SIVAULT SYSTEMS, INC. SVTLQ description of business
SIVAULT SYSTEMS, INC. (SVTLQ) - Description of business
Market for Common Equity and Related Stockholder Matters 216.
Jul 30, 2018
Description of Property 203. Legal Proceedings 204. Submission of Matters to a Vote of Security Holders 20PART II5. Management's Discussion and Analysis or Plan of Operation 237. Financial Statements 358. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 358A. Controls and Procedures 358B. Other Information 36PART III9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 3710. Executive Compensation 4311. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 4612. Certain Relationships and Related Transactions 4813. Exhibits 4914. Principal Accountant Fees and Services 50 Index to Consolidated Financial Statements 3SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis report contains forward-looking statements within the meaning of Section21E of the Securities Exchange Act of 1934. These statements can be identifiedby the use of forward-looking terminology such as "expects", "anticipates","intends", "believes" and similar language, or the negatives thereof, anddiscussions of our strategy, future revenues and future costs. You are cautionedthat our business and operations are subject to a variety of risks anduncertainties and, consequently, our actual results may differ materially fromthose anticipated or projected by any forward-looking statements. Some of thefactors that might cause or contribute to such differences include thosediscussed in Item 6. Management's Discussion and Analysis or Plan of Operation. "Unless the context otherwise requires, all references in this report to (i)"we", "us" or the "Company", or words of similar import, refer to SiVaultSystems, Inc., a Nevada corporation, together with its subsidiaries and(ii)share information reflect a 4:1 forward stock split effected in August 2000and a 1:20 reverse stock split effected in June 2004. 4 PART IITEM 1. DESCRIPTION OF BUSINESS.RECENT DEVELOPMENTS The following significant events occurred during the fiscal year endingJune 30, 2005 and subsequent to the year then ending:SIVAULT ANALYTICS AND VIAQUO ACQUISITION; NAME CHANGE In July 2004, we completed the acquisition of SiVault Analytics Inc.("SiVault Analytics"), a private Delaware corporation that provides securestorage and retrieval of signed documents and biometric signature-basedauthentication for processing of online transactions. Its services are designedto be compliant with regulations and standards in the retail and healthcareindustries for authentication, authorization, transmission and storage of data. The acquisition was completed by means of a share exchange in which weissued 4,000,000 of our shares of common stock to the stockholders of SiVaultAnalytics in exchange for all of the outstanding stock of SiVault Analytics. Ourshares were valued in the transaction at $1.80 per share (market price as ofJuly 9, 2004), or $7,200,000 in the aggregate. We issued 140,000 of our commonshares valued at $1.60 as finders fees in conjunction with this acquisition.Following the acquisition, we merged SiVault Analytics into our company andchanged the name of our company to SiVault Systems, Inc. and our stock tradingsymbol to SVTL.OB. On November 30, 2004, the Company completed the acquisition of all theprincipal assets of Viaquo Corporation ("Viaquo"). Viaquo was a leadingdeveloper of computer security technology. Pursuant to the deal, the Company purchased substantially all of assetsof Viaquo related to Viaquo's ViaSeal Access Control Business, includingphysical equipment, technology, products and intellectual property, in exchangefor 3,050,000 shares of the Company's restricted common stock valued at $2.35per share (average market price for the four trading days around November 30,2004), of which 750,000 of the shares were issued and delivered to Viaquo atclosing; 2,050,000 of the shares were placed in escrow to be held until theearlier to occur of (i) the issuance of a U.S. Patent for certain U.S. PatentApplications acquired by SiVault, or (ii) the abandonment by SiVault of the U.S.Patent Application following final rejection thereof by the U.S. Patent andTrademark Office; and the remaining 250,000 shares were placed in escrow to beheld until the earlier to occur of (1) the issuance by the European PatentOffice ("EPO") of a decision to grant a European Patent with respect to anEuropean Patent Application acquired by SiVault, or (ii) the abandonment bySiVault of European Patent Application following a final refusal by ELP to grantthe European Patent. The core technology and intellectual property purchased representsViaquo's patent pending ViaSeal(TM) security technology. ViaSeal providescryptographic protection of electronic data for distribution or access bymultiple parties. 