##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q/A
  
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2007
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File Number: 000-51456
 
 180 CONNECT INC.
 
 Delaware
    
    20-2650200(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification Number)
 6501 E. Belleview Avenue
Englewood, Colorado 80111
(Address of principal executive offices)
 Registrants Telephone Number: (303) 395-6000
 
 x o
  o o x
 o x




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##### 



180 Connect Inc.
Form 10-Q
Quarter Ended September 30, 2007
Table of Contents
 PageExplanatory Note
    
    
    2Part I.
    
    Financial InformationItem 1
    
    Financial Statements
    
    
    3Unaudited Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2007 and 2006
    
    
    4Unaudited Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2007 and 2006
    
    
    5Unaudited Notes to Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 4
    
    Controls and Procedures
    
    
    41Part II
    
    Other InformationItem 6
    
    Exhibits
    
    
    43Signatures
    
    
    
    
    45EX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEO & CFO




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EXPLANATORY NOTE
 Company Initial Filing
  2




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##### Table of Contents



Part I. Financial Information
 
 ITEM 1. FINANCIAL STATEMENTS
 Consolidated Financial Statements
 
 180 Connect Inc.
Consolidated Balance Sheets
(in United States Dollars)
(Unaudited)
 September 30, 2007
    
    
    December 31, 2006(Restated  Note 5)
    
    
    (Restated  Note 5)Assets (Note 5)Current AssetsCash and cash equivalents
    
    $
    969,285
    
    
    $
    2,904,098Accounts receivable (less allowance for doubtful
accounts of $1,652,894 and $2,506,637, respectively)
    
    
    52,009,680
    
    
    
    48,934,952Inventory
    
    
    18,388,807
    
    
    
    15,816,148Restricted cash
    
    
    11,859,300
    
    
    
    14,503,000Prepaid expenses and other assets
    
    
    7,523,344
    
    
    
    7,910,255TOTAL CURRENT ASSETS
    
    
    90,750,416
    
    
    
    90,068,453Property, plant and equipment
    
    
    31,375,700
    
    
    
    34,882,890Goodwill
    
    
    11,034,723
    
    
    
    11,034,723Customer contracts, net
    
    
    22,311,634
    
    
    
    25,072,756Deferred tax asset
    
    
    276,608
    
    
    
    Other assets
    
    
    2,621,795
    
    
    
    4,384,750TOTAL ASSETS
    
    $
    158,370,876
    
    
    $
    165,443,572Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    81,395,821
    
    
    $
    78,686,245Current portion of long-term debt
    
    
    23,939,882
    
    
    
    26,502,096Fair value of derivative financial instruments
    
    
    8,194,756
    
    
    
    4,065,729Current portion of capital lease obligations
    
    
    9,968,067
    
    
    
    13,033,104TOTAL CURRENT LIABILITIES
    
    
    123,498,526
    
    
    
    122,287,174Income tax liability
    
    
    387,212
    
    
    
    Long-term debt
    
    
    1,545,314
    
    
    
    12,264,621Convertible debt
    
    
    
    
    
    
    6,276,584Capital lease obligations
    
    
    15,621,286
    
    
    
    15,213,112TOTAL LIABILITIES
    
    
    141,052,338
    
    
    
    156,041,491Commitments and contingencies (Notes 5, 17 and 19)Shareholders EquityCommon stock $.0001 par value; authorized 100,000,000,
at September 30, 2007 and December 31, 2006 issued and
outstanding shares 25,500,152 and 14,685,976,
respectively
    
    
    2,550
    
    
    
    1,469Paid- in capital
    
    
    121,698,780
    
    
    
    91,871,813Treasury stock, 500,000 shares and nil at
September 30, 2007 and December 31, 2006 respectively
    
    
    (224,019
    )
    
    
    Deficit
    
    
    (104,643,803
    )
    
    
    (82,956,231
    )Accumulated other comprehensive income
    
    
    485,030
    
    
    
    485,030TOTAL SHAREHOLDERS EQUITY
    
    
    17,318,538
    
    
    
    9,402,081TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    158,370,876
    
    
    $
    165,443,572
  3




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180 Connect Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in United States Dollars)
(Unaudited)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Revenue
    
    $
    102,521,340
    
    
    $
    89,908,346
    
    
    $
    283,615,672
    
    
    $
    239,245,733ExpensesDirect expenses
    
    
    89,914,862
    
    
    
    78,711,246
    
    
    
    254,853,816
    
    
    
    216,089,499General and administrative
    
    
    4,054,289
    
    
    
    4,712,862
    
    
    
    13,802,266
    
    
    
    13,933,478Non-cash stock-based compensation
    
    
    227,019
    
    
    
    
    
    
    
    227,019
    
    
    
    91,214Foreign exchange loss (gain)
    
    
    (72,760
    )
    
    
    (469
    )
    
    
    (113,442
    )
    
    
    3,033Restructuring costs
    
    
    
    
    
    
    
    
    
    
    275,000
    
    
    
    392,879Depreciation
    
    
    3,058,116
    
    
    
    3,433,006
    
    
    
    8,574,819
    
    
    
    10,013,336Amortization of customer contracts
    
    
    920,376
    
    
    
    929,727
    
    
    
    2,761,122
    
    
    
    2,789,180Other (income) expenseInterest and loan fees
    
    
    7,801,006
    
    
    
    2,898,538
    
    
    
    14,012,024
    
    
    
    6,925,495Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on sale of investments and
assets
    
    
    (7,336
    )
    
    
    135,696
    
    
    
    491,884
    
    
    
    (1,114,467
    )(Gain) loss on change in fair value of
derivative liabilities
    
    
    887,062
    
    
    
    (4,599,330
    )
    
    
    5,576,723
    
    
    
    (3,433,755
    )Other expense
    
    
    4,379,459
    
    
    
    
    
    
    
    4,379,459
    
    
    
    Income (loss) from continuing operations
before income tax expense
    
    
    (8,640,753
    )
    
    
    4,920,071
    
    
    
    (21,225,018
    )
    
    
    (5,211,158
    )Income tax expense (recovery)
    
    
    130,583
    
    
    
    (96,965
    )
    
    
    383,027
    
    
    
    (58,165
    )Income (loss) from continuing operations
    
    
    (8,771,336
    )
    
    
    5,017,036
    
    
    
    (21,608,045
    )
    
    
    (5,152,993
    )Loss from discontinued operations, net of
income taxes of nil
    
    
    
    
    
    
    (538,899
    )
    
    
    (79,527
    )
    
    
    (1,876,694
    )Net income (loss) and comprehensive
income(loss) for the period
    
    $
    (8,771,336
    )
    
    $
    4,478,137
    
    
    $
    (21,687,572
    )
    
    $
    (7,029,687
    )Net income (loss) per share from
continuing
operations:Basic
    
    $
    (0.43
    )
    
    $
    0.34
    
    
    $
    (1.27
    )
    
    $
    (0.35
    )Diluted
    
    $
    (0.43
    )
    
    $
    0.32
    
    
    $
    (1.27
    )
    
    $
    (0.35
    )Net income (loss) per share:Basic
    
    $
    (0.43
    )
    
    $
    0.30
    
    
    $
    (1.27
    )
    
    $
    (0.48
    )Diluted
    
    $
    (0.43
    )
    
    $
    0.29
    
    
    $
    (1.27
    )
    
    $
    (0.48
    )Weighted average number of shares
outstanding  basic
    
    
    20,243,082
    
    
    
    14,685,976
    
    
    
    17,011,000
    
    
    
