-----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, VLOm3UMjPxUOgMwZh0bbH4Sf6DZQqcLstEBEpc+P7uDsyz72wk9sOypM4guUEQ/+ vt5dYN7MxH8dp+n4Ha2UDg== 0001144204-05-035587.txt : 20051117 0001144204-05-035587.hdr.sgml : 20051117 20051114174734 ACCESSION NUMBER: 0001144204-05-035587 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTIVECORE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001011601 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30397 FILM NUMBER: 051203366 BUSINESS ADDRESS: STREET 1: 156 FRONT STREET WEST STREET 2: SUITE 210 CITY: TORONTO STATE: A6 ZIP: M5J 2L6 BUSINESS PHONE: 9053069343 MAIL ADDRESS: STREET 1: 156 FRONT STREET WEST STREET 2: SUITE 210 CITY: TORONTO STATE: A6 ZIP: M5J 2L6 FORMER COMPANY: FORMER CONFORMED NAME: IVP TECHNOLOGY CORP DATE OF NAME CHANGE: 20050106 FORMER COMPANY: FORMER CONFORMED NAME: ACTIVECORE TECHNOLOGIES, INC. DATE OF NAME CHANGE: 20050105 FORMER COMPANY: FORMER CONFORMED NAME: IVP TECHNOLOGY CORP DATE OF NAME CHANGE: 20000404 10QSB 1 v029029.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2005 |_| TRANSITION PERIOD REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to _____. Commission File No. 000-30486 ACTIVECORE TECHNOLOGIES, INC. (Exact Name of Registrant as specified in its charter) NEVADA 65-6998896 - --------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 156 Front Street West, Suite 210, Toronto, Ontario, Canada M5J 2L6 (Address of principal Executive Offices) (416) 252-6200 (Registrant's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 |X| No|_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act). Yes |_| No |X| Transitional Small Business Disclosure Format (Check one): Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equities as of the latest practicable date: as of November 3, 2005, there were 76,937,692 outstanding shares of the issuer's common stock. , $0.001par value. ACTIVECORE TECHNOLOGIES, INC. (formerly IVP TECHNOLOGY CORPORATION) FORM 10-QSB TABLE OF CONTENTS
Page ---- PART I.......................................................................................3 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS................................................3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......................30 ITEM 3. CONTROLS AND PROCEDURES.........................................................44 PART II.....................................................................................46 ITEM 1. LEGAL PROCEEDINGS...............................................................46 PART 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS......................47 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................47 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................47 ITEM 5. OTHER INFORMATION...............................................................47 ITEM 6. EXHIBITS AND REPORT FOR FORM 8-K................................................48 SIGNATURES.................................................................................49 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002*................50 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002*................51 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.......................................................52 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.......................................................53
2 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ACTIVECORE TECHNOLOGIES, INC. (FORMERLY IVP TECHNOLOGY CORPORATION.) As of September 30, 2005 INDEX TO FINANCIAL STATEMENTS Page 4 Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004 Page 5 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004 (Unaudited) Page 6 Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2005 (Unaudited) Pages 7 - 8 Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2005 and 2004 (Unaudited) Pages 9 - 29 Notes to Condensed Consolidated Financial Statements as of September 30, 2005 (Unaudited) 3 ACTIVECORE TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
September 30, 2005 December 31, (Unaudited) 2004 ------------ ------------ CURRENT ASSETS Cash $ 32,105 $ 53,351 Accounts receivable, net (note 4) 3,495,200 2,390,549 Other receivables -- 20,992 Taxes recoverable 124,713 -- Deferred compensation (note 21) 516,250 -- Prepaid expenses and other current assets 242,745 137,035 ------------ ------------ Total Current Assets 4,411,013 2,601,927 ------------ ------------ CAPITAL ASSETS (NOTE 5) 374,123 312,460 ------------ ------------ OTHER ASSETS Goodwill and other intangible assets, net (note 6) 5,074,018 868,854 Investments at cost (note 7) -- 262,648 Deferred costs 16,108 175,009 Deferred compensation (note 21) 165,000 Deferred equity line commitment fees -- 16,092 Net assets from discontinued operations -- 593,409 ------------ ------------ Total Other Assets 5,255,126 1,916,012 ------------ ------------ TOTAL ASSETS $ 10,040,262 $ 4,830,399 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank Overdraft $ 155,384 $ 17,566 Line of credit (note 10) 1,184,666 -- Accounts payable 2,545,421 702,672 Accrued liabilities 1,094,684 354,077 Taxes payable (note 13) 812,936 957,011 Leases payable 17,752 22,093 Long-term debt, current portion (note 8) 398,409 857,161 Due to related parties (note 11) 24,448 132,364 Redeemable preferred shares (note 9) 125,000 -- Deferred tax liability 100,005 -- Other current liabilities 174,689 27,247 ------------ ------------ Total Current Liabilities 6,633,394 3,070,191 ------------ ------------ LONG-TERM LIABILITIES Long-term debt (note 8) 254,661 491,622 Redeemable preferred shares (note 9) 281,250 Accrued liabilities 26,484 30,447 Deferred tax liability 250,012 -- ------------ ------------ Total Long-Term Liabilities 812,407 522,069 ------------ ------------ TOTAL LIABILITIES 7,445,801 3,592,260 ------------ ------------ COMMITMENTS AND CONTINGENCIES (note 14) STOCKHOLDERS' EQUITY Preferred stock, $.001 par value, 50,000,000 shares authorized Preferred Stock issued and outstanding (note 15) Series A, 8,333.333 shares as of September 30, 2005 and December 31, 2004 8,333 8,333 respectively Series B, 4,167,667 shares as of September 30, 2005 and December 31, 2004 4,168 4,168 respectively Common stock, $0.01 par value, 500,000,000 shares authorized, 78,337,692 and 46,711,708 shares issued and outstanding at December 31,2004 and 2003, respectively outstanding as of September 30, 2005 and December 31, 2004, respectively 783,378 467,117 (note 15) Common stock to be returned (68,783) (68,783) Treasury Stock (112,000) -- Warrants 74,463 -- Additional paid-in capital 43,433,395 39,137,498 Accumulated deficit (40,619,541) (37,892,002) Accumulated other comprehensive loss (773,952) (256,204) Subscription Receivable - Preferred -- (150,000) Deferred compensation (135,000) (11,988) ------------ ------------ Total Stockholders' Equity 2,594,461 1,238,139 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 10,040,262 $ 4,830,399 ============ ============
See accompanying notes to consolidated financial statements. 4 ACTIVECORE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the nine For the three For the three months months months ended For the nine ended ended September months ended September 30, September 30, 30, September 30, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ REVENUES $ 2,708,373 $ 1,432,810 $ 4,665,541 $ 2,730,059 COST OF SALES Direct wages 1,593,180 273,460 2,850,559 584,591 Amortization of licensing agreements and other costs 121,215 19,412 224,618 105,139 ------------ ------------ ------------ ------------ Total Cost of Sales 1,714,395 292,872 3,075,177 689,730 ------------ ------------ ------------ ------------ GROSS PROFIT (LOSS) 993,978 1,139,938 1,590,364 2,040,329 ------------ ------------ ------------ ------------ OPERATING EXPENSES Salaries and wages 515,702 394,380 937,411 1,144,904 Consulting fees 131,096 35,215 511,126 197,179 Research and development 55,000 -- 165,000 -- Legal and accounting 281,182 95,026 628,745 258,481 General and administrative 289,288 148,524 996,239 539,439 Financial advisory fees 16,043 2,662 65,679 10,292 Depreciation & amortization of intangible assets 84,045 14,614 300,472 19,931 ------------ ------------ ------------ ------------ Total Operating Expenses 1,372,356 690,421 3,604,672 2,170,226 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (378,378) 449,517 (2,014,308) (129,897) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Gain (loss) on extinguishment of debt (74,463) -- (74,463) 2,000 Interest income -- 25,480 -- 55,456 Interest expense (74,070) (33,204) (189,974) (88,180) Foreign exchange gain (loss) 31,367 37,626 (5,928) 19,735 ------------ ------------ ------------ ------------ Total Other Income (Expense) (117,166) 29,902 (270,365) (10,989) ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (495,544) 479,419 (2,284,673) (140,886) ------------ ------------ ------------ ------------ Income tax recovery (18,600) -- (18,600) -- ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS (476,944) 479,419 (2,266,073) (140,886) ------------ ------------ ------------ ------------ (15,165) 120,490 (461,466) (20,901) Gain (loss) from discontinued operations - net (note 2) NET INCOME (LOSS) $ (492,109) $ 599,909 $ (2,727,539) $ (161,787) ============ ============ ============ ============ Preferred Stock Dividend 12,500 -- 36,092 NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (504,609) $ 599,909 $ (2,763,631) $ (161,787) LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS - BASIC AND DILUTED $ (0.01) $ 0.00 $ (0.05) $ 0.00 ------------ ------------ ------------ ------------ LOSS PER COMMON SHARE FROM DISCONTINUED OPERATIONS - BASIC AND DILUTED $ -- 0.00 $ -- $ 0.00 ------------ ------------ ------------ ------------ NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ 0.00 $ (0.05) $ 0.00 ------------ ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING- BASIC AND DILUTED 61,313,668 45,490,996 55,918,440 38,781,040 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 ACTIVECORE TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2005 (UNAUDITED)
SHARES SERIES AMOUNT SHARES SERIES AMOUNT A SERIES A B SERIES B ---------------------------------------------------------- Balance, December 31, 2004 8,333,333 $ 8,333 4,167,667 $ 4,168 Stock issued for employment services Stock issued for director fees Stock issued for consulting services Stock issued for financing services Stock issued for settlement of debt Warrants issued in conjunction with debt conversion Stock issued for redemption of preference shares Stock issued for beneficial owner roundup on reverse split Stock consideration received through sale of Twincentric Stock to be issued on acquisition Stock issued on Cratos acquisition Stock issued to vendor Deferred cost recognized Preferred stock subscription received Net loss for period Preferred Stock Dividend Cumulative translation adjustment Balance, September 30, 2005 8,333,333 $ 8,333 4,167,667 $ 4,168 COMMON STOCK COMMON SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------------------- Balance, December 31, 2004 46,711,708 $ 467,117 (252,725) $ (68,783) Stock issued for employment services 750,000 7,500 Stock issued for director fees 480,000 4,800 Stock issued for consulting services 975,000 9,750 Stock issued for financing services 5,000,000 50,000 Stock issued for settlement of debt 8,508,285 85,083 Warrants issued in conjunction with debt conversion Stock issued for redemption of preference shares 1,720,026 17,200 Stock issued for beneficial owner roundup on reverse split 50,010 500 Stock consideration received through sale of Twincentric Stock to be issued on acquisition 1,200,000 12,000 Stock issued on Cratos acquisition 9,021,030 90,210 Stock issued to vendor 3,921,633 39,217 Deferred cost recognized Preferred stock subscription received Net loss for period Preferred Stock Dividend Cumulative translation adjustment Balance, September 30, 2005 78,337,692 $ 783,378 (252,725) $ (68,783) WARRANTS TREASURY STOCK CAPITAL DEFICIT --------------------------------------------------------------------- Balance, December 31, 2004 $ - $ 39,137,498 $(37,892,002) Stock issued for employment services 105,000 Stock issued for director fees 139,200 Stock issued for consulting services 136,500 Stock issued for financing services 540,000 Stock issued for settlement of debt 801,568 Warrants issued in conjunction with debt conversion 74,463 Stock issued for redemption of preference shares 136,992 Stock issued for beneficial owner roundup on reverse split Stock consideration received through sale of Twincentric (112,000) Stock to be issued on acquisition 252,000 Stock issued on Cratos acquisition 1,857,577 Stock issued to vendor 363,152 Deferred cost recognized Preferred stock subscription received Net loss for period Preferred Stock Dividend (36,092) Cumulative translation adjustment Balance, September 30, 2005 $ 74,463 $ (112,000) $ 43,433,395 $(40,619,541) INCOME (LOSS) STOCK COMPENSATION ----------------------------------------------- Balance, December 31, 2004 $ (256,204) $ (150,000) $ (11,988) Stock issued for employment services Stock issued for director fees Stock issued for consulting services Stock issued for financing services Stock issued for settlement of debt Warrants issued in conjunction with debt conversion Stock issued for redemption of preference shares Stock issued for beneficial owner roundup on reverse split Stock consideration received through sale of Twincentric Stock to be issued on acquisition Stock issued on Cratos acquisition Stock issued to vendor Deferred cost recognized Preferred stock subscription received 150,000 Net loss for period (2,727,539) Preferred Stock Dividend Cumulative translation adjustment (517,748) Balance, September 30, 2005 $ (773,952) $ - $ (135,000) TOTAL ------------ Balance, December 31, 2004 1,238,139 Stock issued for employment services (75,000) Stock issued for director fees (120,000) Stock issued for consulting services Stock issued for financing services Stock issued for settlement of debt Warrants issued in conjunction with debt conversion 74,463 Stock issued for redemption of preference shares Stock issued for beneficial owner roundup on reverse split Stock consideration received through sale of Twincentric (112,000) Stock to be issued on acquisition Stock issued on Cratos acquisition Stock issued to vendor Deferred cost recognized 71,988 Preferred stock subscription received Net loss for period Preferred Stock Dividend Cumulative translation adjustment Balance, September 30, 2005 2,594,462
See accompanying notes to consolidated financial statements. 6 ACTIVECORE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the nine For the nine months ended months ended September 30, September 30, 2005 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) for the period $(2,727,539) $ (161,787) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Depreciation 108,113 34,947 Amortization of intangible assets 330,638 84,712 Amortization of other deferred charges 244,366 267,926 Stock issued for compensation 154,000 238,738 (Gain) loss on extinguishment of debt 74,463 (2,000) Loss on disposal of discontinued operations 16,434 -- Changes in operating assets and liabilities excluding business acquisition: Decrease (increase) in receivables 219,989 (1,947,413) Decrease (increase) in prepaid expenses and other current (154,748) 121,417 assets (Increase) decrease in other receivables 22,237 -- (Increase) decrease in other assets -- Increase (decrease) in accounts payable (926,523) 115,738 Increase (decrease) in accrued liabilities 874,020 64,962 Increase (decrease) in taxes payable 111,933 336,444 Increase (decrease) in other current liabilities 105,873 12,020 Change in deferred consulting fees 3,105 -- ----------- ----------- Net Cash Used In Operating Activities (1,543,639) (834,296) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of capital assets (66,154) (273,138) Proceeds from sale of investment in ePocket, Inc. 250,000 Proceeds, net of bank indebtedness assumed from -- disposition of Twincentric Limited Business acquisition costs (35,000) Acquisition of Cratos Technology Solutions, Inc. (143,249) -- Acquisition of Disclosure Plus (125,000) -- ----------- ----------- Net Cash (Used In) Provided by Investing Activities (119,403) (273,138) ----------- -----------
