-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2IyCCjuTMS7oMCq1a1G/Nta2m3NRvkrG/9yUD+NrtdiFjgSXhhERgZZ8NDKWCw4 B9qCdsq1BF4FpMu9CV/buA== 0001144204-06-016612.txt : 20060425 0001144204-06-016612.hdr.sgml : 20060425 20060424190934 ACCESSION NUMBER: 0001144204-06-016612 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20060425 DATE AS OF CHANGE: 20060424 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SiVault Systems, Inc. CENTRAL INDEX KEY: 0001101046 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 980209119 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30711 FILM NUMBER: 06776351 BUSINESS ADDRESS: STREET 1: 500 FIFTH AVENUE STREET 2: SUITE 1650 CITY: NEW YORK STATE: NY ZIP: 10110-0002 BUSINESS PHONE: 2129315760 MAIL ADDRESS: STREET 1: 500 FIFTH AVENUE STREET 2: SUITE 1650 CITY: NEW YORK STATE: NY ZIP: 10110-0002 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY BIOMETRICS INC DATE OF NAME CHANGE: 20001228 FORMER COMPANY: FORMER CONFORMED NAME: GREAT BEAR INVESTMENTS INC DATE OF NAME CHANGE: 20000313 10KSB 1 v039937_10ksb.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: JUNE 30, 2005 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____ to _____ Commission file number: 0-3071 SiVault Systems, Inc. --------------------- (Exact name of small business issuer as specified in its charter) Nevada 98-0209119 - -------------------------------- -------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 500 Fifth Avenue, Suite 1650, New York, NY 10110 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: 212-931-5760 ------------------------ Securities registered under Section 12(b) of the Act: None ---- (Title of each class) Securities registered under Section 12(g) of the Act: Common Stock, par value $.001 per share --------------------------------------- (Title of each class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10KSB or any amendment to this Form 10KSB. [ ] State issuer's revenues for its most recent fiscal year: $1,602,013. As of February 15, 2006, there were 38,262,426 shares of the registrant's common stock issued and outstanding. Of these, approximately 8,000,000 shares are held by non- affiliates of the registrant. As of February 15, 2006, the market value of common stock held by non-affiliates was approximately $2,400,000 based on the closing price of the common stock on that date. Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X] DOCUMENTS INCORPORATED BY REFERENCE NONE 2 TABLE OF CONTENTS Item Number and Caption Page - ------------------------------------------------------------- ---- PART I 1. Description of Business 5 2. Description of Property 20 3. Legal Proceedings 20 4. Submission of Matters to a Vote of Security Holders 20 PART II 5. Market for Common Equity and Related Stockholder Matters 21 6. Management's Discussion and Analysis or Plan of Operation 23 7. Financial Statements 35 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 8A. Controls and Procedures 35 8B. Other Information 36 PART III 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 37 10. Executive Compensation 43 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 46 12. Certain Relationships and Related Transactions 48 13. Exhibits 49 14. Principal Accountant Fees and Services 50 Index to Consolidated Financial Statements 3 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements can be identified by the use of forward-looking terminology such as "expects", "anticipates", "intends", "believes" and similar language, or the negatives thereof, and discussions of our strategy, future revenues and future costs. You are cautioned that our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may differ materially from those anticipated or projected by any forward-looking statements. Some of the factors that might cause or contribute to such differences include those discussed in Item 6. Management's Discussion and Analysis or Plan of Operation." Unless the context otherwise requires, all references in this report to (i) "we", "us" or the "Company", or words of similar import, refer to SiVault Systems, Inc., a Nevada corporation, together with its subsidiaries and (ii)share information reflect a 4:1 forward stock split effected in August 2000 and a 1:20 reverse stock split effected in June 2004. 4 PART I ITEM 1. DESCRIPTION OF BUSINESS. RECENT DEVELOPMENTS The following significant events occurred during the fiscal year ending June 30, 2005 and subsequent to the year then ending: SIVAULT ANALYTICS AND VIAQUO ACQUISITION; NAME CHANGE In July 2004, we completed the acquisition of SiVault Analytics Inc. ("SiVault Analytics"), a private Delaware corporation that provides secure storage and retrieval of signed documents and biometric signature-based authentication for processing of online transactions. Its services are designed to be compliant with regulations and standards in the retail and healthcare industries for authentication, authorization, transmission and storage of data. The acquisition was completed by means of a share exchange in which we issued 4,000,000 of our shares of common stock to the stockholders of SiVault Analytics in exchange for all of the outstanding stock of SiVault Analytics. Our shares were valued in the transaction at $1.80 per share (market price as of July 9, 2004), or $7,200,000 in the aggregate. We issued 140,000 of our common shares valued at $1.60 as finders fees in conjunction with this acquisition. Following the acquisition, we merged SiVault Analytics into our company and changed the name of our company to SiVault Systems, Inc. and our stock trading symbol to SVTL.OB. On November 30, 2004, the Company completed the acquisition of all the principal assets of Viaquo Corporation ("Viaquo"). Viaquo was a leading developer of computer security technology. Pursuant to the deal, the Company purchased substantially all of assets of Viaquo related to Viaquo's ViaSeal Access Control Business, including physical equipment, technology, products and intellectual property, in exchange for 3,050,000 shares of the Company's restricted common stock valued at $2.35 per share (average market price for the four trading days around November 30, 2004), of which 750,000 of the shares were issued and delivered to Viaquo at closing; 2,050,000 of the shares were placed in escrow to be held until the earlier to occur of (i) the issuance of a U.S. Patent for certain U.S. Patent Applications acquired by SiVault, or (ii) the abandonment by SiVault of the U.S. Patent Application following final rejection thereof by the U.S. Patent and Trademark Office; and the remaining 250,000 shares were placed in escrow to be held until the earlier to occur of (1) the issuance by the European Patent Office ("EPO") of a decision to grant a European Patent with respect to an European Patent Application acquired by SiVault, or (ii) the abandonment by SiVault of European Patent Application following a final refusal by ELP to grant the European Patent. The core technology and intellectual property purchased represents Viaquo's patent pending ViaSeal(TM) security technology. ViaSeal provides cryptographic protection of electronic data for distribution or access by multiple parties. 5 NEW MANAGEMENT AND APPOINTMENT OF BOARD OF ADVISORS Following the SiVault Analytics acquisition, certain principals and management of SiVault Analytics were elected as members of our management and Board of Directors. Emilian Elefteratos was elected President and Chief Executive Officer, Igor J. Schmidt was elected Chief Strategy Officer, Steven Pollini was elected Vice President-Engineering and Operations and Alexander Gelf was elected Vice President-Analytics. Effective August 6, 2004, Messrs. Elefteratos and Schmidt were elected directors of our company. Effective August 24, 2005, Mssrs. David Dalton and Gerard Munera resigned from the Company's Board of Directors and Mr. John Mahoney was appointed to the Board of Directors. Effective September 1, 2005, Mssrs Gil Amelio and Emilian Elefteratos resigned as a member of the Board and on September 16, 2005, Mr. Anthony Low Beer was appointed to the Board. Effective November 21, 2005, Mr. Orhan Sadik-Khan and Mr. Michel Kadosh were appointed to the Board of Directors. Effective November 21, 2005, John Mahoney was named acting Chief Executive Officer, Anthony Low-Beer was named Chairman of the Board; Mr. Wayne Taylor will continue as Chief Financial Officer of the Company. RESTRUCTURING OF DEBT The Company recently commenced a program to restructure its debt. The restructuring of Company debt, and debt of its wholly-owned subsidiary, Lightec Communications, Inc., is expected to be completed by the end of the fiscal year ending June 30, 2006. Restructuring of Longview Debt. The Company and three Longview Funds ("Longview") have agreed to restructure $2,588,237 of Longview Convertible Notes as follows. All outstanding debt of the Comany to Longview to be restructured as follows: (a) The Company to pay $400,000 to Longview on or before January 31, 2006; Longview was paid $400,000 in February 2006 - there was no notice of default. (b) The Company to pay an additional $400,000 to Longview on or before April 30, 2006; 6 (c) Convertible Notes of Longview to be adjusted pro rata as follows: (i) Principal amount to be reduced to $410,000; (ii) Fixed Conversion Price to be reduced to $.20 per share; (iii) SiVault granted a one year redemption right with respect to any shares issued at $.25 per share provided that the Company has not had an event of default since November 21, 2005; (d) Balance of debt to be forgiven if Company is not in default with the forgoing terms and conditions. In addition to the settlement of Longview, the following notes, loans, accounts payable and accrued liabilities, and lawsuits as of June 30, 2005 were settled by payment of cash, establishing an installment payment schedule, and the issuance and planned issuance of common stock and stock warrants.
Approximate amount owed as of Description June 30, 2005 Approximate Settlement Summary ----------- ------------- ----------------------------------- Notes and loans - non-related parties $1,450,000 Installment payables of $570,000 6.5 million shares of common stock valued at $l million, and 580,000 warrants valued at $300,000,and an additional 760,000 repriced warrants Notes and loans - related parties 550,000 3.4 million shares of common stock Valued at $450,000 Accounts payable and accrued liabilities 1,800,000 $120,000 paid in cash installment payables of $560,000, and 2.3 Million shares of common stock valued at $460,000 WonderNet Arbitration 350,000 Installment Payables of $350,000 (included in accounts payable and accrued liabilities ------------- $4,150,000 -------------
The Company expects to complete its restructuring and settling of its notes, loans, and accounts payable, and amounts due to the Company's former employees by the end of its fiscal year ending June 30, 2006. PRIVATE PLACEMENT Since the end of the fiscal year ending June 30, 2005, the Company has completed two private placements in which the Company raised gross proceeds of approximately $2.2 Million. The Company sold an aggregate of approximately 13,900,000 of its common shares in private placements at per share prices averaging $.10 and .45 per share. NEW BUSINESS As part of the Company's restructuring plan, the Company has been actively pursuing agreements to market the Company's software products. In January 2006, the Company entered into a licensing agreement with Hypercom Corporation ("Hypercom"). Hypercom is to pay the Company a licensing fee of 30% of the transaction fee that pertains to the Company's products. The current chief technology officer of Hypercom was a former officer and member of the Board of Directors of the Company during the fiscal year ended June 30, 2005. BUSINESS We are engaged in the commercialization of technologies designed to implement secure electronic solutions and retrieval of signed documents and biometric signature-based authentication for electronic transactions. Our technology solutions have evolved beyond the development stage and we are positioned for deployment in production environments. We intend to provide turnkey solutions combining the advantages of these technologies to facilitate safe, efficient and secure electronic transactions and data access. Through our wholly-owned subsidiary, Lightec Communications, Inc. ("Lightec"), we also provide design, installation and technical support services for information technology systems. 7 For the year ended June 30, 2005, we earned revenue of $1,602,013 and incurred a net loss of $23,900,354. In the prior fiscal year, we earned revenue of $7,131,437 and incurred a net loss of $3,406,660. Substantially all of our historical revenue has been generated from Lightec. By enabling the transition to electronic transactions from traditional paper-based transactions, we believe that our products and services will promote reduced costs, quicker response times, lower levels of mistakes and fraud and the facilitation of other benefits not feasible for paper-based transactions such as instant transaction query capability, data mining for numerous business and research purposes and more efficient data storage. STRATEGY Our objective is to become a leading provider of technology solutions to assist in the migration of paper transactions to electronic transactions. With our recent management changes and expanded technology capabilities following the acquisition of SiVault Analytics, we have revised our business strategy to take advantage of our core competencies. Key elements of our strategy include: Focus on Retail and Healthcare Markets. While our technology solutions are appropriate for numerous markets, including retail, healthcare, banking and government, we believe the United States retail and healthcare markets represent the most immediate opportunities for our company due to their size, market inefficiencies and regulatory changes requiring increased data availability and higher levels of security. As such, our initial target markets will be retail and healthcare. For retail, we will offer our branded product ReceiptCity purchased in March 2004 from a subsidiary of Symbol Technologies. ReceiptCity is a software solution designed to store electronic copies of signed customer receipts to facilitate billing inquiries, lower the cost of dispute resolution and decrease the number of charge-backs that otherwise would occur due to merchants' inability to timely locate and present proof of transactions. For healthcare, we offer an electronic prescription service utilizing biometrically-authenticated signatures, thereby reducing prescription fraud and filling errors and facilitating compliance with new standards relating to medical record access. Transaction-Based Revenue Model. To minimize up-front costs to customers, we price our services on a per transaction basis, depending on volume and type of transaction. Subject to financing availability, we may also offer our customers leasing and financing options for necessary hardware and software, to further offset implementation costs. Acquire New Technologies and Integrate with Existing Technologies. Our ability to offer turnkey solutions depends on our ability to offer a number of technologies and applications in a comprehensive service package. We devote considerable resources to ensuring that our existing technologies are compatible and well integrated and we will continue to seek out and integrate new technologies as appropriate to support our existing and planned product and service offerings. 8 Leverage Our Lightec Business. Lightec has historically provided a significant source of our cash funding needs. During the year ended June 30, 2005, substantially all of our revenue was generated by Lightec. In addition, we believe that Lightec's system design and installation business and our other technology offerings can be synergistic in terms of mutually beneficial marketing opportunities. Protect Our Intellectual Property. Protection of our intellectual property is important to generating maximum revenue from our products and services and maximizing the value of our business in general. To that end, we seek, whenever practicable, to obtain patent and other intellectual property protection for our technologies and we seek to ensure that others from whom we license important technologies do the same. We currently have pending three United States provisional patent applications relating to technologies owned by us. We also own and are considering applying for additional trademarks and/or copyrights. OUR CORE TECHNOLOGIES Our core technologies are comprised of the following: - - Biometric Signature Authentication Technology - software designed to record and analyze biometric parameters relating to a person's handwritten signature. Parameters include image, speed, stroke sequence, pen tilt and acceleration. Recorded information is stored for each registered signer in a dynamic database that changes over time to reflect subtle changes in each registered signer's signature. Commercial applications of this technology include document approval, verification of the identity of users participating in electronic transactions and securing log-in access to computer systems or protected networks. Key components of this technology are licensed from Communications Intelligence Corporation. - - Access Control Technology - a distributed access management software solution that permits only authorized users to access (put in or take out) protected information being shared among groups of all sizes. The system uses access credentials (permissions) that apply to each individual file (or field on an XML form) and distributed to each organizational member, and which are automatically refreshed over the Internet. This access control technology enables members to securely encrypt files or XML fields for use by groups that are defined by access credentials issued to each member by security administrators. Only individuals with the correct access credentials may consume (decrypt) or create (encrypt) the data. Individual members are assigned multiple credentials with read and/or write permissions according to their role in the organization. Once encrypted by the creator- e.g., the central database sending a report to an insurance company-the data remains protected by strong encryption (typically AES encryption) and routed and/or stored to and from a number of locations before the properly authorized person with the read credential opens it to access the data. We license this technology on an exclusive basis in the healthcare field from Viaquo Corporation. 9 - - Service Oriented Architecture - Our technology solutions employ a number of electronic functionalities, including biometric authentication, database management, transaction processing, financial settlement, data communication, secure data access and storage, data mining and Internet-based service provision. We enable these functionalities and related system components to communicate with one another through a service oriented architecture designed for fast and easy integration of functionalities, as well as scalability to accommodate growth and adaptation to changing market needs. Our system components include Sun database servers, Solaris database operating system, EMC storage area network, Hewlett Packard blade application and web servers, Oracle database management software, InterNap primary production communication link (network provider) and Fiorano enterprise service bus. Our enterprise service bus is a key component of our system architecture as it provides the basic connectivity backbone. It is designed to interoperate with a variety of disparate application servers simultaneously, potentially smoothing over technical differences and also providing services for communication and integration. Our turnkey solutions may incorporate some or all of these technologies, as well as other proprietary technologies that we may either license or otherwise obtain for the benefit of our customers, depending on the needs of the particular application. OUR PRODUCTS AND SERVICES While our core technologies have numerous applications, and can be customized to suit the needs of particular customers, we intend to focus on the following product and service offerings: ReceiptCity - is a branded software solution targeted to retail enterprises that stores electronic copies of signed receipts of customers to facilitate billing inquiries, lower the cost of dispute resolution and decrease the number of charge-backs that otherwise would occur due to merchants' inability to timely locate and present proof of transactions. This product can be combined with our proprietary data analysis technology to enable merchants to: - - Create targeted advertisements delivered directly to credit card terminals while the customer is waiting for credit card authorization. - - Recognize and track customers' shopping patterns - - Track efficiency of marketing campaigns and promotions. To support ReceiptCity, merchants must have credit and debit card processing capability, point-of-sale terminals capable of biometric signature capture and Internet connectivity. We may enter into arrangements with third party providers of these facilities to offer them to our potential customers. Expanded Offerings - Other products and services we are offering to our target markets include: 10 - - Biometric signature registration - - Biometric signature authentication per transaction - - Database security protection(access control) - - Digital pen and paper for forms input - The product consists of a digital pen that contains ink and a small camera that captures pen strokes and puts them into digital form. After docking the pen in its cradle, the data is automatically integrated into the enterprise data infrastructure. It is targeted to businesses with processes that rely heavily on filling out paper forms, including retail and healthcare businesses. e-Prescriptions - We plan to offer an electronic prescription solution utilizing biometrically-authenticated signatures, thereby reducing prescription fraud and filling errors and facilitating compliance with new standards relating to medical record access. The service will provide a systematic way to capture signatures of medical doctors who prescribe medication, utilizing devices such as signature pads, pen computers and person digital assistants (PDAs). Once authenticated, a secure prescription with a unique number will be created and centrally stored. A hard copy of the prescription can be given to the patient, and/or the prescription can be routed in electronic form directly to the dispensing pharmacy. To the extent permitted by law, the system would store prescription-related data, and allow access by pharmacies, physicians and other groups involved in healthcare delivery, only to the extent authorized. Through our Lightec subsidiary, we offer design, installation and technical support for information technology systems. See "- Lightec Communications." TECHNOLOGY LICENSES Our technology platform is comprised of a number of technologies, several of which we license from others. Set forth below is a summary of the material technology license agreements to which we are a party. Our rights to these technologies are dependent on our continued fulfillment of our responsibilities under these agreements, including our satisfaction of royalty and license fee payment obligations. 