    14,625,856Weighted average number of shares
outstanding  diluted
    
    
    20,243,082
    
    
    
    15,510,667
    
    
    
    17,011,000
    
    
    
    14,625,856
  4




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180 Connect Inc.
Consolidated Statements of Cash Flows
(in United States Dollars)(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Cash provided by (used in) the following activities:OperatingIncome (loss) from continuing operations
    
    $
    (8,771,336
    )
    
    $
    5,017,036
    
    
    $
    (21,608,045
    )
    
    $
    (5,152,993
    )Add (deduct) items not affecting cash:Depreciation and amortization
    
    
    3,978,492
    
    
    
    4,362,733
    
    
    
    11,335,941
    
    
    
    12,802,516Non-cash interest expense
    
    
    4,680,713
    
    
    
    1,008,180
    
    
    
    6,865,837
    
    
    
    2,124,570Stock-based compensation
    
    
    227,019
    
    
    
    
    
    
    
    227,019
    
    
    
    91,214Future income taxes
    
    
    
    
    
    
    (180,000
    )
    
    
    
    
    
    
    (180,000
    )Settlement of derivative liability
    
    
    (2,766,573
    )
    
    
    
    
    
    
    (2,766,573
    )
    
    
    Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on change in fair value of
derivative liabilities
    
    
    887,062
    
    
    
    (4,599,330
    )
    
    
    5,576,723
    
    
    
    (3,433,755
    )(Gain) loss on sale of investments and assets
    
    
    (7,336
    )
    
    
    135,696
    
    
    
    491,884
    
    
    
    (1,114,467
    )Other
    
    
    34,067
    
    
    
    961
    
    
    
    73,993
    
    
    
    3,106Changes in non-cash working capital balances related
to operations:Accounts receivable
    
    
    (11,009,290
    )
    
    
    (13,939,349
    )
    
    
    (3,074,728
    )
    
    
    4,339,502Inventory
    
    
    (3,624,307
    )
    
    
    (5,004,743
    )
    
    
    (2,572,659
    )
    
    
    2,522,490Other current assets
    
    
    (320,110
    )
    
    
    (419,655
    )
    
    
    (700,259
    )
    
    
    (305,961
    )Insurance premium deposits
    
    
    (3,289,009
    )
    
    
    (525,317
    )
    
    
    1,316,723
    
    
    
    (2,827,125
    )Other assets
    
    
    918,776
    
    
    
    (58,765
    )
    
    
    (453,287
    )
    
    
    (38,063
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    2,643,700
    
    
    
    247,366Accounts payable and accrued liabilities
    
    
    19,886,709
    
    
    
    9,613,919
    
    
    
    2,593,371
    
    
    
    (6,123,210
    )Operating cash flows from discontinued operations
    
    
    
    
    
    
    (472,882
    )
    
    
    (60,507
    )
    
    
    (1,529,897
    )Total cash provided by (used in) operating activities
    
    
    824,877
    
    
    
    (6,294,517
    )
    
    
    (110,867
    )
    
    
    192,292InvestingPurchase of property, plant and equipment
    
    
    (360,421
    )
    
    
    (630,210
    )
    
    
    (2,052,529
    )
    
    
    (2,091,671
    )Net proceeds from disposition of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327,693Total cash used in investing activities
    
    
    (360,421
    )
    
    
    (630,210
    )
    
    
    (2,052,529
    )
    
    
    (763,978
    )FinancingRepayment of capital lease obligations
    
    
    (1,755,783
    )
    
    
    (3,533,928
    )
    
    
    (9,241,450
    )
    
    
    (11,378,009
    )Repayment of debt
    
    
    (7,000,001
    )
    
    
    
    
    
    
    (10,333,336
    )
    
    
    (7,350,000
    )Proceeds from share issuance
    
    
    14,704
    
    
    
    
    
    
    
    61,372
    
    
    
    259,712Net proceeds from reverse merger
    
    
    37,933,165
    
    
    
    
    
    
    
    37,933,165
    
    
    
    Issuance costs on reverse merger
    
    
    (6,976,440
    )
    
    
    
    
    
    
    (6,976,440
    )
    
    
    Redemption of convertible debt
    
    
    (10,393,577
    )
    
    
    
    
    
    
    (10,393,577
    )
    
    
    Increase (decrease) in borrowings under the Revolver
credit facility
    
    
    (11,418,105
    )
    
    
    1,098,488
    
    
    
    (3,993,853
    )
    
    
    1,098,488Issuance costs on long-term debt
    
    
    
    
    
    
    (3,414,390
    )
    
    
    
    
    
    
    (3,515,471
    )Net proceeds from refinancing of vehicles
    
    
    
    
    
    
    
    
    
    
    3,470,714
    
    
    
    Proceeds from issuance of convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,686,101Proceeds from refinancing of long-term debt
    
    
    
    
    
    
    42,140,497
    
    
    
    
    
    
    
    42,140,497Extinguishment of long-term debt
    
    
    
    
    
    
    (32,863,525
    )
    
    
    
    
    
    
    (32,863,525
    )Repurchase of common stock
    
    
    (224,019
    )
    
    
    
    
    
    
    (224,019
    )
    
    
    Issuance costs paid on convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,388,985
    )Total cash provided by (used in) financing activities
    
    
    179,944
    
    
    
    3,427,142
    
    
    
    302,578
    
    
    
    (2,311,192
    )Effect of exchange rates on cash and cash equivalents
    
    
    (34,067
    )
    
    
    (19,892
    )
    
    
    (73,993
    )
    
    
    (22,037
    )Net increase (decrease) in cash and cash equivalents
during the period
    
    
    610,333
    
    
    
    (3,517,477
    )
    
    
    (1,934,813
    )
    
    
    (2,904,915
    )Cash and cash equivalents, beginning of period
    
    
    358,952
    
    
    
    3,966,014
    
    
    
    2,904,098
    
    
    
    3,353,452Cash and cash equivalents, end of period
    
    $
    969,285
    
    
    $
    448,537
    
    
    $
    969,285
    
    
    $
    448,537Supplemental cash flow information:Interest paid
    
    $
    1,691,880
    
    
    $
    1,425,122
    
    
    $
    6,102,000
    
    
    $
    4,504,060Income taxes paid
    
    $
    76,715
    
    
    $
    228,935
    
    
    $
    219,298
    
    
    $
    323,292
 Supplemental disclosure of non-cash investing and financing transactions:
  5




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180 Connect Inc.
Notes to Consolidated Financial Statements
(In United States Dollars)
(Unaudited)
 1. BASIS OF PRESENTATION
      6




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Seasonality
  Change in Accounting Estimate
  2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
  
    
    Permits fair value remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation.
    
    Clarifies which interest-only strips and principal-only strips are not subject to
the requirements of Statement 133.
    
    Establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation.
    
    Clarifies that concentrations of credit risk in the form of subordination are not
embedded derivatives.
    
    Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
    7




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3. RESTRICTED CASH
   4. GOODWILL AND CUSTOMER CONTRACTS
  CustomerGoodwill
    
    
    ContractsBalance as of December 31, 2006
    
    $
    11,034,723
    
    
    $
    25,072,756Amortization expense
    
    
    
    
    
    
    (2,761,122
    )Balance at of September 30, 2007
    
    $
    11,034,723
    
    
    $
    22,311,634
   2007 (remainder)
    
    $
    920,3812008
    
    
    3,681,5032009
    
    
    3,681,5032010
    
    
    3,681,5032011
    
    
    3,681,503Thereafter
    
    
    6,665,241Total
    
    $
    22,311,634
  8




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5. LONG-TERM DEBT AND COMMON STOCK PURCHASE WARRANTS
  September 30,
    
    
    December 31,2007
    
    
    2006(Restated)
    
    
    (Restated)Revolving credit
facility and over
advance facility of
up to $37,000,000
bearing interest at
prime plus 3% to 5%,
subject to a minimum
interest rate of 10%
to 11% with interest
payable monthly. The
revolving credit
facility is subject
to the Companys
eligible trade
receivables and
inventory as per the
debt agreement and
collateralized by
the Companys real
and personal
property. For the
period of August 1,
2006 to July 31,
2007, the Company
was able to draw in
excess of the
eligible trade
receivables and
inventory an over
advance of up to
$9,000,000 but not
to exceed an
aggregate amount of
$37,000,000. At
September 30, 2007
the interest rate
of the revolving
credit facility was
10.75% and with an
effective interest
rate of 14.15%. At
December 31, 2006
the interest rate
for the revolving
credit facility was
11.25% and the
interest rate for
the over advance
facility was 13.25%
with an effective
interest rate of
12.21%. Repayment
is due on or before
July 31, 2009. The
credit facility may
be borrowed,
repaid, and
reborrowed in
accordance with the
terms of the
Security
Agreement.
    
    $
    16,346,583
    
    
    $
    19,758,475Term note, bearing
interest at prime
plus 5%, subject to
a minimum interest
rate of 12% and
interest is payable
monthly. At
September 30, 2007,
the interest rate
was 12.75% with an
effective interest
rate of 16.35%. At
December 31, 2006,
the interest rate
was 13.25% with an
effective interest
rate of 17.5%.
Repayments of the
term note commenced
on February 1, 2007
for $666,667 per
month, with the
final payment due on
July 31, 2009.
    
    
    9,138,613
    
    
    
    19,008,242Total debt
    
    
    25,485,196
    
    
    
    38,766,717Less: current portion
    
    
    (23,939,882
    )
    
    
    (26,502,096
    )Total long-term debt
    
    $
    1,545,314
    
    
    $
    12,264,621
   9




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Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that
Include Both a Subjective Acceleration Clause and a Lockbox Arrangement (EITF 95-22)
 Previously Reported
    
    
    As restatedSeptember 30, 2007
    
    
    September 30, 2007Current portion of long-term debt
    
    $
    6,817,352
    
    
    $
    23,939,882Long-term debt
    
    
    18,667,844
    
    
    
    1,545,314
 Previously Reported
    
    
    As restatedDecember 31, 2006
    
    
    December 31, 2006Current portion of long-term debt
    
    $
    5,967,674
    
    
    $
    26,502,096Long-term debt
    
    
    32,799,043
    
    
    
    12,264,621
  6. CONVERTIBLE DEBENTURES
  11




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7. WARRANTS AND DERIVATIVE FINANCIAL INSTRUMENTS
       12




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th
 13




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EmbeddedPIPE
    
    
    Public
    
    
    Derivatives of
    
    
    StockWarrants
    
    
    Warrants
    
    
    Convertible Debt
    
    
    Repurchase
    
    
    TotalThree months ended September 30, 2007
and September 30, 2006, respectively:Fair value, June 30, 2007
    
    $
    2,396,406
    
    
    $
    
    
    
    $
    5,245,338
    
    
    $
    
    
    
    $
    7,641,744Fair value, August 24, 2007
    
    
    
    
    
    
    6,936,225
    
    
    
    
    
    
    
    
    
    
    
    6,936,225Changes in fair value
    
    
    (1,718,460
    )
    
    
    580,585
    
    
    
    (741,636
    )
    
    
    2,766,573
    
    
    
    887,062Settlement of derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,766,573
    )
    
    
    (2,766,573
    )Settled on redemption of debentures
    
    
    
    
    
    
    
    
    
    
    (4,503,702
    )
    
    
    
    
    
    
    (4,503,702
    )Fair value, September 30, 2007
    
    $
    677,946
    
    
    $
    7,516,810
    
    
    $
    0
    
    
    $
    0
    
    
    $
    8,194,756Fair value, June 30, 2006
    
    $
    1,648,227
    
    
    $
    
    
    
    $
    4,947,013
    
    
    $
    
    
    
    $
    6,595,240Changes in fair value
    
    
    (1,191,885
    )
    
    
    
    
    
    
    (3,407,445
    )
    
    
    
    
    
    
    (4,599,330
    )Fair value, September 30, 2006
    
    $
    456,342
    
    
    $
    
    
    
    $
    1,539,568
    
    
    $
    
    
    
    $
    1,995,910Nine months ended September 30, 2007
and September 30, 2006, respectively:Fair value at December 31, 2006
    
    $
    1,035,207
    
    
    $
    
    
    
    $
    3,030,522
    
    
    $
    
    
    
    $
    4,065,729Fair value, August 24, 2007
    
    
    
    
    
    
    6,936,225
    
    
    
    
    
    
    
    
    
    
    
    6,936,225Changes in fair value
    
    
    (357,261
    )
    
    
    580,585
    
    
    
    2,586,826
    
    
    
    2,766,573
    
    
    
    5,576,573Settlement of derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,766,573
    )
    
    
    (2,766,573
    )Settled on conversion of debentures
    
    
    
    
    
    
    
    
    
    
    (1,113,646
    )
    
    
    
    
    
    
    (1,113,646
    )Settled on redemption of debentures
    
    
    
    
    
    
    
    
    
    
    (4,503,702
    )
    
    
    
    
    
    
    (4,503,702
    )Fair value, September 30, 2007
    
    $
    677,946
    
    
    $
    7,516,810
    
    
    $
    0
    
    
    $
    0
    
    
    $
    8,194,756Fair value at March 22, 2006
    
    $
    1,076,693
    
    
    $
    
    
    
    $
    4,352,972
    
    
    $
    
    
    
    $
    5,429,665Changes in fair value
    
    
    (620,351
    )
    
    
    
    
    
    
    (2,813,404
    )
    
    
    
    
    
    
    (3,433,755
    )Fair value, September 30, 2006
    
    $
    456,342
    
    
    $
    
    
    
    $
    1,539,568
    
    
    $
    
    
    
    $
    1,995,910
 14




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##### Table of Contents



8. CHANGES IN SHAREHOLDERS EQUITY
 180 Connect Inc.
Consolidated Statements of Shareholders Equity
(in United States Dollars)
(Unaudited)
 AccumulatedOtherCommon
    
    
    Paid in
    
    
    Treasury
    
    
    
    
    
    
    ComprehensiveStock
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance, December 31, 2006
    
    $
    1,469
    
    
    $
    91,871,813
    
    
    $
    
    
    
    $
    (82,956,231
    )
    
    $
    485,030
    
    
    $
    9,402,081Issuance on exercise of stock
options for cash
    
    
    
    
    
    
    44,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,112Issuance on exercise of
warrants for cash
    
    
    
    
    
    
    17,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,260Issuance on conversion of
convertible debt
    
    
    
    
    
    
    2,293,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,293,230Stock-based compensation
    
    
    
    
    
    
    227,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227,019Net proceeds from reverse
merger
    
    
    
    
    
    
    37,933,165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,933,165Issuance costs attributed to
reverse merger
    
    
    
    
    
    
    (6,976,440
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,976,440
    )Purchase of 500,000 shares of
treasury stock
    
    
    
    
    
    
    
    
    
    
    (224,019
    )
    
    
    
    
    
    
    