7 ACTIVECORE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the nine For the nine months ended months ended September 30, September 30, 2005 2004 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit 1,449,657 -- Increase in due to related parties 88,881 433,171 Advance of notes payable 530,000 Proceeds (repayments) received from (to) related parties -- Repayments made to related parties (65,253) -- Repayment of notes payable (35,407) (82,590) Change in bank overdraft 129,744 -- Repayment of debt -- Preferred stock dividend (48,280) -- Proceeds from preferred shares subscription 150,000 Proceeds from issuance of common stock 51,217 Proceeds from issuance of series A preferred stock 250,000 Payment on leases (29,081) (20,081) ----------- ----------- Net Cash Provided By Financing Activities 1,640,261 1,161,717 ----------- ----------- ----------- ----------- FOREIGN EXCHANGE GAIN ON CASH HELD IN FOREIGN CURRENCY 1,150 (45,122) ----------- ----------- NET INCREASE (DECREASE) IN CASH FOR THE PERIOD (21,631) 9,161 CASH - BEGINNING OF PERIOD 53,736 -- ----------- ----------- CASH - END OF PERIOD $ 32,105 $ 9,161 =========== =========== Non-Cash Transactions: Equipment purchase under capital leases $ 16,703 $ 28,475 Issuance of shares related to acquisition of Cratos Technology Solutions $ 1,947,787 $ -- Issuance of shares to vendors $ 811,579 $ -- Issuance of shares for compensation $ 232,500 $ -- Issuance of stock to satisfy Common Stock to be issued $ -- $ 380,000 Issuance of stock for acquisitions $ 264,000 $ 1,081,209 Issuance of stock for payment of accrued liabilities $ $ 48,000 Issuance of stock for payment of debt and accrued interest thereon $ 736,860 $ 658,168 Issuance of stock for payment of amounts due to related parties $ $ 610,325 Common stock issued for share exchange agreement $ $ 240,000 Issuance of shares to satisfy mandatorily redeemable preferred shares $ 154,192 $ Issuance of shares to secure financing arrangements $ 590,000 $ Share subscription receivable for sale of Series B preferred stock $ $ 250,000 Treasury stock rescinded $ $ 770,000 Note Receivable for sale of SilverBirch Studios Division $ $ 749,000
8 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION Basis of Presentation and Going Concern The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-KSB. The results for the three and nine month periods may not be indicative of the results for the entire year. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the fiscal year 2005. In the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. The consolidated financial statements are expressed in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company's independent auditors have issued a going concern opinion on the Company's consolidated financial statements as at December 31, 2004 that raises substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has experienced negative cash flows from operations and has an accumulated deficit at September 30, 2005 of $40,619,541. The Company has funded its activities to date almost exclusively from debt and equity financings. Management's plan to continue operations is to raise additional debt or equity capital until such time as the Company is able to generate sufficient operating revenues through its new acquisitions. The Company's ability to continue as a going concern is dependent on its ability to raise additional debt and equity financing and to implement its business plan to market and sell its various enterprise software and services. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 9 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION - (Continued) Recent Accounting Pronouncements In December 2004 the FASB issued SFAS No. 123 (revised 2004), Shares - Based Payment, ("SFAS No. 123 R"), which amends, "Accounting for Stock Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123 (R) requires compensation expense to be recognized for all share based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS No. 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines established, such as accounting for forfeitures that will change our accounting for stock-based awards in the future. SFAS No. 123 (R) must be adopted in the annual period beginning after June 15, 2005. The statement allows companies to adopt its provision using either of the following transition alternatives: (i) The modified prospective method, which results in the recognition of compensation expense using SFAS 123(R) for all share-based awards granted after the effective date and the recognition of compensation expense using SFAS 123 for all previously granted share - based awards that remain unvested at the effective date; or (ii) The modified retrospective method, which results in applying the modified prospective method and restating prior periods by recognizing the financial statement impact of share-based payments in a matter consistent with the pro forma disclosure requirements of SFAS No. 123. The modified retrospective method may be applied to all prior periods presented or previously reported interim periods of the year of adoption. The Company has not yet determined either the method of adoption or the impact that the new standard is expected to have on our financial statements. In March 2005, the Securities and Exchange Commission ("SEC") released SEC Staff Accounting Bulletin No. 107, Share-Based Payment ("SAB 107"). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently evaluating SAB 107 and will be incorporating it as part of its adoption of SFAS 123R. 10 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("SFAS 154") which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods' financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not expect the adoption of SFAS 154 to have a material impact on its consolidated results of operations and financial condition. New accounting policies Rebate Accrual The Company has a significant customer associated with its SIM division for which it operates a rebate program. This program allows this customer to earn rebates which can be redeemed towards consulting engagements in the subsequent fiscal year. The customer earns these rebates based on remitting payment for current projects within a specified time period. The Company has recorded an accrual, based on its best estimate of this future liability, which has been included on its Consolidated Balance Sheet as an accrued liability. In determining the appropriate amount of this accrual at reporting dates, the Company considers numerous factors, including this customer's history at both earning these rebates and redeeming them within the required period before they expire. Investments Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. Investments in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. 10 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 2 DISCONTINUED OPERATIONS During fiscal 2004 and 2005, the Company disposed of two components of its business which constituted discontinued operations - SilverBirch Studios and Twincentric Limited. The gain (loss) on the Company's consolidated statements of operations for the three and nine month periods ended September 30, 2004 and 2005 is summarized as follows:
Three month Three month Nine month Nine month period period period period ended ended ended ended September 30, September September September 30, 2005 30, 2004 30, 2005 2004 --------------- --------------- --------------- --------------- SilverBirch Studios Loss from discontinued operations $ -- $ (954) $ -- $ (129,450) Twincentric Limited Loss on Disposal (16,434) -- (16,434) -- Gain (loss) from discontinued operations 1,269 121,444 (445,032) 108,549 --------------- --------------- --------------- --------------- (15,165) 121,444 (461,466) 108,549 --------------- --------------- --------------- --------------- Gain (loss) from discontinued operations - net $ (15,165) $ 120,490 $ (461,466) $ (20,901) =============== =============== =============== ===============
SilverBirch Studios Effective February 29, 2004, the Company entered into an agreement to sell certain assets and liabilities of the Company's cellular phone game and ring tone development group, SilverBirch Studios, and the web portals Recessgames.com, Bladeofzorro.com and Silverbirchstudios.com (collectively, the "Games Division") to SilverBirch Studios Inc. SilverBirch Studios Inc. is majority owned by a former employee and officer of the Company. 11 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The purchase price initially consisted of a promissory note for $830,300 (CAD $1,000,000), a 4-year royalty agreement based on 2% of SilverBirch's gross revenues, a 5% equity interest in SilverBirch, and a non-exclusive grant of the right to use certain of the SilverBirch technology on preferential terms. Due to the fact that the recoverability of the aforementioned note was dependent upon the future successful operations of the division sold, management had previously determined that the recognition of the sales proceeds was not appropriate. Accordingly, the value of the note which amounted to $830,300 (CAD $1,000,000) was not included in the consolidated results for the fiscal quarter ended March 31, 2004. During the quarter ended June 30, 2005, SilverBirch Studios Inc. announced its intention to enter into a reverse take-over transaction (the "RTO") which would result in it becoming a publicly traded company on the TSX Venture Exchange ("TSXV"). On June 30, 2005, the Company restructured the above consideration with SilverBirch Studios Inc. such that the original purchase consideration as described above will be waived in consideration for the following: (a) Silverbirch Studios Inc. will pay the Company CAD $125,000 (US $102,000) upon completion of the RTO. (b) The Company will be granted 1,750,000 common shares in the new public company that SilverBirch Studios Inc. reverses into. (c) The Company will receive 1,000,000 warrants priced at CAD $0.36 with an expiry date of January 31, 2006 upon completion of the RTO. The Company will recognize the above consideration in its consolidated statement of operations during the quarter ending December 31, 2005 as this consideration was received subsequent to the end of the quarter ended September 30, 2005 (See note 22). Following is a summary of the results of operations of the Games Division for the period from January 1, 2004 through September 30, 2004. 2004 --------------- Salaries and wages $ 131,433 Other (1,983) --------------- Net loss from discontinued operations $ 129,450 =============== Twincentric, Limited On August 13, 2005, the Company entered into an agreement to sell its wholly owned U.K. subsidiary, Twincentric Limited ("Twincentric") to Tony McGurk. Mr. McGurk was the majority shareholder of Twincentric at the time it was acquired during fiscal 2004 by the Company, and he had continued to operate the Twincentric business since that time. Consideration received by the Company was 1,400,000 of its common shares. These common shares represented the same shares originally issued by the Company to Mr. McGurk in the transaction which resulted in the Company originally acquiring Twincentric. Twincentric had been part of the Company's SIM operating segment. For the purpose of calculating the loss realized on this transaction, the common shares received by the Company were valued at the closing share price on the date this transaction was consummated. The Company incurred a loss of $16,434 on this transaction, calculated as follows: Consideration received $ 112,000 Less: Net book value of Twincentric at the date of disposition (94,434) Direct transaction costs (34,000) --------- Loss on disposition of subsidiary $ (16,434) --------- 12 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Additionally, the Company incurred the following losses from discontinued operations for the three and nine month periods ended September 30, 2004 and 2005:
Three month Three month Nine month Nine month period ended period ended period ended period ended September September September 30, September 30, 30, 2005 30, 2004 2005 2004 ------------- ------------- ------------- ------------- Revenue $ 50,767 $ 261,642 $ 527,398 $ 264,420 Salaries and Wages (47,385) (61,892) (552,531) (72,548) General and administrative (1,811) (43,214) (410,097) (45,115) Amortization -- (31,385) -- (34,501) Interest expense (302) (3,707) (9,802) (3,707) ------------- ------------- ------------- ------------- Gain (Loss) from discontinued operations $ 1,269 $ 121,444 $ (445,032) $ 108,549 ============= ============= ============= =============
