of title to the customers, provided that the collection of the proceeds of sales is reasonably assured. f) Long-term Financial Instruments The fair value of each of the Company's long-term financial assets and debt instruments is based on the amount of future cash flows associated with each instrument discounted using an estimate of what the Company's current borrowing rate for similar instruments of comparable maturity would be. g) Property, Plant and Equipment Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided using the following annual rates and methods: Furniture and fixtures 20% declining balance method Leasehold improvements 20% 5 years, straight-line Office equipment 20% declining balance method Computer equipment 30% declining balance method Computer software 100% declining balance method h) Intellectual Property Intellectual property is recorded at cost less impairment write down. Intellectual property is not amortized as it has an indefinite life. Impairment tests are performed at least once a year and when conditions indicating possible impairment exist. Intellectual property is written down if the carrying amount exceeds the fair value or if significant doubt exists with respect to recoverability. i) Foreign Currency Translation The Company's subsidiary, Perfisans Networks Corporation, is a foreign private company and maintains its books and records in Canadian dollars (the functional currency). The financial statements are converted to US dollars for consolidation purposes. The translation method used is the current rate method which is the method mandated by SFAS No. 52 where the functional currency is the foreign currency. Under the current rate method all assets and liabilities are translated at the current rate, stockholder's equity accounts are translated at historical rates and revenues and expenses are translated at average rates for the year. 10 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) Due to the fact that items in the financial statements are being translated at different rates according to their nature, a translation adjustment is created. This translation adjustment has been included in accumulated other comprehensive income (loss). j) Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. Current income tax expense (recovery) is the amount of income taxes expected to be payable (recoverable) for the current year. A deferred tax asset and/or liability is computed for both the expected future impact of differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax losses. Valuation allowances are established when necessary to reduce the deferred tax asset to the amount expected to be "more likely than not" to be realized in future returns. Tax law and rate changes are reflected in income in the period such changes are enacted. k) Research and Development Research and development costs, other than capital expenditures but including acquired research and development costs, are charged against income in the period incurred. l) Comprehensive Income The Company has adopted SFAS No. 130 Reporting Comprehensive Income. This standard requires companies to disclose comprehensive income in their financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to stockholders' equity, such as foreign currency translation adjustments. m) Long-Lived Assets The Company has adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of, which has been superceded by SFAS No. 144. SFAS No. 144 requires that long-lived assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management used its best estimate of the undiscounted cash flows to evaluate the carrying amount and have determined that no impairment has occurred. 11 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) n) Stock Based Compensation The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148 which introduced the use of a fair value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize compensation expenses for stock-based compensation to employees based on the new fair value accounting rules. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the measurement date over the amount an employee must pay to acquire the stock. The Company has adopted SFAS No. 123(Revised) in the first quarter of 2006. Pro-forma information regarding net loss and loss per share is required by FAS No. 123 (Amended by FAS No.148) - "Accounting for Stock Based Compensation" and has been determined as if the company had accounted for its employee stock options based on fair values at the grant date for options granted under the Plan. 2005 2005 ------------ ------------ As reported Pro-Forma ------------ ------------ Stock-based compensation -- 106,640 Net loss (3,822,903) (3,929,543) Basic and diluted EPS (0.10) (0.10) The fair value of each option used for the purpose of estimating the stock compensation cost is based on the grant date using the Black-Scholes pricing model. The unexpended stock based compensation deferred over the vesting period is $746,481. 