    
    
    
    (224,019
    )Issuance of warrants on long
term debt
    
    
    
    
    
    
    3,087,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,087,660Acquisition of the net assets of
AVP
    
    
    
    
    
    
    (6,797,958
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,797,958
    )Issuance of common shares
    
    
    1,081
    
    
    
    (1,081
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,687,572
    )
    
    
    
    
    
    
    (21,687,572
    )Balance, September 30, 2007
    
    $
    2,550
    
    
    $
    121,698,780
    
    
    $
    (224,019
    )
    
    $
    (104,643,803
    )
    
    $
    485,030
    
    
    $
    17,318,538
    15




---



##### Table of Contents



Number of SharesTotal Outstanding Shares as of September 30, 2007
    
    
    25,500,152Potentially Dilutive SecuritiesPIPE Warrants
    
    
    942,060Laurus Warrants
    
    
    850,000Employee stock options
    
    
    1,487,729Employee restricted stock units
    
    
    815,750Share appreciation rights
    
    
    167,999Public Warrants and Unit Options
    
    
    19,350,000Maximum Potential Diluted Shares Outstanding
    
    
    49,113,690
 9. STOCK -BASED COMPENSATION
     16




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##### Table of Contents



3 Year
    
    
    
    
    
    
    Share3 Year
    
    
    4 Year
    
    
    Restricted Stock
    
    
    4 Year Restricted
    
    
    AppreciationStock Options
    
    
    Stock Options
    
    
    Units
    
    
    Stock Units
    
    
    RightsNumber granted
    
    
    499,750
    
    
    
    664,500
    
    
    
    445,250
    
    
    
    370,500
    
    
    
    167,999Stock price on day of grant
    
    $
    3.25
    
    
    $
    3.25
    
    
    $
    3.25
    
    
    $
    3.25
    
    
    $
    4.01Exercise price
    
    $
    3.25
    
    
    $
    3.25
    
    
    
    
    
    
    
    
    
    
    $
    2.50Expected life in years
    
    
    4.5
    
    
    
    4.75
    
    
    
    3
    
    
    
    3.25
    
    
    
    3.75Vesting period in years
    
    
    3
    
    
    
    4
    
    
    
    3
    
    
    
    4
    
    
    
    4Interest free rate
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.25
    %
    
    
    4.44
    %Volatility
    
    
    61.0
    %
    
    
    61.0
    %
    
    
    61.0
    %
    
    
    61.0
    %
    
    
    60.5
    %Forfeiture rate
    
    
    18.0
    %
    
    
    18.0
    %
    
    
    18.0
    %
    
    
    18.0
    %
    
    
    18.0
    %Dividend
    
    Nil
    
    nil
    
    Nil
    
    Nil
    
    Nil
    Nine Months Ended
    
    
    Year EndedSeptember 30, 2007
    
    
    December 31, 2006Number of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted AverageOptions
    
    
    Exercise Price
    
    
    Options
    
    
    Exercise PriceOutstanding, beginning of
period
    
    
    349,946
    
    
    $
    2.92
    
    
    
    856,000
    
    
    $
    2.18Granted
    
    
    2,147,999
    
    
    $
    1.96
    
    
    
    
    
    
    
    Exercised
    
    
    (26,467
    )
    
    $
    1.67
    
    
    
    (155,827
    )
    
    $
    1.67Cancelled
    
    
    
    
    
    
    
    
    
    
    (350,227
    )
    
    $
    1.67Outstanding, end of period
    
    
    2,471,478
    
    
    $
    2.10
    
    
    
    349,946
    
    
    $
    2.92Options exercisable, end of
period
    
    
    323,479
    
    
    $
    3.01
    
    
    
    349,946
    
    
    $
    2.92
 17




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##### Table of Contents



Options Outstanding and ExercisableWeighted AverageRemainingNumber
    
    
    Contractual Life
    
    
    Weighted AverageSecurity
    
    of Shares
    
    
    (Years)
    
    
    Exercise PriceRestricted stock units under LTIP
    
    
    815,750
    
    
    
    3.92
    
    
    
    Stock options granted during
Cable Play
acquisition
    
    
    323,479
    
    
    
    2.51
    
    
    $
    3.01Share appreciation rights
    
    
    167,999
    
    
    
    4.17
    
    
    $
    2.50Stock options granted under LTIP
    
    
    1,164,250
    
    
    
    6.92
    
    
    $
    3.25
 10. RELATED PARTY TRANSACTIONS
  11. RESTRUCTURING COSTS
  RestructuringReserve
    
    
    Costs Incurred
    
    
    
    
    
    
    ReserveDecember 31, 2006
    
    
    in 2007
    
    
    Paid During 2007
    
    
    September 30, 2007Rent
    
    $
    
    
    
    $
    275,000
    
    
    $
    218,750
    
    
    $
    56,250Moving expenses
    
    
    500
    
    
    
    
    
    
    
    500
    
    
    
    Other
    
    
    6,325
    
    
    
    
    
    
    
    6,325
    
    
    
    Total restructuring
    
    $
    6,825
    
    
    $
    275,000
    
    
    $
    225,575
    
    
    $
    56,250
  18




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12. INCOME TAXES
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Allocation of income tax expense
(recovery)Current income tax expense
    
    $
    130,583
    
    
    $
    83,035
    
    
    $
    272,423
    
    
    $
    121,835Future income tax recovery
    
    
    
    
    
    
    (180,000
    )
    
    
    
    
    
    
    (180,000
    )FIN 48 income tax
    
    
    
    
    
    
    
    
    
    
    110,604
    
    
    
    Total income tax expense (recovery)
    
    $
    130,583
    
    
    $
    (96,965
    )
    
    $
    383,027
    
    
    $
    (58,165
    )
     19




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##### Table of Contents



13. INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Numerator:Income (loss) from continuing operations
    
    $
    (8,771,336
    )
    
    $
    5,017,036
    
    
    $
    (21,608,045
    )
    
    $
    (5,152,993
    )Loss from discontinued operations
    
    
    
    
    
    
    (538,899
    )
    
    
    (79,527
    )
    
    
    (1,876,694
    )Net income (loss) for the period
    
    $
    (8,771,336
    )
    
    $
    4,478,137
    
    
    $
    (21,687,572
    )
    
    $
    (7,029,687
    )Denominator:Denominator for basic income (loss) per
share  weighted average number of
shares
    
    
    20,243,082
    
    
    
    14,685,976
    
    
    
    17,011,000
    
    
    
    14,625,856Effect of dilutive options
    
    
    
    
    
    
    24,063
    
    
    
    
    
    
    
    Effect of dilutive warrants
    
    
    
    
    
    
    800,628
    
    
    
    
    
    
    
    Denominator for diluted income (loss) per
share  adjusted weighted average shares
and assumed conversion
    
    
    20,243,082
    
    
    
    15,510,667
    
    
    
    17,011,000
    
    
    
    14,625,856Income (loss) per share data:Basic  from continuing operation
    
    $
    (0.43
    )
    
    $
    0.34
    
    
    $
    (1.27
    )
    
    $
    (0.35
    )Basic  from discontinued operations
    
    $
    
    
    
    $
    (0.04
    )
    
    $
    
    
    
    $
    (0.13
    )Basic, net
    
    $
    (0.43
    )
    
    $
    0.30
    
    
    $
    (1.27
    )
    
    $
    (0.48
    )Diluted  from continuing operation
    
    $
    (0.43
    )
    
    $
    0.32
    
    
    $
    (1.27
    )
    