11 Communications Intelligence Corporation Effective May 13, 2004, we entered into an agreement with Communications Intelligence Corporation ("CIC") pursuant to which we were granted a worldwide, non-exclusive license to use and incorporate CIC's iSign software and to distribute the licensed software embedded in our software or as part of our solution. In consideration for the license, we agreed to pay CIC a fee equal to 33.33% of all CIC-based transaction fee proceeds. For each unit shipped by us in a reseller capacity, we agreed to pay CIC 75% of its then published list price. For CIC support as contemplated by the agreement, we agreed to pay an additional 10% of the license fees otherwise payable. The term of the agreement is three years, subject to automatic one-year renewals if not terminated at least one month prior to the scheduled renewal date. In addition to standard termination provisions, the agreement is terminable by CIC if we have not generated revenue to CIC within 180 days of the effective date or if, in CIC's reasonable judgment, we do not make continual reasonable commercial use of the licensed technology. @POS.com Pursuant to an agreement dated March 2, 2004, we acquired assets of @POS.com, Inc., a subsidiary of Symbol Technologies, Inc., exclusively related to the business of capturing sales receipt transaction data for the purpose of providing access to such data on an ASP basis. Included in the acquired assets are the ReceiptCity.com software, hardware, a variety of hosted services related thereto and trademarks for the names "Crossvue" and "MyReceipts". The business was formerly conducted by the seller's wholly-owned subsidiary, Crossvue, Inc. We also acquired a non-exclusive worldwide, non-trasferable, non-sublicensable license under the seller's patent claims necessary to operate the acquired software and to make, use, sell and have sold the hosted software. Under the agreement, we granted @POS a non-exclusive, worldwide, perpetual, sublicensable license under copyright in all acquired software developed by @POS, provided that for two years from closing @POS agreed not to sublicense the licensed software as a substantially complete system for providing ASP functionality similar to the hosted services. In consideration for the acquired assts, we agreed to pay the following consideration to @POS: For the year ending December 31, 2005, 10% of net receipts accrued by us for that year, for the year ending December 31, 2006, 8% of net receipts accrued by us for that year, and for each year thereafter, 6% of net receipts accrued by us for that year, provided that the rate shall drop to 5% if and when patents under which the license is granted are no longer valid or enforceable. The agreement has no set term and no provision for termination following closing. 12 Intelli-Check On August 24, 2004 we entered into a software license agreement with Intelli-Check Inc., a Delaware corporation, pursuant to which we were granted a nonexclusive, nontransferable right to use the licensed software in connection with the sale, by us or distributors, of our signature verification technology. In consideration for the license, we agreed to pay Intelli-Check a fee of $475 for each system that uses the licensed software, as well as additional amounts pursuant to agreed upon pricing for hardware and other products and services offered by Intelli-Check as well as software updates. The agreement has no fixed term and is cancelable by us for any reason upon 60 days' notice and by Intelli-Check only upon breach by us that remains uncured following two months' notice. 13 Hypercom Effective February 13, 2006, we entered into a Product Technology and License Agreement (the "Agreement") with Hypercom Corporation, a corporation engaged in the design, manufacture and sale of electronic payment solutions worldwide (NYSE: HYC). Pursuant to the Agreement, SiVault granted Hypercom a perpetual, worldwide, non-exclusive license to demonstrate, market and distribute to its customers, distributors, resellers and other end-users SiVault's products and services, including SiPay, Sipay, Mobile SiSign, SiSeal, ReceiptCity and all related software. In addition, SiVault granted to Hypercom a perpetual, worldwide, non-exclusive license to use, copy, modify and create derivative works based on certain SiVault technology, including technology pertinent to distributed security systems, payment methods, identify establishing services and processing payments via short message service, as disclosed in U.S. Patent Applications 09/930,029, 60/650,856, 60/618,443 and 60,681,902 respectively. The initial term of the Agreement is one year, and is automatically renewable thereafter for one-year terms, unless terminated in writing three months prior to expiration of the original term, or any renewed terms. The Agreement provides for the payment of licensing fee of 30% of the portion of the transaction fee that pertains to SiVault's products and derivative works for each transaction and 30% of licensing fees generated by sublicensing SiVault's products. MARKETING We employ a channel-based sales strategy, with some direct selling efforts to targeted large prospects. Our managed network infrastructure services are priced on a transaction basis, determined by the volume and type of transaction. Related value-added services incur additional fees. Alternatively, large enterprises can license our service package(s) and manage their own system internally. We have entered into agreements with a number of third parties to assist us in our marketing efforts. These arrangements are designed to leverage our presently limited sales force and to target defined geographic and business markets. We envision that certain of our technology license arrangements will also result in marketing opportunities with those companies. Set forth below is a summary of some of our existing marketing arrangements. Hypercom Effective May 13, 2004, we entered into an agreement with Hypercom U.S.A., Inc. under which we were appointed a non-exclusive Hypercom reseller in the United States. Under the agreement, we are authorized to purchase Hypercom point of sale terminal products and peripherals and to resell them to end user customers. We agreed to use our best efforts to promote and market the products throughout the United States and to maintain an active and suitably trained sales force. The term of the agreement is three years from the effective date, subject to earlier termination upon three months' notice by either party for any reason. The agreement may also be terminated under a variety of circumstancesfor cause and without notice. 14 Rycom CCI Effective September 22, 2004, we entered into a strategic alliance and exclusive management agreement with Rycom CCI Inc., a company located in Ontario, Canada ("Rycom"). Under the agreement, Rycom was authorized as our exclusive Canadian Strategic Manager to develop and operate a fully managed signature verification authentication system and other solutions using our proprietary technology for the Canadian market. In consideration for the agreement, we and Rycom agreed to share all software license and software maintenance revenue generated under the agreement on a 50-50 basis. Rycom's rights under the agreement are exclusive in Canada. The agreement has an initial term of three years, subject to automatic two-year renewal at the end of each term. The agreement can be terminated upon 90 days' prior notice upon either party's breach. COMPETITION In the retail market, we are aware of companies that offer technologies that store pictures of electronic signatures entered through point of sale terminals. Some of these companies enable the signature to be printed on the transaction receipt. In the prescription management market, we are aware of a number of companies that provide electronic prescription services, including A4 Health Systems, Allscripts, SureScripts, Alteer, ChartLogic, eInformatics, E-Physician, Health Probe, I-Scribe, Medical Manager/WebMD, OnCall Data, Pocket Scripts, and RxMadeSimple. There are several companies that offer electronic biometric signature authentication technology there are numerous electronic authentication and verification technologies such as pin, password, and other biometrics technologies. A number of companies offer digital pen technology. For example, PenPower Group, and Palm Inc. have developed or are developing complete pen-based hardware and software systems. Others, such as Microsoft Corporation, Silanis Technology, Inc., and Advanced Recognition Technology, Inc., have focused on different elements of those systems, such as character recognition technology, pen-based operating systems and environments, and pen-based applications. LIGHTEC COMMUNICATIONS Lightec was established in 1994. It provides telecommunications design, installation and information technology services. Lightec's customer base, which is primarily located in Northeastern United States, includes governmental units, particularly school districts. Lightec's projects involve design and installation of cable and fiber optic networks. Lightec's clients include educational institutions, including universities and local school systems, governmental entities, hospitals and corporations. 15 Lightec's target market includes government, manufacturers, processors, utilities, banks, schools, universities, research complexes, media conglomerates, securities and commodities exchanges, law firms, consulting and research organizations and transportation service companies. Lightec competes on the basis of quality versus price. Lightec's services are largely delivered through long-term subcontractors and temporary staff. In the information technology sector, Lightec competes with large-scale project firms such as Verizon and SNET rather than maintenance shops or equipment resellers. In the general installation business Lightec competes with 20 to 30 small regional/local premise-wiring providers. In the fiber optic splicing market, Lightec competes with national and regional firms. Lightec views its real competition as the turnkey solution providers who can retain the value-added service contracts ensuring the longevity of the solution provided. Lightec has historically relied on one customer for the majority of its revenues. Lightec is under contract to provide supplies and services to this customer. This customer has notified Lightec that it does not intend to order from it in the future under this contract. Lightec has advised this customer that, in addition to owing Lightec a substantial account payable balance, it is obligated to continue to utilize Lightec as contracting party for services approved by the primary funding sources, the Universal Services Administration. If this dispute is not resolved or if the customer became unable to finance the continued acquisition of these supplies and services, the impact on Lightec's earnings would be significant. HISTORY We were incorporated in the State of Nevada on March 12, 1999 as Great Bear Resources, Inc. On May 25, 1999, we changed our name to Great Bear Investments Inc. On August 11, 2000, we changed our name to Security Biometrics, Inc. On July 23, 2004, we changed our name to SiVault Systems, Inc. On August 25, 2000, we acquired all of the outstanding capital stock of Biometrics Security, Inc., a Nevada company, in a share exchange with its shareholders. In connection with the acquisition, we issued 1,875,000 shares of our common stock to Gesture Recognition Technologies International Limited in exchange for the preferred shares of Biometrics Security, Inc. it owned, and we issued approximately 25,000 shares of our common stock in exchange for the outstanding shares of common stock of Biometrics Security, Inc. On August 22, 2000, Biometrics Security, Inc. entered into an option agreement with DSI Datotech to acquire an exclusive license to that company's gesture recognition technology for banking and financial transactions. The exercise price of the option was $8,000,000, of which we paid $320,000. On December 2, 2002, the name of Biometrics Security, Inc. was changed to eMedRX, Inc. 16 On June 29, 2001, we acquired all of the outstanding membership interests of Netface LLC, a Connecticut limited liability company, in exchange for an aggregate of 1,000,000 shares of our common stock. NetFace held an option to acquire an exclusive royalty-free license to exploit DSI Datotech's gesture recognition technology for video games and Internet/television. The exercise price of the option was $5,000,000, of which we have paid $200,000, plus a 20% equity interest in NetFace LLC. Netface LLC is presently inactive. We have elected not to exercise our options to acquire licenses to DSI Datotech's gesture recognition technology and the options have expired. Consequently, the Company expensed $320,000 in 2001 and the balance of the investment of $200,000 in 2002. On June 14, 2002, we acquired Lightec Communications, Inc. through a merger with a wholly-owned subsidiary formed by us. The merger consideration consisted of 950,000 shares of our common stock and $4,000,000 in cash. 900,000 shares were issued to Maryanne Richard and 50,000 shares were issued to Dr. Nabil El-Hag. We financed the cash portion of the merger consideration through the issuance and sale of 9% promissory notes in the aggregate principal amount of $2,000,000 and the sale of common stock and warrants at $2.40 per share for gross proceeds of $850,000. The notes were issued in equal principal amounts to Synergex Group Partnership, whose managing partner is Gerard Munera, a director of our company, and Maryanne Richard, the owner of Lightec. We also entered into an employment agreement with the manager of Lightec, Michael Richard, under which we agreed to pay Mr. Richard an annual salary of $150,000 and performance related bonuses for 2002, 2003 and 2004. The employment agreement was subsequently terminated pursuant to the settlement described below. In connection with the acquisition, we issued 200,000 shares of common stock and accrued $200,000 as a finder's fees under a finder's fee agreement with Chris Farnworth. In August 2004, the $200,000 liability plus an additional $31,813 in amounts due to Chris Farnworth was converted to 144,718 shares of common stock. On June 4, 2004, we entered into a Settlement Agreement with MaryAnne Richard and Michael Richard, pursuant to which we and Lightec, on the one hand, and MaryAnne Richard and Michael Richard, on the other hand, agreed to settle all obligations and disputes between them. As part of the agreement, we arranged for the payment to the Richards of $1,189,983 in cash (including an $850,000 payment for the shares referred to below) and we issued to MaryAnne Richard a warrant to purchase 400,000 shares of our common stock at $2.50 per share, and the Richards (i) transferred 850,000 shares of our common stock to third parties designated by our company for $850,000 in cash and (ii) surrendered a promissory note issued by us in the principal sum of $1,000,000. On July 2, 2004, the parties finalized the settlement and executed a mutual waiver and release of all claims of any kind whatsoever that each may have had against the other, and on that date the remaining balance of the settlement payment $339,983 was paid to the Richards. On June 28, 2002 we acquired all of the outstanding stock of Datadesk Technologies, Inc., a Washington corporation ("Datadesk"), pursuant to a merger with a newly formed subsidiary of our company. In the merger, we issued approximately 550,000 shares of our common stock to the shareholders of Datadesk, and borrowed $1,680,000, pursuant to a one-year convertible debenture, $1,375,000 of the proceeds of which was used to pay Datadesk bank loans, certain liabilities and closing costs. In connection with and as a condition to the acquisition, we entered into a three-year employment agreement with Robert Solomon, pursuant to which we agreed to employ Mr. Solomon as chief technology officer at an annual base salary of $150,000 plus annual bonuses based on Datadesk sales. 17 Datadesk was in the business of designing, manufacturing, and selling desktop solutions, educational computing systems, and handheld and wireless devices. On August 20, 2003, we transferred ownership of Datadesk to Pan Pacifica Ltd. in consideration for assumption of the net liabilities of Datadesk. In connection with the transfer, Mr. Solomon's employment with our company was terminated. We recorded net income (loss) from discontinued operations o $266,021 and $3,918,281 (including a writedown of goodwill of $3,405,645 ) for the years ending June 30, 2004 and 2003 to reflect the disposition of Datadesk. On January 21, 2003, we established a new wholly-owned subsidiary, eMedRx, Inc., a British Columbia corporation ("eMedRx Canada"). EMedRx Canada entered into an exclusive worldwide license agreement with our Company to develop and market our electronic prescription system. eMedRx Canada has issued certain common stock to outside interests for approximately $50,000 thereby reducing our ownership of eMedRx Canada to below 100%. We currently have two United States-based subsidiaries under the name eMedRx, Inc. To streamline our corporate structure, these business were merged into the Company effective October 2005. On February 18, 2004, we entered into a stock purchase agreement to purchase all of the outstanding shares of Datagility, Inc. ("Datagility"). The transaction was consummated in May 2004. Datagility has developed a software application, CyberTrooper, that is designed to fulfill the scanning requirements of the United States Patriot Act and Office of Foreign Assets Control. The purchase price for the Datagility shares was (i) $200,000 in cash, $100,000 of which was paid at closing and the balance of which is payable on December 31, 2004, and (ii) 116,278 shares of our common stock, which was issued at closing. Of the $100,000 payment scheduled to become due on December 31, 2004, $50,000 is payable to Mr. Herve Bertacchi, President of Lightec. Under the agreement, we agreed to pay additional cash consideration of up to $200,000 if revenues earned by us from CyberTrooper exceed certain targets by December 31, 2004 and June 30, 2005. Subsequent to year end, Mr. Bertacchi resigned as President of Lightec and the Company agreed to settle amounts owed to him by the payment of $270,000 installments (including $50,000 in respect of Datagility). In addition, Mr. Bertacchi was engaged by Lightec as a consultant to be paid on an hourly basis. On July 9, 2004, we issued an aggregate of 4,000,0000 shares of our common stock, valued at $1.80 per share, to the shareholders of SiVault Analytics, Inc., a Delaware corporation, in exchange for all of the outstanding stock of SiVault Analytics, Inc. Thereafter, on July 28, 2004, we merged that company into ours and simultaneously changed our name to SiVault Systems, Inc. As of November 30, 2004, we acquired substantially all of the assets of Viaquo Corporation ("Viaquo") related to Viaquo's ViaSeal Access Control Business, including physical equipment, technology, products and intellectual property, in exchange for 3,050,000 shares of the Company's restricted common stock which were initially valued at $2.35 per share (average market price for the four trading days around November 30, 2004), of which (1) 750,000 of the shares were issued and delivered to Viaquo at closing, (2) 2,050,000 of the shares were placed in escrow. As of March 31, 2005, an amendment was entered into regarding the Viaquo assets purchase agreement, pursuant to new information obtained about the ultimate issuance of patents (valued at $1.52 per share - market price as of March 31, 2005) that had been hold in escrow by Viaquo. As of June 30, 2005, there were no shares remaining in the escrow account. HUMAN RESOURCES 18 As of December 31, 2005, we had two full-time employees. Subsequently, we have hired five full-time employees, including a COO and a Vice President of Engineering and Sales. EXECUTIVE OFFICERS Our executive officers are as follows: NAME AGE POSITION - --------------------- --- ------------------------------------------- John Mahoney 56 Chief Executive Officer, President and Director Wayne Taylor 53 Interim Chief Financial Officer and Director Richard Moore 53 Chief Operating Officer Alan Alpert 50 Vice President-Engineering Richard Arturo 47 Vice President-Sales For a description of Mssrs Mahoney, Taylor and Moore. See Item 9. "Directors, Executive, Officers, Promotors and Control Persons, Compliance with Section 16(a) of the Exchange Act" at Page 37. Richard Arturo Richard Arturo has 25 years of experience in the computer, networking and software industry. Rick was part of Sun Microsystem's Open Systems growth in the late 80's and Cisco's Systems internet build out in the mid 90's. At Cisco, his sales teams contributed over half a billion dollars of revenue during his tenure. Since then, he has held VP of Sales positions at start-ups HydraWeb Technologies, CentrePath and SiVault Systems (SVLT.PK). He established sales teams that sold new products and services into Service Provider and Enterprise markets. As an investor, he provided seed funding to create two new technology companies that provided e-Learning products (TrainingScape) and financial services software (PFN, sold to Guggenheim Partners). Mr. Arturo holds a Bachelor of Science degree from Carnegie Mellon University. Alan Alpert For the past five years Mr. Alpert was a senior executive at Financial Fusion where he was responsible for SWIFT (Society for Worldwide Interbank Financial Telecommunication). His responsibilities included business analysis, detailed requirements, architecture, documentation, design, on and offshore development and test, leading to successful business deployment. The SWIFTNet FIX (Financial Information Exchange) Hub architecture developed by Financial Fusion enables SWIFT customers secure access to the entire SWIFT community through a single FIX connection. Mr. Alpert worked with the Financial Fusion President and COO to generate $4 plus million dollars of incremental revenue in 2005 from SWIFT partnership. 19 In addition, Mr. Alpert managed business/software development in the Telecom and Healthcare vertical markets leveraging Sybase's existing IP and customer accounts. Mr. Alpert holds a Bachelor of Science degree in Computer Science from Queens College. ITEM 2. DESCRIPTION OF PROPERTY We occupy approximately 1,500 square feet of space at 500 Fifth Avenue, Suite 1650, New York, New York, under a sublease expiring December 31, 2007, at a base rent of $4,500 per month. In San Jose, California, we sublease an office at 560 South Winchester Blvd., San Jose, CA 95128, under a sublease expiring May 31, 2008. ITEM 3. LEGAL PROCEEDINGS Neither we, nor any of our subsidiaries, are a party to any material legal proceeding, nor, to our knowledge, is any material litigation threatened against us or our subsidiaries. Subsequent to year end we settled claims by a third-party lender and licensor. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE 20 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Our common stock is currently traded in the over-the-counter market and has been quoted on the pink sheets since November, 2005, and on the OTC Bulletin Board from June 12, 2001 to November, 2005. The trading symbol for our common stock is currently SVTL.PK. The following table presents the range of the high and low bid quotations for our common stock as reported for each quarter beginning July 1, 2003. Such quotations reflect inter-dealer prices without adjustments for retail mark-up, markdown or commissions, and do not necessarily represent actual transactions. Period High Low - ----------------------------------- ----- ----- January 1, 2006 - March 31, 2006 $0.50 $0.11 October 1, 2005 - December 2005 $0.14 $0.02 July 1, 2005 - September 30, 2005 $0.75 $0.09 April 1, 2005 - June 3, 2005 $1.5 $0.44 January 1, 2005 - March 31, 2005 $2.85 $1.30 October 1, 2004 - December 31, 2004 $3.50 $2.00 July 1, 2004 - September 30, 2004 $4.50 $0.75 April 1, 2004 - June 30, 2004 $2.70 $0.80 January 1, 2004 - March 30, 2004 $3.00 $1.90 October 1, 2003 - December 31, 2003 $3.00 $2.10 July 1, 2003 - September 30, 2003 $3.40 $1.50 HOLDERS As of March 31, 2006 our common stock was owned by approximately 300 holders of record. DIVIDENDS We have never declared or paid any cash dividends. It is our present policy to retain earnings to finance the growth and development of the business and, therefore, we do not anticipate paying dividends on common stock in the foreseeable future. 21 RECENT SALES OF UNREGISTERED SECURITIES The following sets forth certain information regarding sales of our securities during the year ended June 30, 2005, which sales were not registered under the Securities Act of 1933. Unless otherwise indicated, no underwriters were involved in these transactions. The following sets forth certain information regarding sales of our securities during from January 1, 2005 to April 30, 2005, which sales were not registered under the Securities Act of 1933 (the "Act"). Unless otherwise indicated, no underwriters were involved in these transactions. In January and February 2005, we sold to private investors 530,000 shares of our common stock for a total purchase price of $1,017,500. For no additional consideration, three of the investors also received two-year warrants to purchase a like number of shares of common stock at an exercise price of $2.00 per share. On January 14, 2005, we issued 50,000 shares of our common stock to an individual as consideration for investor relations services. On March 11, 2005, we issued 250,000 shares of our common stock to two individuals (one of whom is now an employee) as collateral to secure repayment of promissory notes. On March 16, 2005, we issued 60,000 shares of our common stock to two individuals as partial payment for legal services and executive recruiting services. Also on March 16, 2005 we issued 13,889 share of our common stock to our former Chairman pursuant to his contract to provide services to the Company. On March 23, 2005, we issued 50,000 shares of our common stock to an individual as consideration for renewing a loan to the Company. On March 29, 2005, we issued 50,000 shares of our common stock to an individual who is now an employee as consideration for making a loan to the Company. On March 28, 2005, we issued 11,666 shares of our common stock to an individual pursuant to the Share Exchange Agreement between eMedRx, Inc. (Canada) and SiVault Systems, Inc. to acquire remaining minority equity interests of eMedRx, Inc. (Canada). On March 30, 2005, we issued 57,600 shares of our common stock to three employees as consideration for making loans to the Company. On April 30, 2005, the Company issued 8,333 shares of our common stock to the Chairman of the Board as consideration for accepting a promissory note from the Company for payments owed to him in connection with services performed under his contract for the period January 1 through April 30, 2005. During the Period July 1, 2005 to the date of this report, the Company sold approximately 13,892,400 shares of its common stock to approximately ten individuals at prices between $.10 and $.45. All such shares were sold in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933. On February 1, 2006, the Board of Directors approved that each of the nine members of the board to be issued a one-time grant of 250,000 restricted shares of the Company's common stock valued at $495,000 at $0.22 per share. The Board of Directors also approved the issuance of 100,000 restricted shares to each board member for fiscal year 2006 compensation valued at $198,000 at $0.22 per share. 