5NEW MANAGEMENT AND APPOINTMENT OF BOARD OF ADVISORS Following the SiVault Analytics acquisition, certain principals andmanagement of SiVault Analytics were elected as members of our management andBoard of Directors. Emilian Elefteratos was elected President and ChiefExecutive Officer, Igor J. Schmidt was elected Chief Strategy Officer, StevenPollini was elected Vice President-Engineering and Operations and Alexander Gelfwas elected Vice President-Analytics. Effective August 6, 2004, Messrs.Elefteratos and Schmidt were elected directors of our company. Effective August 24, 2005, Mssrs. David Dalton and Gerard Muneraresigned from the Company's Board of Directors and Mr. John Mahoney wasappointed to the Board of Directors. Effective September 1, 2005, Mssrs GilAmelio and Emilian Elefteratos resigned as a member of the Board and onSeptember 16, 2005, Mr. Anthony Low Beer was appointed to the Board. EffectiveNovember 21, 2005, Mr. Orhan Sadik-Khan and Mr. Michel Kadosh were appointed tothe Board of Directors. Effective November 21, 2005, John Mahoney was namedacting Chief Executive Officer, Anthony Low-Beer was named Chairman of theBoard; Mr. Wayne Taylor will continue as Chief Financial Officer of the Company.RESTRUCTURING OF DEBT The Company recently commenced a program to restructure its debt. Therestructuring of Company debt, and debt of its wholly-owned subsidiary, LightecCommunications, Inc., is expected to be completed by the end of the fiscal yearending June 30, 2006.Restructuring of Longview Debt. The Company and three Longview Funds("Longview") have agreed to restructure $2,588,237 of Longview Convertible Notesas follows.All outstanding debt of the Comany to Longview to be restructured as follows: (a) The Company to pay $400,000 to Longview on or before January 31, 2006; Longview was paid $400,000 in February 2006 - there was no notice of default. (b) The Company to pay an additional $400,000 to Longview on or before April 30, 2006; 6 (c) Convertible Notes of Longview to be adjusted pro rata as follows: (i) Principal amount to be reduced to $410,000; (ii) Fixed Conversion Price to be reduced to $.20 per share; (iii) SiVault granted a one year redemption right with respect to any shares issued at $.25 per share provided that the Company has not had an event of default since November 21, 2005; (d) Balance of debt to be forgiven if Company is not in default with the forgoing terms and conditions. In addition to the settlement of Longview, the following notes, loans,accounts payable and accrued liabilities, and lawsuits as of June 30, 2005 weresettled by payment of cash, establishing an installment payment schedule, andthe issuance and planned issuance of common stock and stock warrants. Approximate amount owed as of Description June 30, 2005 Approximate Settlement Summary ----------- ------------- -----------------------------------Notes and loans - non-related parties $1,450,000 Installment payables of $570,000 6.5 million shares of common stock valued at $l million, and 580,000 warrants valued at $300,000,and an additional 760,000 repriced warrantsNotes and loans - related parties 550,000 3.4 million shares of common stock Valued at $450,000Accounts payable and accrued liabilities 1,800,000 $120,000 paid in cash installment payables of $560,000, and 2.3 Million shares of common stock valued at $460,000WonderNet Arbitration 350,000 Installment Payables of $350,000(included in accounts payableand accrued liabilities ------------- $4,150,000 -------------The Company expects to complete its restructuring and settling of its notes,loans, and accounts payable, and amounts due to the Company's former employeesby the end of its fiscal year ending June 30, 2006.PRIVATE PLACEMENTSince the end of the fiscal year ending June 30, 2005, the Company has completedtwo private placements in which the Company raised gross proceeds ofapproximately $2.2 Million. The Company sold an aggregate of approximately13,900,000 of its common shares in private placements at per share pricesaveraging $.10 and .45 per share.NEW BUSINESSAs part of the Company's restructuring plan, the Company has been activelypursuing agreements to market the Company's software products. In January 2006,the Company entered into a licensing agreement with Hypercom Corporation("Hypercom"). Hypercom is to pay the Company a licensing fee of 30% of thetransaction fee that pertains to the Company's products. The current chieftechnology officer of Hypercom was a former officer and member of the Board ofDirectors of the Company during the fiscal year ended June 30, 2005.BUSINESSWe are engaged in the commercialization of technologies designed to implementsecure electronic solutions and retrieval of signed documents and biometricsignature-based authentication for electronic transactions. Our technologysolutions have evolved beyond the development stage and we are positioned fordeployment in production environments. We intend to provide turnkey solutionscombining the advantages of these technologies to facilitate safe, efficient andsecure electronic transactions and data access.Through our wholly-owned subsidiary, Lightec Communications, Inc. ("Lightec"),we also provide design, installation and technical support services forinformation technology systems. 