    $
    (0.35
    )Diluted  from discontinued operations
    
    $
    
    
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.13
    )Diluted, net
    
    $
    (0.43
    )
    
    $
    0.29
    
    
    $
    (1.27
    )
    
    $
    (0.48
    )
  14. (GAIN) LOSS ON SALE OF INVESTMENTS AND ASSETS
  Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Gain from investments
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,320,193
    )(Gain) loss on disposal of assets
    
    
    (7,336
    )
    
    
    135,696
    
    
    
    491,884
    
    
    
    205,726$
    (7,336
    )
    
    $
    135,696
    
    
    $
    491,884
    
    
    $
    (1,114,467
    )
 20




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##### Table of Contents



15. OTHER EXPENSE
  16. DISCONTINUED OPERATIONS
  Consolidated statements of operations and comprehensive income (loss) from discontinued operations
is as follows:
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from discontinued
operations
    
    $
    
    
    
    $
    591,942
    
    
    $
    199,744
    
    
    $
    2,182,905Loss from discontinued
operations, net of income taxes of
nil
    
    $
    
    
    
    $
    (538,899
    )
    
    $
    (79,527
    )
    
    $
    (1,876,694
    )Diluted loss per share from
discontinued operations
    
    $
    
    
    
    $
    (0.03
    )
    
    $
    
    
    
    $
    (0.13
    )
 17. CONTINGENCIES
   21




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##### Table of Contents



18. SEGMENT INFORMATION
    Geographic information
 September 30, 2007
    
    
    December 31, 2006Property, plant and equipment, goodwill and
customer contractsCanada
    
    $
    1,817,599
    
    
    $
    1,468,498United States
    
    
    62,904,458
    
    
    
    69,521,871Total
    
    $
    64,722,057
    
    
    $
    70,990,369
 Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006RevenueCanada
    
    $
    4,441,292
    
    
    $
    2,752,547
    
    
    $
    10,848,835
    
    
    $
    6,418,920United States
    
    
    98,080,048
    
    
    
    87,155,799
    
    
    
    272,766,837
    
    
    
    232,826,813Total
    
    $
    102,521,340
    
    
    $
    89,908,346
    
    
    $
    283,615,672
    
    
    $
    239,245,733
 22




---



##### Table of Contents



19. SUBSEQUENT EVENTS
   23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       Principles of Consolidation and Basis of Presentation
    24




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##### Table of Contents



Seasonality
  Selected Financial Highlights  Third Quarter Ended September 30, 2007
  Third Quarter Highlights
 
    
    Revenue grew to $102.5 million, an increase of $12.6 million, or 14.0%, compared to
revenue of $89.9 million in 2006.
    
    EBITDA from continuing operations (1)was $8.4 million, an increase of
$1.9 million or 29.5% compared to $6.5 million in 2006.
    
    Total cash provided by operating activities was $0.8 million, an increase of $7.1
million from the cash used by operating activities of $6.3 million in 2006.
    
    Loss from continuing operations was $8.8 million, a decrease of $13.8 million
compared to income from continuing operations of $5.0 million in 2006.
    
    Net loss was $8.8 million, a decrease of $13.3 million compared to net income of
$4.5 million in 2006.
 25




---



##### Table of Contents




    
    Net income (loss) per share for the three months ended September 30, 2007 and
September 30, 2006, respectively, is as follows:
 
    
    Net income (loss) from continuing operations, was a loss of $(0.44) per share
basic and diluted compared to net income from continuing operations of $0.34 basic
and $0.33 diluted per share, respectively, in 2006.
    
    Net income (loss), was a loss of $(0.44) per share basic and diluted compared to
net income of $0.30 per share basic and $0.29 diluted per share, respectively, in
2006.
  Comparison of Quarters Ended September 30, 2007 and September 30, 2006
 Selected Financial Information
  Financial Review
    26




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##### Table of Contents



Results of Operations
 Comparison of Quarters Ended September 30, 2007 and 2006
 For the Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    % ChangeRevenue
    
    $
    102,521,340
    
    
    $
    89,908,346
    
    
    
    14.0
    %Direct expenses
    
    
    89,914,862
    
    
    
    78,711,246
    
    
    
    14.2
    %Direct contribution margin (1)
    
    
    12,606,478
    
    
    
    11,197,100
    
    
    
    12.6
    %General and administrative
    
    
    4,054,289
    
    
    
    4,712,862
    
    
    
    (14.0
    )%Non cash stock-based compensation
    
    
    227,019
    
    
    
    
    
    
    
    Foreign exchange gain
    
    
    (72,760
    )
    
    
    (469
    )
    
    
    Depreciation
    
    
    3,058,116
    
    
    
    3,433,006
    
    
    
    (10.9
    )%Amortization of customer contracts
    
    
    920,376
    
    
    
    929,727
    
    
    
    (1.0
    )%Other (income) expenseInterest and loan fees
    
    
    7,801,006
    
    
    
    2,898,538
    
    
    
    169.1
    %Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )
    
    
    (100.0
    )%(Gain) loss on sale of investments and assets
    
    
    (7,336
    )
    
    
    135,696
    
    
    
    (105.4
    )%(Gain) loss on fair market value of derivatives
    
    
    887,062
    
    
    
    (4,599,330
    )
    
    
    (119.3
    )%Other expense
    
    
    4,379,459
    
    
    
    
    
    
    
    Income (loss) from continuing operations before income tax
expense (recovery)
    
    
    (8,640,753
    )
    
    
    4,920,071
    
    
    
    (275.6
    )%Income tax expense (recovery)
    
    
    130,583
    
    
    
    (96,965
    )
    
    
    (234.7
    )%Income (loss) from continuing operations
    
    
    (8,771,336
    )
    
    
    5,017,036
    
    
    
    (274.8
    )%Loss from discontinued operations
    
    
    
    
    
    
    (538,899
    )
    
    
    (100.0
    )%Net income (loss) for the period
    
    $
    (8,771,336
    )
    
    $
    4,478,137
    
    
    
    (295.9
    )%Net income (loss) per share from continuing operationsBasic
    
    $
    (0.43
    )
    
    $
    0.34Diluted
    
    $
    (0.43
    )
    
    $
    0.32Net income (loss) per shareBasic
    
    $
    (0.43
    )
    
    $
    0.30Diluted
    
    $
    (0.43
    )
    
    $
    0.29
 
 (1)
    
    DCM consists of revenue less direct expenses and excludes general and
administrative expense, foreign exchange gain, non-cash stock-based compensation,
depreciation, amortization of customer contracts, interest and loan fees, (gain) loss on
sale of investments and assets, other expense, gain (loss) on fair market value of
derivatives, gain on extinguishment of debt, and income tax expense (recovery). DCM is a
non-GAAP measure. The comparative GAAP measure is income (loss) from continuing
operations. For a reconciliation of DCM to income (loss) from continuing operations, see
Direct Contribution Margin. Revenue
  27




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##### Table of Contents



Direct Contribution Margin
   Reconciliation of DCM to Income (loss) from Continuing Operations
 For the Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006Direct contribution margin (1)
    
    $
    12,606,478
    
    
    $
    11,197,100General and administrative
    
    
    4,054,289
    
    
    
    4,712,862Non-cash stock-based compensation
    
    
    227,019
    
    
    
    Foreign exchange gain
    
    
    (72,760
    )
    
    
    (469
    )Depreciation
    
    
    3,058,116
    
    
    
    3,433,006Amortization of customer contracts
    
    
    920,376
    
    
    
    929,727Other (income) expenseInterest and loan fees
    
    
    7,801,006
    
    
    
