RNS Number : 3636V
Redknee Solutions Inc.
28 May 2008
Redknee Solutions Inc.
Interim Consolidated Financial Statements
(Unaudited)
March 31, 2008
(expressed in Canadian dollars)
Redknee Solutions Inc. March 31, September 30, 2007
Interim Consolidated Balance Sheet 2008 $
(Unaudited) $
(expressed in Canadian dollars)
Assets
Current assets
Cash and cash equivalents 8,678,471 8,927,770
Short-term investments 7,361,952 14,763,046
Accounts receivable 11,103,932 5,992,035
Unbilled revenue 5,914,828 3,925,232
Investment tax credits and income taxes 500,000 400,000
receivable
Prepaid expenses 891,430 1,064,183
Goods in transit 142,786 146,308
34,593,399 35,218,574
Restricted cash 379,186 -
Property and equipment 464,130 250,020
Intangible assets 1,527,255 -
Other assets 448,155 90,004
37,412,125 35,558,598
Liabilities
Current liabilities
Accounts payable 1,443,214 1,598,436
Accrued liabilities 6,970,702 5,045,954
Income taxes payable 3,153,040 2,444,196
Deferred revenue 3,877,680 3,403,246
Current portion of obligations under 24,284 49,371
capital leases
15,468,920 12,541,203
Shareholders' Equity
Share capital, net of employee share 39,681,981 39,768,298
purchase loans
Contributed surplus 3,988,522 3,520,838
Deficit (21,516,339) (20,060,782)
Accumulated other comprehensive loss, (210,959) (210,959)
net of income taxes
Total deficit and accumulated other (21,727,298) (20,271,741)
comprehensive loss
21,943,205 23,017,395
37,412,125 35,558,598
Guarantees and contingencies (note 8)
Redknee Solutions Inc. 2008 2007
Interim Consolidated Statement of Operations $ $
(Unaudited)
For the six months ended March 31, 2008
(expressed in Canadian dollars)
Revenue
Software, services and other 17,891,152 15,118,593
Support 6,196,987 5,565,738
24,088,139 20,684,331
Cost of revenue 7,386,090 5,496,748
Gross profit 16,702,049 15,187,583
Operating expenses
Selling and marketing 8,111,071 6,954,783
General and administrative 4,839,551 4,076,984
Research and development 6,521,134 5,611,242
Amortization of property and equipment 127,095 174,000
Foreign currency exchange gain (1,709,004) (373,264)
17,889,847 16,443,745
Loss from operations (1,187,798) (1,256,162)
Interest income 334,208 165,507
Interest expense (9,592) (1,650,164)
Loss before income taxes (863,182) (2,740,819)
Income taxes
Current 592,375 423,823
Loss for the period (1,455,557) (3,164,642)
Loss per common share (note 3)
Basic and diluted (0.02) (0.08)
Weighted average number of common shares
Basic and diluted 58,350,625 41,600,791
2008 2007
$ $
Loss for the period (1,455,557) (3,164,642)
Other comprehensive income, net of income taxes
Foreign currency translation adjustment - 174,527
Comprehensive loss for the period (1,455,557) (2,990,115)
Redknee Solutions Inc.