2004 2004 ------------ ------------ As reported Pro-Forma ------------ ------------ Stock-based compensation 2,079,317 2,080,792 Net loss (4,530,204) (4,531,679) Basic and diluted EPS (0.12) (0.12) The fair value of each option used for purposes of estimating the pro-forma amounts summarized above is based on the grant date using the Black-Scholes option pricing model with the weighted average assumptions shown in the following table: 2005 2004 Risk free interest rate 3.0% 3.0% Volatility factor 115.77% 161.48% Weighted average expected life 10 years 10 years Expected dividends nil nil 12 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) o) Earnings or Loss Per Share The Company has adopted FAS No. 128, "Earnings per Share", which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year. p) Recent Pronouncements In December 2004, the FASB issued SFAS No. 153. This Statement addresses the measurement of exchanges of Non-monetary assets. The guidance in APB No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends APB No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for non-monetary asset exchanges incurred during fiscal years beginning after the date of this Statement is issued. Management believes this Statement will have no impact on the financial statements of the Company once adopted. Financial Accounting Standards Board ("FASB") Statement No. 154 Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3 This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in 13 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This Statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of prefer ability. FASB Statement No. 154 is effective for fiscal years beginning after December 15, 2005. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS is an amendment to SFAS No. 133 and 140. SFAS No.155 improves financial reporting by eliminating the exception from applying SFAS No.133 to interest in securitized financial assets so similar instruments are accounted for similarly regardless of the form of instruments. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS No.155 to have an impact on its financial position or results of operation. Also, SFAS No. 156"Accounting for Servicing of Final Assets" was recently issued but has no current applicability to the Company and has no effect on the consolidated financial statements. 14 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) Financial Accounting Standards Board ("FASB") Statement No. 154 Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3 This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This Statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of prefer ability. FASB Statement No. 154 is effective for fiscal years beginning after December 15, 2005. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS is an amendment to SFAS No. 133 and 140. SFAS No.155 improves financial reporting by eliminating the exception from applying SFAS No.133 to interest in securitized financial assets so similar instruments are accounted for similarly regardless of the form of instruments. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS No.155 to have an impact on its financial position or results of operation. Also, SFAS No. 156"Accounting for Servicing of Final Assets" was recently issued but has no current applicability to the Company and has no effect on the consolidated financial statements. 15 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) SFAS NO. 123R- In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("FAS 123R"), which revised FAS 123 "Accounting for Stock-Based Compensation". FAS 123R requires measurement and recognition of the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide service in exchange for such award. Implementation is required as of the first interim or annual reporting period that begins after December 15, 2005 for public entities that file as small business issuers. Management intends to comply with this statement at the scheduled effective date for the relevant financial statements of the Company. The Company believes that the above standards would not have a material impact on its financial position, results of operations or cash flows with the exception of SFAS No. 123(Revised). The Company is evaluating the financial impact of SFAS No. 123(Revised) which will be implemented in the first quarter of 2006. 4. COST OF GOODS SOLD Includes $73,805 specific charge for inventory write-off relating to inventory acquired during the last quarter of 2005 (Prior year: Nil) 5. OTHER COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) are as follows: 2005 2004 $ $ Net loss (3,822,903) (4,530,204) Foreign currency translation adjustment (130,756) (106,974) ---------- ---------- Other Comprehensive loss (3,953,659) (4,637,178) ========== ========== The foreign currency translation adjustments are not currently adjusted for income taxes as the Company is located in Canada and the adjustments relate to the translation of the financial statements from Canadian dollars into United States dollars, which is done as disclosed in note 3(i). 6. INVESTMENT TAX CREDITS The Company participates in research and development activities which are eligible for tax credits upon filing of the Company's determination of qualifying expenditures. These amounts are subject to review and approval by the Canada Revenue Agency prior to the receipt of the funds. The Company recorded tax credits of $ 243,503 in 2005 ($471,258 in 2004). 16 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 7. ACCOUNTS RECEIVABLE 2005 2004 $ $ Trade receivable -- 20,639 Goods & Service tax receivable 30,051 46,979 Tax credit receivable 51,060 -- Less: Allowance for doubtful accounts -- -- ------ ------ Accounts receivable, net 81,111 67,618 ====== ====== The Company carries accounts receivable at the amount it deems to be collectible. Accordingly, the Company provides allowances for accounts receivable it deems to be uncollectible based on management's best estimates. Recoveries are recognized in the period they are received. The ultimate amount of accounts receivable that becomes uncollectible could differ from those estimated. 