Kaboose Inc. [unaudited] September 30, 2006

Transcription

1 Interim Consolidated Financial Statements Kaboose Inc. The consolidated statements of loss and deficit and cash flows for the three and nine months ended September 30, 2005 have not been reviewed by the Company s auditors. These financial statements are the responsibility of management and have been reviewed and approved by the Company s Audit Committee.

2 INTERIM CONSOLIDATED BALANCE SHEETS [in thousands of dollars] As at As at September 30, December 31, $ $ ASSETS Current Cash and cash equivalents 13,250 11,453 Restricted cash [note 4] 4,471 Accounts receivable [note 10[c]] 4,689 1,817 Inventory Prepaid expenses and other receivables Total current assets 23,427 13,712 Property, plant and equipment 1, Development costs Intangible assets [note 3] 16, Goodwill [note 3] 19, ,774 15,086 LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 4,847 1,359 Deferred revenue Notes payable 168 Current portion of obligations under capital leases Income taxes payable 685 Total current liabilities 5,865 1,556 Obligations under capital lease Future income taxes [note 3] 6,439 Total liabilities 12,450 1,579 Commitments and contingencies [note 3] Shareholders' equity Share capital [note 7[a]] 53,543 19,437 Contributed surplus [note 7[b]] 3, Cumulative translation adjustment 411 (39) Deficit (8,988) (6,790) Total shareholders' equity 48,324 13,507 60,774 15,086 See accompanying notes

3 INTERIM CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT [in thousands of dollars, except per share information] Three-month Nine-month September 30 September $ $ $ $ Revenue [notes 8 and 11] 5,905 1,813 11,752 3,841 Expenses Selling, operating and administrative [notes 8] 5,032 2,128 11,766 4,937 Cost of commerce transactions , Other income [note 5] (65) (65) Interest on Retractable Preference Shares [note 6] Interest expense (income) (187) 1 (352) 9 Amortization , ,068 2,630 13,852 6,259 Loss before income taxes (163) (817) (2,100) (2,418) Provision for (recovery of) income taxes Current income tax Future income tax (206) (250) Net loss for the period (224) (817) (2,198) (2,418) Deficit, beginning of period (8,764) (5,079) (6,790) (3,477) Deficit, end of period (8,988) (5,896) (8,988) (5,895) Loss per share Basic and diluted (0.00) (0.05) (0.03) (0.22) Weighted average number of shares outstanding Basic and diluted [000's] 83,141 16,340 66,999 10,990 See accompanying notes

4 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS [in thousands of dollars] Three-month Nine-month September 30 September $ $ $ $ OPERATING ACTIVITIES Net loss for the period (224) (817) (2,198) (2,418) Add (deduct) items not involving cash: Amortization , Unrealized foreign exchange (gain) loss 62 (8) 68 (4) Stock-based compensation Gain on note payable [note 5] (65) (65) Future income taxes (206) (250) Imputed interest on Retractable Preference Shares Changes in non-cash working capital balances related to operations: Accounts receivable (936) (385) (966) (200) Inventory (57) (46) (186) (77) Prepaid expenses and other receivables (188) (20) (157) (10) Accounts payable and accrued liabilities 682 (186) 446 (310) Income taxes payable (352) (271) Interest payable (59) 59 Deferred revenue (22) (10) 5 (27) Cash used in operating activities (455) (1,306) (2,136) (2,414) INVESTING ACTIVITIES Acquisition of property, plant and equipment (287) (85) (720) (255) Proceeds from (additions to) other long-term assets (191) (71) (196) 20 Restricted cash (4,471) Acquisition [note 3] (671) (24,172) (271) Cash used in investing activities (1,149) (156) (29,559) (506) FINANCING ACTIVITIES Proceeds from issuance of shares (760) 33,610 Proceeds from exercise of options and agents warrants ,408 Repayment of obligations under capital leases (6) (28) Repayment of notes payable (372) (3) (422) (26) Cash provided by (used in) financing activities (822) (3) 33,492 4,382 Net increase (decrease) in cash and cash equivalents during the period (2,426) (1,465) 1,797 1,462 Cash and cash equivalents, beginning of period 15,676 4,512 11,453 1,585 Cash and cash equivalents, end of period 13,250 3,047 13,250 3,047 See accompanying notes