13 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 3 ACQUISITIONS AND DISPOSITIONS Cratos Technology Solutions, Inc. On May 19, 2005, the Company completed the acquisition of Cratos Technology Solutions Inc., an Ontario corporation ("Cratos"). The Company effected the acquisition of Cratos pursuant to the terms of a Share Purchase Agreement dated effective February 22, 2005, as amended May 19, 2005. Under the terms of the Share Purchase Agreement, the Registrant acquired from Andrew Wickett ("Wickett") and Debbie Gracie-Smith ("Gracie-Smith") all of the stock of Cratos in exchange for total consideration of approximately $2.1 million, comprised of cash, a promissory note due August 2005, and common stock of the Company. Cratos is a solutions-oriented organization specializing in international banking and financial transaction processing. The majority of Cratos' customers specialize in card products such as Visa(R), MasterCard(R), Eurocard, Smart cards, Debit cards, Credit cards, Store cards, Private label cards, and Loyalty-based products. The Company accounted for this acquisition using the purchase method of accounting in accordance with the provisions of SFAS No. 141, and began consolidating the results of Cratos effective May 1, 2005. Under the terms of the Share Purchase Agreement, the Company issued 9,021,030 shares (the "Purchaser Shares") of its common stock (in equal proportions to Wickett and Gracie-Smith) and paid cash in the amount of $79,560 (in equal proportions to Wickett and Gracie-Smith), and issued promissory notes in the amount of $79,560 (in equal proportions to Wickett and Gracie-Smith). The Company valued the common stock issued in accordance with this transaction based on a simple average of the closing share price of the Company for 2 days prior and subsequent to this transaction being announced. On this basis, the common stock issued in connection with this transaction was valued at $1,947,787. The purchase price is subject to an adjustment mechanism which will require (i) the Company to issue up to an additional 800,000 shares to Wickett and Gracie-Smith (in equal proportions) in the event Cratos exceeds certain specified profitability targets for Cratos for the 8 successive quarters following the close of this transaction. The Company will account for any additional consideration earned in the period in which such additional consideration is determined. The Company is still assessing the impact, if any, which such additional consideration, if earned, will have on its future consolidated statements of operations. The Company also issued 3,921,633 shares of its common stock to a supplier in consideration for its agreement to (i) enter into renewed agreements with Cratos, and (ii) terminate any existing security agreements between such party and Cratos as well as discharge any registered security and agree to subordinate any future security to that of any senior lender of the Company. No gain or loss was recorded on this transaction. The preliminary purchase price allocation set forth below represents management's best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are based on a preliminary assessment undertaken by management. The final valuation may differ from the preliminary purchase price allocation and these differences may be material. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Cratos acquisition: 14 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Current assets $ 1,251,514 Long term assets 111,032 Customer assets 1,023,380 Goodwill 3,336,286 --------------- Total assets acquired 5,722,212 Total liabilities assumed (3,615,305) --------------- Net assets acquired 2,106,907 =============== The customer assets of $1,023,380 have been assigned a life of five years. The useful lives assigned represent management's preliminary estimates and changes may occur from these preliminary estimates and these changes may be material. The Company also recorded a deferred tax liability of $368,000 in respect of the temporary difference associated with this intangible asset. The portion of the purchase price allocated to goodwill was assigned to the Company's Systems Integration and modernization reporting segment. No amount of the goodwill is expected to be deductible for tax purposes. As part of the purchase price allocation, the Company recognized liabilities associated with completing this transaction of $72,000. The Company expects that these costs will be discharged by the end of the current fiscal year. DisclosurePlus Inc. On February 25, 2005, the Company acquired all the outstanding common stock of DisclosurePlus Inc. ("DP") a privately held Canadian Corporation which provides publicly traded corporations with the foundation and tools to enhance the scope of corporate disclosure on-line with a standardized regulatory compliant web-based solution. Consideration for this acquisition represented 1,200,000 shares of the Company's restricted common stock valued at $264,000 in addition to $125,000 payable in cash. The 1,200,000 shares have been classified as shares to be issued on the Company's consolidated balance sheet and were issued subsequent to the end of the quarter. As of September 30, 2005, the entire amount of the cash portion of the consideration had been paid. The Company also acquired intellectual property relating to the DP business in a concurrent transaction. The consideration above represents the total consideration for this entire acquisition. The value was allocated to the common share consideration and was based on the weighted average share price of the Company's common shares for the two trading days before, the day of, and the two days after the day the Company entered into the terms of the acquisition agreement. The Company accounted for this acquisition using the purchase method of accounting in accordance with the provisions of SFAS No. 141, and accordingly, DP's operating results have been included in the Company's consolidated statement of operations from the acquisition. The Company acquired net tangible liabilities of $29,000, though the transaction provided the Company with intellectual property, customers, and a set of employees who had operated this business prior to the acquisition. Goodwill recorded in connection with this business combination is not deductible for tax purposes. The preliminary purchase price allocation set forth below represents management's best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are based on a preliminary assessment undertaken by management. The final valuation may differ from the preliminary purchase price allocation and these differences may be material. 15 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The Company will account for the purchased goodwill in accordance with the provisions of SFAS 142. The entire balance of goodwill recorded on this transaction will be allocated to the Company's Corporate Disclosure and Messaging segment. The Company's preliminary purchase price allocation recorded for the acquisition of DP is as follows: Technology assets $ 250,000 Goodwill 168,000 Total assets acquired 418,000 Liabilities assumed (29,000) Net assets acquired $ 389,000 The above purchase price allocation is subject to adjustment these adjustments may be material. Pro forma results The following pro forma results of operations reflect the combined results of Activecore and Cratos (acquired on May 1, 2005), for the three and nine-month periods ended September 30, 2005 and 2004 as if the business combination occurred at the beginning of Activecore's fiscal year. Pro forma financial information giving effect to the acquisition of DP has not been provided on the basis that its results of operations for the three and nine months ended September 30, 2005 and 2004 would not be material to the Company.
Three months ended Nine months ended September 30 September 30 ---------------------------- ---------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenue $ 2,708,373 $ 2,207,823 $ 6,941,526 $ 5,420,411 Net income (loss) $ (479,921) $ 171,279 $ (2,489,004) $ (733,764) Net income (loss) per share, basic and diluted $ (0.01) $ 0.00 $ (0.04) $ (0.22) ============ ============ ============ ============ Shares used in basic and diluted income (loss) per share calculation 61,313,668 54,511,027 59,934,658 47,801,071 ============ ============ ============ ============
These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had actually been completed as of the assumed dates and for the periods presented. The pro forma results represent Activecore's preliminary assessment of the intangible assets and are subject to change and, therefore, the final values may differ substantially from these amounts. The actual results for the quarter ended September 30, 2005 include the results for Cratos beginning May 1, 2005. 16 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 4 ACCOUNTS RECEIVABLE The components of accounts receivable, net, as of September 30, 2005 and December 31, 2004 consist of: 2005 2004 ----------- ----------- Trade receivables $ 3,679,071 $ 2,490,549 Imputed interest discount (82,685) (100,000) Allowance for doubtful accounts (101,186) -- ----------- ----------- Accounts receivable, net $ 3,495,200 $ 2,390,549 =========== =========== Trade receivables consist primarily of vendor receivables for enterprise software and information technology services sold. An imputed interest discount is included in the value of accounts receivable. NOTE 5 CAPITAL ASSETS As of September 30, 2005 and December 31, 2004, property and equipment consisted of: 2005 2004 ------------- ------------- Computer equipment $ 608,380 $ 476,990 Office equipment and furniture 114,448 87,371 Computer software 54,731 33,378 Leasehold improvements 43,157 41,185 Vehicles 12,839 -- ------------- ------------- 833,555 638,924 ------------- ------------- Less: accumulated depreciation and amortization 459,432 326,464 ------------- ------------- Property and Equipment, net $ 374,123 $ 312,460 ============= ============= Assets held under capital lease in the amount of $84,236 (2004 - $64,584) with accumulated depreciation in the amount of $38,888 (2004 - $22,802) are included in computer equipment. 17 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangibles assets consisted of the following as of September 30, 2005 and December 31, 2004:
2005 2004 ----------- ----------- Other intangible assets subject to amortization: Customer contracts $ 1,023,380 $ -- Customer lists 275,000 275,000 Capitalized software 115,701 115,701 Technology assets 250,000 -- Licenses 51,242 51,242 ----------- ----------- 1,715,323 441,943 ----------- ----------- Less: Accumulated amortization Customer contracts (158,432) -- Customer lists (183,333) (114,583) Capitalized software (77,136) (48,210) Technology assets (27,504) -- Licenses (51,240) (32,299) ----------- ----------- (497,645) (195,092) ----------- ----------- Other intangible assets subject to amortization, net 1,217,678 246,851 Goodwill 3,856,340 622,003 ----------- ----------- Goodwill and other intangible assets, net $ 5,074,018 $ 868,854 =========== ===========
The activity in goodwill for the nine months ended September 30, 2005 is as follows: Balance, December 31, 2004 $ 622,003 Plus: Goodwill recorded for Disclosureplus acquisition 168,000 Plus: Goodwill recorded for Cratos acquisition 3,336,286 Effect of foreign exchange rate fluctuation (269,949) ----------- Balance, September 30, 2005 $ 3,856,340 ----------- Of the above goodwill balance as of September 30, 2005, $3,336,286 relates to the Company's SIM division and the remaining $520,054 relates to the Company's CDM division. 18 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The activity in identifiable intangible assets for the nine months ended September 30, 2005 is as follows: Balance, December 31, 2004 $ 246,851 Plus: Customer assets recorded for Cratos acquisition 1,023,380 Plus: Technology assets recorded for DP acquisition 250,000 Less: Amortization for the 9 month period ended September 30, 2005 (330,638) Effect of foreign exchange rate fluctuation 27,575 ----------- Balance, September 30, 2005 $ 1,217,678 ----------- Estimated future amortization of other intangible assets based on balances existing at September 30, 2005 is as follows: 2005 remainder of the year $ 92,232 2006 336,363 2007 238,691 2008 238,691 2009 238,691 2010 and beyond 73,010 ---------- Total $1,217,678 ========== 19 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 7 INVESTMENT On June 26, 2003, the Company purchased 300,000 common shares, equal to approximately 5% of the then issued share capital of ePocket, Inc. for 1,000,000 shares of the Company's common stock. The shares were valued at $0.25 per share or an aggregate of $250,000, representing the market value at the date of issuance. During the quarter ended September 30, 2005, ePocket Inc. was acquired by Global Sterling Payment Services ("GSPS"), a company controlled by a director of the Company. As consideration for this sale, the Company received its initial investment amount of $250,000 during the quarter, as well as a 0.4% equity interest in GSPS which represented the same pro rate consideration as all other ePocket shareholders. Also during the quarter, the company received an additional 4.2% equity interest in GSPS in exchange for services rendered by management of the Company to GSPS. As ePocket is a private company with no readily determinable market value, the Company has valued its combined 4.6% interest in GSPS at nil in the accompanying consolidated balance sheet. Additionally, the Company has determined that it can exercise significant influence over ePocket. This determination was made based on review of several factors, including the fact that 2 members of the Company's senior management represent 50% of the ePocket board of directors. As such, the Company is required to equity account for this investment which entails recording, in its consolidated statement of operations, its pro rata share of ePocket's net income for each reporting period. As ePocket recorded a net loss in the quarter ended September 30, 2005, no amount has been recorded for the current period. However, at such time that ePocket generates cumulative net income from July 1, 2005, the Company will begin to record its pro rata share of ePocket's net income. NOTE 8 LONG-TERM DEBT Long-term debt consists of the following as of September 30, 2005 and December 31, 2004:
2005 2004 --------------- --------------- Note payable to IBEW Local Union 105, five year term, no principal payments until August 2004,bearing interest at 12% (1) $ -- $ 500,000 Note payable to SCI Healthcare Group, unsecured (2) 63,784 130,915 Short term loans (3) 239,241 543,901 Bank term loan, seven year term with monthly equal principal payments, bearing interest at the Canadian prime plus 3% (4) 158,840 173,967 Bank Term Loan, 3 year term with monthly equal principal payments, bearing interest at 5.4% (5) 191,205 -- --------------- --------------- 653,070 1,348,783 Less current portion 398,409 857,161 --------------- --------------- Long term portion $ 254,661 $ 491,622 --------------- ---------------
20 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (1) On July 31, 2003, the Company's wholly owned Canadian subsidiary ActiveCore Technologies Limited, received a $500,000 term loan from the International Brotherhood of Electrical Workers union in Hamilton, Ontario, Canada. Under the terms of the agreement, the first year accrued interest at the rate of 12% and the principal was repayable over a five-year term with no principal nor interest payments required during the first 12 months, principal payments were to be amortized over the remaining 48 months of the loan. The loan was convertible into common stock of the Company at the rate of 4.5 shares for every 1 dollar of the loan balance, excluding interest, remaining at the time of conversion. As additional consideration for the loan, the Company issued warrants to the lender for the purchase of 50,000 shares of common stock at a purchase price of $0.312 per share which expired on July 31, 2004. The fair value assigned to the warrants amounted to $0. The Company estimated the fair value of the warrant at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for this grant; no dividend yield for all years; expected volatility of 9.3%; risk-free interest rate of 1.12%, and an expected life of 1 year. The loan is collateralized by substantially all of the assets of the subsidiary Company. During the year ended December 31, 2004 the Company and the union agreed to exchange the outstanding loan into mandatorily redeemable convertible preferred shares (series C) in exchange for the note payable and the release of its security over ActiveCore Technologies Limited. The series C shares were not issued as at December 31, 2004, but had been by September 30, 2005 (see note 9). 