7For the year ended June 30, 2005, we earned revenue of $1,602,013 and incurred anet loss of $23,900,354. In the prior fiscal year, we earned revenue of$7,131,437 and incurred a net loss of $3,406,660. Substantially all of ourhistorical revenue has been generated from Lightec.By enabling the transition to electronic transactions from traditionalpaper-based transactions, we believe that our products and services will promotereduced costs, quicker response times, lower levels of mistakes and fraud andthe facilitation of other benefits not feasible for paper-based transactionssuch as instant transaction query capability, data mining for numerous businessand research purposes and more efficient data storage.STRATEGY Our objective is to become a leading provider of technology solutions toassist in the migration of paper transactions to electronic transactions. Withour recent management changes and expanded technology capabilities following theacquisition of SiVault Analytics, we have revised our business strategy to takeadvantage of our core competencies. Key elements of our strategy include: Focus on Retail and Healthcare Markets. While our technology solutions areappropriate for numerous markets, including retail, healthcare, banking andgovernment, we believe the United States retail and healthcare markets representthe most immediate opportunities for our company due to their size, marketinefficiencies and regulatory changes requiring increased data availability andhigher levels of security. As such, our initial target markets will be retailand healthcare. For retail, we will offer our branded product ReceiptCitypurchased in March 2004 from a subsidiary of Symbol Technologies. ReceiptCity isa software solution designed to store electronic copies of signed customerreceipts to facilitate billing inquiries, lower the cost of dispute resolutionand decrease the number of charge-backs that otherwise would occur due tomerchants' inability to timely locate and present proof of transactions. Forhealthcare, we offer an electronic prescription service utilizingbiometrically-authenticated signatures, thereby reducing prescription fraud andfilling errors and facilitating compliance with new standards relating tomedical record access. Transaction-Based Revenue Model. To minimize up-front costs tocustomers, we price our services on a per transaction basis, depending on volumeand type of transaction. Subject to financing availability, we may also offerour customers leasing and financing options for necessary hardware and software,to further offset implementation costs. Acquire New Technologies and Integrate with Existing Technologies. Ourability to offer turnkey solutions depends on our ability to offer a number oftechnologies and applications in a comprehensive service package. We devoteconsiderable resources to ensuring that our existing technologies are compatibleand well integrated and we will continue to seek out and integrate newtechnologies as appropriate to support our existing and planned product andservice offerings. 8 Leverage Our Lightec Business. Lightec has historically provided asignificant source of our cash funding needs. During the year ended June 30,2005, substantially all of our revenue was generated by Lightec. In addition, webelieve that Lightec's system design and installation business and our othertechnology offerings can be synergistic in terms of mutually beneficialmarketing opportunities. Protect Our Intellectual Property. Protection of our intellectual propertyis important to generating maximum revenue from our products and services andmaximizing the value of our business in general. To that end, we seek, wheneverpracticable, to obtain patent and other intellectual property protection for ourtechnologies and we seek to ensure that others from whom we license importanttechnologies do the same. We currently have pending three United Statesprovisional patent applications relating to technologies owned by us. We alsoown and are considering applying for additional trademarks and/or copyrights.OUR CORE TECHNOLOGIES Our core technologies are comprised of the following:- Biometric Signature Authentication Technology - software designed to recordand analyze biometric parameters relating to a person's handwritten signature.Parameters include image, speed, stroke sequence, pen tilt and acceleration.Recorded information is stored for each registered signer in a dynamic databasethat changes over time to reflect subtle changes in each registered signer'ssignature. Commercial applications of this technology include document approval,verification of the identity of users participating in electronic transactionsand securing log-in access to computer systems or protected networks. Keycomponents of this technology are licensed from Communications IntelligenceCorporation.- Access Control Technology - a distributed access management software solutionthat permits only authorized users to access (put in or take out) protectedinformation being shared among groups of all sizes. The system uses accesscredentials (permissions) that apply to each individual file (or field on an XMLform) and distributed to each organizational member, and which are automaticallyrefreshed over the Internet. This access control technology enables members tosecurely encrypt files or XML fields for use by groups that are defined byaccess credentials issued to each member by security administrators. Onlyindividuals with the correct access credentials may consume (decrypt) or create(encrypt) the data. Individual members are assigned multiple credentials withread and/or write permissions according to their role in the organization. Onceencrypted by the creator- e.g., the central database sending a report to aninsurance company-the data remains protected by strong encryption (typically AESencryption) and routed and/or stored to and from a number of locations beforethe properly authorized person with the read credential opens it to access thedata. We license this technology on an exclusive basis in the healthcare fieldfrom Viaquo Corporation. 