5 1. DESCRIPTION OF THE BUSINESS Kaboose Inc. ["Kaboose" or the "Company"] is a public company traded on the Toronto Stock Exchange under the symbol KAB and was formed under the Canadian Business Corporations Act. The Company is an online media company focused on the family market. The Kaboose properties include Babyzone.com, Kaboose.com, Twopeasinabucket.com, Birthdayinabox.com, Funschool.com and Zeeks.com. The Company's revenues are generated primarily from advertising on the Kaboose.com, Babyzone.com, Funschool.com, Twopeasinabucket.com and Zeeks.com properties and commerce transactions from the Birthdayinabox.com and Twopeasinabucket.com properties. 2. BASIS OF PRESENTATION The accompanying interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ["GAAP"] for interim financial statements. The disclosures contained in these interim consolidated financial statements do not include all requirements of GAAP for annual consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, These interim consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the financial position of the Company as at and 2005 and the results of operations and cash flows for the three-month and nine-month periods ended and These interim consolidated financial statements are based upon accounting policies consistent with those used and described in note 2 to the December 31, 2005 annual consolidated financial statements. 1

6 3. BUSINESS COMBINATIONS 2006 Acquisitions During the nine-month, Kaboose completed the acquisitions of BabyZone.com Inc. ["BabyZone"] and Two Peas Inc. ["Two Peas"]. These acquisitions were accounted for under the purchase method of accounting with the results of operations of the acquired businesses being included in the accompanying interim consolidated financial statements since the date of acquisition. [a] BabyZone On June 12, 2006, the Company acquired all the issued and outstanding shares of BabyZone for cash consideration of $22,966 [US$20,913]; 1,886,360 warrants and certain additional payments up to a maximum amount of US$15,000. Each warrant gives the holder the right to purchase one Common Share of the Company at the price of $1.00 per share and has a term of 10 years. The fair value of the warrants has been estimated at $2,217. The $22,966 cash consideration amount is subject to certain working capital and assumed liability adjustments. The actual calculation and allocation of the purchase price was based on the fair value of identifiable assets including intangible assets acquired and liabilities assumed at the effective date of the acquisition and other information available at that date and the balance being allocated to goodwill. The Company engaged an independent valuator to undertake a valuation of the intangible assets acquired on the acquisition. Upon achieving certain revenue milestones, the Company is required to pay the former shareholders of BabyZone amounts up to US$4,500 and US$10,500 for fiscal years 2006 and 2007, respectively. The Company has the option to settle a certain portion of these earn-out amounts by issuing Common Shares. These earn-out amounts are determined as follows: [i] in respect of the year ended December 31, 2006, if revenue exceeds US$4,400, then one third of revenues up to US$6,000, and 100% of revenues in excess of US$6,000 up to US$8,500; [ii] in respect of the year ended December 31, 2007, subject to revenue exceeding US$6,000, one quarter of revenues up to US$8,000; and [iii] in respect of revenues for the year ended December 31, 2007, 100% of the revenues in excess of US$8,000 up to US$16,500 and up to US$3,000 of confirmed insertion orders received prior to January 15, 2008 for the 2008 calendar year, for a maximum payment of US$8,500. 2

7 With respect to the amounts earned under [i] [with respect to revenues in excess of US$6,000] and [iii] above, a minimum of 20% is payable in cash with the remainder, at the Company's option, payable in Common Shares using the market price on the date of settlement. All other earn out amounts are payable in cash. During the three-month and nine-month periods ended, the Company has accrued earn-out payments amounting to $2,114 to the former shareholders of BabyZone which are included in accounts payable and accrued liabilities and goodwill. This accrual is based on BabyZone s actual revenues through. BabyZone is an online destination focused on pregnancy and parenting and the only fully personalized and localized parenting destination, providing content, tools and community features for new and expectant parents. [b] Two Peas On May 11, 2006, Kaboose acquired the assets of Two Peas, for cash consideration of $661 [US$600]. The actual calculation and allocation of the purchase price was based on the fair value of identifiable assets including intangible assets acquired and liabilities assumed at the effective date of the acquisition and other information available at that date with the balance being allocated to goodwill. Upon achieving certain revenue and profit milestones, the Company is required to pay the former shareholders of Two Peas amounts up to US$700 and US$700, respectively, during the first twelve-month and the following twelve-month periods after the acquisition. Two Peas, which carries on business as Twopeasinabucket.com, is an online scrapbooking community. In addition to operating an online storefront, Two Peas offers its users a number of services that enhance their scrapbooking hobby. 3