21 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (2) The promissory note relating to the acquisition of SCI Healthcare Group bears interest at 10%. SCI Healthcare is acting as a billing and collection agent for the Company with respect to a specific customer in the healthcare industry. Amounts collected by SCI Healthcare are not remitted back to the Company but rather serve to reduce this promissory note. (3) During 2004, various arm's length parties loaned the Company, on a short term basis, funds to assist with working capital. Certain of these loans were converted into equity during the quarter ended September 30, 2005. (4) On August 17, 2004 one of the Company's Canadian subsidiaries obtained a term loan with a Canadian Chartered Bank in the amount of (CAD) $220,000. Under the terms of the agreement, the loan is repayable over a seven year term with principal and interest payments due monthly. Interest on the borrowings is the bank's prime rate plus 3%. (5) During fiscal 2005 one of the Company's Canadian subsidiaries obtained a term loan with a Canadian Chartered Bank in the amount of (CAD) $250,000. Under the terms of the agreement, the loan is repayable over a three year term with principal and interest payments due monthly. Interest on the borrowings is at 5.4%. (6) Future maturities of short and long-term notes payable as of September 30, 2005 are as follows: 2005 $ 332,697 2006 95,216 2007 99,025 2008 57,444 2009 25,758 Thereafter 42,930 --------- $ 653,070 ========= NOTE 9 REDEEMABLE PREFERRED SHARES The Company has outstanding series C preferred shares which are mandatorily redeemable over 16 quarters. The initial value of these shares was $500,000, and the quarterly redemption values are $31,250. During the quarter ended September 30, 2005, the Company issued shares to redeem the first 3 quarterly redemption amounts which had been in arrears. NOTE 10 LINE OF CREDIT In conjunction with the close of the Cratos acquisition, the Company secured a line of credit with a Canadian chartered bank. This line of credit allows for maximum borrowings under it of $1.5 million CAD and bears interest at the rate of prime plus 1%. Security for this facility is comprised of a general security agreement over all of the assets of the Company's subsidiary which entered into this facility, as well as personal guarantees by two of the Company's senior executives. Borrowings under this facility may not exceed 85% of specified receivables as defined in the respective credit agreement. As of September 30, 2005, approximately $95,000 was available under this line of credit. 22 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 11 DUE TO RELATED PARTIES The Company's officers and directors have loaned various amounts to the Company and its subsidiaries to meet operating cash flow requirements. The amounts due to related parties are non-interest bearing and have no specific repayment terms. The balances due to them were $24,448 and $132,364 as of September 30, 2005 and December 31 2004, respectively, and are classified as current liabilities in the accompanying consolidated balance sheet. During 2004 Ardrossan Investments Inc. a Canadian Controlled Private Corporation owned and operated by the spouse of a former officer and director of the Company loaned the Company, on a short term basis, funds to assist with working capital. This loan was paid in full during fiscal 2005. NOTE 12 REVERSE STOCK SPLIT In order to satisfy the terms of the Cratos share purchase agreement (see note 3), the Company conducted a reverse split of its shares on a 10:1 basis effective March 1, 2005. All share information contained in this Form 10-QSB has given effect to this transaction. NOTE 13 TAXES PAYABLE The Company has various tax liabilities outstanding which relate to several different taxing jurisdictions. These amounts relate principally to payroll and related taxes- Activecore Technologies Limited, a Canadian subsidiary of Activecore Technologies, Inc. has a liability to the Canada Customs and Revenue Agency ("CCRA") which includes un-remitted payroll taxes, and a fiscal CCRA employee audit assessment whereby several contract employees were deemed to be eligible for statutory pension and unemployment premiums not previously recorded, as well as interest and penalties. The Company has accrued these liabilities together with appropriate interest and penalties, which approximate $100,000. This liability is included in taxes payable in the current liabilities section of the accompanying consolidated balance sheet as of September 30, 2005. The Company is in the process of negotiating a payment plan with CCRA Failure to continue to make payments on a timely basis could result in an aggressive collection effort by the CCRA which could have a significant negative effect on the Company's operations. NOTE 14 COMMITMENTS AND CONTINGENCIES (a) On June 13, 2002, the Company canceled its "Power Audit" software distribution agreement with Orchestral (the "licensor"). In November 2002, the licensor commenced a proceeding in Ontario, Canada against the Company which was discontinued while the parties discussed a settlement. That proceeding alleged that the Company had infringed upon the copyright that the licensor maintained, and further that the Company had breached the distribution contract claiming damages of CAD $4,000,000. The licensor also claimed punitive and exemplary damages in the amount of CAD $1,000,000. When a settlement was not concluded, Orchestral commenced a second, identical action in August, 2003. The Company retained legal counsel to defend itself on the basis that there is no merit to the case and even if there was merit, the time frame in which to bring an action under the distribution agreement has expired. The Company has not yet determined if it will counter-sue for return of all proceeds paid to Orchestral during the period of time between 1999 and 2001. 23 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Compulsory mediation has occurred in the second lawsuit. The next step would normally be "examination for discovery" then on to a trial. Instead of proceeding with the prosecution of its second lawsuit, Orchestral commenced an Application before the Ontario courts to enforce a settlement which it alleges was reached with the Company during the negotiations between its first and second lawsuits. The court ordered that a settlement was enforceable and that $226,824 was owed by the Company to the licensor. An appeal by the Company of this judgment is pending. An allocation of $226,000 has been made on the Company's financial statements for the settlement claim which is under appeal, however, the Company maintains that all of Orchestral's claims and legal proceedings are frivolous. (b) On March 17, 2000, the Company entered into a consulting agreement with TPG Capital Corporation regarding an inactive reporting shell company that the Company acquired. The consulting agreement provides that one year after the execution of the agreement, ("reset date"), 350,000 common shares issued by the Company under the agreement would be increased or decreased based upon the average closing bid for the Company's stock 30 days prior to the reset date, so the value of the 350,000 shares will equal $500,000. The average closing price of the stock was $14.87 per share. The Company is obligated to issue an additional 30,284 common shares to the consultant as an additional fee. On June 14, 2004, James Cassidy filed a demand for arbitration against the Company seeking, among other things, the reset shares. The Company believes the consultant is not entitled to the reset shares due to the SEC and regulatory problems relating to the acquisition of the shell company and as such has not provided any accrual for this matter in the accompanying consolidated financial statements. The arbitration is proceeding but no final decision has been rendered. (c) From December 2003 to April 2004, the Company was engaged in discussions with certain major shareholders of Infolink Technologies Limited with regard to the potential acquisition of Infolink Technologies Ltd., a public company listed on the Toronto Stock Exchange venture board under the symbol "IFL". During the course of discussions, an offer to purchase was rebuffed by Cesar Correia, the former Chairman of the Board, President and CEO, and 34% shareholder of Infolink. At the time, Mr. Correia was told that the Company would purchase another competitor to Infolink, C Comm Network Corporation. In May of 2004, the Company purchased C Comm. In July of 2004, an unrelated minority shareholder of Infolink commenced an action in Ontario alleging that Mr. Correia has mismanaged Infolink and amongst other things that he had inappropriately obtained funds from Infolink and converted them to his own purposes. The day prior to the court hearing with regard to the minority shareholder action against Infolink, Infolink Technology commenced a proceeding in the same Ontario court against the Company alleging unfair competition as a result of an alleged improper acquisition of confidential information from Infolink and numerous other causes of action. The Company has not yet had to file a defence to any of Infolink's claims against the Company. Meanwhile, the court appointed a monitor and investigator to look into the allegations against Mr. Correia. The court appointed monitor and investigator issued an interim report in October 2004 which found that several of the allegations against Mr. Correia were substantiated. Mr. Correia was removed from the position of Chairman, President and CEO of Infolink and is now an employee of Infolink. The Company believes that Infolink as a corporate entity will not proceed with any action against the Company as the Company believes that the action was commenced as a defensive move by Mr. Correia and now that he has been removed from management of Infolink there is little basis for the action to continue. (d) On September 14, 2005, the Company entered into a guarantee pursuant to which the Company agreed to guarantee payment of amounts outstanding from time to time which were due from the Company's Cratos subsidiary to a certain trade creditor. As additional security for amounts outstanding and due to this trade creditor, ActiveCore agreed, effective September 14, 2005, to pledge its 4.2% equity interest in Global Sterling Payment Systems Ltd. 24 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 15 COMMON AND PREFERRED SHARES Common Shares On February 9, 2005, the Company issued 400,000 restricted shares of Common stock to two directors as Director's fee. The fair value of these shares, based on the market value on the date they were issued was $120,000. 80,000 restricted shares of Common stock were also issued to two outside parties to pay for services rendered to the Company. The Company has recorded, in its Consolidated Statement of Operations, an expense of $24,000 representing the fair market value of these shares on of the date they were issued. During the nine months ended September 30, 2005, the Company issued 3,921,633 common shares to a vendor of one of the Company's wholly-owned subsidiaries in order to settle a debt for services rendered prior to that subsidiary being acquired by the Company. The fair value of these common shares, based on the market value on the date they were issued was $402,369. During the nine months ended September 30, 2005, the Company issued 50,010 restricted shares of Common stock for beneficial owner round up as a result of the reverse stock split on March 1, 2005. On September 23, 2005, the Company issued 3,334,980 to a member of senior management. Of this amount, 1,084,980 common shares related to amounts advanced by this individual to the Company, 2,000,000 common shares relate to services provided by that individual to personally guarantee certain indebtedness of the Company over the next two years and 250,000 common shares related to employment services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $108,098, $220,000, and $37,500 respectively. On September 23, 2005, the Company issued 4,750,000 to an other member of senior management. Of this amount, 2,500,000 common shares related to amounts advanced by this individual to the Company, 2,000,000 common shares relate to services provided by that individual to personally guarantee certain indebtedness of the Company over the next two years and 250,000 common shares related to employment services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $250,000, $220,000, and $37,500 respectively. On September 23, 2005, the Company issued 1,000,000 common shares to an unrelated party in exchange for provided financial consulting services over the next year to assist the Company in obtaining further financing. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $150,000. 25 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 On September 23, 2005, the Company issued 850,500 common shares to two unrelated parties as settlement for previously provided professional services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $85,050. On September 23, 2005, the Company issued 975,000 common shares to two unrelated parties in exchange for services to be provided. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $258,750. On September 23, 2005, the Company issued 3,787,619 common shares to various unrelated parties who agreed to convert various loans and advances made to the Company. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $378,762. On September 23, 2005, the Company issued 250,000 common shares to one member of its senior management team in consideration for employment services rendered. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $37,500. On September 23, 2005, the Company issued 1,720,026 common shares to the holder of its Series C Preferred Shares. Of this amount, 257,370 common shares related to interest and penalties relating to late payment and 1,462,656 relate to the mandatory redemption of those Series C shares for common shares. On September 23, 2005, the Company issued 285,186 common shares to the holder of its Series A and B Preferred Shares in respect of dividends due to that holder under the terms of those preference shares. All amounts issued during the nine month period ended September 30, 2005 were valued based on the closing market price of the Company's common stock on the date which the Company committed itself to the respective transaction. Preferred Shares The Company has issued or committed to issue three series of preferred shares: Series A and B On September 14, 2004, the board of directors authorized the issuance of 8,333,333 Series A and 4,167,667 Series B preferred shares which had a purchase price of $0.03 and $0.06, respectively totaling $500,000. With respect to the Series A shares, the Company may force conversion if the trading price of the Company's common shares exceeds $2.00 for 30 days. With regard to the Series B shares, the Company may force conversion if the trading price of the Company's common shares exceeds $4.00 for 30 days. These shares have a right of redemption whereby if the stock is not converted within 5 years, the Company, at its option, shall have the right to redeem all outstanding but unconverted shares of series A (same for B) Preferred Stock held by such person by paying to the holder thereof $0.30 (for B, $0.60) per share plus all accrued but unpaid dividends thereon, if any. These shares are not manditorily redeemable. The preferred shareholders will be paid a dividend at the rate of 10% per annum. Series C In 2004, the Company and the International Brotherhood of Electrical Worker's Union (See Note 8) agreed to settle the outstanding loan of $500,000 into Series C convertible preferred shares. The terms of the Series C preferred stock require the Company to redeem the preferred shares over 16 quarters, commencing on December 31, 2004. The Company shall have the option of paying the quarterly redemptions in the form of cash or common shares. Also the preferred shares will have a 12% annual dividend rate payable quarterly based on the number of preferred shares outstanding at the end of the quarter. 26 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 NOTE 16 WARRANTS The Company's Board of Directors has granted warrants to non-employees of the Company. The following is a summary of activity under these warrant provision.
