CNCT China Teletech Holding Inc (PK)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days: Yes  x      No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  o       Accelerated filer  o       Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o       No x

As of November 9, 2007, there were 23,012,092 shares of the Registrant’s Common Stock issued and outstanding which excludes 2,508,060 exchangeable shares and 500,000 shares of common stock held in the Company’s treasury.

 

 

180 Connect Inc.
Form 10-Q
Quarter Ended September 30, 2007

Table of Contents

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

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A is filed to amend the Quarterly Report on Form 10-Q of 180 Connect Inc. (the “ Company ”) for the fiscal quarter ended September 30, 2007 (the “ Initial Filing ”) in order to correct an error in our Consolidated Balance Sheets as of September 30, 2007 and as of December 31, 2006. We determined that the long-term debt for our revolving credit facility should be reclassified as current in accordance with EITF-95-22. These restatements to reclassify certain amounts of long-term debt as current portion of long-term debt had no impact on the amounts of total debt previously reported in the consolidated balance sheets as of September 30, 2007 and December 31, 2006, the amount of the net loss and comprehensive income (loss) reported in the consolidated statements of operations and comprehensive income (loss) and the statements of shareholders’ equity and cash flows for each of the above noted periods. As a result of these reclassifications, the current portion of long-term debt increased by $17,122,530 and $20,534,422 as of September 30, 2007 and December 31, 2006, respectively, with a corresponding decrease of the same amount to long-term debt for each of the respective periods.

     Except as set forth in this Amendment No. 1 on Form 10-Q/A, the other Items in the Initial Filing remain unchanged and are not restated herein. This Amendment No. 1 continues to reflect circumstances as of the date of the Initial Filing and the Company has not updated the disclosures contained therein to reflect events that occurred at a later date, except for the items relating to the restatement.

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 Assets
Cash and cash equivalents		$	969,285			$	2,904,098
Accounts receivable (less allowance for doubtful accounts of $1,652,894 and $2,506,637, respectively)			52,009,680				48,934,952
Inventory			18,388,807				15,816,148
Restricted cash			11,859,300				14,503,000
Prepaid expenses and other assets			7,523,344				7,910,255
TOTAL CURRENT ASSETS			90,750,416				90,068,453
Property, plant and equipment			31,375,700				34,882,890
Goodwill			11,034,723				11,034,723
Customer contracts, net			22,311,634				25,072,756
Deferred tax asset			276,608				—
Other assets			2,621,795				4,384,750
TOTAL ASSETS		$	158,370,876			$	165,443,572
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities		$	81,395,821			$	78,686,245
Current portion of long-term debt			23,939,882				26,502,096
Fair value of derivative financial instruments			8,194,756				4,065,729
Current portion of capital lease obligations			9,968,067				13,033,104
TOTAL CURRENT LIABILITIES			123,498,526				122,287,174
Income tax liability			387,212				—
Long-term debt			1,545,314				12,264,621
Convertible debt			—				6,276,584
Capital lease obligations			15,621,286				15,213,112
TOTAL LIABILITIES			141,052,338				156,041,491
Commitments and contingencies (Notes 5, 17 and 19)
Shareholders’ Equity
Common 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				1,469
Paid- in capital			121,698,780				91,871,813
Treasury 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				485,030
TOTAL SHAREHOLDERS’ EQUITY			17,318,538				9,402,081
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	158,370,876			$	165,443,572

See accompanying notes

180 Connect Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(in United States Dollars)
(Unaudited)

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Revenue		$	102,521,340			$	89,908,346			$	283,615,672			$	239,245,733
Expenses
Direct expenses			89,914,862				78,711,246				254,853,816				216,089,499
General and administrative			4,054,289				4,712,862				13,802,266				13,933,478
Non-cash stock-based compensation			227,019				—				227,019				91,214
Foreign exchange loss (gain)			(72,760	)			(469	)			(113,442	)			3,033
Restructuring costs			—				—				275,000				392,879
Depreciation			3,058,116				3,433,006				8,574,819				10,013,336
Amortization of customer contracts			920,376				929,727				2,761,122				2,789,180
Other (income) expense
Interest and loan fees			7,801,006				2,898,538				14,012,024				6,925,495
Gain 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				14,625,856
Weighted average number of shares outstanding — diluted			20,243,082				15,510,667				17,011,000				14,625,856