22 In addition, the Company issued shares of its stock in connection with the settlement of debt. Those issuances are summarized under "Description of Business - Recent Developments" at Page 5. Each of the foregoing sales was made in reliance on the exemption afforded by Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities, the securities were offered to a limited number of individuals and the transfer thereof was appropriately restricted by us, all purchasers were believed to be accredited or sophisticated investors capable of evaluating the merits and risks of the investment and each purchaser represented that the securities were acquired for investment and not with a view to re-sale in contravention of the registration provisions of the Securities Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION When used in this report, the words "anticipated", "estimate", "expect", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions including the possibility that we will fail to generate planned revenues. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following discussion and analysis of financial conditions and results of operation should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Prospectus. It is intended to assist the reader in understanding and evaluating our financial position. CRITICAL ACCOUNTING POLICIES Management discussion addresses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of theses statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period. On an on- going basis, management evaluates its estimates and judgment, including those related to revenue recognition, goodwill, bad debts, income taxes, and contingent liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. 23 The following discussion of critical accounting policies represents our attempt to report on those accounting policies which we believe are critical to our consolidated financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 1 of the Notes to the Consolidated Financial Statements for the years ended June 30, 2005 and 2004 included in this report. We have identified the following as critical accounting policies affecting our company: Revenue Recognition; Income Taxes; and Goodwill and Other Long-Lived Assets Revenue Recognition Our revenue recognition policies are significant because our revenue is a key component of our results of operations. Revenue recognition in connection with our Lightec business, which accounted for substantially all of our approximately $1,602,013 million in revenue for the most recent fiscal year, is particularly subjective as it has historically been generated from fixed-price or modified fixed-price contracts. Recognition of revenue from these contracts requires the estimation of the cost, scope and duration of each engagement. Revenue and the related costs for these projects are recognized using the percentage-of-completion method as costs (primarily labor and materials) are incurred, with revisions to estimates reflected in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future revenue and margins from this business may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting changes in revenues and reductions in margins or contract losses could be material to our results of operations. Income Taxes We have a history of losses. These losses generated sizeable federal net operating loss ("NOL") carry forwards which as of June 30, 2005 totaled approximately $19,800,000. Generally accepted accounting principles require that we record a valuation allowance against the deferred income tax asset associated with these NOL carry forwards and other deferred tax assets if it is "more likely than not" that we will not be able to utilize them to offset future income taxes. Due to our history of unprofitable operations, we only recognize net deferred tax assets in those subsidiaries in which we believe that it is "more likely than not" that we will be able to utilize them to offset future income taxes in the future. We currently provide for income taxes only to the extent that we expect to pay cash taxes on current income. It is possible, however, that we could be profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carry forwards and other deferred tax assets. The net operating loss carry forwards may be limited in accordance with Section 382 of the Internal Revenue Code of 1986, as amended, based on certain changes in ownership that have occurred, or could occur in the future. Upon being profitable, we would immediately record the estimated net realizable value of the deferred tax assets at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax assets could cause our provision for income taxes to vary significantly from period to period. 24 Goodwill And Other Long-Lived Assets We review the carrying value of our long-lived assets held for use whenever circumstances indicate there may be an impairment. For all assets excluding goodwill, the carrying value of a long-lived asset is considered impaired if the sum of the undiscounted cash flows is less than the carrying value of the asset. If this occurs, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. The fair value is determined by applying a market-rate multiple to the estimated near-term future revenue stream expected to be produced by the segment. We have adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under this accounting standard, we do not amortize our goodwill and are required to complete an annual impairment test. For the purpose of implementing SFAS No. 142, we have designated the fourth quarter as the period of the annual test. For the year ended June 30, 2005, we incurred an impairment of cost in excess of fair value from the acquisition of SiVault Analytics, Inc. of $5,706,060 and an impairment of long-lived assets of $761,436. RESULTS OF OPERATIONS 25 Year Ended June 30, 2005 vs. Year Ended June 30, 2004 Our revenues for the year ended June 30, 2005 were $1,602,013 a decrease of $5,529,424 or approximately 80% from the prior year. Our revenues continued to be substantially all generated from the Lightec subsidiary, in regards to the Bridgeport contract. Revenues under this contract decreased significantly because of delayed funding by USAC and a curtailment of activities by the Board of Education. The costs of revenue incurred for the year ended June 30, 2005 decreased to $833,299, a 77% decrease from the year earlier period. This reduction parallels the 80% reduction in revenue from the the gross margins, as a percentage of sales, were 48% and 49% for the years ended June 30, 2005 and 2004 respectively. Hence our efficiency in delivering product and services to Bridgeport has stayed the same Our selling, general and administrative expenses for the year ended June 30, 2005 were $16,532,269 an increase of $10,298,314 or 165% over the prior year. 26 The increase in expenses during the most recent fiscal year was largely attributable to increased head count in the Company's San Jose office and payroll increase of approximately $3.5 million, increased consulting fees of approximately $2,400,000, issuance of stock warrants to certain officers of the company in connection with short-term selling financing of approximately $3.1 million, Board of Directors fees of $1.3 million increase in rent expense of approximately $375,000 and increased travel and entertainment expense of approximately $224,000. Our other expenses for the year ended June 30, 2005 were $8,136,799, an increase of $7,340,579, or approximately 920% increase from the year earlier period. Interest expense for the year ended June 30, 2005 was $1,669,303, an increase of approximately 110% from the prior year. The increase in interest expense was primarily due to the amortization of debt discount (a non-cash charge) upon the issuance of convertible debt in 2005. For the year ended June 30, 2005, we incurred an impairment charge of $5,706,060 of cost in excess of fair value from the July 2004 acquisition of SiVault Analytics, Inc., and an impairment of long-lived assets of $761,436. Subsequent to the purchase of SiVault Analytics, Inc., we reviewed the initially recorded excess cost over net tangible assets acquired amount and determined that $2,157,000 should be assigned as the fair value of a technology product intangible and that the remaining $5,706,060 related to other elements, such as the associated management team, for which specific fair values could not be quantified. As of June 30, 2005 the factors supporting the realization of any future benefits from those other elements were no longer present. Consequently, the entire $5,706,060 was charged to expense as an impairment of cost in excess of fair value of net assets acquired. The $2,157,000 assigned as the fair value of a technology product intangible will be amortized over its useful life once it is placed in service. We have not yet determined the useful life of this intangible asset. Because the marketability and functioning of this technology has not yet been proven, there remains substantial doubt about whether this technology will ultimately provide any value. Subsequent to the purchase of the ViaSeal Access Control Business in November 2004, we reviewed the initially recorded excess cost over net tangible assets acquired amount and determined that all of it should be assigned as the fair value of the technology acquired. The $5,097,058 assigned as the fair value of the technology will be amortized over its useful life, which has not yet been determined. Because uncertainties remain about the marketability and functioning of this technology, there is substantial doubt about whether this technology will ultimately provide any value. The impairment of long-lived assets of $761,436 in 2005 consisted of a write-down of property and equipment of $312,576 held in San Jose, California, New York, and Connecticut and $448,576 for software not being utilized. Our net loss for the year ended June 30, 2005 was $23,900,354 as compared to a loss of $3,406,660 for the prior fiscal year, or an increase of $20,493,694, or 602%. The increase is primarily attributable to a decrease of $5,529,424, or approximately 78%, an increase in selling, general, and administrative expenses of $10,298,314, or approximately 165%, and an increase in other expenses of $7,340,759, or approximately 920%. LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2005, our consolidated operating activities did not generate positive cash flow. We continue to finance our operations primarily through the placement of our common stock and convertible debt and cash flows from our Lightec subsidiary. We had a working capital deficit of approximately $9.1 million at June 30, 2005 as compared with $4.3 million at June 30, 2004. Cash decreased by approximately $103,000 during the year ended June 30, 2004. Net cash used in operating activities was $7,146,713 during the year ended June 30, 2005, as compared to $150,338 used for the year ended June 30, 2004. Net cash used in operations for the year ended June 30, 2005 resulted primarily from our net loss of $23.9 million offset by an increase in accounts payable and accrued liabilities of approximately $2.1 million and certain non-cash expenses of approximately $15.1 million. Investing activities utilized $290,129 of cash during the year ended June 30, 2005, as compared to $495,798 for the year ended June 30, 2004. Financing activities provided $7,333,859 of cash during the year ended June 30, 2005 as compared to $756,899 for the year ended June 30, 2004. Net cash provided resulted primarily from the issuance of common stock, convertible debt, and notes and loan payable, the exercise of stock warrants of approximately $9 million, offset by repayments of $115,000 on advances from shareholders and of $1,548,552 on notes payable. During the year ending June 30, 2005, we raised approximately $3.4 million dollars in equity and we reduced outstanding indebtedness to related parties and others amounted to approximately $693,000, through the issuance of equity. We also sold $3,000,000 principal amount of Convertible Notes due 2007 on November 23, 2004, of which an initial funding of $1,500,000 was received on that date and an additional $1,500,000 was received on January 11, 2006. Subsequent to year end, the Company continued to finance its operations through the issuance of equity. The sale of additional equity or debt securities will result in further dilution to our stockholders. These securities may also have rights senior to those of holders of our common stock. Any indebtedness could contain covenants, which restrict our operations and limit our ability to incur additional debt. The proceeds from any such private placement will continue to be utilized to reduce or pay-off our outstanding obligations and to fund expanded operations. 27 The Company has been engaged in an intense effort at settling and/or refinancing debts the past six months. To date approximately $6,700,000 debts as of June 30, 2005 have been settled or restructured, including the approximately $2.5 million owed to the Longview Funds at June 30, 2005 which was restructured by payment of $400,000 in February 2006, an additional $400,000 due April 30, 2006 and issuance of 410,000 convertible notes at a fixed conversion rate of $.20 per share for shares(subject to repurchase rights). The Company intends to continue to settle payables on favorable terms until such time as it is able to generate funds from operations. In addition to the foregoing, ongoing operations will be funded by shareholder loans, equity and debt placements, monetization of Lightec's receivables and settlement of claims. While the Company believes that these sources will be sufficient to fund operations through June 30, 2006, any significant expansion of business and realization of the Company's business plan will require a significant institutional investment in the Company, the sale of assets, realization of income from operations sufficient to sustain growth or a combination of these factors. In the past, the Company has, in part, relied on revenues from its Lightec subsidiary to fund operations. These revenues have decreased significantly, and the Company is no longer relying on this as a source of significant revenues. Moreover, the City of Bridgeport, CT Board of Education has notified Lightec that it disputes amounts owed to Lightec for past services rendered and also has stated that it may not utilize Lightec's services in the future. In their audit report for the fiscal year ended June 30, 2005, our independent auditors, Miller Ellin & Company, stated that there is substantial doubt as to our ability to continue as a going concern as well as substantial doubt about whether our recorded intangible assets will provide future benefits. While the Company and its management is working diligently to achieve financial stability, it is unclear at this time whether long-term financing can be secured at all, or if secured may be secured on terms which will enable the Company to service its obligations out of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES AND FACTORS THAT MAY AFFECT FUTURE RESULTS Interest Rate Risk. The Company has an investment portfolio of fixed income securities that are classified as cash equivalents. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if the market interest rates increase. The Company attempts to limit this exposure by investing primarily in short-term securities. The Company did not enter into any short-term security investments during the twelve months ended June 30, 2005. FACTORS THAT MAY AFFECT FUTURE RESULTS We may from time to time make written or oral statements that contain forward-looking information. However, our actual results may differ materially from our expectations, statements or projections. The following risks and uncertainties could cause actual results to differ from our expectations, statements or projections. 28 Risks related to our business. We have a limited history of operations, which makes it difficult to anticipate our future performance. We have a limited operating history and limited historical financial information upon which to base your evaluation of our performance, particularly in light of our recent change in business strategy. Our Lightec business, which is largely independent of our new technology solution offerings, has historically generated substantially all of our revenue. We have not generated any meaningful revenue from our new business strategy and our historical performance is not indicative of future performance. Our business model is unproven and may not succeed. We recently changed and continue to refine our business model and strategy. Although we have some customers for the turnkey solutions that form the core of our new business strategy, we have not yet validated our business model or strategy in the market. The success of our business model and strategy is dependent on a number of factors including: - - our ability develop and deliver our technology solutions within budgeted costs; - - our ability to enter into and implement successful channel partner arrangements - - acceptance in the market of our technology solutions - - our ability to price our technology solutions at competitive rates Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies starting a new business, particularly companies in rapidly evolving markets such as the markets for our technology solutions. We have incurred and expect to continue to incur significant losses and may never achieve profitability. We incurred a net loss of $23,900,354 during the fiscal year ended June 30, 2005 and $3,406,660 during the prior fiscal year. At June 30, 2005, we had an accumulated deficit of $42,112,412. Our auditors have issued a qualification in their report on our financial statements for the year ended June 30, 2005, reflecting their concern about our ability to continue as a going concern for the current fiscal year. We expect to make significant expenditures in connection with the implementation of our new business strategy, including expenditures relating to sales and marketing activities, technology development and integration, potential acquisitions and administrative resources. As a result, we expect our losses to continue for the foreseeable future and we may never achieve profitability. 29 We need and may not be able to obtain additional financing. As of June 30, 2005, we had a working capital deficiency of approximately $9.1 million. Despite raising approximately $2.2 million in equity from June 30,2005 through the date of this report, we need to raise additional capital in order to continue to fund our plan of operations and service our debts. We have no sources of financing from which we can draw immediately. We cannot assure investors that we will have adequate capital resources to fund planned operations or that any additional funds will be available to our company when needed, or if available, will be available on favorable terms or in amounts required. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our existing and planned operations. We are dependent on a limited number of customers. Substantially all of our historical revenue has been attributable to our Lightec business. During the year ended June 30, 2005, substantially all of our revenue was attributable to a contract with the Bridgeport School District funded by the Federal eRate program. While additional amounts have been budgeted for this project for the 2004-2005 school year and we have received Federal approval under the eRate program. The School District has advised Lightec that it does not intend to authorize additional work under this contract. Our plan of operation is dependent on successfully fulfilling the Bridgeport and New Haven contracts. Should we fail for any reason to perform the balance of the contracts, or if Federal approval is not granted or Bridgeport or New Haven defaults on payments under the contract, we may not have sufficient funding to continue the Lightec business as planned and our other activities will be substantially harmed. Our Lightec assets remain subject to creditors liens granted in connection with two debt obligations which have been settled but which may be foreclosed upon should we default in payment of settlement agreements. We have granted a first priority lien in the assets and revenue of Lightec to secure repayment of a debenture in the principal amount of $2,588,237 as of June 30, 2005. This balance will be reduced to $400,000 after year end. Our refocused business strategy exposes us to long sales and implementation cycles for our products. Our target customers in the electronic transaction authentication, data storage and retrieval and access control markets include large retailers, financial institutions and government agencies, which typically require longer sales and implementation cycles than smaller, independent customers. We expect the longer sales and implementation cycles for these larger companies to continue to delay our ability to realize meaningful revenue from these prospective customers. In addition, budgetary constraints and economic slowdowns may also continue to delay purchasing decisions by these prospective customers. These initiatives have costs associated with them, and we cannot assure you that they ultimately will prove successful or result in meaningful revenue. 30 In addition, the loss or significant reduction in government spending by government entities could materially limit our ability to obtain government contracts. These limitations could also have a material adverse effect on our business, financial condition and results of operations. In addition, we will need to develop additional strategic relationships with large government contractors in order to successfully compete for government contracts. Our inability to develop these strategic relationships may limit our ability to implement our business strategy. Our products and technologies may not achieve market acceptance. The markets for our products and technology are relatively new. Because of the emerging nature of these markets we are unable to predict whether we can sufficiently commercialize our products and technology and obtain and retain significant market acceptance. Demand and market acceptance for our electronic document authentication, data storage and retrieval and access control products and services is evolving and uncertain. Our products and technology involve changes to traditional ways of doing business and related processes, which, despite its efficiencies and potential cost savings, will likely encounter resistance to implementation. Our business may suffer if the market develops more slowly than anticipated and does not sustain market acceptance. We face competition in the markets for our products and services. We face competition in each of our markets. Our competitors are generally more established, benefit from greater market recognition and have greater financial, development and marketing resources than we have. As such, our competitors may develop products or technologies that are more effective, easier to use or less expensive than ours. This could make our products and technologies obsolete or non-competitive. We may not be successful in keeping pace with the rapid technological changes that characterize our industry. The technology incorporated in our technology solutions is characterized by rapid changes. Moreover, the emergence of new technologies can rapidly render existing products obsolete and unmarketable. Our ability to anticipate changes in technology and industry standards and successfully develop and introduce new and enhanced products which can gain market acceptance on a timely basis will be a critical factor in our ability to grow and to remain competitive. In addition, we may diversify our business by developing new products and applications based on our core technologies. There can be no assurance that we will timely or successfully complete the development of new or enhanced products or applications or successfully manage transitions from one release to the next, or that our future products or applications will achieve market acceptance. 