8. PROPERTY, PLANT AND EQUIPMENT 2005 2004 $ $ Furniture and fixtures 84,560 94,732 Leasehold improvements -- 56,364 Office equipment 46,509 45,001 Computer equipment 131,573 119,844 Computer software 136,906 132,465 ------- ------- Cost 399,548 448,406 ------- ------- Less: Accumulated amortization Furniture and fixtures 44,288 37,178 Leasehold improvements -- 30,310 Office equipment 24,888 18,851 Computer equipment 72,727 47,566 Computer software 120,356 100,439 ------- ------- 262,259 234,344 ------- ------- Net 137,289 214,062 ======= ======= 17 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 9. INTELLECTUAL PROPERTY 2005 2004 $ $ Intellectual property 327,324 327,324 Less: Impairment write down (327,323) (327,323) -------- -------- 1 1 ======== ======== Intellectual property represents licenses to use, modify and prepare derivative works of licensors' source material. Licenses may be subject to annual and usage fees. The terms of the licenses continue indefinitely unless breached by the terms of the agreements. As at December 31, 2005 and December 31, 2004, the Company had three licensing agreements, which it entered into between April 2002 and July 2002. These licenses are non-transferable, non-sublicensable and royalty free. The Company must pay annual support and maintenance fees to the licensors to maintain the terms of the agreements. These licenses give the Company the right to incorporate licensor software into the Company's internally-developed software and the products it is developing. Annual support and maintenance fees are expensed as they become due. For 2005, the company is in breach of payment of its annual support and maintenance fees, and in default of such fee payment, the licensors may not maintain the terms of the agreements. The Company evaluates the recoverability of the intellectual property and reviews the impairment on an annual basis and at any other time if events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount utilizing the guidance of SFAS No. 142, "Goodwill and other Intangible Assets". Several factors are used to evaluate the intellectual property, including but not limited to, management's plans for future operations, recent operating results and projected undiscounted cash flows. The Intellectual property was written-down to a nominal value of $1 in 2002. 10. BANK INDEBTEDNESS The Company has overdraft protection available up to a maximum of $8,300. The Company did not use the overdraft protection as at December 31, 2005 and December 31, 2004. 18 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2005 2004 $ $ Accounts payable and accrued liabilities are comprised of the following: Accounts payables 398,703 605,575 Accrued liabilities 1,393,111 352,614 --------- ------- 1,791,814 958,189 ========= ======= 12. LONG-TERM DEBT 2005 2004 $ $ a) Instalment loan under the bank's job creation loan program to finance property and equipment additions, payable in 60 monthly principal payments of $1,387 plus interest at prime plus 0.25% per annum. -- 26,345 Less: Current portion -- 26,345 ------------ ------------ -- -- ============ ============ As at December 31, 2004, the Company was not in compliance with the financial covenants specified in its bank borrowing agreements. Consequently, long-term debt was classified as current. The loan was also repaid in full on March 29, 2005. To date no penalties have been levied. b) Interest expense with respect to long-term debt amounted to $335 ($1,402 for the year ended December 31, 2004). 13. LOAN FROM SHAREHOLDERS The loan from shareholders excluding loan of $90,000 is unsecured, non-interest bearing, with no specific terms of repayment. Shareholders loan of $90,000 is unsecured, bears interest at 3% per month with no specific terms of repayment. 19 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 14. CAPITAL STOCK a) Authorized 5,000,000 non-voting Preferred shares with a par value of $0.001 per share 150,000,000 Common shares with a par value of $0.001 per shares b) Issued 43,305,847 Common shares (38,105,189 in 2004). c) Changes to Issued Share Capital i) During the year ended December 31, 2004, the Company issued 60,000 Common shares for legal services estimated to be $120,000 which was expensed in the consolidated statements of operations. ii) During the year ended December 31, 2004, the Company issued 375,000 Common shares for net proceeds of $695,000 pursuant to the Company's agreement with SBI and Westmoreland (note 14(f)). iii) During the second quarter of 2005, the Company received $6,876, being exercise of stock options and issued 27,500 common shares in lieu thereof. iv) During the second quarter of 2005, a total of $152,000 of the convertible term notes were converted into common stock by the note holders. The conversions were done @$0.3375 per common share which resulted in the issue of an additional 450,370 common shares. An additional 2,512 common shares were also issued in lieu of accrued interest. v) During the third quarter of 2005 a total of $166,603 of the convertible term notes were converted into common stock. The conversions were done at varied rates ranging from $0.159 to $0.245 per common share