8 The allocation of purchase price for these acquisitions is preliminary, as the Company has not yet finalized the valuation of the intangible assets acquired. Any changes to the valuation of intangible assets may also impact the amounts allocated to future tax liabilities. The Company expects to complete the allocation of the purchase price prior to the completion of the Company's consolidated financial statements for the year ended December 31, The allocation of the purchase price is summarized as follows: BabyZone.com Two Peas Inc. Inc. Total $ $ $ Assets Accounts receivable 1, ,905 Prepaid expenses Inventory 6 6 Other assets Property, plant and equipment Intangible asset Customer relationships 5,492 5,492 Brand name 5, ,930 Technology Content 4,613 4,613 Goodwill 18, ,596 Liabilities Accounts payable accrued liabilities (919) (10) (929) Income taxes payable (956) (956) Deferred revenue (265) (265) Capital lease (124) (124) Note payable (410) (410) Future tax liability (6,570) (6,570) 27, ,503 Consideration Cash paid, net of cash acquired 22, ,627 Warrants issued 2,217 2,217 Expenses related to acquisition Earn-out payments accrued 2,114 2,114 27, ,503 The intangible assets representing brand name, customer relationships, technology and content are amortized over 10 years, 8 years, 3 years and 8 years, respectively. 4

9 2005 ACQUISITION On February 25, 2005, the Company completed the acquisition of the majority of the assets of Birthday-in-a-box, Inc. ["Birthday"]. The purchase price was satisfied through payment of cash in the amount of $271. This business combination has been recorded under the purchase method of accounting with the results of operations of the acquired business being included in the consolidated financial statements since the date of acquisition. The assets acquired and liabilities assumed at fair value, as of February 25, 2005, were as follows: Inventory 184 Other current assets 6 Property, plant and equipment 42 Domain name 46 Goodwill 531 Current liabilities (521) Obligations under capital leases (17) Cash consideration RESTRICTED CASH The Company had $4,471 [US$4,000] of cash held in an escrow account as part of the performance payments payable to the former shareholders of BabyZone related to its acquisition. The funds are not available for general purposes. Interest earned on restricted cash accumulates to the benefit of the Company. $ 5

10 5. NOTES PAYABLE During 2004, the Company entered into an agreement to purchase certain assets including a proprietary search engine and website for camps and other outdoor educational programs. The consideration for the assets and the search engine was $258 [US$200] and the payment of which was an interest-free promissory note payable on an earn-out basis over the twenty-four month period following September 1, The earn-out payments were based on a percentage of membership revenue derived from the website. The asset purchase was accounted for using the purchase method whereby the purchase price is allocated based on the relative fair value of the assets. During the three-month, the twenty-four month earn-out period expired and the remaining note payable of $159 related to this transaction was reversed. The related asset was also considered to be impaired and was written down to nil. The net impact on income was a gain of $65 which is included in other income. During the three-month, the Company settled the outstanding balance of other notes payable amounting to $ RETRACTABLE PREFERENCE SHARES On June 22, 2004, the Company issued 4,466,670 Class B Convertible Floating Preference Shares ["Retractable Preference Shares"], pre-stock split, for total proceeds of $3,350. Until May 15, 2008, the holders had the right to exchange these Retractable Preference Shares for Class A Common Shares at the rate of one Class A Common Share for one Retractable Preference Share. After May 15, 2008, the Company had the option of converting the Retractable Preference Shares into Class A Common Shares at the same rate. The holders were entitled to one vote for each Retractable Preference Share. The Retractable Preference Shares earned a dividend payable on a semi-annual basis calculated as the lower of 8% per annum and the prime rate plus 2.75% per annum. The Retractable Preference Shares were redeemable for cash at the option of the holders on May 15, 2008 at the principal amount plus any accrued and unpaid dividends. The proceeds of the Retractable Preference Shares were allocated between a liability portion and an equity portion. The liability portion was determined based on the estimated fair value of an equivalent non-convertible loan and the equity portion representing the holders'fixed price conversion option was determined using the residual method. Interest expense on the Retractable Preference Shares was accrued at an effective rate of 16% per annum and was charged to the consolidated statements of loss and deficit as incurred. During the three-month and nine-month periods ended, interest expense on the Retractable Preference Shares was nil 6