31 If we are unable to adequately protect our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete in the market as well as our financial condition and results of operations. We seek to rely on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect our proprietary rights in our products and technologies. These protections may not adequately protect us for a number of reasons. First, our competitors may independently develop technologies that are substantially equivalent or superior to ours. Second, the laws of some of the countries in which our products may be licensed do not protect those products and our intellectual property rights to the same extent as do the laws of the United States. Third, because of the rapid evolution of technology and uncertainties in intellectual property law in the United States and internationally, our current and future products and technologies could be subject to infringement claims by others. Fourth, a substantial portion of our technology and know-how are trade secrets and are not protected by patent, trademark or copyright laws. We require our employees and contractors to execute written agreements that seek to protect our proprietary information. We also have a policy of requiring prospective business partners to enter into non-disclosure agreements before any of our proprietary information is revealed to them. However, measures taken by us to protect our technology, products and other proprietary rights may not be enforceable; to the extent they involve contractual restrictions, and otherwise might not adequately protect us against improper use. We may be required to take legal action to protect or defend our proprietary rights. Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize products. If we are required to defend against lawsuits brought by third parties, or if we sue to protect our proprietary rights, we may be required to pay substantial litigation costs, and our management and technical personnel's attention may be diverted from operating our business. If the results of any litigation are adverse to us, we may be required to expend significant resources to develop non-infringing technology or obtain licenses from third parties. If we are not successful in those efforts or if we are required to pay any substantial litigation costs, our business would be materially and adversely affected. Failure to manage our operations if they expand could impair our future growth. If we are able to expand our operations, particularly through sales to large retailers, financial institutions and government agencies, as well as implementation of our e-prescription solution, the expansion will place significant strain on our management, financial controls, operating systems, personnel and other resources. Our ability to manage future growth, should it occur, will depend to a large extent upon several factors, including our ability to do the following: 32 - build and train our sales force; - establish and maintain relationships with channel partners; - develop customer support systems; - develop expanded internal management and financial controls adequate to keep pace with growth in personnel and sales; and - manage the use of third-party manufacturers and suppliers. If we are able to grow our business but do not manage our growth successfully, we may experience increased operating expenses, loss of customers, distributors or suppliers and declining or slowed growth of revenues. We are subject to risks associated with product failure and technological flaws. Our technology solutions incorporate complex software and hardware products that require extensive development and testing to ensure that they operate as intended. These solutions may contain undetected errors or result in failures when first introduced or when new versions are released. Despite vigorous product testing efforts and testing by current and potential customers, it is possible that errors will be found in a new product or enhancement after commencement of commercial shipments. The occurrence of product defects or errors could result in adverse publicity, delay in product introduction, diversion of resources to remedy defects, loss, of or a delay in market acceptance, claims by customers against us, or could cause us to incur additional costs, all of which could adversely affect our business. Our business is dependent on our ability to attract and retain management and other key personnel. We depend to a significant degree on the skills, experience and efforts of our executive officers and other key management, technical, finance, sales and other personnel. Our failure to attract, integrate, motivate and retain existing or additional personnel could disrupt or otherwise harm our operations and financial results. While we have employment agreements with a number of our executives, many of these agreements do not have fixed terms. We do not presently carry key man life insurance policies covering any employees. The loss of services of certain of our key employees, an inability to attract or retain qualified personnel in the future, or delays in hiring additional personnel could delay the development of our business and could hurt our existing business. We may not be able to successfully manage and assimilate acquisitions, investments and strategic alliances, which would adversely affect our results of operations. We recently experienced a nearly 100% turnover in our senior management. We may, in the future, acquire, make investments in, or enter into strategic alliances with companies which have technologies, customer bases, channel relationships and other value-added services or assets in our current markets or in areas into which we intend to expand our business. 33 Any acquisitions, investments, strategic alliances, or related efforts will be accompanied by risks such as the: - - Difficulty of identifying appropriate acquisition candidates; - - Difficulty of assimilating operations of respective entities; - - Potential disruption of our ongoing business; - - Potential liability for unknown debts; - - Loss of key management and operating personnel; - - Difficulties managing joint ventures especially those in which we may hold less than a majority interest; - - Inability of management to integrate businesses and capitalize on opportunities presented by acquisitions, investments, strategic alliances or related efforts; - - Failure to successfully incorporate licensed or acquired technology and rights into our services; - - Inability to maintain uniform standards, controls, procedures and policies; and - - Impairment of relationships with employees and customers as a result of changes in management. If we are not able to successfully overcome these risks or any other problems encountered with such acquisitions, investments, strategic alliances or related efforts, the benefits of such transaction may not be realized and we could incur significant costs and suffer reductions in revenue form existing operations. Our Net Operating Loss Carry-Forwards May Be Limited. Our net operating loss carry forwards may be limited in accordance with Section 382 of the Internal Revenue Code of 1986, as amended, based on certain changes in ownership that have occurred, or could in the future occur. Net operating loss carry forwards are utilized to offset future taxable income for federal and state income tax purposes. Risks Related to Our Securities Our stock may be affected by limited trading volume and may fluctuate significantly in price. Our common stock is traded on the NASD OTC Pink Sheets. Trading in our stock has been limited and there can be no assurance that an active trading market for our stock will develop. As a result, this could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Thinly traded shares can be more volatile than shares traded in an active public market. The average daily trading volume of our common stock in March 2006 was 20,000 shares. The high and low bid price of our common stock for the last two years has ranged from $0.02 and $4.50 per share. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. 34 Our common stock is deemed to be a "Penny Stock" which may make it more difficult for investors to sell their shares due to suitability requirements. Our common stock is deemed to be a "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are stock: - - With a price of less than $5.00 per share; - - That are not traded on a "recognized" national exchange; - - Whose prices are not quoted on the NASDAQ automated quotation system; or - - Of issuers with net tangible assets of less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if issuer has been in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for our shareholders to sell shares to third parties or to otherwise dispose of them. This could cause our share price to decline. ITEM 7. FINANCIAL STATEMENTS The financial statements and supplementary data are included beginning immediately following the signature page to this report. See Item 13 for a list of the financial statements and financial statement schedules included. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. ITEM 8A. CONTROLS AND PROCEDURES. An evaluation was performed, as of March 31, 2006, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on such evaluation, our management has concluded that our disclosure controls and procedures were effective as of March 31, 2006. We do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. 35 Management has not yet performed, and is not yet required to perform, its assessment of the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. ITEM 8B. OTHER INFORMATION. All information required to be disclosed in a report on Form 8-K during the fourth quarter of the fiscal year ended June 30, 2005 has been so reported. 36 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The following table sets forth information with respect to the persons who, as of March 31, 2006, were serving or are expected to serve in the near future as directors and executive officers of the Company. Each director holds office until the next annual meeting of shareholders or until his successor has been elected and qualified. Directors Director Name Age Position Since - --------------- --- -------- ----- John Mahoney(4) 56 Chief Executive Officer, President and Director 2004 Wayne Taylor (3) 53 Interim Chief Financial Officer and Director 2003 Allan Gibbins (1)(2) 57 Director 2000 Gerard Munera (2)(4) 70 Director 2001 Stuart Platt (1)(2)(4) 69 Director 2004 Orhan Sadik-Khan 76 Director 2005 Anthony Low-Beer 63 Director 2005 Michel Kadosh 65 Director 2005 (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Corporate Governance Committee (4) Member of the Executive Committee John Mahoney became President and CEO of the Company in September 2005. Prior to that date he was President of CRC a warranty and health claims service company based in Vancouver, B.C. Wayne Taylor is a founder of our company. He served as Chief Financial Officer from June 1999 to March 2002 and from March 2003 to August 2003, and has served as interim Chief Financial Officer since June 2004 to present. Mr. Taylor joined our Board of Directors in September of 2003. He is President of FGH Insurance Agencies Ltd. and has developed both creditor insurance and specialty products for some of the largest international banks. Mr. Taylor was employed by HSBC Canada from 1977 to 1986 and served in a senior management capacity for that institution. As the international database representative for OKRA Marketing Corporation, Mr. Taylor was responsible for selling software systems to major financial institutions. Allan Gibbins has been a Director since November 6, 2000. Mr. Gibbins was interim Vice President, General Manager beginning in June 1992 and was appointed President and Chief Executive Officer of Hubbell Canada Inc., a subsidiary of Hubbell Incorporated, in September 1993. He is the Chairman of the Electrical, an Electrical Manufacturer, and Electronic Manufacturers Association of Canada (EEMAC). From September 1988 to May 1992, Mr. Gibbins was Vice President and General Manager of Nutone Electrical Inc. Prior to that he held senior management positions with duPont Canada Inc. for 16 years. He also was a Director of DSI Datotech Systems Inc. from December 2000 until July 2003. 37 Gerard Munera has been a Director since June 26, 2001. Since 1995, Mr. Munera has been Managing Director of Synergex Group Partnership, a Connecticut general partnership, with majority participations since 1996 in Arcadia, a manufacturer of low-rise curtain walls, storefronts and office partitions, and in Estancia El Olmo, a large cattle ranch. From 1994 to 1996, Mr. Munera was chairman and chief executive officer of Latin American Gold Inc., a junior gold exploration and mining company with activities in Ecuador and Venezuela.. From 1991 to 1994, Mr. Munera was president and chief executive officer of Minorco (USA), a diversified natural resources group with interests in base and precious metals, industrial minerals, oil and gas, chemicals and fertilizers, in both the U.S. and Canada. Rear Admiral Stuart Platt, SC, USN, RET, who joined the Company's Board of Directors effective May 14, 2004. Rear Admiral Platt has enjoyed a distinguished 31-year military career in the United States Navy, where he led an historic reform program to improve the way the Navy buys ships, aircrafts and weapons systems. He was Deputy Commander of the Naval Sea Systems, where he was responsible for the acquisition of Navy surface ships and submarines during the buildup of the 600 ship Navy. He was recently honored by being named to the Cold War Leadership Hall of Fame by the Submarine Force Library and Museum Association. He serves as the Chairman of the Historic Ships Foundation in San Francisco and as a Presidential appointee to the Board of Governors of the United States Merchant Marine Academy. Admiral Platt is the Chairman of The Wornick Company, the largest seller of combat rations to the Department of Defense and the Chairman of IDM Services, a Washington based, international data storage firm. He also serves on the Board of DRS Technologies, a New York Stock Exchange listed Defense Electronics Company. Orhan Sadik-Khan is an investment banker and international businessman. For the past five years he has been President of ADI Investments, Old Greenwich, CT. Anthony Low-Beer has been a private money manager based in Stamford, CT for the past five years. Michel Kadosh has been a hotelier and international real estate investor and developer for the past five years, based in Miami, FL. EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE COMPANY Please refer to "Item 1, Description of Business", at Page 5. 38 BOARD MEETINGS AND COMMITTEES Board Meeting Attendance During the year ended June 30, 2005, each incumbent Director attended at least 75% of the total number of Board of Directors meetings and meetings of committees on which he served. Director Fees Each director is elected to hold office until the next annual meeting of stockholders and until his successor is elected and qualified. Our Board held five meetings during the fiscal year ended June 30, 2005. Our directors receive US$1,500 for their attendance at each board meeting and US$500 for each telephonic board meeting, which each director waived. All officers serve at the discretion of the Board of Directors subject to the terms and conditions of their agreements with the Company as approved by the Compensation Committee. On February 1, 2006, each Board member was issued 350,000 restricted shares of stock. 250,000 of such shares were a one time grant and 100,000 were for compensation for the current fiscal year ending June 30, 2006 Compensation Committee The Compensation Committee is composed of Gerard Munera, (Chairman), Allan Gibbins and Stuart Platt. The responsibilities of our committee include reviewing our incentive plans, reviewing and approving the compensation of our executive officers, and determining the option awards given to our officers. Members of the Committee have never served as our officers or employees or officers or employees of any of our subsidiaries. The Compensation Committee held 3 meetings in 2005. Audit Committee The Audit Committee, which currently consists of Allan Gibbins [(Chairman)] and Stuart Platt, assists the Board of Directors by recommending the engagement of independent public accountants, reviewing and considering actions of our management in matters relating to audit functions, reviewing with independent public accountants the scope and results of their audit engagement, reviewing reports from various regulatory authorities, reviewing the system of internal controls and procedures and reviewing the effectiveness of procedures intended to prevent violations of law and regulations. Nominating Committee and Corporate Governance The Nominating Committee and Corporate Governance is composed of Richard Moore (Chairman)and Wayne Taylor. David Dalton served on this Committee until his resignation in August 2005. The responsibilities of our committee include reviewing our nomination of directors and advisors and overseeing the corporate governance procedures. Members of the Committee have never served as our officers or employees or officers or employees of any of our subsidiaries, except for Wayne Taylor who serves as the Interim Chief Financial Officer. 39 The Board of Directors adopted a charter for the Audit Committee. A copy of the Audit Committee's Charter was previously filed with the Company's Definitions Proxy Statement for its 2003 Annual Meeting of Shareholders. All members of the Audit Committee are "independent" within the meaning of NASDAQ Marketplace Rule 4200(a)(15). The information contained in this Annual Report with respect to the Audit Committee charter and the independence of the members of the Audit Committee shall not be deemed to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference to such filing. AUDIT COMMITTEE REPORT The following is the report of our Audit Committee with respect to our audited financial statements for the year ended June 30, 2005. Review with Management: We have reviewed and discussed our audited financial statements with management. Review and Discussions with Independent Public Accountants: The Committee has discussed with Miller Ellin & Company LLP ("Miller Ellin") our independent auditors, the matters required to be discussed by statement on Auditing Standards No. 61, "Communication with Audit Committees." Regarding the auditors judgments about the quality of our accounting principles as applied to its financial reporting. The Audit Committee of the Board of Directors has considered whether the provision of the non-audit services is compatible with maintaining the independence of our principal accountants. The Committee also has received written disclosures and the letter that is required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," and has discussed with Miller Ellin its independence. Conclusion: Based on the review and discussions referred to above, the Committee recommended to the Board of Directors that its audited financial statements be included in our Annual Report on Form 10-KSB for the year ended June 30, 2005 for filing with the Securities and Exchange Commission. Submitted by the Audit Committee of the Board of Directors Allan Gibbins, Chairman Stuart Platt 40 BOARD OF ADVISORS Effective February 1, 2006, The Company established a Board of Advisors. The Board of Advisors was formed to help in recruiting staff to run the Company or for other functions. The Board of Advisors will also help with product introductions, customer introductions, credibility, product validation, marketing/sales advice, critiques, and advice to members of the Board and the management team. Initial members of the Board of Advisors are: John Mahoney, CEO of SiVault, Mr. Roger Mahabir, who will act as Chairman, Mr. David Gibbins, Mr. Bhanu Singh, Mr. Colin Ground and Mr. Richard Moore, COO of SiVault. Roger R. Mahabir, Chairman Roger Mahabir is the President and Chief Executive Officer of Technology Innovations Inc., an Information Technology services and consulting firm established in 1991. He is also Chairman of Assurent Secure Technologies, a world leader in vulnerability research and security software and services, headquartered in Toronto, Canada. Mr. Mahabir was previously the Chief Information Officer at RBC Capital Markets (Royal Bank Canada) where he served for over 5 years. He is recognized as one of the industry's top-CIOS, having served in senior executive positions, including four CIO roles with Fortune 500 companies in Financial Services, Government, Manufacturing, and Retail. His systems work for innovation and delivery at Fortune 500 companies has won international acclaim and been recognized by many, including the Smithsonian. He was inducted into the Canadian Information Productivity Hall of Fame (1995) for his innovation and delivery at Suncor/Sunoco, General Electric and Toronto Police. Mr. Mahabir was named by CIO Magazine as one of Canada's top CIOs in 1994. Under his leadership his organization was recognized by Computerworld Magazine as one of the "Global 100" Outstanding Information Technology users Worldwide in 1995 and also received an "Award of Distinction" from the Canadian Information Productivity Association. The "Metropolis" project which significantly re-engineered policing across the entire Metropolitan Toronto area led to this distinction and received international acclaim and recognition. Bhanu Singh Bhanu Singh is a Partner and leader in the technology and IT practice at Bain and Company. He also co-leads Bain's global capability sourcing practice. Mr. Singh rejoined Bain in 2004 after spending 4 years running TCG Software (a global IT software services firm). While at TCG he transitioned R&D, IT, support and engineering functions from an onsite to an onsite-offsite-offshore model for a number of companies in the financial services and high-tech markets. Most of these projects involved significant process redesign and changes to management. At Bain, Mr. Singh has worked on growth strategy and operational improvement projects in the financial services, telecom and technology verticals. His recent experience has included designing go-to- market and outsourcing strategies for technology and services firms. He has also worked in the private equity group, assisting clients with due diligence and portfolio company strategies in a variety of industries. 41 Prior to joining Bain, Mr. Singh worked at Hewlett Packard (HP), HR Strategies (a successful start-up) and DCM Toyota. He earned an M.B.A. from the University of Michigan with highest distinction. He also has a Masters in Operations Research & Statistics from Rensselaer Polytechnic Institute, NY. He has a B.Tech in Mechanical engineering from the Indian Institute of Technology (IIT). David Gibbins David Gibbins is the former Managing Director, Global Head Foreign Exchange and, Commodity Derivatives, for RBC Capital Markets' Global Treasury Services. Mr. Gibbins sat on the Operating Committee of the Global Treasury Services Division, as well as on the Executive Committee of the RBC Capital Markets, the Investment Banking arm of the RBC Financial Group. Mr. Gibbins spent 27 years with Royal Bank of Canada, the past 21 within the trading business. From 1994 to 1996, Mr. Gibbins was Co-Global Head of Forex Sales and Commodity Trading; from 1991 to 1994 he was Vice President and Head of Treasury USA, Latin America and Caribbean, based in New York. From 1989 to 1991, Mr. Gibbins was Chief Dealer, Canadian Money Markets; from 1987 to 1989, he was Senior Dealer, Interest Rate Derivatives in Toronto and from 1986 to 1988 he was Senior Derivatives Dealer in London, England. Mr. Gibbins is a member of the Board of Directors of Greenfield Commercial Group since January 2004. Colin W. Ground Colin Ground is an attorney with Fraser, Milner Casgrain LLP, Toronto, Canada. Mr. Ground practices in the areas of Corporate/Commercial and Information Technology Law with a focus on emerging growth technology companies. He is a member of the firm's Private Equity/Venture Group providing legal advice on a wide range of private equity and venture capital financings where he has had the opportunity to work with investment funds, private investors and emerging companies. Mr. Ground's practice also involves assisting companies in commercializing their intellectual property and developing their e-commerce initiatives. Richard J. Moore Richard J. Moore was, until joining SiVault as COO in February 2006, most recently President and COO from July 1, 2001, of Financial Fusion, Inc., a subsidiary of a Sybase, Inc. a software company located in Dublin, Canada. From January 1999 to December 2001 he was Senior Vice President Worldwide Sales/Co-CEO Cygent, Inc. an internet software company located in San Francisco, California. Prior to that he held various positions with Unisys Corporation, most recently, Vice President, North America Large Accounts from April 1998 to January 1999. 42 ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth the aggregate compensation earned by, paid to, or accrued for our chief executive officer and each other executive officer whose aggregate compensation, was in excess of $100,000, based on their salary and bonus for the fiscal year ended June 30, 2005, who we refer to as our named executive officers. Summary Compensation Table