    2,898,538Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on sale of investments and assets
    
    
    (7,336
    )
    
    
    135,696(Gain) loss on fair market value of derivatives
    
    
    887,062
    
    
    
    (4,599,330
    )Other expense
    
    
    4,379,459
    
    
    
    Income (loss) from continuing operations
before income tax expense (recovery)
    
    
    (8,640,753
    )
    
    
    4,920,071Income tax expense (recovery)
    
    
    130,583
    
    
    
    (96,965
    )Income (loss) from continuing operations
    
    $
    (8,771,336
    )
    
    $
    5,017,036
 
 (1)
    
    DCM consists of revenue less direct expenses and excludes general and
administrative expense, foreign exchange gain, non-cash stock-based compensation,
depreciation, amortization of customer contracts, interest and loan fees, (gain) loss on
sale of investments and assets, (gain) loss on fair market value of derivatives, gain on
extinguishment of debt, other expense, and income tax expense (recovery). DCM is a
non-GAAP measure. The comparative GAAP measure is income (loss) from continuing
operations. 28




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##### Table of Contents



General and Administrative Expenses and Non-Cash Stock-Based Compensation
   EBITDA from Continuing Operations
   Reconciliation of EBITDA to Income (loss) from Continuing Operations
 For the Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006EBITDA from continuing operations (1)
    
    $
    8,397,930
    
    
    $
    6,484,707Depreciation
    
    
    3,058,116
    
    
    
    3,433,006Amortization of customer contracts
    
    
    920,376
    
    
    
    929,727Other (income) expenseInterest and loan fees
    
    
    7,801,006
    
    
    
    2,898,538Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on sale of investments and assets
    
    
    (7,336
    )
    
    
    135,696(Gain) loss on fair market value of derivatives
    
    
    887,062
    
    
    
    (4,599,330
    )Other expense
    
    
    4,379,459
    
    
    
    Income (loss) from continuing operations before income tax
expense (recovery)
    
    
    (8,640,753
    )
    
    
    4,920,071Income tax expense (recovery)
    
    
    130,583
    
    
    
    (96,965
    )Income (loss) from continuing operations
    
    $
    (8,771,336
    )
    
    $
    5,017,036
 
 (1)
    
    See Non-GAAP Measures Depreciation and Amortization of Customer Contracts
  29




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##### Table of Contents



Other Income and Expense
     Income Tax Expense (Recovery)
  Income (loss) from Continuing Operations
  Loss from Discontinued Operations
  Net Income (loss)
  30




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##### Table of Contents



Results of Operations
 Comparison of Year to Date  Results
 For the Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    % ChangeRevenue
    
    $
    283,615,672
    
    
    $
    239,245,733
    
    
    
    18.6
    %Direct expenses
    
    
    254,853,816
    
    
    
    216,089,499
    
    
    
    17.9
    %Direct contribution margin (1)
    
    
    28,761,856
    
    
    
    23,156,234
    
    
    
    24.2
    %General and administrative
    
    
    13,802,266
    
    
    
    13,933,478
    
    
    
    (0.9
    )%Non-cash stock-based compensation
    
    
    227,019
    
    
    
    91,214
    
    
    
    148.9
    %Foreign exchange loss (gain)
    
    
    (113,442
    )
    
    
    3,033
    
    
    
    Restructuring costs
    
    
    275,000
    
    
    
    392,879
    
    
    
    (30.0
    )%Depreciation
    
    
    8,574,819
    
    
    
    10,013,336
    
    
    
    (14.4
    %)Amortization of customer contracts
    
    
    2,761,122
    
    
    
    2,789,180
    
    
    
    (1.0
    )%Other (income) expenseInterest and loan fees
    
    
    14,012,024
    
    
    
    6,925,495
    
    
    
    102.3
    %Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )
    
    
    (100.0
    )%(Gain) loss on sale of investments and assets
    
    
    491,884
    
    
    
    (1,114,467
    )
    
    
    (144.1
    )%(Gain) loss on fair market value of derivatives
    
    
    5,576,723
    
    
    
    (3,433,755
    )
    
    
    (262.4
    )%Other expense
    
    
    4,379,459
    
    
    
    
    
    
    
    Loss from continuing operations before income tax expense
(recovery)
    
    
    (21,225,018
    )
    
    
    (5,211,158
    )
    
    
    307.3
    %Income tax expense (recovery)
    
    
    383,027
    
    
    
    (58,165
    )
    
    
    (758.5
    )%Loss from continuing operations
    
    
    (21,608,045
    )
    
    
    (5,152,993
    )
    
    
    319.3
    %Loss from discontinued operations
    
    
    (79,527
    )
    
    
    (1,876,694
    )
    
    
    (95.8
    )%Net loss for the period
    
    $
    (21,687,572
    )
    
    $
    (7,029,687
    )
    
    
    208.5
    %Net loss per share from continuing operationsBasic
    
    $
    (1.27
    )
    
    $
    (0.35
    )Diluted
    
    $
    (1.27
    )
    
    $
    (0.35
    )Net loss per shareBasic
    
    $
    (1.27
    )
    
    $
    (0.48
    )Diluted
    
    $
    (1.27
    )
    
    $
    (0.48
    )
 
 (1)
    
    DCM consists of revenue less direct expenses and excludes general and
administrative expense, foreign exchange loss (gain), non cash stock-based compensation,
depreciation, amortization of customer contracts, interest and loan fees, (gain) loss on
sale of investments and assets, gain (loss) on fair market value of derivatives, gain on
extinguishment of debt, other expense, and income tax expense (recovery). DCM is a
non-GAAP measure. See Non-GAAP Measures. The comparative GAAP measure is loss from
continuing operations. For a reconciliation of DCM to loss from continuing operations,
see Direct Contribution Margin. Revenue
  31




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Direct Contribution Margin
   Reconciliation of DCM to Loss from Continuing Operations
 For the Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Direct contribution margin (1)
    
    $
    28,761,856
    
    
    $
    23,156,234General and administrative
    
    
    13,802,266
    
    
    
    13,933,478Non-cash stock-based compensation
    
    
    227,019
    
    
    
    91,214Foreign exchange loss (gain)
    
    
    (113,442
    )
    
    
    3,033Restructuring costs
    
    
    275,000
    
    
    
    392,879Depreciation
    
    
    8,574,819
    
    
    
    10,013,336Amortization of customer contracts
    
    
    2,761,122
    
    
    
    2,789,180Other (income) expenseInterest and loan fees
    
    
    14,012,024
    
    
    
    6,925,495Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on sale of investments and assets
    
    
    491,884
    
    
    
    (1,114,467
    )(Gain) loss on fair market value of derivatives
    
    
    5,576,723
    
    
    
    (3,433,755
    )Other expense
    
    
    4,379,459
    
    
    
    Loss from continuing operations before income tax expense
(recovery)
    
    
    (21,225,018
    )
    
    
    (5,211,158
    )Income tax expense (recovery)
    
    
    383,027
    
    
    
    (58,165
    )Loss from continuing operations
    
    $
    (21,608,045
    )
    
    $
    (5,152,993
    )
 
 (1)
    
    DCM consists of revenue less direct expenses and excludes general and
administrative expense, foreign exchange loss (gain) , non-cash stock-based compensation,
(gain) loss on sale of investments and assets, depreciation, amortization of customer
contracts, interest and loan fees, (gain) loss on fair market value of derivatives, gain
on extinguishment of debt, other expense, and income tax expense (recovery). DCM is a
non-GAAP measure. See Non-GAAP Measures. The comparative GAAP measure is loss from
continuing operations. 32