9- Service Oriented Architecture - Our technology solutions employ a number ofelectronic functionalities, including biometric authentication, databasemanagement, transaction processing, financial settlement, data communication,secure data access and storage, data mining and Internet-based serviceprovision. We enable these functionalities and related system components tocommunicate with one another through a service oriented architecture designedfor fast and easy integration of functionalities, as well as scalability toaccommodate growth and adaptation to changing market needs. Our systemcomponents include Sun database servers, Solaris database operating system, EMCstorage area network, Hewlett Packard blade application and web servers, Oracledatabase management software, InterNap primary production communication link(network provider) and Fiorano enterprise service bus. Our enterprise servicebus is a key component of our system architecture as it provides the basicconnectivity backbone. It is designed to interoperate with a variety ofdisparate application servers simultaneously, potentially smoothing overtechnical differences and also providing services for communication andintegration. Our turnkey solutions may incorporate some or all of these technologies, aswell as other proprietary technologies that we may either license or otherwiseobtain for the benefit of our customers, depending on the needs of theparticular application.OUR PRODUCTS AND SERVICES While our core technologies have numerous applications, and can becustomized to suit the needs of particular customers, we intend to focus on thefollowing product and service offerings:ReceiptCity - is a branded software solution targeted to retail enterprises thatstores electronic copies of signed receipts of customers to facilitate billinginquiries, lower the cost of dispute resolution and decrease the number ofcharge-backs that otherwise would occur due to merchants' inability to timelylocate and present proof of transactions. This product can be combined with ourproprietary data analysis technology to enable merchants to:- Create targeted advertisements delivered directly to credit card terminals while the customer is waiting for credit card authorization.- Recognize and track customers' shopping patterns- Track efficiency of marketing campaigns and promotions. To support ReceiptCity, merchants must have credit and debit cardprocessing capability, point-of-sale terminals capable of biometric signaturecapture and Internet connectivity. We may enter into arrangements with thirdparty providers of these facilities to offer them to our potential customers.ExpandedOfferings - Other products and services we are offering to our target marketsinclude: 10- Biometric signature registration- Biometric signature authentication per transaction- Database security protection(access control)- Digital pen and paper for forms input - The product consists of a digital penthat contains ink and a small camera that captures pen strokes and puts theminto digital form. After docking the pen in its cradle, the data isautomatically integrated into the enterprise data infrastructure. It is targetedto businesses with processes that rely heavily on filling out paper forms,including retail and healthcare businesses.e-Prescriptions - We plan to offer an electronic prescription solution utilizingbiometrically-authenticated signatures, thereby reducing prescription fraud andfilling errors and facilitating compliance with new standards relating tomedical record access. The service will provide a systematic way to capturesignatures of medical doctors who prescribe medication, utilizing devices suchas signature pads, pen computers and person digital assistants (PDAs). Onceauthenticated, a secure prescription with a unique number will be created andcentrally stored. A hard copy of the prescription can be given to the patient,and/or the prescription can be routed in electronic form directly to thedispensing pharmacy. To the extent permitted by law, the system would storeprescription-related data, and allow access by pharmacies, physicians and othergroups involved in healthcare delivery, only to the extent authorized. Through our Lightec subsidiary, we offer design, installation and technicalsupport for information technology systems. See "- Lightec Communications. "TECHNOLOGY LICENSES Our technology platform is comprised of a number of technologies, severalof which we license from others. Set forth below is a summary of the materialtechnology license agreements to which we are a party. Our rights to thesetechnologies are dependent on our continued fulfillment of our responsibilitiesunder these agreements, including our satisfaction of royalty and license feepayment obligations. 