2008
Interim Consolidated Statement
of Shareholders' Equity
(Unaudited)
For the six months ended March
31, 2008
(expressed in Canadian
dollars)
Share capital Employee Accumulated
Total
share other
purchase Contributed comprehensive
shareholders'
Number Amount loans surplus Deficit loss
equity
$ $ $ $ $
$
Balance - September 30, 2007 58,350,626 40,663,829 (895,531) 3,520,838 (20,060,782) (210,959)
23,017,395
Stock-based compensation (note - - - 477,594 - -
477,594
4)
Loss for the period - - - - (1,455,557) -
(1,455,557)
Employee share purchase loans - - (86,317) (9,910) - -
(96,227)
Balance - March 31, 2008 58,350,626 40,663,829 (981,848) 3,988,522 (21,516,339) (210,959)
21,943,205
2007
Share capital Employee Total
share
purchase Contributed comprehensive
shareholders'
Number Amount loans surplus Deficit loss
equity
$ $ $ $ $
$
Balance - September 30, 2006 37,915,628 3,872,010 - 2,943,004 (9,002,010) (385,486)
(2,572,482)
Change in accounting policy - - - - (651,341) -
(651,341)
Issued pursuant to share 215,653 267,410 - - - -
267,410
purchase plan
Issued pursuant to option 3,226,445 1,559,211 - (459,043) - -
1,100,168
exercise plan
Issued on exercise of options 38,438 21,443 - - - -
21,443
Restricted share units 966,250 - - - - -
-
Share buyback (75,000) (7,659) - (85,341) - -
(93,000)
Issued on exchange to Class A - - - - - -
-
and
Class B
Issued on initial public 16,700,000 39,893,878 - - - -
39,893,878
offering
Organization costs related to - (5,109,814) - - - -
(5,109,814)
initial public offering
Issued on exercise of options 8,430 10,217 - - - -
10,217
Stock-based compensation - - - 949,936 - -
949,936
Loss for the period - - - - (3,164,642) -
(3,164,642)
Employee share purchase loans - - (913,310) - - -
(913,310)
Other comprehensive income - - - - - 174,527
174,527
Balance - March 31, 2007 58,995,844 40,506,696 (913,310) 3,348,556 (12,817,993) (210,959)
29,912,990
Redknee Solutions Inc. 2008 2007
Interim Consolidated Statement of Cash Flows $ $
(Unaudited)
For the six months ended March 31, 2008
(expressed in Canadian dollars)
Cash provided by (used in)
Operating activities
Loss for the period (1,455,557) (3,164,642)
Items not involving cash
Amortization of property and equipment 127,095 174,000
Unrealized foreign currency exchange (gain) (1,451,991) 483,712
loss
Stock-based compensation (note 4) 477,594 949,935
Debt accretion - 818,750
Loan accretion - (12,004)
Change in non-cash operating working capital (3,942,941) (2,795,436)
(note 6)
(6,245,800) (3,545,685)
Financing activities
Repayment of notes payable - (581,896)
Repayment of notes payable to related - (774,239)
parties
Proceeds from issuance of common shares - 1,399,238
Proceeds from the initial public offering, - 34,784,064
net of costs
Share buyback - (93,000)
Employee loans - (913,310)
Repayment of debt - (8,275,792)
Deferred organization costs - 84,958
Repayment of obligations under capital (25,087) (28,160)
leases
(25,087) 25,601,863
Investing activities
Proceeds from (purchase of) short-term 7,401,094 (21,077,538)
investments
Purchase of property and equipment (176,205) (34,067)
(Increase) decrease in other assets (358,151) 80,542
Loan to Argent Networks (529,463) -
Repayment of loan to Argent Networks 526,754 -
(Increase) decrease in restricted cash (379,186) 51,465
Acquisition of Argent Networks PTY Ltd., net (1,084,255) -
of cash acquired (note 9)
5,400,588 (20,979,598)
Effect of foreign currency exchange rate 621,000 80,258
changes on cash and cash equivalents
(Decrease) increase in cash and cash (249,299) 1,156,838
equivalents during the period
Cash and cash equivalents - Beginning of 8,927,770 2,902,706
period
Cash and cash equivalents - End of period 8,678,471 4,059,544
Supplemental cash flow information
Interest paid (9,592) (891,382)
Interest received 334,208 74,918
Cash taxes / investment tax credits - 591,179
received, net of income taxes paid
Redknee Solutions Inc.
Notes to Interim Consolidated Financial Statements
(Unaudited)
March 31, 2008
(expressed in Canadian dollars, except as otherwise indicated)
Nature of operations
Redknee Solutions Inc. (the Company) was incorporated in Canada on November 1, 2006. Pursuant to an amalgamation agreement dated
February 15, 2007 (the Amalgamation Agreement) among the Company; Redknee Inc. (Redknee), a company under common control with the Company;
and 2117580 Ontario Inc., a wholly owned subsidiary of the Company. Redknee and 2117580 Ontario Inc. were amalgamated to form a successor
company, Redknee Inc., as a wholly owned subsidiary of the Company. The above transaction is considered to be among companies under common
control and the interim consolidated financial statements of the Company reflect the amalgamation as if the companies had always been
amalgamated.
The Company's software products allow its wireless telecommunications network operator customers to extend and enhance their
capabilities and service offerings, enabling them to introduce new revenue through the introduction of network-based services, including
call and subscriber management, multimedia messaging information services and location aware services. In addition, the Company's software
products also manage and analyze, in real-time, complex and critical network operations, such as service provisioning, network management
and customer care, as well as provide real-time rating, charging and billing.