which resulted in the issue of an additional 873,261 common shares. vi) During the third quarter of 2005, the Company issued 2,700,000 common shares to various consultants for services rendered. The shares were issued @$0.20 per common share. vii) During the fourth quarter of 2005, a total of $118,923 of the convertible term notes were converted into common stock. The conversions were done at varied rates ranging from $0.090 to $0.136 per common share which resulted in the issue of an additional 1,097,015 common shares. viii) During the fourth quarter of 2005, the Company issued 50,000 common shares to a consultant for services rendered. The shares were issued @$0.20 per common share. d) Employee Stock Option Plan The Company has adopted a Stock Option Plan (the Plan), pursuant to which Common Shares not exceeding 25% of the total issued and outstanding shares are reserved for issuance. 20 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) Options may be granted to officers, directors, consultants and full-time employees of the Company. Options granted under the Plan may be exercisable for a period not exceeding ten years, may require vesting, and shall be at an exercise price, all as determined by the Board. Options will be non-transferable and are exercisable only by the participant during his or her lifetime. If a participant ceases affiliation with the Company by reason of death or permanent disability, the option remains exercisable for 180 days following death or 30 days following permanent disability but not beyond the options expiration date. Other termination gives the participant 30 days to exercise, except for termination for cause, which results in immediate termination of the option. Options granted under the Plan must be exercised with cash. Any unexercised options that expire or that terminate upon an employee ceasing to be employed by the Company become available again for issuance under the Plan. The Plan may be terminated or amended at any time by the Board of Directors. The activity of the Plan is as follows: Weighted Shares Average Subject Option to Options Prices ------------ ------------ Outstanding at December 31, 2003 3,794,900 0.25 Granted 205,100 0.35 Exercised -- -- Expired -- -- Cancelled -- -- ------------ ------------ Outstanding at December 31, 2004 4,000,000 0.26 Granted 3,600,000 0.20 Exercised (27,500) 0.25 Expired (2,194,500) 0.25 Cancelled -- -- ------------ ------------ Outstanding at December 31, 2005 5,378,000 0.22 ============ ============ On July 2, 2005 the Board of Directors granted options to its employees to acquire 3,600,000 shares, to vest at 1/4 after completion of one year and 1/48 after completion of each month thereafter for the next three years. The exercise price was set at $0.20 per share. 21 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) As at December 31, 2005, there were 5,378,000 (4,000,000 at December 31, 2004) exercisable options at a weighted average exercise price of $0.22 ($0.26 at December 31, 2004). Number of options Expiry date ----------------- ----------- 2,500 July 15, 2005. 164,500 November 14, 2005. 120,000 April 07, 2006. 317,500 September 15, 2006. 1,135,400 July 2, 2007 205,100 December 14, 2014. 3,600,000 July 2, 2015 e) Purchase Warrants In 2005, the Company issued an aggregate of 8,300,000 warrants to purchase common stock at prices ranging from $0.3375 to $2.00 per share. Of the warrants, 1,777,778 are exercisable for a period of three years at $0.675 per share, 3,500,000 are exercisable for a period of three years at $2.00 per share, 1,777,778 are exercisable for a period of six months at $0.3375 per share which expired, 888,888 are exercisable for a period of six months at $0.675 per share which expired and 355,556 are exercisable for a period of three years at $0.54 per share. In 2004, the following warrants were issued: i. Trilogy Capital Partners, LLC, 100,000 stock warrants at $1 were issued on September 17, 2004 with a term of 3 years. This was for the Company's Investor Relations. ii. Market Byte, LLC, 100,000 stock warrants at $1 were issued on September 17,2004 with a term of 3 years. This was for the Company's Investor Relations. iii. Shingfat International Consulting Inc., 1,500,000 stock warrants at $0.60 were issued on December 1, 2004 with a term of 3 years. This was for business and investor relations and stock market consultations. iv. Salusar Investments, 250,000 stock warrants at $1.10 were issued on July 12, 2004 with a term of 3 years. This was for business and investor relations and stock market consultations. v. Gersten, Savage, Kaplowiz, Wolf & Marcus, LLP, 20,000 stock warrants at $2 were issued on July 12, 2004 with a term of 1 year. This was for legal matters. vi. Concord Idea Corporation, 250,000 stock warrants were issued on July 1, 2004 at $2 with a 1-year term for consultant work on behalf of the Company in the development and execution of its business plan and assistance in marketing the products of the Company. vii. General Resources Company, 250,000 stock warrants were issued on July 1, 2004 at $2 with a 3-year term for marketing and business development in Taiwan. 