11Communications Intelligence Corporation Effective May 13, 2004, we entered into an agreement with CommunicationsIntelligence Corporation ("CIC") pursuant to which we were granted a worldwide,non-exclusive license to use and incorporate CIC's iSign software and todistribute the licensed software embedded in our software or as part of oursolution. In consideration for the license, we agreed to pay CIC a fee equal to33.33% of all CIC-based transaction fee proceeds. For each unit shipped by us ina reseller capacity, we agreed to pay CIC 75% of its then published list price.For CIC support as contemplated by the agreement, we agreed to pay an additional10% of the license fees otherwise payable. The term of the agreement is threeyears, subject to automatic one-year renewals if not terminated at least onemonth prior to the scheduled renewal date. In addition to standard terminationprovisions, the agreement is terminable by CIC if we have not generated revenueto CIC within 180 days of the effective date or if, in CIC's reasonablejudgment, we do not make continual reasonable commercial use of the licensedtechnology. @POS.com Pursuant to an agreement dated March 2, 2004, we acquired assets of@POS.com, Inc., a subsidiary of Symbol Technologies, Inc., exclusively relatedto the business of capturing sales receipt transaction data for the purpose ofproviding access to such data on an ASP basis. Included in the acquired assetsare the ReceiptCity.com software, hardware, a variety of hosted services relatedthereto and trademarks for the names "Crossvue" and "MyReceipts". The businesswas formerly conducted by the seller's wholly-owned subsidiary, Crossvue, Inc.We also acquired a non-exclusive worldwide, non-trasferable, non-sublicensablelicense under the seller's patent claims necessary to operate the acquiredsoftware and to make, use, sell and have sold the hosted software. Under theagreement, we granted @POS a non-exclusive, worldwide, perpetual, sublicensablelicense under copyright in all acquired software developed by @POS, providedthat for two years from closing @POS agreed not to sublicense the licensedsoftware as a substantially complete system for providing ASP functionalitysimilar to the hosted services. In consideration for the acquired assts, weagreed to pay the following consideration to @POS: For the year ending December31, 2005, 10% of net receipts accrued by us for that year, for the year endingDecember 31, 2006, 8% of net receipts accrued by us for that year, and for eachyear thereafter, 6% of net receipts accrued by us for that year, provided thatthe rate shall drop to 5% if and when patents under which the license is grantedare no longer valid or enforceable. The agreement has no set term and noprovision for termination following closing. 12Intelli-Check On August 24, 2004 we entered into a software license agreement withIntelli-Check Inc., a Delaware corporation, pursuant to which we were granted anonexclusive, nontransferable right to use the licensed software in connectionwith the sale, by us or distributors, of our signature verification technology.In consideration for the license, we agreed to pay Intelli-Check a fee of $475for each system that uses the licensed software, as well as additional amountspursuant to agreed upon pricing for hardware and other products and servicesoffered by Intelli-Check as well as software updates. The agreement has no fixedterm and is cancelable by us for any reason upon 60 days' notice and byIntelli-Check only upon breach by us that remains uncured following two months'notice. 13Hypercom Effective February 13, 2006, we entered into a Product Technology andLicense Agreement (the "Agreement") with Hypercom Corporation, a corporationengaged in the design, manufacture and sale of electronic payment solutionsworldwide (NYSE: HYC). Pursuant to the Agreement, SiVault granted Hypercom a perpetual,worldwide, non-exclusive license to demonstrate, market and distribute to itscustomers, distributors, resellers and other end-users SiVault's products andservices, including SiPay, Sipay, Mobile SiSign, SiSeal, ReceiptCity and allrelated software. In addition, SiVault granted to Hypercom a perpetual, worldwide,non-exclusive license to use, copy, modify and create derivative works based oncertain SiVault technology, including technology pertinent to distributedsecurity systems, payment methods, identify establishing services and processingpayments via short message service, as disclosed in U.S. Patent Applications09/930,029, 60/650,856, 60/618,443 and 60,681,902 respectively. The initial term of the Agreement is one year, and is automaticallyrenewable thereafter for one-year terms, unless terminated in writing threemonths prior to expiration of the original term, or any renewed terms. TheAgreement provides for the payment of licensing fee of 30% of the portion of thetransaction fee that pertains to SiVault's products and derivative works foreach transaction and 30% of licensing fees generated by sublicensing SiVault'sproducts.MARKETING We employ a channel-based sales strategy, with some direct selling effortsto targeted large prospects. Our managed network infrastructure services arepriced on a transaction basis, determined by the volume and type of transaction.Related value-added services incur additional fees. Alternatively, largeenterprises can license our service package(s) and manage their own systeminternally. We have entered into agreements with a number of third parties to assist usin our marketing efforts. These arrangements are designed to leverage ourpresently limited sales force and to target defined geographic and businessmarkets. We envision that certain of our technology license arrangements willalso result in marketing opportunities with those companies. Set forth below isa summary of some of our existing marketing arrangements.Hypercom Effective May 13, 2004, we entered into an agreement with Hypercom U.S.A.,Inc. under which we were appointed a non-exclusive Hypercom reseller in theUnited States. Under the agreement, we are authorized to purchase Hypercom pointof sale terminal products and peripherals and to resell them to end usercustomers. We agreed to use our best efforts to promote and market the productsthroughout the United States and to maintain an active and suitably trainedsales force. The term of the agreement is three years from the effective date,subject to earlier termination upon three months' notice by either party for anyreason. The agreement may also be terminated under a variety of circumstancesforcause and without notice. 