Summary of significant accounting policies
Basis of presentation
These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting
principles and have been prepared on a basis consistent with the audited consolidated financial statements for the year ended September 30,
2007, except as described below. Certain of the prior period's amounts have been reclassified to conform with the current period's
presentation.
The preparation of these interim consolidated financial statements requires management to make assumptions and estimates that affect the
figures within these interim consolidated financial statements and notes. Actual results could differ significantly from those assumptions
and estimates. Furthermore, the operating results for the interim periods presented are not necessarily indicative of the results
anticipated for the full year. In the opinion of management, these interim consolidated financial statements reflect adjustments necessary
to state fairly the results for the periods presented.
Principle of consolidation
The interim consolidated financial statements include the financial statements of the Company, Redknee and its wholly owned subsidiary
companies, of which the principal subsidiaries are Redknee (Ireland) Ltd., Redknee (Germany) GmbH, Redknee (UK) Ltd., Redknee (ME) FZ-LLC
(Dubai) and Redknee (India) Technologies Pvt. Ltd. All significant intercompany balances and transactions have been eliminated on
consolidation. The Company does not have any entities to be consolidated under Accounting Guideline 15, Consolidation of Variable Interest
Entities.
Changes in accounting policies
Capital disclosures
In December 2006, The Canadian Institute of Chartered Accountants (CICA) issued Handbook Section 1535, Capital Disclosures. This section
establishes standards for disclosing information about an entity's objectives, policies and processes for managing capital. This standard is
effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2007 on a prospective
basis. The Company adopted this new standard effective October 1, 2007. Capital disclosures are described in note 2.
Financial instruments - disclosures and presentation
In December 2006, the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments -
Presentation. These standards enhance existing disclosures in previously issued Section 3861, Financial Instruments - Disclosures and
Presentation. Section 3862 places greater emphasis on disclosures about risks related to recognized and unrecognized financial instruments
and how those risks are managed. Section 3863 carries forward the same presentation standards as Section 3861. These new standards are
effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2007 on a prospective
basis. The Company adopted these new standards effective October 1, 2007. Additional disclosures required by Section 3862 are provided in
note 2.
Future changes in accounting standards
The Company reviews all changes to the CICA Handbook when issued. The following is a discussion of relevant items that were released,
revised or will become effective after March 31, 2008:
Financial statement presentation
In April 2007, the CICA Accounting Standards Board amended CICA Handbook Section 1400, General Standards of Financial Statement
Presentation. These amendments require management to disclose any uncertainties that cast significant doubt on the entity's ability to
continue as a going concern. In assessing whether the going concern assumption is appropriate, management must take into account all
available information about the future, which is at least, but is not limited to, 12 months from the balance sheet date. The standard is
effective for years beginning on or after January 1, 2008. The Company is analyzing the impact of this standard on its consolidated
financial statements.
Goodwill and other intangible assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and Other Intangible Assets, which replaces Handbook Sections 3062,
Goodwill and Other Intangible Assets, and 3450, Research and Development Costs. This standard establishes the standards for the recognition
measurement and disclosure of goodwill and intangible assets. The standard becomes effective for years beginning on or after October 1,
2008. The Company is analyzing the impact of the new standard on its consolidated financial statements.
Inventories
In June 2007, the CICA issued Handbook Section 3031, Inventories, which replaces CICA Handbook Section 3030, Inventories. The standard
requires inventory to be measured at the lower of cost or net realizable value and requires any writedowns to be reversed if the value
subsequently recovers, provides expanded guidance on the determination of cost, including the allocation of certain overhead costs and
expands disclosures. The standard becomes effective for years beginning on or after January 1, 2008. The Company is analyzing the impact of
this standard on its consolidated financial statements.
Financial risk management and capital management
Foreign currency risk
Foreign currency risk arises because of fluctuations in exchange rates. The Company's objective in managing its foreign currency risk is
to minimize its net exposures to foreign currency cash flows by converting foreign-denominated cash balance into Canadian dollars to the
extent practical to match Canadian dollar obligations. The Company conducts a significant portion of its business activities in foreign
countries. The monetary assets and liabilities that are denominated in foreign currencies are affected by changes in the exchange rate
between the Canadian dollar and these foreign currencies. The Company recognized a foreign currency exchange gain in the first half of 2008
of $1,709,004, as compared to a foreign currency exchange gain of $373,264 in the first half of 2007.