Non-Employee Weighted Options and Average Warrants Exercise Price ------------ ------------ Warrants outstanding at December 31, 2003 88,000 $ 1.47 Expired 51,500 0.45 Granted 400,000 0.18 ------------ ------------ Warrants outstanding at December 31, 2004 436,500 0.42 Issued 3,545,883 0.14 ------------ ------------ Warrants outstanding at September 30, 2005 3,982,383 $ 0.17 ============ ============
During the nine month period ended September 30, 2005, the Company issued 3,545,883 warrants to parties to whom the Company was previously indebted to and who, during this period, agreed to settle their debt to common shares of the Company. These warrants were issued at a 40% premium to the market price of the Company's common stock as of the date of the settlement. These warrants expire in September, 2006. The Company used Black-Scholes to value these warrants using the following assumptions: dividend yield - nil; risk-free interest rate 3%; volatility - 80%; expected life - 1 year. The fair value of these warrants was charged to the Company's Consolidated Statement of Operations as a loss on extinguishment of debt during the three month period ended September 30, 20005. As of September 30, 2005 and December 31, 2004, all warrants were fully vested and exercisable. NOTE 17 INCOME TAXES No provision for Federal, state and foreign income taxes has been recorded as the Company has net operating loss carry forwards to offset any net income for the three and nine month periods ended September 30, 2005. As of September 30, 2005, the Company has significant net operating loss carry forwards for income tax purposes available to offset future taxable income. The Company is in arrears on filing many of its statutory income tax filings and is therefore unable to determine the amount of such carry forwards at this time. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses and capital losses carried forward may be impaired or limited in certain circumstances. Events, which may cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Deferred tax assets as of September 30, 2005 and December 31, 2004 consist primarily of the tax effect of net operating loss carry forwards and amortization of intangibles. The Company has provided a full valuation allowance on the deferred tax assets as of September 30, 2005 and December 31, 2004 to reduce such deferred tax assets to zero, as it is management's belief that realization of such amounts is not considered more likely than not. 27 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The Company has recorded on its Consolidated Balance Sheet a deferred tax liability relating to the temporary difference associated with specifically identifiable intangible assets recorded in conjunction with one of its business combinations. This temporary difference is being amortized into the Company's tax provision over the same period as the related intangible asset. For the nine month period ended September 30, 2005, the Company's entire tax provision related to the amortization of this temporary difference. NOTE 18 TOTAL COMPREHENSIVE INCOME (LOSS) The following table presents the Company's total comprehensive income (loss) for the three and nine month periods ended September 30, 2005 and 2004 respectively:
Three months Three months Nine months Nine months ended ended ended ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- Net income (loss) for the period $ (479,921) $ 599,909 $ (2,715,351) $ (161,787) Other comprehensive income (loss) for the period $ (254,905) $ (101,266) $ (517,748) $ (45,122) ------------- ------------- ------------- ------------- Comprehensive net income (loss) for the period $ (734,826) $ 498,643 $ (2,197,603) $ (206,909) ============= ============= ============= =============
NOTE 19 SEGMENT INFORMATION The Company has two reportable segments: Systems Integration and Modernization ("SIM") and Corporate Disclosure and Messaging ("CDM"). For detailed descriptions of the Company's two operating segments refer to Management's Discussion and Analysis beginning on page 32. The Company evaluates operating segment performance based on revenues and direct operating expenses of the segment. The accounting policies of the operating segments are the same as those set forth in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004. Contribution margin from operating segments does not include amortization of intangible assets, depreciation, interest, other income (expense) and provision for income taxes. Goodwill and other intangible assets have been included in segment assets. Prior to the quarter ended June 30, 2005, the Company operated in only one operating segment - the delivery of software products and services. Consequently, segment operating results have only been provided for the three months ended September 30, 2005, and segment assets have been provided only as of September 30, 2005. Prior year and prior year comparatives have not been provided on the basis that the acquisition of Cratos during the quarter ended June 30, 2005 caused these segments to be created, and hence these segments did not exist in the prior year. 28 A reconciliation of the totals reported for the operating segments to the applicable line items in the unaudited condensed consolidated financial statements for the three months ended September 30, 2005 is as follows:
Three Months Ended September 30, 2005 SIM CDM Total --------------- --------------- --------------- Revenue 2,378,513 329,860 2,708,373 Operating Costs 2,043,109 364,954 2,408,063 --------------- --------------- --------------- Contribution Margin 335,404 (35,094) 300,310 Less: Corporate expenses (469,630) Less: Interest expense (61,882) Less: Depreciation and amortization (147,176) Less: Other expense and taxes (101,543) --------------- Net loss for the period (479,921) =============== Segment assets as of September 30, 2005 8,649,333 1,390,929 10,040,262 =============== =============== ===============
NOTE 20 SIGNIFICANT CUSTOMER AND VENDOR A single customer accounted for 50% and 42% of the Company's revenue during the three and nine month periods ended September 30, 2005 respectively. This customer did not account for any revenue during the three or nine month period ended September 30, 2004. This same customer accounted for 41% of the Company's accounts receivable balance at September 30, 2005 and nil as of December 31, 2004. In addition, the Company uses consultants to deliver many of the service contracts for its customers. These consultants are procured primarily through one significant consulting agency. Amounts recorded in the Company's Statements of Operations as direct wages almost exclusively represent consulting services incurred through this significant vendor. NOTE 21 DEFERRED COMPENSATION During the nine month period ended September 30, 2005, the Company issued shares to certain individuals for services to be performed in future periods (see note 15). These amounts have been recorded on the Company's Consolidated Balance Sheet as deferred compensation, and will be recognized on a straight-line basis over the term of the respective service agreement in the Company's Consolidated Statement of Operations. NOTE 22 SUBSEQUENT EVENTS SilverBirch Studio RTO Completed In October, 2005 SilverBirch Studios completed its RTO transaction, and issued the Company the consideration agreed to in June 2005 (see note 2). This consideration comprised $125,000 CAD of cash, 1,750,000 shares in SilverBirch Studios, and 1,000,000 warrants to purchase common shares of Silverbirch Studios. This consideration will be recognized in the Company's Statement of Operations in the quarter ending December 31, 2005. 29 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Forward-Looking Statements and Associated Risks. This Report contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (a) the Company's projected sales and profitability, (b) the Company's growth strategies, (c) anticipated trends in the Company's industry, (d) the Company's future financing plans, (e) the Company's anticipated needs for working capital, (f) the benefits related to ownership of the Company's common stock. Forward-looking statements, which involve assumptions and describe the Company's future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause the Company's actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis or Plan of Operations" as well as in this Report generally. You should not place undue reliance on our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and, except as otherwise required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible to predict all of them.Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Certain Business Risk Factors" and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected. Overview ActiveCore Technologies, Inc. ("ActiveCore" or the "Company") is a Nevada registered Company with its head office in Toronto, Canada, and operations in the United States and the United Kingdom. The Company operates within the enterprise software and services market in a sector which has been described by the Gartner Group as that group of vendors of software and services that sell and install "Smart Enterprise Suites" and related products. The Company has organized itself into two distinct divisions to deliver its products and services. The Systems Integration and Migration (SIM) division focuses on large projects in the financial services, insurance, healthcare, education and manufacturing industries. These projects are aimed at protecting the customer's investment in, improving the functionality of, and extending the life span of their existing information technology systems. The acquisition of Cratos Technologies Solutions Inc. ("Cratos") during the quarter ended June 30, 2005 is expected to begin to give this division critical mass. The Corporate Disclosure and Messaging (CDM) division is focused on working with these same and additional customers to provide them with a range of communication and information distribution based products that allow them to leverage existing corporate information and share it with their customers, employees and other stakeholders and facilitates their move towards a Smart Enterprise. The Company's products encompass application integration, application modernization, application migration, content management, vertical application portals, a corporate disclosure portal and an outbound corporate messaging portal. This product set gives ActiveCore the capability to deliver effective, efficient and economical integration, modernization, migration and corporate messaging services or complete solutions to clients seeking to enable or extend their existing systems to stakeholders and customers without wholesale changes to their systems. ActiveCore's products are designed to enable the Company's clients to extend the functions of their current systems, often called "legacy systems", by using the Company's integration, modernization and migration product sets that are sold and delivered by the SIM division. For organizations wanting to take the next step in achieving what ActiveCore terms "A Smart Enterprise" the Company offers its disclosure and messaging products that are sold and delivered by the CDM division. By concentrating on the improvement of the customers existing systems and providing an additional communication/messaging product layer the Company is able to offer its customers a cost effective way to rapidly improve the overall capability and extend the life of their existing information technology assets. 30 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The two divisions of the Company have very different revenue models and it is important that this is clearly understood. See Note 19 to the consolidated financial statements for segmented information which provide more granular reporting by division so that shareholders can develop a better understanding of the Company's revenue sources and how the revenue mix within the two divisions affects the gross profit margin at a consolidated level. The SIM division derives its revenue from the sale of value added labor and software licenses. This division has repeat customers and maintenance revenue but to grow it must find new customers on a regular basis to replace revenue from completed projects. Projects in this division usually range from one to two years in length and can exceed one million dollars in value. These projects tend to have long sell cycles and are predominantly with large customers. The gross profit percentage of this division varies based on the mix of sales as product revenue tends to yield a higher margin than services revenue. The Company considers this division to be a "solutions provider", therefore, there will always be a mix of both product and service revenue but normally the mix will be weighted towards services. In this division the Company competes with a variety of System Integration "SI" vendors but has the advantage of having ownership of most of the products it uses to develop client specific and industry specific solutions. The CDM division of the Company derives its revenue from the sale of product based services and usually delivers these services via an Application Service Provider (ASP) model. The size of the individual sales in this division are much smaller than in the SIM division but the revenue generated by this division is recurring in nature. Contracts in this division can vary from a one time job to three years and the length is determined by the target customer. Customers that purchase the DisclosurePlus product set usually sign three year contracts that consist of an initial setup fee and monthly payments and once the customer has committed to use this product set they become long term customers. Customers that purchase the Messaging product set tend to sign shorter contracts or choose to use the service as required. This division has shorter sell cycles and employs both telephone and direct sales representatives. The contribution margin from this division will vary based on the mix of Messaging sales versus DisclosurePlus sales. DisclosurePlus sales will yield a higher margin once the division has reached a critical mass of repeat customers. The Company has set up a "service bureau" operation under the product identity "ActiveCast" to implement the Messaging ASP service whereby it offers broadcast services to customers on an outsourced basis using its own internal installation of ActiveLINK and DynaPortal. The Company is actively increasing the scope and revenue earning capacity of this operation by investing in fixed assets and personnel to grow the revenue and client base. It should be noted that as of September 30, 2005 the CDM business had only been existence for a few quarters and following a fairly substantial investment in this division it was just approaching break-even from an operating income perspective (see segmented information). The expenses in this division currently exceed its revenue, but over the next quarter the Company anticipates that this trend will reverse and this division will be producing operating income by the end of the current fiscal year. The Company completed the DisclosurePlus acquisition in the first quarter to add additional revenue opportunities to this division and to increase the amount of recurring revenue for the overall Company. The Company continues to search for potential acquisition candidates that can expand the range of products and services that the Company can offer within the context of the CDM division. In this area of operations, the Company competes with such companies as Infolink Technologies Limited in Canada, J2 Global Communications, Inc., and Xpedite Corporation. 31 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The Company has developed a clear vision of how it intends to expand the business in the future. Expansion will be accomplished by growing the SIM and the CDM divisions organically as well as developing markets via strategic acquisitions in either division. The Company will also expand its marketing program to increase the "upselling" and "cross selling" opportunities which naturally exist between the two divisions. The Company continues to hold a minority interest in ePocket, an organization currently completing a major round of funding that will allow it to enter the "electronic payment" market with a revolutionary product. The Company maintains strong business relationships with both companies. The Company envisions significant benefits from the Cratos acquisition as the relationship and synergies between ePocket and ActiveCore become more developed in the upcoming quarters. Market Positioning Summary The Company's "Smart Enterprise Suite" The Company provides organizations of all sizes with the capability to integrate, enable, and extend their "legacy systems" to connect to and communicate with their customers, employees and stakeholders. Therefore, the Company's products and services facilitate the creation of the "Smart Enterprise". The Company's products encompass application integration, application modernization, application migration, content management, vertical application portals, a corporate disclosure portal and an outbound corporate messaging portal. In addition the Company delivers its DisclosurePlus and ActiveCast product sets via an "Application Service Provider" (ASP) model using a Company hosted corporate messaging service bureau. The Company's products can be sold individually or as a combination to form customized solutions based on the customers' most immediate need. This approach allows the customer to deal with information technology problems in a tactical manner and can often alleviate customer capital expenditure restrictions. ActiveLINK is the Company's core application integration product and is used to create solutions that integrate disparate databases and applications, creating a hub through which legacy system functionality can be enabled and extended. The other products owned by the Company are ActiveCast, DisclosurePlus and MD LINK. In addition the Company sells and services third party products that complete its "Smart Enterprise Suite". These include DynaPortal, Caravel, and Micro Focus. ActiveCore normally sells its products and services to companies that want to improve their existing "legacy systems", however, the Company has also identified three other target markets: software resellers, independent software vendors and system integrators. 