14Rycom CCI Effective September 22, 2004, we entered into a strategic alliance andexclusive management agreement with Rycom CCI Inc., a company located inOntario, Canada ("Rycom"). Under the agreement, Rycom was authorized as ourexclusive Canadian Strategic Manager to develop and operate a fully managedsignature verification authentication system and other solutions using ourproprietary technology for the Canadian market. In consideration for theagreement, we and Rycom agreed to share all software license and softwaremaintenance revenue generated under the agreement on a 50-50 basis. Rycom'srights under the agreement are exclusive in Canada. The agreement has an initialterm of three years, subject to automatic two-year renewal at the end of eachterm. The agreement can be terminated upon 90 days' prior notice upon eitherparty's breach.COMPETITION In the retail market, we are aware of companies that offer technologiesthat store pictures of electronic signatures entered through point of saleterminals. Some of these companies enable the signature to be printed on thetransaction receipt. In the prescription management market, we are aware of a number ofcompanies that provide electronic prescription services, including A4 HealthSystems, Allscripts, SureScripts, Alteer, ChartLogic, eInformatics, E-Physician,Health Probe, I-Scribe, Medical Manager/WebMD, OnCall Data, Pocket Scripts, andRxMadeSimple. There are several companies that offer electronic biometric signatureauthentication technology there are numerous electronic authentication andverification technologies such as pin, password, and other biometricstechnologies. A number of companies offer digital pen technology. For example, PenPowerGroup, and Palm Inc. have developed or are developing complete pen-basedhardware and software systems. Others, such as Microsoft Corporation, SilanisTechnology, Inc., and Advanced Recognition Technology, Inc., have focused ondifferent elements of those systems, such as character recognition technology,pen-based operating systems and environments, and pen-based applications.LIGHTEC COMMUNICATIONS Lightec was established in 1994. It provides telecommunications design,installation and information technology services. Lightec's customer base, whichis primarily located in Northeastern United States, includes governmental units,particularly school districts. Lightec's projects involve design and installation of cable and fiber opticnetworks. Lightec's clients include educational institutions, includinguniversities and local school systems, governmental entities, hospitals andcorporations. 15 Lightec's target market includes government, manufacturers, processors,utilities, banks, schools, universities, research complexes, mediaconglomerates, securities and commodities exchanges, law firms, consulting andresearch organizations and transportation service companies. Lightec competes on the basis of quality versus price. Lightec's servicesare largely delivered through long-term subcontractors and temporary staff. Inthe information technology sector, Lightec competes with large-scale projectfirms such as Verizon and SNET rather than maintenance shops or equipmentresellers. In the general installation business Lightec competes with 20 to 30small regional/local premise-wiring providers. In the fiber optic splicingmarket, Lightec competes with national and regional firms. Lightec views itsreal competition as the turnkey solution providers who can retain thevalue-added service contracts ensuring the longevity of the solution provided. Lightec has historically relied on one customer for the majority of itsrevenues. Lightec is under contract to provide supplies and services to thiscustomer. This customer has notified Lightec that it does not intend to orderfrom it in the future under this contract. Lightec has advised this customerthat, in addition to owing Lightec a substantial account payable balance, it isobligated to continue to utilize Lightec as contracting party for servicesapproved by the primary funding sources, the Universal Services Administration.If this dispute is not resolved or if the customer became unable to finance thecontinued acquisition of these supplies and services, the impact on Lightec'searnings would be significant.HISTORY We were incorporated in the State of Nevada on March 12, 1999 as Great BearResources, Inc. On May 25, 1999, we changed our name to Great Bear InvestmentsInc. On August 11, 2000, we changed our name to Security Biometrics, Inc. OnJuly 23, 2004, we changed our name to SiVault Systems, Inc. On August 25, 2000, we acquired all of the outstanding capital stock ofBiometrics Security, Inc., a Nevada company, in a share exchange with itsshareholders. In connection with the acquisition, we issued 1,875,000 shares ofour common stock to Gesture Recognition Technologies International