11 and nil, respectively [three-month and nine-month periods ended September 30, $107 and $313, respectively]. All outstanding Retractable Preference Shares were converted into common shares in November SHAREHOLDERS' EQUITY [a] Share capital Common shares: Authorized - unlimited number Issued and outstanding Common shares # $ Balance, December 31, ,337,263 19,437 Issued for cash consideration [i] 26,570,700 37,199 Issuance cost [i] (3,589) Exercise of stock options and agents warrants [ii] 417, Transfer from contributed surplus on exercise of stock options [note 6[b]] 164 Balance, 83,325,160 53,543 [i] During June 2006, the Company issued 26,570,700 common shares through a public offering at a price of $1.40 per share. Total cash issuance costs were $3,589 [threemonth June 30, $3,571, three-month September 30, $18], resulting in net proceeds of $33,610. 7

12 [ii] During the three-month, 60,166 stock options [threemonth September 30, nil], and 298,281 broker warrants [three-month period September 30, nil] were exercised and common shares were issued. During the nine-month, 110,166 stock options [nine-month September 30, nil], 298,281 broker warrants [nine-month period September 30, nil] and 8,750 agents warrants [nine-month September 30, nil] were exercised and common shares were issued. [b] Contributed surplus A summary of the changes in contributed surplus for the nine-month is as follows: Balance, December 31, Stock-based compensation 406 Transferred to common shares upon exercise of options, broker warrants and agents warrants (164) Warrants issued to BabyZone shareholders as part of purchase price 2,217 Balance, 3,358 [c] Stock options The Company has established a stock option plan for its directors, officers, employees and consultants, whereby options to a maximum of 11,728,683 common shares may be granted subject to certain terms and conditions. All stock options granted under the plan that have not been exercised on or before the fifth anniversary of the grant will expire on that date subject to earlier termination upon the optionee ceasing to be an officer, director, employee or consultant of the Company. $ 8

13 Changes in the number of stock options for the nine-month period, with their weighted average exercise prices are summarized below: September 30, 2005 Weighted Weighted average average Number exercise Number exercise of options price of options price # $ # $ Outstanding, beginning of period 5,855, ,959, Granted 1,342, ,895, Forfeited (120,334) 0.73 Exercised (10,166) 0.59 Outstanding, end of period 7,066, ,855, Options exercisable, end of period 3,935, ,012, The table above excludes 150,000 options and 56,150 agents warrants related to the November 2005 reverse takeover of Iron Springs Capital Corp. ["Iron Springs"]. These options and agents warrants that would have been previously granted to officers, directors and agents of Iron Springs were converted to Kaboose options and agents warrants upon completion of the reverse takeover. Each option and agent warrant is exercisable at $0.25 for one common share and they expire on August 7, 2010 and July 13, 2007, respectively. Subsequent to the reverse takeover and prior to December 31, 2005, 50,000 options were exercised. During the nine-month, 100,000 stock options related to the November 2005 reverse takeover of Iron Springs Capital Corp. and 8,750 agents warrants were exercised for aggregate proceeds of $27. As at, the remaining 47,400 agents warrants are outstanding and exercisable. The fair value of stock options granted during the period is determined using the Black-Scholes stock option pricing model and is amortized into the interim consolidated statements of loss and deficit on a straight-line basis over the stock option's vesting period. 9