If a shift in exchange rates of 10% were to occur, the exchange gain or loss on our net monetary assets could be valued at plus or minus
$2,700,000 due to the fluctuation and this would be recorded in the consolidated statement of operations.
Credit risk
Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk
from customers.
The Company's process includes the following:
1. obtaining signed contracts with customers;
2. assessing the credit worthiness of customers on an ongoing basis;
3. receiving order confirmations from customers;
4. receiving progress payments throughout the life of the contract; and
5. reviewing the customer aged listing and following up with them.
As at March 31, 2008, the Company's two largest customers accounted for 20% of sales (7.5% as at September 30, 2007). Losses under trade
receivables have historically been insignificant. In order to minimize the risk of loss for trade receivables, the Company's extension of
credit to customers involves review and approval by senior management as well as progress payments as contracts are executed.
Credit reviews take into account the counterparty's financial position, past experience and other factors. Management regularly monitors
customer credit limits. The Company believes that the concentration of credit risk from trade receivables is limited, as they are widely
distributed among customers in various countries.
While the Company's credit controls and processes have been effective in mitigating credit risk, these controls cannot eliminate credit
risk and there can be no assurance that these controls will continue to be effective or that the Company's low credit loss experience will
continue. Most sales are invoiced with payment terms in the range of 30 to 60 days.
The Company reviews its trade receivable accounts regularly and reduces amounts to their expected realizable values by making an
allowance for doubtful receivables, as soon as the account is determined not to be fully collectible.
The Company's trade receivables had a carrying value of $11,103,089 as at March 31, 2008, representing the maximum exposure to credit
risk of those financial assets, exclusive of the allowance for doubtful accounts (currently $nil). Normal credit terms for amounts due from
customers call for payment within 30 to 60 days. Approximately, 28% of trade receivables were past due as at March 31, 2008, of which
$1,677,000 was outstanding for more than 120 days.
The allowance for doubtful accounts is charged against income. Shortfalls in collections are applied against this provision. Estimates
for allowance for doubtful debts are determined by a customer-by-customer evaluation of collectability at each balance sheet reporting date,
taking into account the amounts that are past due and any available relevant information on the customers' liquidity and going concern
problems. The Company's exposure to credit risk for trade receivables by geographic area as at March 31, 2008 was as follows:
March 31, September 30,
2008 2007
% %
Asia and Pacific Rim 38 9
Americas 32 57
Europe, Middle East and Africa 30 34
100 100
The Company also has credit risk relating to cash and short-term investments, which it manages by dealing with large chartered Canadian
banks and investing in highly liquid investments of a rating of no less than R1 or R1 high.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities.
Substantially all of the Company's financial liabilities will mature within one year. The Company also has significant contractual
obligations in the form of operating leases.
Management believes the Company's existing cash and short-term investment resources will be adequate to support all of its financial
liabilities and contractual commitments.
Interest rate risk
Interest rate risk arises because of the fluctuation in interest rates. The Company is subject to interest rate risk on its cash and
short-term investments. The Company does not have any long-term debt and, hence, is not subject to interest rate risk on debt.
Fair value of financial instruments
The book values of cash, short-term investments, accounts receivable, unbilled revenue, investment tax credits and income taxes
receivable, accounts payable, accrued liabilities, and income taxes payable approximate their respective fair values due to the short term
nature of these instruments.
Management of capital
The Company's objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy, fund research and
development, undertake selective acquisitions, while at the same time taking a conservative approach toward financial leverage and
management of financial risk. The Company's capital is composed of share capital. The Company's primary uses of capital are to finance its
operations, increases in non-cash working capital and capital expenditures. The Company currently funds these requirements from internally
generated cash flows and cash raised through past share issuances. The Company's objectives when managing capital are to ensure that the
Company will continue to have enough liquidity so it can provide its services to its customers and returns to its shareholders. There were
no changes in the Company's approach to capital management during the period.
Loss per common share
As a result of the loss for the six-month periods ended March 31, 2008 and 2007, all potential dilutive securities, being stock options,
unvested restricted share units and shares issued under the share purchase plan for which loans were given totalling 9,696,764 (2007-
9,220,416), were anti-dilutive.
Stock-based compensation
During the six months ended March 31, 2008, 874,500 (2007 - 158,125) stock options with a weighted fair value of $0.49 (2007 - $1.56) at
the date of grant were issued to employees. The fair value of the stock options was determined using a Black-Scholes option pricing model
with the following assumptions:
Risk free interest rate 4.00%
Expected volatility 67.53%
Expected life 7 years
Expected dividends nil
Stock-based compensation expense during the period was $340,594 (2007 - $731,680) relating to the Company's stock options.