Annual Compensation Long-Term Compensation ------------------- ---------------------------------------------------- Awards Awards Payouts ------ ------------------------- ------- Other Name and annual Restricted Securities Principal Fiscal compen stock underlying LTIP All other Position Year Salary Bonus sation awards options/ SARs Payouts compensation - --------------------- ------ -------- ------- -------- ---------- ------------- ------- ------------ Emilian 2005 $172,125 Elefteratos (1) President and 2004 $0 Chief Executive Officer 2003 $0 - -------------------- Wayne 2005 $62,662 Taylor, (2) Chief Financial 2004 $35,750 Officer 2003 $18,000 - --------------------- ------ -------- ------- -------- ---------- ------------- ------- ------------ Igor J. Schmidt 2005 $166,582 Chief Strategy Officer(3) 2004 $0 2003 $0 - --------------------- ------ --------
(1) Mr. Elefteratos joined the Company in July 2004 and resigned from the Company effective September 1, 2005. (2) Mr. Taylor joined the Company in July 1999, as a founder. (3) Mr. Schmidt joined the Company in July 2004 and resigned effective October 2005. Option/SAR Grants In Last Fiscal Year Individual Grants There were no stock options/SARs granted to our named executive officers during the fiscal year ended June 30, 2005: AGGREGATED OPTION/SAR EXERCISES DURING THE FISCAL YEAR-ENDED JUNE 30, 2004 AND FISCAL YEAR-END OPTION/SAR VALUES There were no stock options/SARs owned by the Company's named executive officers as of the fiscal year ended June 2005. 43 Stock Option Plan In April 2004 the Company adopted its 2004 Incentive Stock Plan (the "2004 Plan"). The 2004 Plan permits the grant of stock options, stock awards (awards in the form of shares of our stock or stock units, in either case for which no payment by the participant is required0 and restricted stock purchase awards. Stock options granted under the 2004 Plan may be options intended to qualify as incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code or nonqualified stock options ("NSOs"), which are options that are not intended to qualify as ISOs. Stock options granted to a person who owns more than ten percent of our or any of our subsidiary's voting power shall have exercise prices of at least 110% of fair market value of our stock on the date of grant. Stock options granted to others will have exercise prices of not less than 100% of the fair market value of our stock on the date of grant if they are ISOs and not less than 85% of the fair market value of our stock on the date of grant if the are NSOs. Stock options granted under the 2004 Plan may only be transferred by will or the laws of descent and distribution. Stock options granted under the 2004 Plan will have terms of not more than 10 years. The 2004 Plan contains limitations on vesting of stock options. The affect of a termination of employment or service on a participant's stock options depends on the reason for the termination, and is described in the 2004 Plan and award agreements. Stock awards give participants shares of our common stock or the right to receive shares of our common stock. A participant's rights with respect to stock awards may be subject to conditions established by our Board of Directors or Executive Compensation Committee, including continued service, achievement of specified business objectives, indices, attaining growth rates and other measurements of our performance, conditioned upon satisfaction of company or individual performance goals. Stock awards may also be awarded free of restrictions. Restricted stock purchase awards give participants the opportunity to purchase shares of our common stock, subject to restrictions prescribed by our Board of Directors or Executive Compensation Committee. With certain limited exceptions described in the 2004 Plan, stock awards and restricted stock purchase awards granted under the 2004 Plan are not transferable. The effect of a termination of employment or service on a participant's stock options depends on the reason for the termination, and is described in the 2004 Plan and award agreements. The 2004 Plan provide for the issuance of up to 2,250,000 shares pursuant to awards. Stock issued under the 2004 Plan may be authorized but unissued stock or stock that we have reacquired. Shares covered by awards that terminate or expire and shares that we repurchase in accordance with the terms of an award shall again be available for issuance under the 2004 Plan. In the event of a change in our outstanding stock in connection with a stock split, stock dividend, recapitalization, merger, spin off or similar event, the number of shares that may be issued under the 2004 Plan and the number and price of shares subject to outstanding awards may be adjusted by the Board of Directors or the Executive Compensation Committee. 44 The 2004 Plan is administered by of the Executive Compensation Committee of the Board of Directors. The committee has authority to grant awards, determine from the eligible group of participants those to whom awards will be granted, determine the terms of awards, construe and interpret the plan, amend outstanding awards, and perform such other duties relating to the plan's administration. The Board may, at any time and from time to time, alter, amend, suspend or terminate the 2004 Plan in whole or in part, subject to certain restrictions as stated in the 2004 Plan. Awards under the 2004 Plan may be made to employees, directors and consultants of SiVault Systems, Inc. or its subsidiaries, as selected by the 2004 Plan's administrator. The approximate number of persons who are currently eligible to participate under the 2004 Plan is 19, which includes 5 employees, 9 directors and 5 consultants. As of June 30, 2005 no options have been exercised by the employees under the 2004 Plan. Subsequent to year end all of the Company's employees based in San Jose were terminated. Under the terms of this 2004 Plan, options issued to these employees terminated three months after the date of separation. Equity Compensation Plans The following table sets forth certain information as of the fiscal year ended June 30, 2005 with respect to our compensation plans (including individual compensations arrangements). 45 Equity Compensation Plan Information Table (1)
- --------------------------------------------------------------------------------------------------------------------- (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- Number of securities remaining available for Number of securities to be Weighted-average exercise future issuance under issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants and (excluding securities Plan Category warrants and rights (2) rights reflected in column (a)) - --------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders ______ _____ ______ - --------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security ______ _____ ______ holders - --------------------------------------------------------------------------------------------------------------------- Total ______ _____ ______ - ---------------------------------------------------------------------------------------------------------------------
(1) The Company adopted a stock option plan on April 30, 2004. No options were exercised under the plan during the 2005 fiscal year. The Company has reserved 2,250,000 shares for issuance under the plan. (2) At June 30, 2005, options to purchase 2,357,600 shares had been issued under the Plan; subsequent to year end 2,102,500 of these options were canceled. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Principal Shareholders The following table indicates how many shares of common stock were beneficially owned, as of February 15, 2005 by (1) each person known by us to be the owner of more than 5% of the outstanding shares of common stock, (2) each director, (3) each executive officer named in the Summary Compensation Table and (4) all directors and executive officers as a group. In general, "beneficial ownership" includes those shares a person has the power to vote or the power to transfer, and stock options and other rights to acquire common stock that are exercisable currently or become exercisable within 60 days. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on February 15, 2005, any security which such person or group of persons has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing the percentage ownership of such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them. We based our calculation of the percentage owned on February 15, 2005 by our officers and directors as a group as being 30,368,266 shares of the 38,262,426 shares of common stock outstanding. 46
Amount and Nature of Percent of Name and Address of Beneficial Owner (1) Beneficial Ownership(2) Class - -------------------------------------------------------- ----------------------- ---------- Gesture Recognition Technologies International Limited 2,692,624 7% c/o CIBC Trust and Merchant Bank (Barbados) Limited Bank Warrens Street, Michael's Bar, Barbados (3) Wayne Taylor (4) 3,224,624 8.43% Allan Gibbins (10) 60,000 0%* 212 Westridge Drive Kleinberg, ON Canada Synergex Group LLC (5) 1,238,936 3.2% 16 Old Mill Road Greenwich, CT Gerard E. Munera (6) 3,162,000 8.26% 16 Old Mill Road Greenwich CT Igor Schmidt (7) 2,050,000 5.36% Elaine Bloom (8) 206,875 0%* Stuart Platt (9) 85,000 0%* John Mahoney 3,754,758 9.81% Orhan Sadik-Khan 3,954,759 10.34% Anthony Low-Beer 12,920,250 33.77% Michel Kadosh 3,000,000 7.84% Viaquo Corporation 2,913,100 7.61% All officers and directors as a group 30,368,265 79% (10 individuals)
* Indicates less than 1% of the outstanding shares of the Company's common stock - --------------- 1. Except as otherwise noted, the address of each beneficial owner is c/o SiVault Systems, Inc., 500 Fifth Avenue, Suite 1650, New York, New York, 10110. 2. Except as otherwise noted in the footnotes to this table, the named person owns directly and exercises sole voting and investment power over the shares listed as beneficially owned by such persons. Includes any securities that such person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. Does not include shares issued to directors effective February 1, 2006. 3. Shares are owned by the GRT Family Trust established by Mr. Taylor and as to which he maintains beneficial ownership. 47 4. Includes 2,692,624 shares owned by Gesture Recognition. Includes options to purchase 25,000 shares of common stock which are exercisable within 60 days. 5. Synergex Group LLC ("Synergex")is a family holding company as to which Mr. Gerard Munera serves as Managing Partner and owns an approximately 17% beneficial interest. 6. Includes 1,238,936 shares owned by Synergex. Also includes 400,000 shares that he may acquire upon exercise of a warrant and more options to purchase 25,000 shares of common stock granted to Mr. Munera in October 2004. 7. Mr. Schmidt resigned form the Board in October 2005. 8. Includes options to purchase 25,000 shares of common stock which were issued to Ms. Bloom in October 2004. 9. Includes options to purchase 25,000 shares of common stock issued to Mr. Platt in October 2004. 10. Includes options to purchase 25,000 shares of common stock issued to Mr. Gibbins in October 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In December 2005 certain officers and directors of the Company converted amounts owed to them into shares. These include; John Mahoney: Amount Converted to shares $205,000 Wayne Taylor: Amount Converted to shares $220,000 Gerard Munera: Amount Converted to shares $260,000 Orhan Sadik-Khan: Amount Converted to shares $385,000 Anthony Low-Beer Amount Converted to shares $280,000 COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that no other reports were required for those persons, we are not aware of any failure to file reports or report transactions in a timely manner during the fiscal year ended June 30, 2005. 48 ITEM 13. EXHIBITS. The following Exhibits and Financial Statements are included as part of this report: INDEX TO FINANCIAL STATEMENTS Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets F-3-4 Consolidated Statement of Operations F-5 Consolidated Statements of Stockholder's Equity (Deficiency) F-6 Consolidated Statements of Cash Flow F-7-8 Notes to Consolidated Financial Statements F-9-32 Exhibit Number Title of Document - ------ ------------------- 2.1 Stock Purchase Agreement dated July 9, 2004 among the registrant and all shareholders of SiVault Analytics, Inc. (Incorporated by reference to the registrant's report on Form 8-K filed on July 20, 2004) 3.1 Amended and Restated By-Laws of the registrant. (Incorporated by reference to Exhibit 3.1 to the registrant's report on Form 10-Q filed on June 4, 2004) 10.1 2004 Incentive Stock Plan of the registrant. (Incorporated by reference to the Registrant's Proxy Statement on Schedule 14A filed on April 19, 2004) 10.2 Settlement Agreement dated June 4, 2004 among the registrant, MaryAnne Richard, Michael Richard and Lightec Communications Corp. (Incorporated by reference to the registrant's report on Form 8-K filed on June 8, 2004) 10.3 Warrant in favor of MaryAnn Richard to purchase400,000shares expiring May 6, 2006 (Incorporated by reference to the registrant's report on Form 8-K filed on June 8, 2004) 10.4 Settlement Agreement dated June 23, 2004 between the registrant and Synergex Group, LLC (Incorporated by reference to the Statement on Schedule 13D filed by Synergex Group LLC and Gerard Munera on July 1, 2004) 10.5 Sublease dated September 24, 2004 between the registrant and Euclid Network Solutions for San Jose facility. 10.6 Exclusive Distribution and Partnership Rights Agreement dated August 15, 2003 between the registrant and WonderNet, Ltd. 10.7 Strategic Partnering and ASP License Agreement effective as of May 13, 2004 between SiVault Analytics, Inc. and Viaquo Corporation. 49 10.8 ISV and Reseller License Agreement effective May 13,2004 between SiVault Analytics, Inc. and Communications Intelligence Corporation. 10.9 Reseller Agreement effective May 13, 2004 between Hypercom U.S.A., Inc. and SiVault Analytics, Inc. 10.10 Agreement dated March 2, 2004 for Purchase and Sale of Assets between SiVault Analytics, Inc. and @POS.com, Inc. 10.11 Master Agreement effective September 15, 2004 between Opus Software Solutions Pvt. Ltd and the registrant. 10.12 Software License and Strategic Alliance Agreement effective September 2004 between Intelli-Check, Inc. and the registrant. 10.13 Strategic Alliance and Exclusive Management Agreement effective September 22, 2004 between Rycom CCI Inc. and the registrant. 10.14 Product Technology and License Agreement between the Company and Hypercom, Inc. dated February 13, 2006. 21.1 List of Subsidiaries of the registrant. 23.1 Consent of Miller Ellin & Company, LLP., Certified Public Accountants.* 32.1 Section 1350 Certification of Chief Executive Officer.* 32.2 Section 1350 Certification of Chief Financial Officer.* ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Fees paid to Independent Accountants for 2005 and 2004 The total fees and related expenses for professional services provided by the Company's independent registered public accounting firms Amisano Hanson, and Miller Ellin and Company, LLP for the fiscal years ended June 30, 2005 and 2004 are presented in the table below. Year ended June 30, ------------------- 2005 Fees 2004 Fees --------- --------- Audit Fees $ 136,130 $ 95,937 Audit Related Fees $ 147,519 $ -0- Tax Fees $ 98,289 $ -0- All Other Fees $ 10,783 $ -0- The Audit Fees listed above were billed in connection with the audit of statements included in our quarterly reports on Forms 10-QSB for the fiscal year. - -------------------------- *Filed herewith. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on it behalf by the undersigned, thereunto duly authorized. SiVault Systems, Inc. By: /s/ John Mahoney ------------------------------ John Mahoney, Chief Executive Officer Dated: April 24, 2006 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Capacity Date - ----------------------- ------------------------------------ ------ Chief Executive Officer, President and Director (principal executive /s/ John Mahoney officer) April 24, 2006 - ----------------------- ------------------------------------ ------------- John Mahoney Interim Chief Financial Officer (principal financial and /s/ Wayne Taylor accounting officer) and Director April 24, 2006 - ----------------------- ------------------------------------ ------------- Wayne Taylor /s/ Michel Kadosh Director April 24, 2006 - ----------------------- ------------------------------------ ------------- Michel Kadosh Chairman of the Board of /s/ Gerard Munera Directors April 24, 2006 - ----------------------- ------------------------------------ ------------- Gerard Munera /s/ Allan Gibbins Director April 24, 2006 - ----------------------- ------------------------------------ ------------- Alan Gibbins 51 /s/ Stuart Platt Director April 24, 2006 - ----------------------- ------------------------------------ ------------- Stuart Platt /s/ Orhan Sadik-Khan Director April 24, 2006 - ----------------------- ------------------------------ ------------- Orhan Sadik-Khan /s/ Michel Kadosh Director April 24, 2006 - ----------------------- ------------------------------- ------------- Michel Kadosh /s/ Anthony Low-Beer Director April 24, 2006 - ----------------------- ------------------------------- ------------- Anthony Low-Bee 52 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2005 AND 2004 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2005 AND 2004 CONTENTS PAGE ---- INDEPENDENT AUDITORS' REPORT 2 CONSOLIDATED BALANCE SHEETS 3 - 4 CONSOLIDATED STATEMENT OF OPERATIONS 5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) 6 CONSOLIDATED STATEMENT OF CASH FLOWS 7 - 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - 33 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders, SiVault Systems, Inc. (formerly Security Biometrics, Inc.) and Subsidiaries We have audited the accompanying consolidated balance sheets of SiVault Systems, Inc. (formerly Security Biometrics, Inc.) and Subsidiaries (the "Company") as of June 30, 2005 and 2004 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended June 30, 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 auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance 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 financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of SiVault Systems, Inc. (formerly Security Biometrics, Inc.) and Subsidiaries as of June 30, 2005 and 2004 and the results of their operations and their cash flows for the years ended June 30, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, conditions exist which raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in this regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 4 to the consolidated financial statements, the Company has reviewed its purchases of SiVault Analytics, Inc. and the ViaSeal Access Control Business. As a result of these reviews, substantial doubt remains whether the technologies acquired with these business purchases will ultimately provide any value. The financial statements do not include any adjustments that might result from any determination about the realization of benefits from the technologies acquired. MILLER, ELLIN & COMPANY, LLP New York, New York CERTIFIED PUBLIC ACCOUNTANTS March 31, 2006 2 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED BALANCE SHEETS
JUNE 30, ---------------------------------------------- 2005 2004 ---------------------- --------------------- ASSETS CURRENT ASSETS Cash $9,808 $112,880 Accounts receivable, net of allowance of $663,966 and $0, respectively 204,042 848,617 Inventory 136,606 3,884 Prepaid expenses and other current assets 354,639 58,788 ---------------------- --------------------- Total current assets 705,095 1,024,169 ---------------------- --------------------- PROPERTY AND EQUIPMENT, net of accumulated depreciation 70,000 636,994 OTHER ASSETS 113,457 56,916 INTANGIBLE ASSETS 7,254,058 -- ---------------------- --------------------- $ 8,142,610 $1,718,079 ====================== ===================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable and accrued liabilities - non-related parties $3,886,599 $2,558,883 Accounts payable and accrued liabilities - related parties 812,170 789,410 Billings in excess of costs and estimated earnings on uncompleted contracts -- 90,018 Notes and loans payable. non-related parties 1,370,377 339,983 Notes and loans payable - related parties 1,491,856 -- Convertible notes and debenture payable 2,039,509 1,358,569 Capital lease obligations -- 3,329 Corporate income taxes payable 179,920 129,920 Current liabilities of discontinued operations -- 93,913 ---------------------- --------------------- Total current liabilities 9,780,431 5,364,025 ---------------------- --------------------- OTHER LIABILITIES 15,915 16,954 ---------------------- --------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Common stock Authorized - 50,000,000 shares $0.001 par value Issued and outstanding - 20,510,636 and 7,924,664 as of June 30, 2005 and 2004 respectively 20,511 7,924 Additional paid-in capital 40,445,476 14,548,456 Accumulated other comprehensive loss (7,311) (7,222) Accumulated deficit (42,112,412) (18,212,058) ---------------------- --------------------- TOTAL STOCKHOLDERS' DEFICIENCY (1,653,736) (3,662,900) ---------------------- --------------------- $ 8,142,610 $1,718,079 ====================== =====================
The accompanying notes are an integral part of these consolidated financial statements. 3 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, ------------------------------------------- 2005 2004 ------------------------------------------- REVENUES: Contract revenues earned $ 1,526,211 $ 7,110,034 Other revenues 75,802 21,403 ------------------ ------------------- Total revenues 1,602,013 7,131,437 ------------------ ------------------- OPERATING EXPENSES: Costs of revenue earned 833,299 3,649,302 Selling, general and administrative 16,532,269 6,233,955 ------------------ ------------------- 17,365,568 9,883,257 LOSS FROM OPERATIONS (15,763,555) (2,751,820) ------------------ ------------------- OTHER EXPENSES: Interest expense 1,669,303 796,220 Impairment of cost in excess of fair value from a business combination 5,706,060 -- Impairment of long-lived assets 761,436 -- ------------------ ------------------- 8,136,799 796,220 LOSS BEFORE PROVISION FOR INCOME TAXES (23,900,354) (3,548,040) PROVISION FOR INCOME TAXES -- 34,934 ------------------ ------------------- LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST OF SUBSIDIARY (23,900,354) (3,582,974) Minority interest in loss of subsidiary -- 121 ------------------ ------------------- LOSS FROM CONTINUING OPERATIONS (23,900,354) (3,582,853) INCOME FROM DISCONTINUED OPERATIONS -- 176,193 ------------------ ------------------- NET LOSS $ (23,900,354) $ (3,406,660) ================== =================== BASIC AND DILUTED LOSS PER COMMON SHARE Continuing operations $ (1.44) $ (0.51) ================== =================== Discontinued operations $ 0.00 $ 0.02 ================== =================== Net loss $ (1.44) $ (0.49) ================== =================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,566,258 6,971,497 ================== ===================