32 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 MDI Solutions sells a vertically optimized version of ActiveLINK known as MD LINK to health care facilities to support their systems integration needs. The MDI group also sells consulting support services for other integration products resulting in recurring income from support contracts. The MDI acquisition provided the Company with the knowledge to vertically enhance ActiveLINK and create MD LINK. ActiveCast, the Company's corporate messaging software product is sold to companies that want to extract data from internal "legacy systems" and use it for outbound messaging. These opportunities have short sales cycles resulting in rapid cash flow and recurring revenue from organizations sending information to dedicated lists. This product is also directly marketed to all companies that need to communicate "stand alone" information to their customers, employees and stakeholders. The C Comm acquisition provided the base product from which ActiveCast evolved. DisclosurePlus provides corporations with a standard methodology for reporting and distributing information related to public disclosure required by public companies. This division is adding additional products to their offering to expand the functionality available within the DisclosurePlus product. Cratos is a technology solution provider that focuses on payment solutions for the financial services industry and on the migration of mainframe systems to a Microsoft environment. Its expertise in various payment technologies is well known globally as evidenced by its blue chip customers. Cratos uses the Micro Focus product set to perform system migrations for large customers and they have a well trained consulting group that manages and delivers complex payment integration projects. There is an opportunity to introduce several of the Company owned products into Cratos projects. Recent Developments In the MDI Solutions group, further progress has been made in the development of the MD LINK product and the company recently released version 4.1 at the end of June 2005. During the last few months, the Company has secured and shipped several orders for the new version of MD LINK. The Company expects the number of MD Link product sales to rise during the balance of 2005 and this is a direct result of the new product features and the marketing efforts of this group in 2004 and early 2005. In the Company's ActiveCore and ActiveCast business lines, the Company is continuing to obtain additional clients. On the ActiveCast side of operations, the Company is also adding additional sales personnel to accelerate the rollout of the Company's innovative messaging portal product. This division has generated new revenue in the first quarter and continues to improve the margins on this business. We expect revenues from this division to continue to increase throughout the remainder of 2005. For the nine month period ended September 30, 2005, the Company made relatively large investments in equipment and new staff in this area of the business. The Company continues to acquire new organizations and completed the acquisition of DisclosurePlus in the first quarter of 2005 and completed the acquisition of Cratos during the second quarter ended June 30. These acquisitions continue to add significant revenue to the Company during the balance of 2005. The DisclosurePlus group is actively selling the DisclosurePlus product and if the Company is able to add the "press release" product to their offering, we expect that this development will also enhance sales. Acquisitions and Reorganizations The Company maintains an active interest in acquisitions and the reorganization of its component parts to better service clients. The Company has undertaken an internal restructuring to facilitate better customer service, increased sales and reduced costs. Investment in its existing operations augmented by growth through acquisitions is a key goal of management as is the effective use of capital to drive acceptable returns on investment. The following paragraphs briefly describe recent acquisitions and reorganizations that have occurred. Acquisition of DisclosurePlus Prior to being acquired by the Company, DisclosurePlus operated as a private company developing its intellectual property and test marketed its product to several clients before agreeing to be acquired by ActiveCore. On February 25, 2005, the Company entered into a purchase and sale agreement with the shareholders of DisclosurePlus whereby the Company paid 1,200,000 shares of the Company's common stock representing $264,000 plus $125,000 in cash for a total value of $389,000 for 100% of the DisclosurePlus common shares. In connection with this acquisition the Company also entered into management contracts with Gord Sutton and Dean Peloso. 33 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 DisclosurePlus offers a unique set of products to the public company market. These products are offered as an ASP model and are targeted at public companies that want to provide better disclosure of corporate information to their shareholders, customers and other stakeholders. This division will also add press release dissemination to the product set later this year which is expected to have a positive impact on revenue opportunities. Acquisition of Cratos Technology Solutions Prior to being acquired by the Company, Cratos operated as a private company providing technical consulting services and mainframe migration to companies in the financial services sector in many countries. During the quarter ended June 30, 2005, the Company entered into a purchase and sale agreement with the shareholders of Cratos Solutions whereby the Company paid 9,021,030 shares of the Company's common stock in addition to cash and debt consideration of $159,120 representing total consideration of $2.1 million in exchange for 100% of the shares of Cratos. In conjunction with this acquisition the Company paid CAD $470,000 of debt owed to SQL Tech. by Cratos along with 3,921,633 Common Shares of ActiveCore. The Company also arranged a bank credit facility to help finance Cratos' debt that was personally secured by the senior mangers of ActiveCore. Cratos is a service based company that specializes in providing project management and delivery to large companies in the financial service, education and insurance market place. Twincentric, Limited On August 13, 2005, the Company entered into an agreement to sell its wholly owned U.K. subsidiary, Twincentric Limited ("Twincentric") to Tony McGurk. Mr. McGurk was the majority shareholder of Twincentric at the time it was acquired during fiscal 2004 by the Company, and he had continued to operate the Twincentric business since that time. Consideration received by the Company was 1,400,000 of its common shares. These common shares represented the same shares originally issued by the Company to Mr. McGurk in the transaction which resulted in the Company originally acquiring Twincentric. Going Concern The accompanying Consolidated Financial Statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a loss from operations of $378,378 for the three months ended September 30, 2005 and a loss from operations of $2,014,308 for the nine months ended September 30, 2005. The Company incurred negative cash flow from operations of $175,770 and $1,543,639 for the three and nine months ended September 30, 2005 respectively, and has a working capital deficiency of $2,222,381 at September 30, 2005. There is substantial doubt that the Company will continue as a going concern and will likely still incur a going concern note as at December 31, 2005. The Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty. Management's plan to continue operations is to raise additional debt or equity capital until such time as the Company is able to generate sufficient operating revenues through its new acquisitions. Critical Accounting Policies Significant Accounting Policies and Critical Accounting Estimates 34 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The Company's Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company's control. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. Revenue: A significant portion of all of the Company's net sales are derived from commercial software development and sales activities, which are subject to increasing competition, rapid technological change and evolving customer preferences, often resulting in the frequent introduction of new products and short product lifecycles. Accordingly, the Company's profitability and growth prospects depend upon its ability to continually acquire, develop and market new, commercially successful software products and obtain adequate financing. If the Company is unable to continue to acquire, develop and market commercially successful software products, its operating results and financial condition could be materially adversely affected in the near future. The Company recognizes revenue for software sales in accordance with Statement of Position ("SOP") 97-2 "Software Revenue Recognition", as amended by SOP 98-9 "Modification of SOP 97-2 Software Revenue Recognition with respect to Certain Transactions." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-9 deals with the determination of vendor specific objective evidence ("VSOE") of fair value in multiple element arrangements, such as maintenance agreements soldin conjunction with software packages. For the fiscal year 2004 and 2003 the Company does not have any multi-element arrangements that would require it to establish VSOE for each element, nor does the Company have any sales activity that requires the contract method of accounting. The Company's software transactions generally include only one element, the interactive software game or commercial software under license. The Company recognizes revenue when the price is fixed and determinable, there is persuasive evidence of an arrangement, the fulfillment of its obligations under any such arrangement, and determination that collection is probable. Accordingly, revenue is recognized when the license or title and all risks of loss are transferred to the customer, which is generally upon receipt by customer. The Company's payment arrangements with its customers provide primarily multi month terms unless the purchase price is relatively low. As a result of the multi-month terms, an imputed interest cost accounting for the net present value of the terms was deducted in determining the amount of revenue and receivable recognized. The Company recognizes revenue in the period in which the service is performed and collection is reasonably assured. Allowance for Doubtful Accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoing credit evaluations of its customer's financial condition and if the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would likely be required. Actual collections could differ materially from our estimates. Income Taxes. The Company has currently recorded a full valuation allowance against all of its deferred income tax assets as management believes it is more likely than not that all of the deferred income tax assets will not be realized. In making this determination, management has considered factors such as the reversal of deferred income tax liabilities, projected taxable income, the character of the income tax asset and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. 35 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Litigation. The Company is a party, from time to time, in legal proceedings. In these cases, management assesses the likelihood that a loss will result, as well as the amount of such loss and the financial statements provide for the Company's best estimate of such losses. To the extent that any of these legal proceedings are resolved and result in the Company being required to pay an amount in excess of what has been provided for in the financial statements, the Company would be required to record, against earnings, the excess at that time. If the resolution resulted in a gain to the Company, or a loss less than that provided for, such gain is recognized when received or receivable. Valuation of Intangible Assets. The Company has a history of acquiring other businesses, and expects that this trend will likely continue in the future. As part of the completion of any business combination, the Company is required to value any intangible assets acquired at the date of acquisition. This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. However, there can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. If management makes judgments or estimates that differ from actual circumstances, the Company may be required to write-off certain of its intangible assets. Similarly, in accordance with SFAS No. 142 Goodwill and Other Intangible Assets, the Company is required to annually test the value of its goodwill as well as its acquired intangible assets. This testing requires management to make estimates of the market value of its various operating segments. Changes in estimates could result in different conclusions for the value of goodwill. The Company performs its annual impairment testing on its goodwill at December 31st of each fiscal year, provided that circumstances don't arise during the year that would necessitate an earlier evaluation. 36 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Results of Operations Results of Operations for the Three and Nine Month Periods Ended September 30, 2005 Compared to the Same Periods Ended September 30, 2004 Overview During the quarter ended September 30, 2005, the Company recorded revenues of $2.8 million, and a loss from operations of $0.4 million. These amounts compare to revenue of $1.9 million during the previous quarter ended June 30, 2005, when a loss from operations of $1.2 million was incurred. The increase in revenue from the prior quarter was the result of several factors. Firstly, as the Company began consolidating the results of Cratos effective May 1, 2005, during the quarter ended September 30, 2005 the Company consolidated an entire quarter of operations as compared with only 2 months in the quarter ended June 30, 2005. Additionally however, organic growth was generated by the Company's CDM division, as both the ActiveCast and DisclosurePlus businesses demonstrated significant percentage increases in revenue as compared with the prior quarter. The Company incurred numerous one-time expenses totaling $300,000 associated with restructuring its organization and management in the quarter ended June 30, 2005, which were not present in the quarter ended September 30, 2005. These amounts had related to consulting expense, legal and accounting, and general and administrative expenses. The Company feels that its operating expenses incurred during the quarter ended September 30, 2005 are fairly representative of the cost structure it will carry in the foreseeable future. As a result, should the Company be able to continue to grow its revenue in future quarters, the Company can expect to see improved profitability. Revenues - ------------------------------------- ---------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- ---------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------- ---------- ------------ ---------- ----------- ----------- 2,708,373 1,432,810 89% 4,665,541 2,730,059 71% - ------------- ---------- ------------ ---------- ----------- ----------- During the three months ended September 30, 2005 the Company generated $2.7 million in revenue from the sale of products and services versus $1.4 million in revenue in the same three month period ended September 30, 2004. For the nine month period ended September 30, 2005, total revenue was $4.7 million, which represented a 71% from the $2.7 million recorded during the nine month period ended September 30, 2004. From a revenue source perspective, the vast majority of the revenue recorded in both 2005 and 2004 was service related, while product related revenue represented only a small percentage of the total. In the three months ended September 30, 2005, the majority of the Company's revenue was generated from services work and product installation performed by the Company's SIM division (see note 19 to the notes to the Unaudited Financial Statements for segmented information). Specifically, the Cratos acquisition was completed during the quarter ended June 30, 2005, and the Company has consolidated their operations in its consolidated financial statements beginning May 1, 2005. Over the 5 month period during which Cratos' results of operations have been consolidated with the Company, Cratos has generated approximately $3.3 million of revenue, and approximately $0.3 million of contribution margin. Also of note is the fact that during the 3 month period ended September 30, 2005 Cratos signed a master services agreement with ePocket to become its exclusive implementation partner for software installations. As of September 30, 2005, only nominal amounts of revenue have been earned under this agreement, though the Company is optimistic that beginning in the first quarter of 2006, more significant amounts of revenue will be earned under this agreement. As a result, the Company expects revenues in its SIM division to continue to increase as the ePocket business becomes commercialized. In the shorter term, the quarter ending December 31, 2005 may results in a slight decrease in revenues for the SIM division as compared with the quarter ended September 30, 2005 as a result of the fact that the SIM division generates revenues largely off of billable consultants, and the month of December tends to have far fewer billable days at client locations than the months of July through November. 