Limited inexchange for the preferred shares of Biometrics Security, Inc. it owned, and weissued approximately 25,000 shares of our common stock in exchange for theoutstanding shares of common stock of Biometrics Security, Inc. On August 22,2000, Biometrics Security, Inc. entered into an option agreement with DSIDatotech to acquire an exclusive license to that company's gesture recognitiontechnology for banking and financial transactions. The exercise price of theoption was $8,000,000, of which we paid $320,000. On December 2, 2002, the nameof Biometrics Security, Inc. was changed to eMedRX, Inc. 16 On June 29, 2001, we acquired all of the outstanding membership interestsof Netface LLC, a Connecticut limited liability company, in exchange for anaggregate of 1,000,000 shares of our common stock. NetFace held an option toacquire an exclusive royalty-free license to exploit DSI Datotech's gesturerecognition technology for video games and Internet/television. The exerciseprice of the option was $5,000,000, of which we have paid $200,000, plus a 20%equity interest in NetFace LLC. Netface LLC is presently inactive. We have elected not to exercise our options to acquire licenses to DSIDatotech's gesture recognition technology and the options have expired.Consequently, the Company expensed $320,000 in 2001 and the balance of theinvestment of $200,000 in 2002. On June 14, 2002, we acquired Lightec Communications, Inc. through a mergerwith a wholly-owned subsidiary formed by us. The merger consideration consistedof 950,000 shares of our common stock and $4,000,000 in cash. 900,000 shareswere issued to Maryanne Richard and 50,000 shares were issued to Dr. NabilEl-Hag. We financed the cash portion of the merger consideration through theissuance and sale of 9% promissory notes in the aggregate principal amount of$2,000,000 and the sale of common stock and warrants at $2.40 per share forgross proceeds of $850,000. The notes were issued in equal principal amounts toSynergex Group Partnership, whose managing partner is Gerard Munera, a directorof our company, and Maryanne Richard, the owner of Lightec. We also entered intoan employment agreement with the manager of Lightec, Michael Richard, underwhich we agreed to pay Mr. Richard an annual salary of $150,000 and performancerelated bonuses for 2002, 2003 and 2004. The employment agreement wassubsequently terminated pursuant to the settlement described below. Inconnection with the acquisition, we issued 200,000 shares of common stock andaccrued $200,000 as a finder's fees under a finder's fee agreement with ChrisFarnworth. In August 2004, the $200,000 liability plus an additional $31,813 inamounts due to Chris Farnworth was converted to 144,718 shares of common stock. On June 4, 2004, we entered into a Settlement Agreement with MaryAnneRichard and Michael Richard, pursuant to which we and Lightec, on the one hand,and MaryAnne Richard and Michael Richard, on the other hand, agreed to settleall obligations and disputes between them. As part of the agreement, we arrangedfor the payment to the Richards of $1,189,983 in cash (including an $850,000payment for the shares referred to below) and we issued to MaryAnne Richard awarrant to purchase 400,000 shares of our common stock at $2.50 per share, andthe Richards (i) transferred 850,000 shares of our common stock to third partiesdesignated by our company for $850,000 in cash and (ii) surrendered a promissorynote issued by us in the principal sum of $1,000,000. On July 2, 2004, theparties finalized the settlement and executed a mutual waiver and release of allclaims of any kind whatsoever that each may have had against the other, and onthat date the remaining balance of the settlement payment $339,983 was paid tothe Richards. On June 28, 2002 we acquired all of the outstanding stock of DatadeskTechnologies, Inc., a Washington corporation ("Datadesk"), pursuant to a mergerwith a newly formed subsidiary of our company. In the merger, we issuedapproximately 550,000 shares of our common stock to the shareholders ofDatadesk, and borrowed $1,680,000, pursuant to a one-year convertible debenture,$1,375,000 of the proceeds of which was used to pay Datadesk bank loans, certainliabilities and closing costs. In connection with and as a condition to theacquisition, we entered into a three-year employment agreement with RobertSolomon, pursuant to which we agreed to employ Mr. Solomon as chief technologyofficer at an annual base salary of $150,000 plus annual bonuses based onDatadesk sales. 17 Datadesk was in the business of designing, manufacturing, and sellingdesktop solutions, educational computing systems, and handheld and wirelessdevices. On August 20, 2003, we transferred ownership of Datadesk to PanPacifica Ltd. in consideration for assumption of the net liabilities ofDatadesk. In connection with the transfer, Mr. Solomon's employment with ourcompany was terminated. We recorded net income (loss) from discontinuedoperations o $266,021 and $3,918,281 (including a writedown of goodwill of$3,405,645 ) for the years ending June 30, 2004 and 2003 to reflect thedisposition of Datadesk. On January 21, 2003, we established a new wholly-owned subsidiary, eMedRx,Inc., a British Columbia corporation ("eMedRx Canada"). EMedRx Canada enteredinto an exclusive worldwide license agreement with our Company to develop andmarket our electronic prescription system. eMedRx