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General and Administrative Expenses, Restructuring Costs and Non-Cash Stock-Based Compensation
    Depreciation and Amortization of Customer Contracts
  EBITDA from Continuing Operations
   33




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Reconciliation of EBITDA to Loss from Continuing Operations
 For the Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006EBITDA from continuing operations (1)
    
    $
    14,571,013
    
    
    $
    8,735,630Depreciation
    
    
    8,574,819
    
    
    
    10,013,336Amortization of customer contracts
    
    
    2,761,122
    
    
    
    2,789,180Other (income) expenseInterest and loan fees
    
    
    14,012,024
    
    
    
    6,925,495Gain on extinguishment of debt
    
    
    
    
    
    
    (1,233,001
    )(Gain) loss on sale of investments and assets
    
    
    491,884
    
    
    
    (1,114,467
    )(Gain) loss on fair market value of derivatives
    
    
    5,576,723
    
    
    
    (3,433,755
    )Other expense
    
    
    4,379,459
    
    
    
    Loss from continuing operations before income tax expense
(recovery)
    
    
    (21,225,018
    )
    
    
    (5,211,158
    )Income tax expense (recovery)
    
    
    383,027
    
    
    
    (58,165
    )Loss from continuing operations
    
    $
    (21,608,045
    )
    
    $
    (5,152,993
    )
 
 (1)
    
    See Non-GAAP Measures Other Income and Expense
     34




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Income Tax Expense (Recovery)
  Loss from Continuing Operations
  Loss from Discontinued Operations
  Net Loss
  Liquidity and Capital Resources
    35




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36




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37




---



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Cash Flow from Operating Activities
     Cash Flow from Investing Activities
   38




---



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Cash Flow from Financing Activities
        39




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##### Table of Contents



Contractual Obligations
  As of September 30, 2007Contractual Obligations Due by PeriodTotal
    
    
    Within 1 Year
    
    

2  3 Years
    
    

4  5 Years
    
    
    ThereafterLong term debt (1)
    
    $
    25,485,196
    
    
    $
    23,939,882
    
    
    $
    1,545,314
    
    
    $
    
    
    
    $
    Operating leases, real property
    
    
    9,274,049
    
    
    
    3,391,110
    
    
    
    4,361,508
    
    
    
    1,521,431
    
    
    
    Operating leases, equipment and trucks
    
    
    1,161,089
    
    
    
    362,203
    
    
    
    566,599
    
    
    
    232,287
    
    
    
    Capital leases, I/T Equipment
    
    
    459,461
    
    
    
    166,014
    
    
    
    193,968
    
    
    
    99,479
    
    
    
    Capital leases  Vehicles (2)
    
    
    27,230,831
    
    
    
    10,914,375
    
    
    
    15,418,844
    
    
    
    897,612
    
    
    
    Total
    
    $
    63,610,626
    
    
    $
    38,773,584
    
    
    $
    22,086,233
    
    
    $
    2,750,809
    
    
    $
    
 
 (1)
    
    The long-term debt amounts in the schedule above do not include interest because it is at
variable rates. The estimated interest expense for the remainder of 2007, 2008-2009,
2010-2011 and thereafter is $1,998,081, $5,395,437 and nil, respectively. The Company
estimated interest expense based on current interest rates, current balances and scheduled
repayments. The amounts due have been restated from the amounts previously presented as a
result of the reclassification of balances due under the Laurus Revolver facility being
reclassified to current.(2)
    
    Capital lease obligations include interest in the table above. Off-Balance Sheet Arrangements
  Transactions with Related Parties
  Forward-Looking Statements
  40




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##### Table of Contents



Non-GAAP Measures
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  41




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Internal Control-Integrated Framework,
 Change in Internal Control over Financial Reporting
  42




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Part II  Other Information
 
 Item 6. Exhibits.
  Exhibit No.
    
    Description2.5
    
    
    Amendment No. 1 to the Arrangement Agreement dated as of July 2, 2007 (5)2.6
    
    
    Amendment No. 2 to the Arrangement Agreement dated as of August 6, 2007 (5)3.1
    
    
    Amended and Restated Certificate of Incorporation (7)3.2
    
    
    By-laws (2)4.1
    
    
    Specimen Unit Certificate (6)4.2
    
    
    Specimen Common Stock Certificate (6)4.3
    
    
    Specimen Warrant Certificate (6)10.1
    
    
    Securities Purchase Agreement dated March 21, 2006 among 180 Connect (Canada) and Midsummer Investment
Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC (5)10.2
    
    
    Registration Rights Agreement dated March 21, 2006 among 180 Connect (Canada) and Midsummer Investment
Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC (5)10.3
    
    
    Replacement Common Stock Purchase Warrant to purchase 206,556 common shares (7)10.4
    
    
    Replacement Common Stock Purchase Warrant to purchase 528,948 common shares (7)10.5
    
    
    Replacement Common Stock Purchase Warrant to purchase 206,556 common shares (7)10.6
    
    
    Security and Purchase Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect Inc. (a
Nevada Corporation), Mountain Center, Inc., JJ&V Communications Inc., Tumbleweed HS Inc., Piedmont
Telecommunications Inc., 180 Digital Interiors, Inc., HD Complete, Inc., Ironwood Communications Inc. and
Queens Cable Contractors, Inc. (5)10.7
    
    
    Secured Non-Convertible Revolving Note dated July 31, 2006 in the principal amount of $37,000,000 (5)10.8
    
    
    Secured Non-Convertible Revolving Term Note dated July 31, 2006 in the principal amount of $20,000,000 (5)10.9
    
    
    Overadvance Letter dated July 31, 2006 (5)10.10
    
    
    Guaranty of 180 Connect Inc. (a Nevada corporation) dated July 31, 2006 (5)10.11
    
    
    Guaranty of Wirecomm America, Inc. dated July 31, 2006 (5)10.12
    
    
    Stock Pledge Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation) and Wirecomm America, Inc. (5)10.13
    
    
    Share Pledge Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect (Canada) and
Wirecomm Systems Inc. (5)10.14
    
    
    Master Security Agreement dated July 31, 2006 between Wirecomm Systems Inc. and Laurus Master Fund, Ltd.
(5)10.15
    
    
    Canadian Master Security Agreement dated July 31, 2006 among Wirecomm Systems Inc., 180 Connect (Canada)
and Laurus Master Fund, Ltd. (5)10.16
    
    
    Amendment dated July 2, 2007 to that certain Secured Non-Convertible Revolving Note dated July 31, 2006 by
and among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada corporation) and other parties thereto (5)10.17
    
    
    Common Stock Purchase Warrant dated July 2, 2007 to purchase up to 1,000,000 common shares of 180 Connect
(Canada) (5)10.18
    
    
    Letter Agreement dated July 2, 2007 by and among 180 Connect (Canada), Howard S. Balter and Ilan Slasky (5)10.19
    
    
    Reaffirmation and Ratification Agreement dated July 2, 2007 executed and delivered by 180 Connect (Canada)
and its subsidiaries (5)10.20
    
    
    Amendment Agreement dated July 2, 2007 by and among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation) and its subsidiaries (5)
 43




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##### Table of Contents



Exhibit No.
    