37 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 The Company has also seen revenue growth over the past quarter from its CDM division - a division that did not formally exist until mid-2004 when the Company completed a small acquisition of C-Comm Networks. Since that time, the Company has added to that business through significant investments of both capital and personnel, and that business has now been rebranded as the ActiveCast. It appears these investments are beginning to pay off. Although this division's total revenues remain small relative to the overall corporate totals, they are growing very quickly in percentage terms. Specifically, revenues in the CDM business grew 34% from the quarter ended June 30, 2005 to the quarter ended September 30, 2005. As the CDM division has a relatively fixed expense base, once that division crosses break-even the profitability margins have the potential to be very strong. Incremental revenues recorded once the division achieves break-even are expected to be in the 40-50% range. It is the Company's expectation that this growth will continue to the point that the division will acheive break-even in the fourth quarter from a contribution margin perspective given that during the quarter ended September 30, 2005 it incurred only a small loss of $35,000. The acquisition of DisclosurePlus in the first quarter of 2005 also added a revenue source that did not exist during fiscal 2004. Revenue for this division remains quite small, but customer opportunities remain very encouraging and the Company feels that this division is still two to three quarters away from generating more substantial amounts of revenue. At the current time, this division continues to round out its product offering. During the quarter ended September 30, 2005 DisclosurePlus announced the introduction of two new products - - Whistleblower and SedarPush. As evidenced by the above, the Company has undergone a major transformation over the past 12 months due to the acquisitions that it has made. The integration of these acquisitions is progressing well and represents the main reason for the additional revenue generated during both the three and nine month periods ended September 30, 2005. Cost of Sales - ------------------------------------- --------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- --------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------- ---------- ------------ ---------- --------- ------------ 1,714,395 292,872 521% 3,075,177 689,730 346% - ------------- ---------- ------------ ---------- --------- ------------ 38 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Cost of sales for the three month period ended September 30, 2005 were $1.7 million, which consisted primarily of direct wages paid to consulting services staff of $1.6 million, and amortization of software licensing agreements and other direct costs of $0.1 million. These amounts are significantly higher than fiscal 2004 when the Company's cost of sales for the three month period ended September 30, 2004 totaled $0.3 million which was principally comprised of direct wages for consulting staff. For the nine month period ended September 30, 2005, cost of sales totaled $3.1 million, which represented an increase of 346% from the nine month period ended September 30, 2004. The vast majority of the increase in cost of sales in 2005 as compared to 2004 relates the recent addition of Cratos. Cratos is a services business, and the majority of their operating expenses relate to compensation costs paid to its consultants. This differs substantially from fiscal 2004 when the Company generated most of its revenue through software licensing agreements. As the cost of sale on software licenses is much lower than that for services revenue, the Company's gross margin has decreased significantly from fiscal 2004 to fiscal 2005. Specifically, the September 30, 2005 three month period led to a gross margin of $1.0 million, or 37%, versus a gross margin of $1.1 million, or 80% in the three months ended September 30, 2004. For the nine month period ended September 30, 2005 the Company's gross margin percentage was 34% as compared with 75% during the nine month period ended September 30, 2004. The gross margin percentages reflect the addition of the Cratos acquisition which has brought with it significant revenue growth but given the nature of that business does so at a lower gross margin. The Company expects that its gross profit percentage will begin to increase in future periods as the Company's CDM revenue continues to increase, and as that division becomes a more substantial component of the Company's overall revenue mix. Operating Expenses Total operating expenses for the three months ended September 30, 2005 were $1.4 million versus $0.7 million in the three months ended September 30, 2004. Operating expenses also increased considerably for the nine month periods, up from $2.2 million in 2004 to $3.6 million in 2005. After these expenses, the Company recognized a loss from operations of $0.4 million in the three months ended September 30, 2005 versus income from operations of $0.4 million in the same quarter ended September 30, 2004. For the nine month period ended September 30, 2005, the Company incurred a loss from operations of $2.0 million as compared with a loss of $0.1 million in fiscal 2004. The recent significant investments which the Company has made in both acquired and organically developed businesses are reflected in the above noted operating expense totals. Although these investments have resulted in larger operating losses than have been incurred in the prior year, management has determined that these investments were required in order to lay the foundation for the Company's two operating divisions - SIM and CDM - to develop successfully. The largest components of operating expenses for the first three quarters of 2005 fiscal year were salaries and wages, consulting fees, legal and accounting and other general and administration expenses. These expenses are discussed below. Salaries and Wages - ------------------------------------- --------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- --------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------ ---------- ------------- --------- ---------- ------------ 515,702 394,380 31% 937,411 1,144,904 18% - ------------ ---------- ------------- --------- ---------- ------------ 39 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Salaries and wages in 2005 represent the cost of administration and sales and marketing staff except for certain contractors who are shown as consulting costs. For the three month period ended September 30, 2005, salaries and wages were $0.5 million as compared with $0.4 million during the three month period ended September 30, 2004. For the nine month period ended September 30, 2005, this increase was 18% given that salaries and wages for the nine month period ended September 30, 2005 was $0.9 million as compared to $1.1 million during the nine months ended September 30, 2004. Most of the increase in the three month period ended September 30, 2005 as compared to the same period in fiscal 2004 reflects the additions made to the CDM business in terms of personnel. As mentioned previously, the Company acquired C-Comm Networks in mid-2004 to become the foundation for its messaging business, although the Company has continued to invest in this part of the business since that time. This factor also accounts for the growth in salaries and wages for the nine month period ended September 2005 as compared with 2004. From a sequential perspective, salaries and wages were effectively constant between the three month period ended June 30, 2005 and the three month period ended September 30, 2005 and the Company does not anticipate adding significant costs in this area in the immediate future. Consulting fees - ------------------------------------- --------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- --------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------- -------- -------------- --------- ---------- ------------ 131,096 35,215 272% 511,126 197,179 159% - ------------- -------- -------------- --------- ---------- ------------ For the three month period ended September 30, 2005, consulting fees increased 272% to $0.1 million from $0.0 million during the three month period ended September 30, 2004. For the nine month period ended September 30, 2005, this increase was 159% given that consulting fees for the nine month period ended September 30, 2005 were $0.5 million as compared to $0.2 million during the nine months ended September 30, 2004. Most of the increase in consulting fees paid during the three month period ended September 30, 2005, as compared with the same period in 2004 relates to the amortization of deferred consulting costs which relate to assistance in securing certain financing transactions. The related costs are being amortized over the period which the financing will be in place. The increase in consulting expense for the nine month period ended September 30, 2005 as compared with the nine month period ended September 30, 2004 relate largely to one-time termination costs incurred to exit a consulting contract which the Company determined was no longer producing acceptable returns to the organization. During the quarter ended June 30, 2005, the Company incurred consulting fees of $0.2 million, and therefore from a sequential perspective the Company has managed to lower its expenses in this area. Legal and Accounting - ------------------------------------- --------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- --------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------- -------- -------------- --------- ---------- ------------ 281,182 95,026 96% 628,745 258,481 142% - ------------- -------- -------------- --------- ---------- ------------ 40 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 For the three month period ended September 30, 2005, legal and accounting expenses increased 96% to $0.3 million from $0.1 million during the three month period ended September 30, 2004. For the nine month period ended September 30, 2005, this increase was 142% given that legal and accounting expenses for the nine month period ended September 30, 2005 were $0.6 million as compared to $0.3 million during the nine months ended September 30, 2004. Legal and accounting expense includes legal costs associated with using third party lawyers to act on behalf of the Company in current legal matters (see Note 14 of the Notes to the Unaudited Financial Statements). Additionally, the Company has incurred significant legal costs over the past year in an attempt to gain control over Infolink. During the three month period ended September 30, 2005 the Company incurred approximately $0.2 million relating to the Infolink transaction. Going forward, the Company does not expect legal cost to continue at this rate and should be able to experience a decline in this area. Accounting costs include audit fees and related costs as well as costs incurred to complete periodic regulatory filings and these expenses comprise the balance of this expense. Legal and accounting costs were $0.3 million during the three month period ended June 30, 2005 and therefore have remained stable over the past quarter. General and Administrative - ------------------------------------- --------------------------------- Three months ended September 30 Nine months ended September 30 - ------------------------------------- --------------------------------- 2005 2004 % Change 2005 2004 % Change - ------------ ---------- ------------- --------- ---------- ------------ 289,288 148,524 95% 996,239 539,439 85% - ------------ ---------- ------------- --------- ---------- ------------ For the three month period ended September 30, 2005, general and administrative expenses increased 95% to $0.3 million from $0.1 million during the three month period ended September 30, 2004. For the nine month period ended September 30, 2005, this increase was 85% given that general and administrative expenses for the nine months ended September 30, 2005 were $1.0 million as compared to $0.5 million during the nine months ended September 30, 2004. The large increase in general and administrative expenses from 2004 to 2005 is related partially to the Company's 2005 acquisitions which resulted in a larger infrastructure. General and administrative expenses include amounts spent to operate the Company's various facilities, including rent, office expenses, insurance, and communications, as well as travel expenses. During the nine months ended September 30, 2005, the Company has incurred certain expenses which it does not expect to incur in future periods. Specifically, the Company incurred bad debts of approximately $360,000 to date in fiscal 2005, almost all of which relates to one large customer who went bankrupt. The Company does not have a history of experiencing bad debts and as a result, the Company does not view this occurrence as being indicative of expected future expenses. Additionally, during nine-months ended September 30, 2005, the Company incurred one-time expenses relating to restructuring certain elements of is management team totaling approximately $150,000. General and administrative expenses were $0.7 million during the three month period ended June 30, 2005 and therefore have decreased substantially for the quarter ended September 30, 2005. 41 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Other Income/Expenses
- ---------------------------- ------------------------------------ ---------------------------------- Three months ended September 30 Nine months ended September 30 - ---------------------------- ------------------------------------ ---------------------------------- 2005 2004 % Change 2005 2004 % Change - ---------------------------- ----------- ----------- ------------ ----------- ---------- ----------- Gain (loss) on (74,463) - 100% (74,463) 2,000 38,231% extinguishment of debt - ---------------------------- ----------- ----------- ------------ ----------- ---------- ----------- Interest Income - 25,480 100% - 55,456 100% - ---------------------------- ----------- ----------- ------------ ----------- ---------- ----------- Interest Expense (74,070) (33,204) 123% (189,974) (88,180) 115% - ---------------------------- ----------- ----------- ------------ ----------- ---------- ----------- Foreign Exchange Gain 31,367 37,626 17% (5,928) 19,735 130% (loss) - ---------------------------- ----------- ----------- ------------ ----------- ---------- -----------
During the three month period ended September 30, 2005 the Company incurred a loss on extinguishment of debt of $74,463. This amount represented the fair value of warrants issued during that period to parties to whom the Company was previously indebted to and who agreed to convert their debt to common shares of the Company. As part of this transaction, the Company issued these parties warrants to purchase common shares of the Company which expire in September 2006. In the quarter ended September 30, 2005, the Company expended $74,070 in financial interest which was significantly higher than the $33,204 expensed in the quarter ended September 30, 2004. Interest expense for the nine month period ended September 30, 2005 totaled $189,974 as compared with $88,180 for the nine month period ended September 30, 2004. The increase in interest expense in 2005 as compared with 2004 is a result of interest incurred on a loan from a Canadian chartered bank along with interest incurred in relation to certain short-term loans the Company entered into towards the end of 2004 and into 2005. Foreign exchange gains were $31,367 for the three month period ended September 30, 2005 and represented a loss of $5,928 for the nine month period ended September 30, 2005. This compared with gains of $37,626 and $19,735 for the three and nine month periods ended September 30, 2004 respectively. These balances are a result of the fluctuation of the U.S. dollar relative to the U.K. pound and the Canadian dollar. Going forward, given the disposition of Twincentric, the Company will not continue to be significantly exposed to fluctuations of the U.K. pound. Discontinued Operations In the quarter ended September 30, 2005, the Company recorded a loss from discontinued operations of $15,165 which included a loss on disposal of Twincentric of $16,434 as well as a gain from operations of Twincentric of $1,269. During the nine month period ended September 30, 2005 the Company recorded the same loss on disposal of $16,434 but the loss from operations was $445,032 which provided for a total loss from discontinued operations of $461,466. 42 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 For the three month period ended September 30, 2004, the Company incurred a loss from operations of SilverBirch of $954 along with a gain from operations of Twincentric such that the total gain from discontinued operations was $120,490. For the nine month period ended September 30, 2004, the Company incurred a loss from operations of SilverBirch of $129,450 which was partially offset by a gain from operations from Twincentric such that the net loss from discontinued operations was $20,901. Liquidity and Capital Resources At September 30, 2005, the Company's need for cash included satisfying $6,633,394 of current liabilities. The Company's ability to continue as a going concern is dependent on its ability to raise additional funding through expansion of its current bank facility, an equity injection, a convertible loan and increased sales revenue. The Company anticipates that its cash needs over the next 12 months will consist of $2,500,000 for general working capital. At September 30, 2005, the Company had $32,105 of cash on hand. In addition, certain shareholders have also supported the Company by deferring the timing of certain payments from time-to-time or converting shareholders loans into equity. While there is no legal commitment for them to do so, the Company believes that certain shareholders will continue to support the Company in a similar manner. The failure of the Company to obtain additional debt and equity funding will have a material adverse effect on the Company's business and may force the Company to reorganize, reduce its investment in, or otherwise divest of one or more of the Company's operations, or to reduce the cost of all operations to a lower level of expenditure thereby reducing the Company's expected revenues and net income in 2005 and 2006. Consolidated Statement of Cash Flows Cash on the unaudited consolidated balance sheet decreased from $53,736 in the period ended December 31, 2004 to $32,105 at September 30, 2005. Net Cash Used in Operating Activities Net cash used in operating activities were $1,543,639 and $834,296 in the nine months ended September 30, 2005 and 2004 respectively. In the nine months ended September 30, 2005, the Company had non cash charges in its statement of operations totaling $928,014. This accounts for most of the difference between the Company's loss for the nine month period ended September 30, 2005 of $2,727,539 and its use of cash from operations during the same period of $1,543,639. Over this period the Company also experienced a variety of changes in its various working capital accounts which largely had an offsetting effect, but which in total represented a net source of cash of $360,524. 