22 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) Number of Warrants Exercise Granted Prices ------------ ------------ Outstanding at December 31, 2003 1,777,593 0.45 and average exercise price Granted in 2004 200,000 1.00 Granted in 2004 250,000 1.10 Granted in 2004 520,000 2.00 Granted in 2004 1,500,000 0.60 ------------ ------------ Outstanding at December 31, 2004 4,247,593 0.76 And average exercise price Granted in 2005 1,777,778 0.675 Granted in 2005 3,500,000 2.00 Granted in 2005 1,777,778 0.3375 Granted in 2005 888,888 0.675 Granted in 2005 355,556 0.54 Exercised -- -- Expired (1,777,593) (0.45) Expired (270,000) (2.00) Expired (1,777,778) (0.3375) Expired (888,888) (0.675) Cancelled -- -- ------------ ------------ Outstanding at December 31, 2005 7,833,334 1.31 and average exercise price ============ ============ f) Common Stock Subscribed The Company has an agreement with SBI and Westmoreland wherein they have committed to purchase 2 million common shares of the company stock at $2 each for $4 million of funding. Net proceeds of $695,000 have been received by the company from SBI and Westmoreland to date for the purchase of 375,000 common shares. SBI and Westmoreland have signed promissory notes for the balance that has not yet been received. 23 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 15. CONVERTIBLE TERM NOTES AND DETACHABLE STOCK WARRANTS On March 21, 2005, the Company entered into a Securities Purchase Agreement, dated as of March 21, 2005, by and among the Company and Alpha Capital ("Alpha"), Platinum Partners Value Arbitrage Fund LP ("Platimum"), Nite Capital, Ltd. ("Nite") and Whalehaven Capital Fund Limited ("Whalehaven"). Alpha, Platinum, Nite and Whalehaven are collectively referred to as the "Purchasers". The Company authorized the sale to the Purchasers of Convertible Term Notes (the "Notes") in the aggregate principal amount of $1,200,000, with an over allotment option of $240,000. The offering was made pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company received a total of $1,275,000 and retained the over allotment amount of $75,000. These Notes are convertible into common stock of the Company at a final price of $0.3375 per share. In connection with the offering, the Company issued an aggregate of 8,300,000 warrants to purchase common stock at prices ranging from $0.3375 to $2.00 per share. Of the warrants, 1,777,778 are exercisable for a period of three years at $0.675 per share, 3,500,000 are exercisable for a period of three years at $2.00 per share, 1,777,778 are exercisable for a period of six months at $0.3375 per share which expired, 888,888 are exercisable for a period of six months at $0.675 per share which expired and 355,556 are exercisable for a period of three years at $0.54 per share. The proceeds of the offering will be used to fund acquisitions and for working capital. The company has allocated the proceeds between the warrants and debenture without warrants based on their relative fair values. Paid in capital has been credited with the value of warrants in the amount of $766,270 and convertible term notes has been allocated an amount of $508,730. The value of the beneficial conversion feature calculated at $1,208,889 is restricted to the fair value of the convertible term notes of $508,730 as per EITF 98-5. In accordance with Para 19 of EITF 00-27, this beneficial conversion amount of $508,730 and discount on warrants of $766,270 will be accreted from the date of issuance to the stated redemption date of the convertible instrument. Beginning on August 17, 2005 (and continuing on the same day of each successive month thereafter), the Company must repay 1/13th of the face amount of each note issued, in cash or common stock, at the option of the Company ("Monthly Amount"). If the Company repays the monthly amount in cash, the holder has to be repaid an amount equal to 110% of the Monthly Amount due and owing. If the Monthly Amount is repaid in shares of common stock, the Company is required to issue a number of shares of its common stock determined by dividing (x) the Monthly Amount to be converted into shares of common stock by (y) an amount equal to a 25% discount to the volume weighted average price of its common stock for the ten (10) trading days immediately preceding the date the Monthly Amount is due. During the three month period ended June 30, 2005 a total of $152,000 of the convertible term notes were converted into common stock by the note holders. The conversions were done @$0.3375 per common share which resulted in the issue of an additional 450,370 common shares. An additional 2,512 common shares were also issued in lieu of accrued interest. 24 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) During the three month period ended September 30, 2005 a total of $166,604 of the convertible term notes were converted into common stock. The conversions were done at varied rates ranging from $0.159 to $0.245 per common share which resulted in the issue of an additional 873,261 of common shares. During the three month period ended December 31, 2005 a total of $118,923 of the convertible term notes were converted into common stock. The conversions were done at varied rates ranging from $0.090 to $0.136 per common share which resulted in the issue of an additional 1,097,015 of common shares. For the year ended December 31, 2005 the beneficial conversion cost and the discount on warrants have been expensed in the amount of $394,548 and $594,283 respectively. As of December 31, 2005, the Convertible notes are reflected in the Balance Sheet as under: Convertible debt $1,275,000 Less: Converted into common shares ($437,527) Less: Unamortized beneficial conversion cost ($114,182) Less: Unamortized discount on warrants ($171,987) ----------- As per Balance Sheet $551,304 =========== 16. INCOME TAXES a) Deferred Income Taxes The tax effect of significant temporary differences that gave rise to the benefit is as follows: 2005 2004 $ $ ------------ ------------ Operating losses available to offset future income taxes 2,670,000 2,234,000 Valuation allowance (2,670,000) (2,234,000) ------------ ------------ Net deferred tax assets -- -- ============ ============ The Company has determined that realization of a deferred tax asset is not likely and therefore a valuation allowance has been recorded against this deferred income tax asset. 