Canada has issued certaincommon stock to outside interests for approximately $50,000 thereby reducing ourownership of eMedRx Canada to below 100%. We currently have two UnitedStates-based subsidiaries under the name eMedRx, Inc. To streamline ourcorporate structure, these business were merged into the Company effectiveOctober 2005. On February 18, 2004, we entered into a stock purchase agreement topurchase all of the outstanding shares of Datagility, Inc. ("Datagility"). Thetransaction was consummated in May 2004. Datagility has developed a softwareapplication, CyberTrooper, that is designed to fulfill the scanning requirementsof the United States Patriot Act and Office of Foreign Assets Control. Thepurchase price for the Datagility shares was (i) $200,000 in cash, $100,000 ofwhich was paid at closing and the balance of which is payable on December 31,2004, and (ii) 116,278 shares of our common stock, which was issued at closing.Of the $100,000 payment scheduled to become due on December 31, 2004, $50,000 ispayable to Mr. Herve Bertacchi, President of Lightec. Under the agreement, weagreed to pay additional cash consideration of up to $200,000 if revenues earnedby us from CyberTrooper exceed certain targets by December 31, 2004 and June 30,2005. Subsequent to year end, Mr. Bertacchi resigned as President of Lightec andthe Company agreed to settle amounts owed to him by the payment of $270,000installments (including $50,000 in respect of Datagility). In addition, Mr.Bertacchi was engaged by Lightec as a consultant to be paid on an hourly basis. On July 9, 2004, we issued an aggregate of 4,000,0000 shares of our commonstock, valued at $1.80 per share, to the shareholders of SiVault Analytics,Inc., a Delaware corporation, in exchange for all of the outstanding stock ofSiVault Analytics, Inc. Thereafter, on July 28, 2004, we merged that companyinto ours and simultaneously changed our name to SiVault Systems, Inc. As of November 30, 2004, we acquired substantially all of the assets ofViaquo Corporation ("Viaquo") related to Viaquo's ViaSeal Access ControlBusiness, including physical equipment, technology, products and intellectualproperty, in exchange for 3,050,000 shares of the Company's restricted commonstock which were initially valued at $2.35 per share (average market price forthe four trading days around November 30, 2004), of which (1) 750,000 of theshares were issued and delivered to Viaquo at closing, (2) 2,050,000 of theshares were placed in escrow. As of March 31, 2005, an amendment was entered into regarding the Viaquoassets purchase agreement, pursuant to new information obtained about theultimate issuance of patents (valued at $1.52 per share - market price as ofMarch 31, 2005) that had been hold in escrow by Viaquo. As of June 30, 2005,there were no shares remaining in the escrow account.HUMAN RESOURCES 18 As of December 31, 2005, we had two full-time employees. Subsequently,we have hired five full-time employees, including a COO and a Vice President ofEngineering and Sales.EXECUTIVE OFFICERS Our executive officers are as follows:NAME AGE POSITION--------------------- --- -------------------------------------------John Mahoney 56 Chief Executive Officer, President and DirectorWayne Taylor 53 Interim Chief Financial Officer and DirectorRichard Moore 53 Chief Operating OfficerAlan Alpert 50 Vice President-EngineeringRichard Arturo 47 Vice President-Sales For a description of Mssrs Mahoney, Taylor and Moore. See Item 9. "Directors, Executive, Officers, Promotors and Control Persons, Compliance withSection 16(a) of the Exchange Act" at Page 37.Richard ArturoRichard Arturo has 25 years of experience in the computer, networking andsoftware industry. Rick was part of Sun Microsystem's Open Systems growth in thelate 80's and Cisco's Systems internet build out in the mid 90's. At Cisco, hissales teams contributed over half a billion dollars of revenue during histenure. Since then, he has held VP of Sales positions at start-ups HydraWebTechnologies, CentrePath and SiVault Systems (SVLT.PK). He established salesteams that sold new products and services into Service Provider and Enterprisemarkets. As an investor, he provided seed funding to create two new technologycompanies that provided e-Learning products (TrainingScape) and financialservices software (PFN, sold to Guggenheim Partners). Mr. Arturo holds aBachelor of Science degree from Carnegie Mellon University.Alan AlpertFor the past five years Mr. Alpert was a senior executive at Financial Fusionwhere he was responsible for SWIFT (Society for Worldwide Interbank FinancialTelecommunication). His responsibilities included business analysis, detailedrequirements, architecture, documentation, design, on and offshore developmentand test, leading to successful business deployment. The SWIFTNet FIX (FinancialInformation Exchange) Hub architecture developed by Financial Fusion enablesSWIFT customers secure access to the entire SWIFT community through a single FIXconnection. Mr. Alpert worked with the Financial Fusion President and COO togenerate $4 plus million dollars of incremental revenue in 2005 from SWIFTpartnership. 19In addition, Mr. Alpert managed business/software development in the Telecom andHealthcare vertical markets leveraging Sybase's existing IP and customeraccounts. Mr. Alpert holds a Bachelor of Science degree in Computer Science fromQueens College. More