The accompanying notes are an integral part of these consolidated financial statements. 4 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY YEARS ENDED JUNE 30, 2005 AND 2004
Accumulated Common Stock Additional Other Total ------------------ Paid In Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Loss Deficiency ----------- -------- ----------- ------------ ---------- --------------- Balance, June 30, 2003 6,214,813 $ 6,215 $ 8,319,589 $(14,805,398) $ (5,247) $ (6,484,841) Issuance of common stock for: Cash 935,588 935 1,426,080 -- -- 1,427,015 Services 92,500 93 193,907 -- -- 194,000 Software 141,279 141 374,859 -- -- 375,000 Issuance of shares to settle debt 540,484 540 1,070,428 -- -- 1,070,968 Issuance of common stock by subsidiary -- -- 27,593 -- -- 27,593 Issuance of stock warrants to: -- Extend convertible debenture -- -- 2,016,000 -- -- 2,016,000 Extend note -- -- 480,000 -- -- 480,000 Settle debt -- -- 640,000 -- -- 640,000 Other comprehensive loss -- -- -- -- (1,975) (1,975) Net loss -- -- -- (3,406,660) -- (3,406,660) ----------- -------- ----------- ------------ ---------- ------------ Balance, June 30, 2004 7,924,664 7,924 14,548,456 (18,212,058) (7,222) (3,662,900) Issuance of common stock for: Cash (net of finders fees) 2,628,124 2,628 3,367,940 -- -- 3,370,568 Services 1,173,007 1,173 2,286,726 -- -- 2,287,899 Issuance of common stock to Settle accounts payable and 420,005 420 692,109 -- -- 692,529 accrued liabilities Issuance of common stock for the acquisition of Sivault Analytics, Inc. and related costs 4,140,000 4,140 7,419,860 -- -- 7,424,000 Exercise of warrants 166,667 167 333,167 -- -- 333,334 Issuance of stock options and warrants for services -- -- 4,324,396 -- -- 4,324,396 Issuance of common stock due to the conversion of convertible notes 192,500 193 432,932 -- -- 433,125 Issuance of common stock and warrants as consideration of loans 235,933 236 1,785,020 -- -- 1,785,256 Issuance of common stock for the acquisition of eMedRx stock and Viaquo assets and related costs 3,629,736 3,630 5,254,870 -- -- 5,258,500 Other comprehensive loss -- -- -- -- (89) (89) Net loss -- -- -- (23,900,354) -- (23,900,354) ----------- -------- ----------- ------------ ---------- --------------- Balance, June 30, 2005 20,510,636 $20,511 $40,445,476 $(42,112,412) $ (7,311) $ (1,653,736) =========== ======== =========== ============ ========== ===============
The accompanying notes are an integral part of these consolidated financial statements. 5 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JUNE 30, ---------------------------- 2005 2004 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss from continuing operations ($23,900,354) ($3,582,853) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of property and equipment 189,395 10,026 Provision for doubtful accounts 718,471 16,954 Gain on settlement of debt -- (55,156) Impairment of cost in excess of fair value from a business combination 5,706,060 -- Impairment of long-lived assets 761,434 -- Issuance of common stock for services 2,287,899 194,000 Issuance of common stock to extend note and convertible debenture -- 2,496,000 Issuance of stock options and warrants for services 4,324,396 -- Amortization of debt discount as non-cash interest expense 1,171,209 -- Deferred rent expense (6,459) -- Other -- (193) Changes in current assets and liabilities: Accounts receivable (73,896) (753,983) Inventory (132,722) (3,884) Prepaid expenses and other current assets (101,139) (39,724) Other assets (138,118) (56,916) Accounts payable and accrued liabilities 2,081,709 1,500,439 Billings in excess of costs and estimated earnings on uncompleted contracts (90,018) 90,018 Corporate income taxes payable 50,000 34,934 Security deposit payable 5,420 -- ------------ ----------- NET CASH USED IN OPERATING ACTIVITIES (7,146,713) (150,338) ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in acquisition 5,622 -- Purchases of property and equipment (295,751) (207,002) Advances to discontinued subsidiaries -- (288,796) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (290,129) (495,798) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock 3,370,568 1,454,608 Proceeds from the exercise of stock warrants 333,334 -- Repayments of shareholders' advances (115,000) -- Proceeds from convertible notes 2,681,005 -- Repayment of a convertible debenture (1,358,569) (321,431) Repayment of a note payable - non-related party (189,983) -- Proceeds from notes and loans payable - non-related parties 1,407,000 -- Proceeds from notes and loans payable - related parties 1,208,833 (373,505) Repayment of capital lease obligations (3,329) (2,773) ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,333,859 756,899 ------------ ----------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (89) (1,975) ------------ ----------- NET CHANGE IN CASH (103,072) 108,788 CASH, BEGINNING OF YEAR 112,880 4,092 ------------ ----------- CASH, END OF YEAR $ 9,808 $ 112,880 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 6 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, --------------------------- 2005 2004 ------------ ----------- SUPPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest $ 188,451 $ 795,258 ------------ ----------- Income taxes $ -- $ -- ------------ ----------- NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for: Services $ 2,287,899 $ 194,000 ------------ ----------- Settlement of account payables and accrued liabilities $ 692,529 $ -- ------------ ----------- Software $ -- $ 375,000 ------------ ----------- Settlement of convertible debenture $ -- $ 100,000 ------------ ----------- Settlement of note payable - related party $ -- $ 970,968 ------------ ----------- Conversion of convertible notes $ 433,125 $ -- ------------ ----------- Cost in excess of fair value acquired in the business combination of: SiVault Analytics, Inc. $ 7,863,060 $ -- ------------ ----------- Viaquo Access Control Business $ 5,097,058 $ -- ------------ ----------- Issuance of common stock and warrants as consideration for loans $ 1,785,256 $ -- ------------ ----------- Issuance of stock options and warrants for services $ 4,324,396 $ -- ------------ ----------- Issuance of stock warrants to extend convertible debentures $ -- $ 2,016,000 ------------ ----------- Issuance of stock warrants to extend note payable - related party $ -- $ 480,000 ------------ ----------- Issuance of stock warrants to settle notes payable - related party $ -- $ 640,000 ------------ ----------- Borrowings under note payable - related party to payoff a note payable - non-related party $ 150,000 $ -- ------------ ----------- Borrowings under notes payables - related parties to pay accounts payable and accrued liabilities - related parties $ 41,667 $ 325,000 ------------ ----------- Borrowing under note payable - non-related party to pay accounts payable and accrued liabilities - non-related party $ 49,653 $ -- ------------ ----------- Borrowings from a related party to pay a court order deposit for litigation $ 100,000 $ -- ------------ -----------
The accompanying notes are an integral part of these consolidated financial statements. 7 SIVAULT SYSTEMS, INC. AND SUBSIDIARIES (FORMERLY SECURITY BIOMETRICS, INC.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 ---------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS Security Biometrics, Inc. pursuant to the acquisition of SiVault Analytics Inc, ("Sivault Analytics") in July 28, 2004 changed its name to SiVault Systems, Inc. ("SiVault"). SiVault (together with its consolidated subsidiaries, unless the context otherwise requires, "the Company") is a Nevada corporation incorporated on March 12, 1999. SiVault and its subsidiaries are engaged in the commercialization of technologies designed to implement secure electronic storage and retrieval of signed documents and biometric signature-based authentification for electronic transactions technologies which the Company has developed, acquired or licensed from others. Lightec Communications Corp. ("Lightec"), a wholly-owned subsidiary of SiVault, is a provider of telecommunications design, installation and technical support for information technology systems. The Company had three subsidiaries (collectively known as "eMedRx") to develop and market its electronic medical prescriptions around the world. The three eMedRx companies were incorporated in Nevada, Canada, and Delaware and are referred to as "eMedRx Nevada", "eMedRx Canada", and as "eMedRx Delaware", respectively. On October 20, 2004, the Company entered into three share exchange agreements with the stockholders of eMedRx Delaware, eMedRx Canada, and a shareholder of eMedRx Delaware (the "eMedRx Agreements"). The eMedRx Agreements provided for the exchange of common stock shares of eMedRx Nevada, eMedRx Canada, and eMedRx Delaware, not owned by the Company as of October 20, 2004, for 568,070 restricted shares of the Company's common stock valued at $3.45 per share. The operations of all three eMedRx entities were recorded as part of the SiVault System's segment of the Company effective as of the beginning of the fiscal year 2005. GOING CONCERN The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has experienced significant operating losses since inception. In addition, as of June 30, 2005, the Company has a working capital deficit amounting to approximately $9.1 million. Management has adopted a reorganization plan which the Company believes will address its current financial condition (see Note 2). The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. 8 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (cont'd) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SiVault Systems, Inc. and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. VARIABLE INTEREST ENTITY In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" which was replaced in December 2003 by the issuance of FIN 46R ("FIN 46R"). FIN 46R explains how to identify variable interest entities ("VIEs") and how a company should assess its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46R requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. eMedRx Delaware was considered to be a primary beneficiary of the Company. Accordingly, the Company accounted for eMedRx Delaware as a variable interest entity to be consolidated prior to October 20, 2004. On October 20, 2004, the Company acquired eMedRx Delaware and has been accounted for as a wholly-owned consolidated subsidiary. CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances in banks, which, at times, may exceed the limits of the amount insured by the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses to date as a result of this policy, and management believes there is little risk of loss. The Company derives substantially all of its revenues for the years ended June 30, 2005 and 2004 from one customer. ACCOUNTING ESTIMATES Management uses estimates and assumptions in preparing consolidated financial statements in accordance with generally accepted accounting principles in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Significant estimates made by management include revenue recognition, the fair values of property and equipment, and options and warrants issued, allowances on receivables, the valuation allowance on deferred tax assets and valuation of intangibles assets acquired. REVENUE RECOGNITION The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where the customer specifies final acceptance of the product, system, or solution, revenue is deferred until all acceptance criteria have been met. Service revenue is generally deferred and, in most cases, recognized ratably over the period during which the services are to be performed, which is typically approximately one year. Cash payments received in advance of product or service revenue are recorded as deferred revenue. When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately. 9 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (cont'd) Lightec recognizes certain of its revenues from fixed-price and modified fixed-price contracts on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Revenue from time-and-materials contracts is recognized currently as the work is performed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provision, claims change orders and settlements, are accounted for as changes in estimates in the current period. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts", represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Revenue is recognized when realization is probable and the amount can be reliably estimated. When realization is probable, but the amount cannot be reliably estimated, revenue is recognized to the extent of costs incurred. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- Selling, general and administrative expenses primarily include payroll and related benefits, consulting fees, professional fees, board of directors fees, bad debt expenses, impairment of property and equipment, rent, and depreciation and amortization expenses. See Note 18 for the components of selling, general and administrative expenses for the years ended June 30, 2005 and 2004. ACCOUNTS RECEIVABLE - -------------------- Management performs ongoing credit evaluations of its customers. Management determined that an allowance was necessary as of June 30, 2005, as compared to no allowance needed as of June 30, 2004. Accounts receivable primarily represent amounts due from billings under a contract entered into by Lightec. Accounts are written off when significantly past due and management deems them to be uncollectible after exhaustive collection efforts. INVENTORY - --------- The Company's inventory is stated at the lower of cost using the first-in, first-out (FIFO) method or market. As of June 30, 2005 the Company's inventory consists primarily of electronic point-of-sale terminals which were returned to the vendor subsequent to the year end. SOFTWARE DEVELOPMENT COSTS - --------------------------- The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development cost are capitalized after technological feasibility has been established, which is the earlier point in time at which the Company has developed a working prototype or has a detailed program design for the software. 10 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (cont'd) PROPERTY AND EQUIPMENT - ---------------------- Property and equipment are recorded at cost. Major renewals and improvements are capitalized and replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are charged to expenses when incurred. When items of property and equipment are retired and otherwise disposed of, the original cost and related accumulated depreciation to date are removed from the accounts and any gains or losses upon retirement or sale are recognized. The Company depreciates its property and equipment for financial reporting purposes using the straight-line method based upon the following useful lives of the assets: Furniture and fixtures 7-10 Years Machinery and equipment 5 Years Computer equipment 5 Years Software 3 Years All depreciation and amortizations costs are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations. PATENTS AND TRADEMARKS Costs incurred for the application of patents and trademarks are capitalized and amortized on the straight-line method, based on their estimated useful lives, commencing upon approval of a patent or trademark. The costs incurred prior to approval and costs for unsuccessful applications are charged to expense. As of the date of this report, no patents have yet been approved. INCOME TAXES The Company accounts for income taxes using the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is recorded when it is more likely than not the benefits from deferred tax assets will not be realized. 11 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (cont'd) LOSS PER COMMON SHARE - --------------------- Net loss per common share is calculated by dividing net loss by the weighted average number of shares outstanding during each period presented. Common stock equivalents, consisting of options, warrants and convertible notes and debentures, have not been included, as their effect would be antidilutive for the two years ended June 30, 2005 and 2004. IMPAIRMENT OF LONG-LIVED ASSETS - ------------------------------- The Company follows the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, but amends the prior accounting and reporting standards for segments of a business to be disposed of. The Company periodically evaluates its long-lived assets based on, among other factors, appraisal values, and the estimated undiscounted future cash flows expected to be generated from such assets in order to determine if an impairment exists. For the years ended June 30, 2005 and 2004, the Company recorded an impairment charge of $312,576 and $ 0 respectively, of property and equipment and $448,858 and $0, respectively, for software costs. All of the aforementioned amounts are reflected in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations for the year ended June 30, 2005 and a new basis, if any, for the impaired assets was established. FAIR VALUE OF FINANCIAL INSTRUMENTS In determining the fair value of its financial instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing as of each balance sheet date. For the majority of financial instruments, including receivables, notes and loans payable, and stock options and warrants, standard market conventions and techniques, such as discounted cash flow analysis option, pricing models, replacement cost and termination cost, are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. GOODWILL AND OTHER INTANGIBLE ASSETS - ------------------------------------ The Company has adopted the provisions of SFAS No 142, "Goodwill and Other Intangible Assets". This statement provides that goodwill and other intangible assets with indefinite lives should no longer be amortized, but should be reviewed at least annually for impairment. Management performed a review of its existing cost in excess of fair value of assts acquired in business combination and determined that it was impaired as of June 30, 2005. For the years ended June 30, 2005 and 2004, the Company recorded an impairment of cost in excess of fair value from a business combination of $5,706,060 and $0, respectively. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123, " Accounting for Stock- Based Compensation", as amended by SFAS No. 148, " Accounting for Stock- Based Compensation - Transition and Disclosure- an Amendment of SFAS No. 123". SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. Warrants and options issued to consultants and others are expensed in accordance with SFAS No. 123, as amended by SFAS No. 148. For employee stock options, the company has not adopted SFAS No. 123 (revised), " Share-Based Payment" which requires that the fair market value of share -based compensation, such as stock options, be charged to expense over the period earned. The Company will adopt SFAS No. 123 (revised) for the fiscal year beginning July 2005. 12 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (cont'd) COMPREHENSIVE INCOME (LOSS) - ---------------------------- The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes rules for the reporting of comprehensive income and its components. Comprehensive income (loss) is comprised of foreign currency translation adjustments for the years ended, June 30, 2005, and 2004, the Company had foreign currency translation adjustments of $(89) and $(1,995), respectively. The comprehensive income (loss) for the years ended June 30, 2005 and 2004 was included in selling, general and administrative expenses due to its immateriality. FOREIGN CURRENCY TRANSLATION - ------------------------------ The financial statements of the Company are measured using the United States dollar as the functional and reporting currency. Assets, liabilities and equity accounts of the Company are translated from foreign currency to United States currency at exchange rates as of the balance sheet date or historical acquisition date, depending on the nature of the account. Revenues and expenses are translated at average rates of exchange in effect during the year. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders' equity (deficiency). SEGMENT INFORMATION - ------------------- SFAS No 131, " Disclosure about Segments of an Enterprise and Related Information", establishes annual and interim reporting standards for an enterprise's operating segments, and related disclosures about its products, services, geographic areas and major customers. As defined in SFAS No 131, the Company had two operating segments for the year ended June 30, 2005, and three operating segments for the year ended June 30, 2004. RECLASSIFICATION: - ----------------- Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentations. NEW ACCOUNTING PRONOUNCEMENTS - ----------------------------- In December 2004, the FASB issued Statement of Financial Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"), which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cashflows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition. The Company expects the adoption of SFAS No. 123(R) to have a material effect on its financial statements, in the form of additional compensation expense, on a quarterly and annual basis. It is not possible to precisely determine the expense impact of adoption since a portion of the ultimate expense that is recorded will likely relate to awards that have not yet been granted. The expense associated with these future awards can only be determined based on factors such as the price for the Company's common stock, volatility of the Company's stock price and risk free interest rates as measured at the grant date. However, the pro forma disclosures related to SFAS No. 123 included in the Company's historic financial statements are relevant data points for gauging the potential level of expense that might be recorded in future periods. Statement of Financial Accounting Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151) was issued in November 2004 and becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that SFAS 151 will have any effect on future financial statements. 13 Statement of Financial Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions, an amendment of FASB Statements No. 66 and 67 (SFAS 152) was issued in December 2004 and becomes effective for financial statements for fiscal years beginning after June 15, 2005. The Company does not expect that SFAS 152 will have any effect on future financial statements. Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153) was issued in December 2004 and becomes effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect that SFAS 153 will have any effect on future financial statements. Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154) was issued in May 2005 and becomes effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that SFAS 154 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments--an amendment of FASB Statements No. 133 and 140, was issued in February 2006 and 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. Certain parts of this Statement may be applied prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not expect that SFAS 155 will have any significant effect on future financial statements. Statement of Financial Accounting Standards No. 156, Accounting for Financial Assets--an amendment of FASB Statement No. 140, was issued in March 2006 and 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. Certain parts of this Statement may be applied prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period for that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement. This Statement amends FASB Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Company does not expect that SFAS 156 will have any significant effect on future financial statements. In March 2005, FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). Retrospective application for interim financial information is permitted but is not required. Early adoption of this Interpretation is encouraged. The Company does not expect that FIN 47 will have any significant effect on future financial statements. In December 2004, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) issued Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions (SOP 04-2). SOP 04-2 is effective for financial statements issued for fiscal years beginning after June 15, 2005, with earlier application encouraged. The Company does not expect that SOP 04-2 will have any effect on future financial statements. In September 2005, AcSEC issued Statement of Position 05-1: Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 is effective for fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company does not expect that SOP 05-1 will have any effect on future financial statements. FASB Staff Position (FSP) FAS 13-1--Accounting for Rental Costs Incurred during a Construction Period, was issued on October 6, 2005 and becomes effective for the for new transactions or arrangements entered into after the beginning of the first fiscal quarter following the date that the final FSP is posted by the FASB. The Company does not expect that FSP 13-1 will have any significant effect on future financial statements. On June 29, 2005, the FASB ratified the consensus reached for Emerging Issues Task Force (EITF) Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements). The consensus in this Issue should be applied to fiscal years beginning after December 15, 2005, and reported as a change in accounting estimate effected by a change in accounting principle as described in paragraph 19 of FASB Statement 154. The Company does not expect that EITF 05-5 will have any significant effect on future financial statements. 