25 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) b) Current Income Taxes The Company has certain non-capital losses of approximately $9,440,511 available, which can be applied against future taxable income and which expires between 2007 and 2015. 17. CONTINGENCIES The Company had received a Job Creation Loan in the amount of $77,000. If job creation under the loan program did not materialize, the penalty would be a retroactive increase in the interest rate to prime plus 2.5% per annum from prime plus 0.25% per annum. The loan was repaid on March 29, 2005 and the company was not charged an additional interest penalty at that time. Management is unable to determine the likelihood of this penalty materializing as at December 31, 2005. Any expense that may result from this penalty will be recognized in the period in which it becomes known. 18. COMMITMENTS The Company leases premises under an operating lease with a three years term expiring on December 31, 2008. Minimum lease commitments exclusive of insurance and other occupancy charges under the lease at December 31, 2005 were: 2006 $38,940 2007 $38,940 2008 $38,940 ------- $116,820 ======= 19. SEGMENT DISCLOSURES The Company, after reviewing its reporting systems, has determined that it has one reportable segment and geographic segment. The Company's operations are all related to the research, design, manufacture and sale of products and technologies related to the transmission of location based information, principally using wireless technology. All assets of the business are located in Canada. 26 PERFISANS HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 (Amounts expressed in US Dollars) 20. MANAGEMENT SALARIES Management salaries of $400,000 ($300,000 in 2004) have been expensed in the consolidated statements of operations. Management salaries of $400,000 have been included in accounts payable and accrued liabilities. 21. PROMISSORY NOTE PAYABLE Promissory note in the amount of $595,063 ($415,740 in 2004) bears interest at 3% per month, with principal and interest payable at December 31, 2005. Management is negotiating the terms with the lender. The new terms have not been finalized and agreed to by both sides. 22. RELATED PARTY TRANSACTION Included in cost of sales are purchases of $ Nil (143,200 in 2004) from a shareholder of the Company. This transaction was fully settled as of December 31, 2004. 23. SUBSEQUENT EVENT In March 24, 2006 a total of $78,701.31 of the convertible term notes were converted into common stock. The conversions were done at an average price of $0.11 (rounded) per common share which resulted in the issue of an additional 724,893 common shares. 27 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-KSB/A to be signed on its behalf by the undersigned, thereunto duly authorized. PERFISANS HOLDINGS, INC. By: To-Hon Lam -------------- CEO, Principal Accounting Officer and Chairman of the Board In accordance with the Exchange Act, this report has been signed below by the following persons and in the capacities and on the dates indicated. -------------------------------------------------------------------- SIGNATURE TITLE DATE --------- ----- ------------- To-Hon Lam CEO, Principal Accounting Officer and Chairman of the Board April 18, 2006 ------------------------------------------------------------------- Bok Wong Vice President of Operations & Business Development and Director April 18, 2006 -------------------------------------------------------------------- Eric Wang Director April 18, 2006 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBITS (a) Exhibits 3.1.1 Articles of Incorporation (1) 3.1.2 Amendment to the Articles of Incorporation (1) 3.2 Bylaws (1) 10.1 Acquisition Agreement by and between Perfisans Holdings, Inc. and Perfisans Networks Corporation (1) 10.2 Stock Purchase Agreement by and between the Registrant and SBI Brightline Consulting, LLC. dated February 12, 2004 (1) 10.3 Stock Purchase Agreement by and between the Registrant and Trilogy Capital Partners, Inc. dated February 12, 2004 (1) 10.4 Amendments to Stock Purchase Agreement by and between the Registrant, SBI Brightline, LLC and Trilogy Capital Partners, Inc. both dated June 25, 2004 (1) 10.5 Services Agreement by and between the Registrant and Trilogy Capital Partners, Inc. (1) 10.6 Employment Agreement with To-Hon Lam(1) 10.7 Employment Agreement with Bok Wong(1) 14 Code of Ethics (1) 21 Subsidiaries of the registrant (1) 31 Rule 13a-14(a)/15d-14(a) Certification. (2) 32 Certification by the Chief Executive Officer & Principal Accounting Officer Relating to a Periodic Report Containing Financial Statements. (2) (1) Previously filed. (2) Filed herewith. * The Exhibit attached to this Form 10-KSB shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.