The Company also recorded a stock-based compensation expense of $137,000 (2007 - $218,256) relating to the Company's restricted share
plan. No restricted shares were granted during the period as the plan was cancelled in November 2006.
Research and development expenses
During the six months ended March 31, the research and development expenses were as follows:
2008 2007
$ $
Gross research and development expenses 6,621,134 5,911,242
Less: Investment tax credits recognized 100,000 300,000
6,521,134 5,611,242
In 2007 and 2008, the Company continued to earn investment tax credits related to research and development expenses. However, due to the
Company's past taxable losses the majority of the credits were not afforded asset recognition in the interim consolidated balance sheet.
Change in non-cash operating working capital
2008 2007
$ $
Accounts receivable (3,925,897) (3,273,459)
Unbilled revenue (1,989,596) (2,457,022)
Investment tax credits and income taxes (100,000) 636,330
receivable
Prepaid expenses 197,753 (29,567)
Accounts payable (647,222) 1,241,218
Accrued liabilities 1,775,521 624,603
Deferred revenue 126,134 732,425
Income taxes payable 616,844 398,911
Goods in transit 3,522 (668,875)
(3,942,941) (2,795,436)
Segmented reporting
The Company reviewed its operations and determined that it operates in a single reportable operating segment, the telecommunications
software market. The single reportable operating segment derives its revenue from the sale of software products and related services and
hardware. The following information provides the required enterprise-wide disclosures.
The Company's revenue for the six months ended March 31 by geographic area is as follows:
2008 2007
$ $
Europe, Middle East and Africa 9,298,757 8,676,509
Americas 9,663,514 10,751,425
Asia and Pacific Rim 5,125,868 1,256,397
24,088,139 20,684,331
Revenue is attributed to geographic locations based on the location of the external customer. Sales related to Canadian customers were
$1,284,408 and $2,389,479 for each of 2008 and 2007, respectively.
2008 2007
$ $
Revenue by type
Software and services 16,295,906 14,362,139
Third party software and hardware 1,595,246 756,443
Support 6,196,987 5,565,749
24,088,139 20,684,331
The Company's property and equipment by geographic area are as follows:
March 31, September 30,
2008 2007
$ $
Australia 158,741 -
Canada 157,453 187,074
Ireland/United Kingdom 127,594 41,831
India 17,344 20,469
Other 2,998 646
464,130 250,020
In the period ended March 31, 2008, one customer accounted for approximately 14% of revenue. (2007 - two customers accounted for 10% and
11%).
Guarantees and contingencies
Guarantees
The Company has provided routine indemnifications to its customers against liability if the Company's products infringe on a third
party's intellectual property rights. The maximum exposure from these indemnifications cannot be reasonably estimated. In some cases, the
Company has recourse against other parties to mitigate its risk of loss from these guarantees. The Company has never been called to perform
its obligations under these indemnifications and the Company is not subject to any pending litigation in these matters.
Litigation and claims
The Company is involved in certain claims and litigation arising out of the ordinary course and conduct of business. Management assesses
such claims and, if considered likely to result in a loss and, when the amount of the loss is quantifiable, provisions for loss are made,
based on management's assessment of the most likely outcome. Management does not provide for losses on claims for which the outcome is not
determinable or where the amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for
when reasonably determinable.
Business acquisition
On February 20, 2008, Redknee acquired 100% of the common shares of Argent Networks PTY Ltd. (Argent) of Australia for a cash purchase
price of $526,754. The total cost of acquisition is $1,129,934, including transaction costs. The acquisition was accounted for by the
purchase method and the results and operations of Argent have been consolidated effective February 20, 2008.
The purchase price was allocated to the assets and liabilities as follows:
$
Cash and cash equivalents 45,679
Accounts receivable 310,892
Prepaid expenses 24,744
Intangible assets 1,527,255
Property and equipment 164,907
Accounts payable (192,003)
Accrued liabilities (52,743)
Income taxes payable (91,733)
Deferred revenue (307,145)
Other current liabilities (299,919)
1,129,934
The amounts assigned to the assets acquired and liabilities assumed may be adjusted when the allocation process has been finalized. The
allocation of the purchase price is expected to be completed in the third quarter of 2008.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR KDLFLVEBXBBQ
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