14 The assumptions used and the resulting fair value of the stock options granted are as follows: Three-month Nine-month September 30 September Fair value of stock options granted during the period $150 $420 $1,375 $556 Weighted average assumptions Risk-free rate 5.5% 3.5% 5.5% 3.5% Dividend yield 0% 0% 0% 0% Volatility 125% 85% 122% 85% Expected option life 5 years 5 years 5 years 5 years 8. NON-MONETARY TRANSACTION During 2005, the Company entered into a barter arrangement with a customer whereby advertising on the Company's online media properties and web development services are being provided in exchange for reciprocal advertising space on the customer's product labels. The arrangement commenced during September 2005 and ended during July The transaction is recorded at the fair value of the advertising provided by the Company. The fair value of the advertising is based on the Company's own historical cash-based advertising transactions with other advertising customers unrelated to the parties of this barter arrangement. During the three-month and nine-month periods ended, the Company included in both revenue and selling, operating and administrative expenses an amount of approximately $38 and $331, respectively [three-month and nine-month periods ended September 30, $115 and $115, respectively] related to this non-monetary transaction. 10

15 9. RELATED PARTY TRANSACTION During the three-month and nine-month periods ended, the Company charged rent of $3 and $9, respectively, to a corporation controlled by an officer and director of the Company. During the three-month and nine-month periods ended September 30, 2005, the Company paid rent of $27 and $83, respectively, to a corporation controlled by an officer and director of the Company. All related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by both parties. 10. FINANCIAL INSTRUMENTS [a] Fair value The fair values of financial instruments, which include accounts receivable, accounts payable and accrued liabilities, note payable and obligations under capital leases approximate their carrying values due to their short-term nature. [b] Interest rate risk The Company has minimal exposure to interest rate risk as the Company is largely funded by equity. However, the Company earns interest income on its investments and has interest rate risk due to exposure relating to the change in the bank's prime rate. [c] Credit risk As at, the two largest amounts due from customers accounted for 13% of the Company's total accounts receivable balance [December 31, %]. [d] Foreign currency risk The Company's activities result in exposure to fluctuations in foreign currency exchange rates due to sale and purchase transactions in a foreign currency. The Company does not use derivative instruments to hedge its currency risk. 11

16 As at, of the Company's accounts receivable and accounts payable and accrued liabilities, 97% [December 31, %] and 77% [December 31, %], respectively, are denominated in U.S. dollars. During the three-month and nine-month periods ended, approximately 97% and 97%, respectively, [three-month and nine-month periods ended September 30, % and 97%, respectively] of revenue and approximately 82% and 68%, respectively, [three-month and nine-month periods ended September 30, % and 53%, respectively] of expenses were incurred in U.S. dollars. 11. SEGMENTED INFORMATION The Company's operations are conducted in two reportable operating segments: online advertising and commerce transactions. The accounting policies of the segments are the same as those described in the summary of significant accounting policies of the Company's annual audited consolidated financial statements for the year ended December 31, Management evaluates the reportable segments' performance based on revenue. There are no transactions between the two reportable segments. Reportable segment information Three-month Nine-month September 30 September $ $ $ $ Revenue Online advertising 4,686 1,129 8,379 2,420 Commerce transactions 1, ,373 1,421 5,905 1,813 11,752 3,841 Net income (loss) Online advertising (289) (891) (2,534) (2,581) Commerce transactions (224) (817) (2,198) (2,418) 12

17 Geographical information Three-month Nine-month September 30 September $ $ $ $ Revenue United States 5,745 1,755 11,415 3,713 Canada ,905 1,813 11,752 3,841 Property, plant and equipment, development costs and intangible assets are located as follows: September 30, December 31, $ $ United States 17, Canada The Company's entire goodwill of $19,306 relates to advertising and commerce transaction service operations located in the United States. 12. COMPARATIVE INTERIM CONSOLIDATED FINANCIAL STATEMENTS The comparative interim consolidated financial statements have been revised from statements previously presented to conform to the presentation of the 2006 interim consolidated financial statements. The Company has revised the revenue and expenses for the nine-month September 30, 2005 in connection with the acquisition of Birthday due to a difference in the legal and accounting effective date of the acquisition transaction. This change has a nominal effect on the loss, and revenue and expenses have been reduced by $305 for the nine-month September 30,