    Description10.21
    
    
    Warrant Letter Agreement dated July 2, 2007 between Laurus Master Fund, Ltd. and the Company (4)10.22
    
    
    Tri-Party Letter Agreement dated July 10, 2007 among Laurus Master Fund, Ltd., 180 Connect (Canada),
Howard S. Balter and Ilan M. Slasky (5)10.23
    
    
    Home Services Provider Agreement dated June 1, 2005 among DIRECTV, Inc., 180 Connect Inc. (a Nevada
corporation) and Mountain Center, Inc. (5)10.24
    
    
    Form of SAR Exchange Agreement (5)10.25
    
    
    Executive Employment Agreement with Mark Burel (5)10.26
    
    
    Executive Employment Agreement with Steven Westberg (5)10.27
    
    
    Executive Employment Agreement with Peter Giacalone (5)10.28
    
    
    Amended Director Employment Agreement with M. Brian McCarthy (5)10.29
    
    
    Amendment to M. Brian McCarthy Amended Director Employment Agreement (5)10.30
    
    
    Form of Stock Option Agreement (8)10.31
    
    
    Form of Restricted Stock Units Agreement (8)10.32
    
    
    2007 Long-Term Incentive Plan (8)31.1
    
    
    Section 302 Certification by the Chief Executive Officer (*)31.2
    
    
    Section 302 Certification by the Chief Financial Officer (*)32.1
    
    
    Section 906 Certification by the Chief Executive Officer and Chief Financial Officer (*)
 
 *
    
    Filed herewith.(1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
March 15, 2007.(2)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (SEC File No.
333-124141).(3)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
January 30, 2007.(4)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
July 9, 2007.(5)
    
    Incorporated by reference to the Companys Registration Statement on Form S-4 (SEC File No.
333-142319).(6)
    
    Incorporated by reference to the Companys Form 8-A/A filed with the SEC on August 24, 2007.(7)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
August 30, 2007.(8)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
September 10, 2007. 44




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##### Table of Contents



Signatures
   180 CONNECT INC.By:
    /s/ Steven WestbergSteven WestbergChief Financial Officer and Principal Accounting
Officer and Duly Authorized Officer 45




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| |  |  |  | 
| |  |  |  | 

EXHIBIT INDEX


Exhibit No.
    
    Description2.5
    
    
    Amendment No. 1 to the Arrangement Agreement dated as of July 2, 2007 (5)2.6
    
    
    Amendment No. 2 to the Arrangement Agreement dated as of August 6, 2007 (5)3.1
    
    
    Amended and Restated Certificate of Incorporation (7)3.2
    
    
    By-laws (2)4.1
    
    
    Specimen Unit Certificate (6)4.2
    
    
    Specimen Common Stock Certificate (6)4.3
    
    
    Specimen Warrant Certificate (6)10.1
    
    
    Securities Purchase Agreement dated March 21, 2006 among 180 Connect (Canada) and Midsummer Investment
Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC (5)10.2
    
    
    Registration Rights Agreement dated March 21, 2006 among 180 Connect (Canada) and Midsummer Investment
Ltd., Radcliffe SPC, Ltd., and CAMOFI Master LDC (5)10.3
    
    
    Replacement Common Stock Purchase Warrant to purchase 206,556 common shares (7)10.4
    
    
    Replacement Common Stock Purchase Warrant to purchase 528,948 common shares (7)10.5
    
    
    Replacement Common Stock Purchase Warrant to purchase 206,556 common shares (7)10.6
    
    
    Security and Purchase Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect Inc. (a
Nevada Corporation), Mountain Center, Inc., JJ&V Communications Inc., Tumbleweed HS Inc., Piedmont
Telecommunications Inc., 180 Digital Interiors, Inc., HD Complete, Inc., Ironwood Communications Inc. and
Queens Cable Contractors, Inc. (5)10.7
    
    
    Secured Non-Convertible Revolving Note dated July 31, 2006 in the principal amount of $37,000,000 (5)10.8
    
    
    Secured Non-Convertible Revolving Term Note dated July 31, 2006 in the principal amount of $20,000,000 (5)10.9
    
    
    Overadvance Letter dated July 31, 2006 (5)10.10
    
    
    Guaranty of 180 Connect Inc. (a Nevada corporation) dated July 31, 2006 (5)10.11
    
    
    Guaranty of Wirecomm America, Inc. dated July 31, 2006 (5)10.12
    
    
    Stock Pledge Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation) and Wirecomm America, Inc. (5)10.13
    
    
    Share Pledge Agreement dated July 31, 2006 among Laurus Master Fund, Ltd., 180 Connect (Canada) and
Wirecomm Systems Inc. (5)10.14
    
    
    Master Security Agreement dated July 31, 2006 between Wirecomm Systems Inc. and Laurus Master Master Fund,
Ltd. (5)10.15
    
    
    Canadian Master Security Agreement dated July 31, 2006 among Wirecomm Systems Inc., 180 Connect (Canada)
and Laurus Master Fund, Ltd. (5)10.16
    
    
    Amendment dated July 2, 2007 to that certain Secured Non-Convertible Revolving Note dated July 31, 2006 by
and among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada corporation) and other parties thereto (5)10.17
    
    
    Common Stock Purchase Warrant dated July 2, 2007 to purchase up to 1,000,000 common shares of 180 Connect
(Canada) (5)10.18
    
    
    Letter Agreement dated July 2, 2007 by and among 180 Connect (Canada), Howard S. Balter and Ilan Slasky (5)10.19
    
    
    Reaffirmation and Ratification Agreement dated July 2, 2007 executed and delivered by 180 Connect (Canada)
and its subsidiaries (5)10.20
    
    
    Amendment Agreement dated July 2, 2007 by and among Laurus Master Fund, Ltd., 180 Connect Inc. (a Nevada
corporation) and its subsidiaries (5) 46




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Exhibit No.
    
    Description10.21
    
    
    Warrant Letter Agreement dated July 2, 2007 between Laurus Master Fund, Ltd. and the Company (4)10.22
    
    
    Tri-Party Letter Agreement dated July 10, 2007 among Laurus Master Fund, Ltd., [180 Connect Inc.], Howard
S. Balter and Ilan M. Slasky (5)10.23
    
    
    Home Services Provider Agreement dated June 1, 2005 among DIRECTV, Inc., 180 Connect Inc. (a Nevada
corporation) and Mountain Center, Inc. (5)10.24
    
    
    Form of SAR Exchange Agreement (5)10.25
    
    
    Executive Employment Agreement with Mark Burel (5)10.26
    
    
    Executive Employment Agreement with Steven Westberg (5)10.27
    
    
    Executive Employment Agreement with Peter Giacalone (5)10.28
    
    
    Amended Director Employment Agreement with M. Brian McCarthy (5)10.29
    
    
    Amendment to M. Brian McCarthy Amended Director Employment Agreement (5)10.30
    
    
    Form of Stock Option Agreement (8)10.31
    
    
    Form of Restricted Stock Units Agreement (8)10.32
    
    
    2007 Long-Term Incentive Plan (8)31.1
    
    
    Section 302 Certification by the Chief Executive Officer (*)31.2
    
    
    Section 302 Certification by the Chief Financial Officer (*)32.1
    
    
    Section 906 Certification by the Chief Executive Officer and Chief Financial Officer (*)
 
 *
    
    Filed herewith.(1)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
March 15, 2007.(2)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (SEC File No.
333-124141).(3)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
January 30, 2007.(4)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
July 9, 2007.(5)
    
    Incorporated by reference to the Companys Registration Statement on Form S-4 (SEC File No.
333-142319).(6)
    
    Incorporated by reference to the Companys Form 8-A/A filed with the SEC on August 24, 2007.(7)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
August 30, 2007.(8)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on
September 10, 2007. 47