43 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Net Cash Provided in Investing Activities Net cash used in investing activities was $119,403 for the nine month period ended September 30, 2005. This period's use of cash is largely a result of the DisclosurePlus acquisition and Cratos acquisitions, which together represented a combined use of cash of $268,249. During this period, the Company also purchased capital assets totaling $66,154, incurred $35,000 of business combination costs, and received the proceeds of its ePocket investment referenced above totaling $250,000. For the nine months ended September 30, 2004, the Company used $273,138 from investing activities which all related to the purchase of capital assets. Net Cash Provided by Financing Activities Net cash provided by financing activities was $1,640,261 in the nine months ended September 30, 2005, largely a result of the line of credit the Company secured in order to finance some of the debts of Cratos as well as the issuance for preferred shares. In the nine month period ended September 30, 2004, net cash provided by financing activities totaled $1,161,717, primarily a result of advances received from related parties as well as the advance of a note payable and proceeds received from the issuance of preferred stock. Certain Business Risk Factors A significant portion of the Company's net sales are derived from data integration services and from the sale of enterprise software, which are subject to increasing competition, rapid technological change and evolving customer preferences, often resulting in the frequent introduction of new products and short product lifecycles. Accordingly, the Company's profitability and growth prospects depend upon its ability to continually acquire, develop and market new, commercially successful software products and obtain adequate financing. If the Company is unable to continue to acquire, develop and market commercially successful software products, its operating results and financial condition could be materially adversely affected in the near future. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates and assumptions relate to the recoverability of intangible assets, realization of deferred income taxes, and doubtful accounts. Actual amounts could differ significantly from these estimates. ITEM 3. CONTROLS AND PROCEDURES (A) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-QSB, the Company carried out an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a - 15(e) promulgated under the Securities Exchange Act of 1934, as amended. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. 44 ACTIVECORE TECHNOLOGIES, INC. NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 Conclusions: The Company's Chief Executive Officer has concluded that, subject to the limitation noted above, the Company's disclosure controls and procedures are effective at this reasonable assurance level as of the period covered to timely alert management to material information relating to the Company. (B) Changes in Internal Controls Over Financial Reporting In connection with the evaluation of the Company's internal controls there have been no changes to the Company's internal controls over financial reporting that have materially affected, or one reasonably likely to materially effect, the Company's internal controls over financial reporting. 45 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS James Cassidy and TPG Corporation On March 17, 2000, the Company entered into a consulting agreement with TPG Capital Corporation regarding an inactive reporting shell company that the Company acquired. The consulting agreement provides that one year after the execution of the agreement, ("reset date"), 350,000 common shares issued by the Company under the agreement would be increased or decreased based upon the average closing bid for the Company's stock 30 days prior to the reset date, so the value of the 350,000 shares will equal $500,000. The average closing price of the stock was $14.87 per share. The Company is obligated to issue an additional 30,284 common shares to the consultant as an additional fee. On June 14, 2004, James Cassidy filed a demand for arbitration against the Company seeking, among other things, the reset shares. The Company believes the consultant is not entitled to the reset shares due to the SEC and regulatory problems relating to the acquisition of the shell company and as such has not provided any accrual for this matter in the accompanying consolidated financial statements. The arbitration is proceeding but no final decision has been rendered. Orchestral Corporation On June 13, 2002, the Company canceled its "Power Audit" software distribution agreement with Orchestral (the "licensor"). In November 2002, the licensor commenced a proceeding in Ontario, Canada against the Company which was discontinued while the parties discussed a settlement. That proceeding alleged that the Company had infringed upon the copyright that the licensor maintained, and further that the Company had breached the distribution contract claiming damages of CAD $4,000,000. The licensor also claimed punitive and exemplary damages in the amount of CAD $1,000,000. When a settlement was not concluded, Orchestral commenced a second, identical action in August, 2003. The Company retained legal counsel to defend itself on the basis that there is no merit to the case and even if there was merit, the time frame in which to bring an action under the distribution agreement has expired. The Company has not yet determined if it will counter-sue for return of all proceeds paid to Orchestral during the period of time between 1999 and 2001. Compulsory mediation has occurred in the second lawsuit. The next step would normally be "examination for discovery" then on to a trial. Instead of proceeding with the prosecution of its second lawsuit, Orchestral commenced an Application before the Ontario courts to enforce a settlement which it alleges was reached with the Company during the negotiations between its first and second lawsuits. The court ordered that a settlement was enforceable and that $226,824 was owed by the Company to the licensor. An appeal by the Company of this judgment is pending. An allocation of $226,000 has been made on the Company's financial statements for the settlement claim which is under appeal, however, the Company maintains that all of Orchestral's claims and legal proceedings are frivolous. 46 Cesar Correia and InfoLink Technologies Ltd. From December 2003 to April 2004, the Company was engaged in discussions with certain major shareholders of Infolink Technologies Limited with regard to the potential acquisition of Infolink Technologies Ltd., a public company listed on the Toronto Stock Exchange venture board under the symbol "IFL". During the course of discussions, an offer to purchase was rebuffed by Cesar Correia, the former Chairman of the Board, President and CEO, and 34% shareholder of Infolink. At the time, Mr. Correia was told that the Company would purchase another competitor to Infolink, C Comm Network Corporation. In May of 2004, the Company purchased C Comm. In July of 2004, an unrelated minority shareholder of Infolink commenced an action in Ontario alleging that Mr. Correia has mismanaged Infolink and amongst other things that he had inappropriately obtained funds from Infolink and converted them to his own purposes. The day prior to the court hearing with regard to the minority shareholder action against Infolink, Infolink Technology commenced a proceeding in the same Ontario court against the Company alleging unfair competition as a result of an alleged improper acquisition of confidential information from Infolink and numerous other causes of action. The Company has not yet had to file a defence to any of Infolink's claims against the Company. Meanwhile, the court appointed a monitor and investigator to look into the allegations against Mr. Correia. The court appointed monitor and investigator issued an interim report in October 2004 which found that several of the allegations against Mr. Correia were substantiated. Mr. Correia was removed from the position of Chairman, President and CEO of Infolink and is now an employee of Infolink. The Company believes that Infolink as a corporate entity will not proceed with any action against the Company as the Company believes that the action was commenced as a defensive move by Mr. Correia and now that he has been removed from management of Infolink there is little basis for the action to continue. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On September 23, 2005, the Company issued 3,334,980 common shares to a member of senior management. Of this amount, 1,084,980 common shares related to amounts advanced by this individual to the Company, 2,000,000 common shares relate to services provided by that individual to personally guarantee certain indebtedness of the Company over the next two years and 250,000 common shares related to employment services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $108,098, $220,000, and $37,500 respectively. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 4,750,000 common shares to another member of senior management. Of this amount, 2,500,000 common shares related to amounts advanced by this individual to the Company, 2,000,000 common shares relate to services provided by that individual to personally guarantee certain indebtedness of the Company over the next two years and 250,000 common shares related to employment services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $250,000, $220,000, and $37,500 respectively. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D in an offering made exclusively to accredited investors, as that term is defined in Rule 501. On September 23, 2005, the Company issued 1,000,000 common shares to an unrelated party in exchange for provided financial consulting services over the next year to assist the Company in obtaining further financing. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $150,000. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 850,500 common shares to two unrelated parties as settlement for previously provided professional services. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $85,050. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 975,000 common shares to two unrelated parties in exchange for services to be provided. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $258,750. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 3,787,619 common shares to three unrelated parties who agreed to convert various loans and advances made to the Company. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $378,762. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 250,000 common shares to one member of its senior management team in consideration for employment services rendered. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $37,500. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 1,720,026 common shares to the holder of its Series C Preferred Shares. Of this amount, 257,370 common shares related to interest and penalties relating to late payment and 1,462,656 relate to the mandatory redemption of those Series C shares for common shares. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. On September 23, 2005, the Company issued 285,186 common shares to the holder of its Series A and B Preferred Shares in respect of dividends due to that holder under the terms of those preference shares. The fair value of these common shares, based on the market value on the date they were approved by the Company's board of directors, was $35,648. These shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act. Purchases of Equity Securities During the quarter ended September 30, 2005, the Company repurchased 1,400,000 of its common shares in the connection with its sale of Twincentric Limited:
(d) Maximum (c) Total number of number of Shares Shares Purchased that May Yet Be as Part of Publicly Purchased Under (a) Total number (b) Average Price Announced Plans the Plans or of Shares Paid per Share or Programs Programs Month #1 (July 1, 2005 1,400,000 $0.08 0 0 through July 31, 2005 (1) Month#2 (August 1, 2005 0 0 0 0 through August 31, 2005 Month #3 (September 1, 0 0 0 0 2005 through September 30, 2005
(1) Indicates the per share value of 1,400,000 shares received in connection with the Sale of Twincentric, Limited. Consideration paid by the Company for the shares consisted of all of the stock of Twincentric. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 47 ITEM 6. EXHIBITS AND REPORT FOR FORM 8-K (a) Exhibits: Exhibit No. Description Location - ----------- ----------- -------- Certification by Principal Executive Officer Provided herewith pursuant to 15 U.S.C. Section 7241, as 31.1 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification by Principal Financial Officer Provided herewith 31.2 pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification by Principal Executive Officer Provided herewith 32.1 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification by Principal Financial Officer Provided herewith 32.2 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 48 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. November 14, 2005 ACTIVECORE TECHNOLOGIES, INC. By: /s/Peter J. Hamilton ------------------------------------- President and Chief Executive Officer 49 EX-31.1 2 v029029_ex31-1.txt EXHIBIT 31.1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002* I, Peter J. Hamilton, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report of ActiveCore Technologies, Inc., formerly IVP Technology Corporation, on Form 10-QSB for the period ending September 30, 2005; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 quarterly report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) omitted; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this 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; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's 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's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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 registrant's internal control over financial reporting. Date: November 14, 2005 By: /s/ Peter J. Hamilton --------------------- Name: Peter J. Hamilton Title: President and Chief Executive Officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (September 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. EX-31.2 3 v029029_ex31-2.txt EXHIBIT 31.2 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002* I, Efrem Ainsley, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report of ActiveCore Technologies, Inc. formerly IVP Technology Corporation on Form 10-QSB for the period ending September 30, 2005; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 quarterly report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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 registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this 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; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's 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's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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 registrant's internal control over financial reporting. Date: November 14, 2005 By: /s/ Efrem Ainsley ------------------------ Efrem Ainsley Chief Financial Officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8238 (September 5, 2003) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after April 15, 2005. 51 EX-32.1 4 v029029_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 Quarterly Report of ActiveCore Technologies, Inc. formerly IVP Technology Corporation (the "Company") on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned herby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of the Company, 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 operation of the Company. Date: November 14, 2005 By: /s/ Peter J. Hamilton --------------------- Name: Peter J. Hamilton Title: President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ActiveCore Technologies, Inc. formerly IVP Technology Corporation and will be retained by ActiveCore Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 52 EX-32.2 5 v029029_ex32-2.txt EXHIBIT 32.2 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 Quarterly Report of ActiveCore Technologies, Inc. (the "Company") on Form 10-QSB for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned herby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of the Company, 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 operation of the Company. Date: November 14, 2005 By: /s/ Efrem Ainsley ----------------------- Efrem Ainsley Chief Financial Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ActiveCore Technologies, Inc. formerly IVP Technology Corporation and will be retained by ActiveCore Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 53 -----END PRIVACY-ENHANCED MESSAGE-----