14 On September 28, 2005, the FASB ratified the consensus reached for EITF Issue No. 05-8, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature. The provisions of this Issue should be applied beginning in the first interim or annual reporting period beginning after December 15, 2005. The Company expects that the application of EITF 05-8 could have an effect on the income tax expense reported in future financial statements. It is not possible to determine the impact, if any, from this application on future financial statements. The Company had convertible debt as of June 30, 2005. NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS As shown on the accompanying financial statements, the Company has shown cumulative from inception recurring losses from operations, negative cash flows from operations, and as of June 30, 2005 had a working capital deficit of approximately $9.1 million. These factors raise significant doubt as to the Company's ability to continue as a going concern. Management's plan includes the following: 1. Significantly reducing and/or minimizing the Company's monthly overhead costs while the Company addresses items below concurrent with securing of a third party long-term revenue generating contract(s) or licensing agreement(s). 2. Raising equity through private placements. The Company has raised approximately $2.2 million in private placement of the Company's common shares from July l, 2005 through to the date of this report; 3. Concluding debt settlement agreements with related and/or non-related parties (See Subsequent Event Note No. 23) 4. Additional private placements of debt or equity subsequent to the date of this report. However, continuation of the business thereafter is dependent on the Company's ability to achieve profitable operations and sufficient cash flow to meet its current obligations. Management believes that with settlement of certain debt(s) and with the expected increase in revenues commencing in the first quarter of fiscal 2007,(the Company entered into a licensing agreement with Hypercon Corporation in February 2006) the Company will be able to continue its business for the next twelve months. NOTE 3 - PER SHARE INFORMATION. In accordance with SFAS No. 128 "Earnings Per Share", basic earnings per common share ("Basic EPS") is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per common share ("Diluted EPS") is computed by dividing the net income (loss) by the sum of the weighted-average number of common shares and dilutive common stock equivalents and convertible securities then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the Company's Consolidated Statements of Operations. Consolidated common stock equivalents totaling 13,971,108 and 3,170,268 were excluded from the computation of Diluted EPS for the years ended June 30, 2005 and 2004 as their effect on the computation of Diluted EPS would have been anti-dilutive. The following table sets forth of basic and diluted per share information:
2005 2004 Numerator - --------- Net loss from continuing operations $ (23,900,354) $(3,582,853) Net income from discontinued operations -- 176,193 -------------- ------------ Net loss $ (23,900,354) $ (3,406,660) -------------- ------------ Denominator - ----------- Weighted average common shares outstanding 16,566,258 6,971,497 -------------- ------------ Basic and Diluted Per Share Information - --------------------------------------- Net loss from continuing operations $ (1.44) $ (0.51) Net income from discontinued operations $ 0.00 $ .02 -------------- ------------ Net loss $ (1.44) $ (0.49) -------------- ------------
15 NOTE 4 -- BUSINESS ACQUISITIONS SiVault Analytics, Inc. In July 2004, the Company acquired all of the outstanding common shares of SiVault Analytics, Inc. in exchange for four million shares of the Company's restricted common shares, valued at the market price on the date of issuance of $1.80 per share. The Company later issued 140,000 common shares, valued at the market price on the date of issuance of $1.60 per share, as compensation for finder's fees in conjunction with the acquisition. The acquisition was accounted for as a business purchase and initially recorded at the estimated fair value of the assets acquired and the liabilities assumed, as follows: Cash $ 5,622 Property and equipment 51,815 Other assets 450 Excess cost over net tangible assets acquired 7,863,060 --------------- Total assets 7,920,947 --------------- Accrued expenses (381,947) Advance from shareholder (115,000) --------------- Total liabilities (496,947) --------------- Net assets acquired $7,424,000 =============== The initial allocation of the purchase price was not based on an evaluation of the amount assigned to excess cost over net tangible assets acquired. Subsequent to the purchase of SiVault Analytics, Inc., the Company reviewed the initially recorded excess cost over net tangible assets acquired amount and determined that $2,157,000 should be assigned as the fair value of a technology product intangible and that the remaining $5,706,060 related to other elements, such as the associated management team, for which specific fair values could not be quantified. As of June 30, 2005 the factors supporting the realization of any future benefits from those other elements were no longer present. Consequently, the Company has charged the entire $5,706,060 to expense as an impairment of cost in excess of fair values of net assets acquired. The $2,157,000 assigned as the fair value of a technology product intangible will be amortized over its useful life once it is placed in service. The Company has not yet determined the useful life of this intangible asset. Because the marketability and functioning of this technology has not yet been proven, there remains substantial doubt about whether this technology will ultimately provide any value. Viaquo In November 2004, the Company purchased substantially all of the assets of Viaquo Corporation ("Viaquo") related to Viaquo's ViaSeal Access Control Business in exchange for 3,050,000 shares of the Company's restricted common shares, of which (1) 750,000 shares were delivered to Viaquo at closing (valued at the market price on the date of issuance of $2.35 per share) and (2) 2,050,000 shares were placed in escrow to be held until the earlier to occur of (i) the issuance of a U.S. Patent for certain U.S. Patent Applications acquired by SiVault, or (ii) the abandonment by SiVault of the U.S. Patent and Trademark Office following final rejection thereof by the U.S. Patent and Trademark Office, and (3) the remaining 250,000 shares were placed in escrow to be held until the earlier to occur of (i) the issuance by the European Patent Office ("EPO") of a decision to grant a European Patent with respect to an European Patent Application acquired by SiVault, or (ii) the abandonment by SiVault of the European Patent Application following a final refusal by EPO to grant the European Patent. 16 As of March 31, 2005, an amendment to the purchase agreement was made due to new information about the ultimate issuance of the European Patents. Under the amendment, SiVault agreed to release the 2,300,000 shares (valued at the market price on the date of issuance of $1.52 per share) held in escrow. The acquisition was accounted for as a business purchase and initially recorded at the estimated fair value of the assets acquired and the liabilities assumed, as follows: Property and equipment $ 36,269 Excess cost over net tangible assets acquired 5,097,058 --------------- Total assets 5,133,237 --------------- Vacation pay liability (52,553) --------------- Net 5,080,774 --------------- License fee due to Viaquo at purchase date 250,000 --------------- Advance to Viaquo from the Company (37,046) --------------- Net assets acquired $5,293,728 =============== The initial allocation of the purchase price was not based on an evaluation of the amount assigned to excess cost over net tangible assets acquired. Subsequent to the purchase of the ViaSeal Access Control Business, the Company reviewed the initially recorded excess cost over net tangible assets acquired amount and determined that all of it should be assigned as the fair value of the technology acquired. The amount assigned as the fair value of the technology will be amortized over its useful life, which has not yet been determined. Because uncertainties remain about the marketability and functioning of this technology, there is substantial doubt about whether this technology will ultimately provide any value. 17 NOTE 4 - ACQUISITION OF VIAQUO AND SIVAULT ANALYTICS - (cont'd) The following table shows the unaudited pro forma results of the Company, giving effect to the acquisition of SiVault Analytics, Inc. and the purchase of the ViaSeal Access Control business, assuming they were consummated at the beginning of the years. 2005 2004 ---------------- ------------- Revenues $ 1,612,013 $ 7,172,437 ---------------- ------------- Loss from continuing operations (25,080,662) (4,140,431) ---------------- ------------- Income from discontinued operations -- 176,193 ---------------- ------------- Net loss $ (25,080,662) $ (3,964,238) ================ ============= Basic and Diluted Loss Per Common Share: Loss from continuing operations $ (1.35) $ (0.29) ---------------- ------------- Income from discontinued operations $ 0.00 $ 0.01 ---------------- ------------- Net loss $ (1.35) $ (0.28) ================ ============= NOTE 5 - VALUATION ACCOUNT The Company's accounts receivables are shown on the Company's consolidated balance sheets net of allowance for doubtful accounts. Changes in the valuation account as of June 30, are as follows: 2005 2004 ---- ---- Balance, beginning of the year $ -- $ -- Bad debt expense 718,471 -- Write-offs (54,505) -- -------- ------- Balance, end of year $663,966 $ -- ======== ======= NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment as of June 30, consists of the following: 2005 2004 Furniture and fixtures $ 50,000 $ 64,198 Computer equipment 20,000 24,601 Computer software -- 573,477 ---------------- -------------- 70,000 662,276 Less: accumulated depreciation -- (25,282) ---------------- -------------- $ 70,000 $ 636,994 ================ ============== Depreciation charged to operations for the years ended June 30, 2005 and 2004 amounted to $189,395 and $10,026, respectively. The Company determined that as of June 30, 2005 that certain of its property and equipment have been impaired due to certain software deemed worthless, and write-down of property and equipment held in the Company's offices in San Jose, New York and Connecticut. Accordingly, the Company has reduced its property and equipment asset values to reflect their current estimated fair market values as of June 30, 2005. The Company incurred impairment losses for the years ended June 30, 2005 and 2004 in the amounts of $761,434 and $0, respectively. 18 NOTE 7 - Estimated Earnings On Uncompleted Contracts 2005 2004 ------------ ------------- Costs incurred on uncompleted contracts $ -- $ 3,637,670 Estimated earnings to date -- 3,471,459 ------------ ------------- -- 7,109,129 Less: Billings to date -- 7,199,147 ------------ ------------- Billings in excess of costs and estimated earnings on uncompleted contracts $ -- $ 90,018 ============ ============= NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES- NON-RELATED PARTIES Accounts payable and accrued liabilities non-related parties consist of the following: 2005 2004 ---- ---- Accounts payable $2,186,411 $1,792,065 Accrued payroll and fringe benefits 679,711 -- Accrued professional fees 828,216 633,259 Accrued interest 157,350 52,258 Other accrued expenses 34,911 81,301 ---------- ---------- $3,886,599 $2,558,883 ========== ========== NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - RELATED PARTIES Accounts payable and accrued liabilities - related parties represents amounts due to officers, directors, and private companies with common directors to the company. Accounts payable and accrued liabilities - related parties consists of the following 2005 2004 ---- ---- Accounts payable $ 576,252 $ 789,410 Accrued payroll and fringe benefits 168,905 -- Accrued interest 61,127 -- Other accrued expenses 5,886 -- ---------- ---------- $ 812,170 $ 789,410 ========== ========== On July 28, 2004, the Company issued 375,335 shares of the Company's common stock to two officers of the Company and two other related parties in exchange for reduction of their payable balances by $600,658 (the total balance due to the four individuals was $715,006 as of June 30, 2004). NOTE 10 - NOTES AND LOANS PAYABLE - NON-RELATED PARTIES
2005 2004 --------- --------- On June 13, 2002, the Company issued a note payable to MaryAnne Richard in the amount of $1,000,000 as part of the consideration for the purchase of Lightec. On June 2004, the Company entered into a settlement agreement with MaryAnne and Michael Richard (together "the Richards") whereby the Richard's agreed to settle all obligations and disputes with the Company. The Company agreed to a payment to the Richards of $1,189,983 (principal and accrued interest) and the May 7, 2004 issuance of a warrant for 400,000 shares of the Company common stock at $2.50 per share .The Richards agreed to (i) a June 7, 2004 transfer of 850,000 shares (valued at $850,000) of the Company's common stock to a third-party designee of the Company and (ii) settlement of the promissory note. On July 2, 2004, the parties finalized the settlement and executed a mutual waiver and release of all claims against each other. On July 2, 2004, the remaining balance of $339,983 was paid to the Richards. $ -- $ 339,983 As of June 30, 2005, the Company had eight short-term promissory notes from non-related parties in the amount of $967,736 (net of debt discount of $165,274). These notes bear interest ranging at annual rate between 10% - 12%, payable at the end of their terms. The principal amount of these notes is reflected on the balance sheet, net of the fair market value of the warrants and the stock issued, which are accounted for as debt discount. As of June 30, 2005, the Company was in default of three notes totaling $400,000. The Company subsequently defaulted on the remaining five notes (the latest maturity date was September 10, 2005). In December 2005 and in 2006, the Company settled and/or restructured all of these promissory notes. See Note 23 - - Subsequent Events. 1,141,653 -- As of June 30, 2005, the Company had three loans to non-related parties totaling $393,918. These loans had no terms and bore no annual interest rate. In December 2005, two of these loans for $315,000 were settled. See Note 23 - Subsequent Events. 393,998 -- ---------- -------- 1,535,651 339,983 Less: Debt Discount 165,274 -- ---------- -------- $1,370,377 $339,983 ========== ======== NOTE 11 - NOTES AND LOANS PAYABLE - RELATED PARTIES 2005 2004 ---------- ---------- As of June 30, 2005, the Company had six short-term promissory notes from related parties in the amount of $1,371,023 (net of debt discount of $8,644). These notes, except for one, bear interest ranging at annual rates between 9% - 12%, payable at the end of their terms. One promissory note bore interest at the LIBOR rate. The principal amount of these notes is reflected on the balance sheet, net of the fair market value of the warrants and the stock issued, which are accounted for as debt discount. As of June 30, 2005, the Company was in default of four notes totaling $1,188,000. The Company subsequently defaulted on the remaining two notes (the latest maturity date was July 31, 2005). In December 2005 and in 2006, the Company settled and/or restructured two of these promissory notes totaling $450,000 (an additional $200,000 had been paid in July and August 2005). See Note 23 - Subsequent Events. $1,379,667 $ -- As of June 30, 2005, the Company had two loans to non-related parties totaling $120,833. These loans had no terms and bore no annual interest rate. In December 2005, one of these loans for $100,000 was settled. See Note 23 - Subsequent Events. 120,833 -- ---------- -------- 1,500,500 -- Less: Debt Discount 8,644 -- ---------- -------- $1,491,856 $ -- ========== ======== NOTE 12 - CONVERTIBLE NOTES On June 30, 2002, the Company issued a convertible debenture to Edinburgh Investments LLC ("Edinburgh") in the amount of $1,680.000. On January 19, 2005, the principal and accrued interest balance were paid off using the proceeds of the second closing of the convertible notes to Longview ("Longview"). On November 23, 2004 (the "First Closing") the Company issued $1,500.00 of convertible notes to three investment funds. The convertible notes bear interest at the prime rate of interest plus 3% per annum, and the Company was required to pay down 1/30 of the original principal amount each month commencing on June 1, 2005. The convertible notes were convertible into common stock of the Company at $2,25 per share conversion price. The interest payable on the notes was convertible into common stock. Interest accrued each month and payment commenced on June 1, 2005. The Company also issued 200.000 warrant shares which may be exercised within five years at $3.00 per share.
19 2005 2004 ---------- ---------- On January 19, 2005, after the Company's SB-2 registration statement became effective, the second closing occurred in which the Company issued an additional $1,500,000 of three year convertible notes to Longview with the same terms and conditions as in the First Closing, including issuance of another 200,000 warrant shares. The proceeds to the Company from the second closing were primarily used to pay off the Edinburgh convertible debenture. The notes were secured by a first priority lien on all of the assets of the Company and are reflected on the balance sheet, net of the fair market values of the warrants and the beneficial conversion feature, which are accounted for as debt discount. 2,588,237 -- ----------- ----------- 2,588,237 1,358,569 Less: Debt Discount 548,728 -- ----------- ----------- $ 2,039,509 $ 1,358,569 =========== ===========
Future payment of the convertible notes as of June 30, 2005 are as follows: Year ending June 30 ----------- 2006 $ 788,237 2007 1,200,000 2008 600,000 ---------- 2,588,237 Less: Debt discount 548,728 ---------- $2,039,509 ========== As of June 30, 2005, the Company was in material default in regards to Longview convertible notes. On November 21, 2005, the Company entered into a settlement and restructuring agreement with Longview. See Note 23 - Subsequent Events. NOTE 13 - 401(K) PLAN - ------------------------ On February 1, 2002, Lightec (prior to the Company's acquisition of Lightec) adopted a 401(K) retirement savings plan for its employees. Contributions are determined by the Board of Directors, and the Company did not make any contributions to the plan for the years ended June 30, 2005 and 2004. 20 Note 14 - INCOME TAXES As of June 30, 2005 and 2004, the total net deferred tax assets were approximately $11,590,000 and $4,340,000, respectively, resulting primarily from the potential future tax benefits of net operating loss carry-forwards. In accordance with SFAS No. 109, the Company has provided a full valuation allowance against its net deferred tax assets as of June 30, 2005 and 2004, due to the uncertainty as to their future realization. Due to the operating losses, the valuation allowance against net deferred tax assets increased by approximately $9,380,000 and $3,100,000 during the years ended June 30, 2005 and 2004, respectively. The tax effect of temporary differences that give rise to the deferred tax assets as of June 30, 2005 and 2004 are presented below: 2005 2004 ------------- ------------ Deferred tax assets: Allowance for doubtful accounts $ 260,000 $ -- Accrued expenses and accrued liabilities 330,000 -- Impairment of cost in excess of fair value from a business combination 2,130,000 -- Impairment of long-lived assets 300,000 -- Stock-based compensation 2,900,000 1,250,000 Net operating loss carry-forwards 7,800,000 3,090,000 ------------- ------------ Total deferred tax assets 13,720,000 4,340,000 less: valuation allowance (13,720,000) (4,340,000) ------------- ------------ Net deferred tax assets $ -- $ -- ============= ============ As of June 30, 2005, the Company had net operating loss carry forwards for regular tax and alternative minimum taxable income purposes available to reduce future taxable income and may be limited in accordance with Section 382 of the Internal Revenue Code of 1986, as amended, based on certain changes in ownership that have occurred or could occur in the future. These carry-forwards expire as follows (in thousands): Year Net Operating Loss AMT Operating Loss ---- ------------------ ------------------ 2020 $ 51 $ 51 2021 869 869 2022 993 993 2023 1,191 1,194 2024 4,615 4,618 2025 12,100 12,100 ------------------ ------------------ $ 19,819 $ 19,825 ================== ================== The Company's effective tax rate differs from the statutory Federal income tax rate of 34%, primarily due to the effect of state and local income taxes and the impact of recording a valuation allowance to offset the potential future tax benefit resulting from net operating loss carry-forwards for all years presented. The following is a reconciliation of the U.S. Federal statutory income tax rate to the Company's effective income tax rate for the years ended June 30, 2005 and 2004: 2005 2004 ---- ---- Federal statutory rate 34% 34% State and local income taxes, net of federal tax benefit of deductions 6% 6% Net operating loss carry-forwards (40%) (40%) --------- -------- Effective tax rate 0% 0% ========= ======== The provision for income taxes for the years ended June 30, 2005 and 2004 was $0 and $34,934 (state income taxes), respectively. As of June 30, 2005, accrued interest of $50,000 was recorded for unpaid state corporate taxes of $129,920. The Company's June 30, 2005 consolidated tax return has not been filed as of the report date. 21 NOTE 15 - COMMITMENTS AND CONTINGENCIES LEASES On January 23, 2004, the Company entered into a sublease for its office space in New York City and, on June 22, 2004, sub-subleased part of this office space. The sublease and sub-sublease were to expire on December 30, 2007. In September 2004, the Company sub-subleased a facility space in San Jose, California which was to expire on May 31, 2008. In May 2005, the Company expanded its occupancy of the San Jose location. Subsequently, the Company defaulted on its New York and San Jose leases and applied its security deposits towards rent, in both locations. The Company continued its occupancies on a month-to-month basis and vacated its San Jose office in September 2005. On January 1, 2006, the Company entered into a sublease agreement with its former tenant at its New York location. The Company's landlord in the San Jose office went bankrupt in late 2005. As of the report date, the Company believes it has no remaining liabilities on its two prior leases; however, a contingency remains with respect to rent owed by its San Jose landlord to the ultimate landlord. Future minimum annual lease payments as of January 1, 2006 are as follows: Year Ending June 30, Minimum Annual Rental Expense -------------------- ----------------------------- 2006 $ 18,000 2007 39,000 2008 21,000 --------- $ 78,000 ========= Lightec rented its Connecticut facility on a month-to-month basis. Rent expense for the years ended June 30, 2005 and 2004 was $510,076 and $136,466, respectively. 22 NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIENCY) REVERSE STOCK SPLIT AND INCREASE IN COMMON STOCK On April 30, 2004, the Company's stockholders approved a one-for-twenty reverse stock split which was effected on June 7, 2004. All references in the accompanying consolidated financial statements and notes thereto relating to common stock and additional paid-in capital and warrants per share and share data have been retroactively adjusted to reflect the one-for-twenty reverse stock split. Simultaneously, the Company's stockholders approved an increase in the authorized number of common shares to 50 million from 15 million which became effective on the date of the reverse stock split. NOTE 17 - STOCK-BASED WARRANTS AND STOCK OPTIONS WARRANTS As of June 30, 2005 the Company had the following warrants outstanding: WARRANTS EXERCISE PRICE EXPIRATION OUTSTANDING PER SHARE DATE ------------------- ------------------------ ------------------------ 37,875 $3.00 November 19, 2005 184,525 3.60 December 22, 2005 1,004,975 2.00 August 22, 2006 187,500 4.00 September 13, 2006 1,003,150 2.00 September 13, 2006 (A) 600,998 3.00 October 18, 2006 35,000 4.00 March 16, 2007 250,000 2.67 October 1, 2008 23,408 0.001 October 1, 2008 100,000 2.00 January 21,2010 30,000 2.00 February 23, 2010 66,666 2.25 March 11,2010 150,000 2.25 March 31, 2010 328,653 2.25 April 29, 2010 2,825,000 1.76 May 2,2010 100,000 2.00 June 2, 2010 321,000 2.25 June 10, 2010 42,000 2.25 June 20, 2010 57,600 2.25 March 30, 2015 8,333 2.25 April 30, 2015 ------------- 7,356,683 SUBTOTAL ------------- Other Warrants (in connection with loans, etc.) 400,000 $2.50 May 7, 2006 50,000 3.00 May 9, 2006 400,000 2.50 May 25, 2006 50,000 2.50 December 23, 2006 672,000 3.00 September 30, 2008 200,000 3.00 November 23, 2009 200,000 3.00 January 19, 2010 150,000 3.00 May 26, 2010 50,000 3.00 June 17, 2010 ------------- 2,172,000 SUBTOTAL ------------- 9,528,683 TOTAL WARRANTS ============= 23 NOTE 17 - STOCK-BASED WARRANTS AND STOCK OPTIONS (A) The Company repriced warrants expiring on June 14, 2005 with an exercise price of $7.00 per share. The exercise price of the repriced warrants dated September 13, 2004 are as follows: if exercised within 30 days - $2.00 per share, within one year - $4.00 per share, and within 2 years - $6.00 per share. The expired warrants were dated September 13, 2004 and 166,667 of them were exercised in September 2004 at $2.00 per share. STOCK OPTIONS On April 30, 2004, the Company's stockholders approved the SiVault Systems, Inc. 2004 Incentive Stock Plan (the "2004 Plan") which provides for the issuance of up to 2,250,000 shares. The 2004 Plan permits the grant of stock options, stock awards and restricted stock purchase awards. Stock options granted under the 2004 Plan may be options intended to qualify as incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code or nonqualified stock options ("NSOs"), which are options that are not intended to qualify as ISOs. Stock options granted to a person who owns more than 10% of the Company's voting power shall have exercise prices of at least 110% of fair market value of the Company's stock on the date of the grant. Stock options granted to others will have exercise prices of not less than 100% of the fair market value of the Company's stock on the date of grant if they are ISOs, and not less than 85% of the fair market value of the Company's stock on the date of grant if they are NSOs. Stock options granted under the 2004 Plan will have terms of not more than 10 years. Stock options under the 2004 Plan become exercisable a year after an employee's hire date. As of June 30, 2005, no employee was yet eligible to exercise their stock options under the 2004 Plan. A summary of all options issued is presented in the table below:
2005 2004 ---------------------------------------------------------------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Options outstanding, beginning of year -- -- -- -- Granted 2,922,500 $ 1.80 -- -- Exercised -- -- -- -- Canceled, forfeited or expired -- -- -- -- ---------------------------------------------------------------- Options outstanding, end of year 2,922,500 $ 1.80 -- -- ================================================================ Options exercisable, end of year 565,000 $ 1.98 -- -- ================================================================
As of June 30, 2005, the total stock options outstanding were held by: 2,147,500 employees 375,000 directors 375,000 outside consultants 25,000 outside professional --------- 2,922,500 ========= Subsequent to year end, all of the Company's employees based in San Jose were terminated and, under the terms of the 2004 Plan, options issued to these employees terminated three months after the date of separation. The following table summarizes information about stock options outstanding and exercisable as of June 30, 2005: 24
Options Outstanding Options Exercisable ------------------------------------------------------ ------------------------------------- Weighted- Weighted- Weighted- Average Average Average Range of Remaining Exercise Exercise Exercise Prices Outstanding Contractual Life Price Exercisable Price --------------- ----------- ---------------- ----- ----------- ----- 0.001 - 0.84 40,000 4.71 0.001 40,000 0.001 0.85 - 1.49 25,000 4.95 0.85 25,000 0.85 1.50 - 1.75 100,000 4.18 1.50 100,000 1.5 1.76 - 2.19 2,357,500 10.00 1.76 -- -- 2.20 - 2.24 75,000 1.29 2.20 75,000 2.2 2.25 - 2.66 200,000 1.71 2.25 200,000 2.25 2.67 - 3.00 125,000 1.31 2.67 125,000 2.67
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes binomial pricing model with the following assumptions: 2005 2004 ---- ---- Expected life (years) 2-10 years n/a Risk Free Interest rate 3%-4% n/a Volatility 98%-164% n/a Dividend Yield 0% n/a The table below show the pro forma results of operations and loss per share as if the Company had adopted Statement of Financial Accounting Standards (SFAS) No. 123 and the Black-Scholes valuation model. In December 2005, the Financial Accounting Standards Board issued SFAS No. 123 (Revised), "Share-Based payment", requiring companies to expense employee stock options, reflect the fair value of share-based compensation, as an expense. The Company will adopt the revised rules for the fiscal year beginning on July 1, 2005. 2005 2004 ------------ ------------ Net loss, from continuing operations, as reported $(23,900,354) $ (3,582,853) Compensation cost under fair value based accounting 184,309 -- ------------ ------------ Net loss, from continuing operations, pro forma $(24,084,663) $ (3,582,853) ------------ ------------ Net income from discontinued operations, as reported $ -- $ 176,193 Compensation cost under fair value based accounting -- -- ------------ ------------ Net income from discontinued operations, pro forma $ -- $ 176,193 ------------ ------------ Net loss, as reported $(23,900,354) $ (3,406,660) Compensation cost under fair value based accounting 184,309 0 ------------ ------------ Net loss, as reported $(24,084,663) $ (3,406,660) Basic and diluted (loss) per common share: Continuing operations, as reported $ (1.44) $ (0.51) ------------ ------------ Continuing operations, pro forma $ (1.45) $ (0.51) ------------ ------------ Discontinued operations, as reported $ -- $ 0.02 ------------ ------------ Discontinued operations, pro forma $ -- $ 0.02 ------------ ------------ Net loss, as reported $ (1.44) $ (0.49) ------------ ------------ Net loss, pro forma $ (1.45) $ (0.49) ------------ ------------ 25 Note 18 - Selling, General and Administrative Expenses The following table sets forth a summary of the selling, general, and administrative expenses for the years ended June 30 (in thousands): 2005 2004 ---- ---- Payroll and related expenses $ 4,280 $ 769 Consulting fees 3,100 697 Issuance of stock warrants to certain officers of the Company for their assistance in providing short-term financing to the Company - (see Note 21) 3,076 -- Issuance of stock warrants to extend convertible debenture, extend note, and to settle debt -- 2,496 Board of Directors fees (including issuance of the Company's commons stock and warrants - see Note 21) 1,287 -- Professional fees 1,071 994 Bad debt expense 718 -- Computer and licensing expenses 605 495 Rent 510 136 Travel and entertainment 469 225 Marketing 284 282 Depreciation and amortization 190 10 Other 942 130 ------- ------- $16,532 $ 6,234 ======= ======= NOTE 19 - BUSINESS SEGMENTS The summarized financial information, concerning the Company's reportable segments for the year ended June 30, 2005, as follows: 26 NOTE 19 - BUSINESS SEGMENTS - (cont'd)
SIVAULT SYSTEMS LIGHTEC TOTAL -------------------- -------------------- -------------------- Net sales to external companies $ 75,802 $ 1,526,211 $ 1,602,013 Loss from operations (14,845,525) (918,030) (15,763,555) Total assets 7,939,337 203,273 8,142,610 Depreciation and amortization 186,598 2,797 189,395 Capital expenditures 295,721 - 295,721 Interest expense 1,619,303 50,000 1,669,303 Impairment of cost in excess of fair value from a business combination 5,706,060 - 5,706,060 Impairment of long-lived assets 760,663 761 761,424 Intangible assets 7,254,058 - 7,254,058
The summarized financial information, concerning the Company's reportable segments for the year ended June 30, 2004, as follows:
SiVault Systems Lightec eMedRx Total -------------- --------------- ------------ ------------- Net sales to external companies $ 19,573 $ 7,110,034 $ 1,830 $ 7,131,437 Operating earnings (loss) (3,535,356) 1,197,717 (414,181) (2,751,820) Total assets 685,324 950,515 82,240 1,718,,079 Depreciation and amortization 9,566 460 -- 10,026 Capital expenditures 505,683 -- 75,000 580,683 Interest expense 789,305 6,915 -- 796,220 Provision for income taxes -- 34,934 -- 34,934 Charges related to issuance of stock options and warrants 2,496,000 -- -- 2,496,000
NOTE 20 - ECONOMIC DEPENDENCY The sales and purchases listed below are for the years ended June 30, 2005 and 2004 are: 2005 2004 ---------- ----------- Sales: Sales to major customers were as follows: Customer A 95% 100% Purchases: Purchases from major suppliers and subcontractors were as follows: Supplier or subcontractor A --% 69% Supplier or subcontractor B 22% --% Supplier or subcontractor C 20% --% Supplier or subcontractor D 20% --% Supplier or subcontractor E 18% --% ------ ------- 80% 69% ====== ======= Customer A is a local municipality in Connecticut. 27 NOTE 21 - RELATED PARTY TRANSACTIONS During the years ended June 30, 2005 and 2004, the Company incurred the following expenses, which were paid in cash and/or stock, to directors, officers and private companies with common directors with the Company. 2005 2004 ---------- ---------- Consulting fees $3,845,522 $ 158,400 Directors fees 1,287,650 -- Interest 309,375 244,789 The Company issued common stock, stock options and warrants of $3,455,041 and $0, respectively, for consulting fees, and $1,099,400 and $0, respectively for director's fees for the years ended June 30, 2005 and 2004. On August 8, 2004, the Board of Directors were granted 350,000 shares of the Company's common stock valued at $560,000 at $1.60 per common share pursuant to the Company's 2004 incentive stock plan. On October 18, 2004, the Board of Directors were granted 80,000 S8 shares valued at $262,400 at $3.28 per common share for remuneration for 2004 services. On October 18,2004, the Board of Directors were also granted 200,000 options at a strike price of 20% below market. These options were valued at $277,000 using the Black-Scholes option pricing model with the following parameters: two year expected life, two year expiration period, risk free interest rate of 3%, stock price volatility of 78%, with no dividends over the expected life. The former Chairman of the Board of Directors ("former Chairman") was issued 13,889 shares of the Company's common stock valued at $25,000 at $1.80 per share upon becoming the Chairman. The former Chairman was granted 250,000 in warrants, in lieu of cash, to be earned ratably for a nine-month period beginning January 1, 2005. These warrants were exercisable after September 30, 2005. These warrants were valued at $451,176 ($300,783 was included in consulting fees for the year ended June 30, 2005)using the Black-Scholes option pricing model with the following assumptions: three year expected life, three year expiration period, risk free interest rate of 3%, stock price volatility of 149%, with no dividends over the expected life. In addition, the former Chairman was paid half of his compensation in common stock, in lieu of cash. Certain officers of the Company were issued 2,825,000 warrants shares exercisable for a period of five years at a price of $1.76 per share for their assistance in providing short-term financing to the Company, effective from the Board of Directors resolution date of May 3, 2005. These warrants were valued at $3,076,142 (included in consulting fees) using the Black-Scholes option pricing model with the following parameters: five year expected life, five year expiration period, risk free interest rate of 4%, stock price volatility of 140%, with no dividends over the expected life. 28 NOTE 22 - DISCONTINUED OPERATIONS The Company entered into a Stock and Note Transfer Agreement (the "Transfer Agreement") with Pan Pacifica Ltd. ("Pan Pacifica"), effective as of August 20, 2003, to transfer all of the outstanding shares of Datadesk, a wholly-owned subsidiary of the Company, in exchange for Pan Pacifica assuming the net liabilities of Datadesk. The Transfer Agreement was entered into simultaneously with a settlement agreement between the Company and a former officer. In connection with the settlement, the Company transferred available funds in the amount of $151,020 to Pan Pacifica. For the year ended June 30, 2004, the Company realized a net gain on the disposal of Datadesk of $382,023, which was recognized at the date of disposition. The annual report for the year ended June 30, 2004 reported income from discontinued operations that were based in part on estimates of certain expenses related to Datadesk. During the year ended June 30, 2005, those estimates were revised because it was determined that previously estimated costs of $93,912 were not incurred. Consequently, the financial statements for the year ended June 30, 2005 include a reduction in selling, general and administrative expenses to reflect this change in accounting estimate. On November 13, 2003 the Company established a subsidiary in the United Kingdom to sell and market the Company's products in Europe. This subsidiary, Security Biometrics Limited ("SBL" ) was incorporated as a private limited company in England and Wales with 100,000 shares of authorized capital stock. The Company was issued 60,000 shares and a minority interest was issued 10,000 shares. On May 24, 2004 the Board of Directors approved the sale of this subsidiary to the minority interest holder for consideration of one US dollar. The liabilities of SBL were assumed by the minority stockholder at the date of sale. The Company's consolidated balance sheet includes the following amounts related to the discontinued operations of Datadesk and SBL as of June 30: 2005 2004 ---- ------- Assets of discontinued operations $ -- $ -- ---- ------- Accounts payable -- 93,913 ---- ------- Current liabilities of discontinued operations -- 93,913 ---- ------- Liabilities of discontinued operations $ -- $93,913 ==== ======= Income from discontinued operations is as follows: 2005 2004 --------- --------- Revenue $ -- $ 6,431 Direct expenses -- -- --------- --------- Gross profit -- 6,431 --------- --------- Expenses: Selling general and administrative -- 118,398 --------- --------- -- 118,398 --------- --------- Income before other income -- (111,967) Gain on disposition 288,160 --------- --------- Income from discontinued operations $ -- $ 176,193 ========= ========= 29 NOTE 22 - DISCONTINUED OPERATIONS - (cont'd) Cash flows from discontinued operations are as follows:
2005 2004 --------- --------- Cash Flows from Operating Activities: Net income for the year $ -- $ 176,193 Adjustment to reconcile net income to net cash provided by operating activities: Gain on disposition of subsidiary -- (288,160) Changes in Assets and Liabilities: Accounts receivable -- (2,910) Inventories -- 2,375 Accounts payable and accrued liabilities -- (182,198) --------- --------- Net Cash Used In Operating Activities -- (294,700) --------- --------- Net Cash Used In Investing Activities -- -- --------- --------- Cash Flows from Financing Activities: Bank indebtedness -- 5,904 Advances from parent company -- 288,796 --------- --------- Net Cash Provided By Financing Activities -- 294,700 ========= ========= Net change in cash from discontinued operations during the year -- -- Cash, beginning of the year -- -- --------- --------- Cash, end of the year $ -- $ -- ========= =========
30 NOTE 23 - SUBSEQUENT EVENTS The following significant events have occurred since July 1, 2005: 31 In September 2005 the Company's management decided to close its main operating facility located in San Jose, California and reorganized the Company. Substantially all of the Company's employees were terminated at this time. During the period subsequent to September 2005 management and significant shareholders devised a plan to liquidate and consolidate existing obligations and to raise through private investments monies to fund this process. The first settlement by the Company was with the Longview convertible notes ("Longview") in November 2005. Other settlements followed and are detailed below. 32 RESTRUCTURING OF LONGVIEW DEBT. The Company and Longview have agreed to restructure the of Longview convertible notes as follows. All outstanding debt of the Company to Longview was restructured as follows: (a) The Company to pay $400,000 to Longview on or before January 31, 2006 (Longview was paid $400,000 in February 2006 - there was no notice of default); (b) The Company to pay an additional $400,000 to Longview on or before April 30, 2006; (c) Convertible notes of Longview to be adjusted pro rata as follows: (i) Principal amount to be reduced to $410,000; (ii) Fixed conversion price to be reduced to $.20 per share; (iii) The Company granted a one year redemption right with respect to any shares issued at $.25 per share, provided that the Company has not had an event of default since November 21, 2005; (d) The balance of debt to be forgiven if Company is not in default with the forgoing terms and conditions. In addition to the settlement of Longview, the following notes, loans, accounts payable and accrued liabilities, and lawsuits as of June 30, 2005 were settled by payment of cash, establishing an installment payment schedule, and the issuance and planned issuance of common stock and stock warrants.
Approximate amount owed as of Description June 30, 2005 Approximate Settlement Summary ----------- ------------- ------------------------------ Notes and loans - non-related parties $1,450,000 Installment payables of $570,000, 6.5 million shares of common stock valued at $1 million, and 580,000 warrants valued at $300,000, and an additional 760,000 repriced warrants Notes and loans - related parties 550,000 3.4 million shares of common stock valued at $450,000 Accounts payable and 1,800,000 $120,000 paid in cash, installment accrued liabilities payables of $560,000, and 2.3 million shares of common stock valued at $460,000 WonderNet Arbitration 350,000 Installment payable of $350,000 (included in accounts payable and accrued liabilities) ---------- $4,150,000 ==========
The Company expects to complete its restructuring and settling of its notes, loans, and accounts payable, and amounts due to the Company's former employees by the end of its fiscal year ending June 30, 2006. Since the end of the fiscal year ending June 30, 2005, the Company has completed two private placements in which the Company raised gross proceeds of approximately $2.2 Million. The Company sold an aggregate of approximately 13,900,000 of its common shares in private placements at per share prices averaging $.10 and $.45 per share. WONDERNET, LTD, SETTLEMENT In 2002 and 2003, the Company entered into the Distribution and Partnership Agreements with WonderNet, Ltd, ("WonderNet") whereby the Company was granted the right to develop products based on WonderNet's technology and to use, market, sell, distribute and exploit the technology in North America, Central America, Bermuda and the Caribbean Islands. The Company issued WonderNet 325,000 shares of its common stock and paid an upfront amount of $100,000 under these contracts. The Company was also required to pay a minimum $120,000 per quarter and minimum 10% royalty on gross sales of products. Since the inception of the agreements, two $120,000 payments were made. In November 2004, the Company notified WonderNet that it was terminating the agreements as a result of a breach by WonderNet. Subsequently, the Company filed a demand for arbitration with the American Arbitration Association in New York, New York asking that any agreements be rescinded, that WonderNet reimburse to it $340,000 in monies paid and that the shares of stock issued to WonderNet be cancelled. On April 15, 2005, WonderNet filed its response to the Company's demand for arbitration. In its response, WonderNet claimed damages of $240,000 for unpaid amounts under its contract with the Company, as well as other unspecified damages, including alleged punitive damages and an accounting. See the table above for the WonderNet arbitration settlement. As part of the Company's restructuring plan, the Company has been actively pursuing agreements to market the Company's software products. In February 2006, the Company entered into a licensing agreement with Hypercom Corporation ("Hypercom"). Hypercom is to pay the Company a licensing fee of 30% of the transaction fee that pertains to the Company's products. The current (as of this report date) Chief Technology Officer of Hypercom was a former officer and member of the Board of Directors of the Company during the fiscal year ended June 30, 2005. On February 1, 2006, the Board of Directors approved that each of the nine members of the board be issued a one-time grant of 250,000 restricted shares of the Company's common stock valued at $495,000 at $0.22 per share. The Board of Directors also approved the issuance of 100,000 restricted shares to each board member for fiscal year 2006 compensation valued at $198,000 at $0.22 per share. EMPLOYMENT AND CONSULTING AGREEMENTS Three key executives of the Company had employment and consulting agreements as of June 30, 2005. The minimum annual base compensation of these three executives totaled approximately $1,500,000.These three executive were also entitled to performances bonuses. Subsequent to year end, all of these employment and consulting agreements were terminated through settlement agreements, due to the Company's financial difficulties. 33 EX-31.1 2 v039937_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, John Mahoney, Chief Executive Officer of SiVault Systems, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-KSB of SiVault Systems, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the small business issuer and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the small business issuer internal controls over financial reporting that occurred during the small business issuer most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. /s/ John Mahoney Dated: April 24, 2006 -------------------------------- John Mahoney, Chief Executive Officer (Principal Executive Officer) EX-31.2 3 v039937_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Wayne Taylor, Chief Financial Officer of SiVault Systems, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-KSB of SiVault Systems, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the small business issuer and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures, and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; c) disclosed in this report any change in the small business issuer internal controls over financial reporting that occurred during the small business issuer most recent fiscal quarter (the fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. /s/ Wayne Taylor Dated: April 24, 2006 -------------------------------- Wayne Taylor, Interim Chief Financial Officer (Principal Financial Officer) EX-32.1 4 v039937_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* In connection with the Annual Report of SiVault Systems, Inc. (the "Company") on Form 10-KSB for the year ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Mahoney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that; (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John Mahoney Dated: April 24, 2006 -------------------------- John Mahoney, Chief Executive Officer (Principal Executive Officer) EX-32.2 5 v039937_ex32-2.txt EXHIBIT 32.2 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* In connection with the Annual Report of SiVault Systems, Inc. (the "Company") on Form 10-KSB for the year ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Wayne Taylor, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Wayne Taylor Dated: April 24, 2006 ----------------------------- Wayne Taylor, Interim Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----