See accompanying notes

180 Connect Inc.
Consolidated Statements of Cash Flows
(in United States Dollars)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Cash provided by (used in) the following activities:
Operating
Income (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				12,802,516
Non-cash interest expense			4,680,713				1,008,180				6,865,837				2,124,570
Stock-based compensation			227,019				—				227,019				91,214
Future 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				3,106
Changes in non-cash working capital balances related to operations:
Accounts receivable			(11,009,290	)			(13,939,349	)			(3,074,728	)			4,339,502
Inventory			(3,624,307	)			(5,004,743	)			(2,572,659	)			2,522,490
Other 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				247,366
Accounts 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	)			192,292
Investing
Purchase of property, plant and equipment			(360,421	)			(630,210	)			(2,052,529	)			(2,091,671	)
Net proceeds from disposition of investments			—				—				—				1,327,693
Total cash used in investing activities			(360,421	)			(630,210	)			(2,052,529	)			(763,978	)
Financing
Repayment 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				259,712
Net 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	)			1,098,488
Issuance 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			—				—				—				10,686,101
Proceeds from refinancing of long-term debt			—				42,140,497				—				42,140,497
Extinguishment 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				3,353,452
Cash and cash equivalents, end of period		$	969,285			$	448,537			$	969,285			$	448,537
Supplemental cash flow information:
Interest paid		$	1,691,880			$	1,425,122			$	6,102,000			$	4,504,060
Income taxes paid		$	76,715			$	228,935			$	219,298			$	323,292

Supplemental disclosure of non-cash investing and financing transactions:
For the nine months ended September 30, 2007 and September 30, 2006, the Company had additional capital lease obligations for vehicles of $3,182,956 and $6,797,554, respectively.

See accompanying notes

180 Connect Inc.
Notes to Consolidated Financial Statements
(In United States Dollars)
(Unaudited)

1. BASIS OF PRESENTATION

     On August 24, 2007 (the “Effective Date”), the plan of arrangement (the “Arrangement”) pursuant to the arrangement agreement (the “Arrangement Agreement”), dated as of March 13, 2007, as amended, by and among Ad.Venture Partners, Inc. (“AVP”), 180 Connect Exchangeco Inc., a wholly owned subsidiary of the Company (“Purchaser”) and 180 Connect Inc., a corporation incorporated under the laws of Canada (“180 Connect (Canada)”) was consummated pursuant to which the Purchaser (i) acquired all of the outstanding common shares of 180 Connect (Canada) in exchange for either shares of Company common stock, exchangeable shares of Purchaser that are exchangeable into shares of Company common stock at the option of the holder (“exchangeable shares”), or a combination of Company common stock and exchangeable shares of Purchaser, and (ii) outstanding options to purchase 180 Connect (Canada) common shares were exchanged for options to purchase Company common stock. As a result of the closing of the Arrangement, based on an exchange ratio of 0.6, the 180 Connect (Canada) stockholders were issued an aggregate of 13,643,183 shares of Company common stock, and 2,779,260 shares exchangeable into shares of common stock. The AVP shareholders held 9,577,709 of common shares of the Company immediately after the consummation of the Arrangement. Effective upon the consummation of the Arrangement, AVP changed its name to 180 Connect Inc. (the “Company”).

     Because the consummation of the Arrangement resulted in more than 50% of the voting securities of the Company being held by the shareholders of 180 Connect (Canada), the Arrangement has been accounted for under the reverse acquisition application of the equity recapitalization method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method of accounting, AVP was treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, the Arrangement is considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Arrangement was treated as the equivalent of 180 Connect (Canada) issuing stock for the net monetary assets of AVP, accompanied by a recapitalization. The net monetary assets of AVP were recorded at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The accumulated deficit of 180 Connect (Canada) has been carried forward after the closing. Operations prior to the closing for all periods presented are those of 180 Connect (Canada). All common shares, warrants, options and earning per share amounts related to transactions and periods prior to August 24, 2007 have been restated in these financial statements to reflect the 0.6 exchange ratio applied to 180 Connect (Canada)’s equity instruments.

     The interim consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles applicable to interim consolidated financial statements and include 180 Connect Inc. (formerly known as Ad.Venture Partners, Inc.) and its subsidiaries (the “Company”). The notes presented in these interim consolidated financial statements include only significant events and transactions occurring since the Company’s last fiscal year and are not fully inclusive of all matters normally disclosed in the Company’s annual audited consolidated financial statements. As a result, these interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2006, included as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2007.

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

     In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to fairly present the Company’s results for the interim periods presented. These unaudited interim consolidated financial statements have been prepared by management using the same accounting policies and methods of application as the most recent annual consolidated financial statements of the Company except as described in Note 2 below.

     The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

      Seasonality

     The Company’s revenue is subject to seasonal fluctuations. Our customers’ subscriber growth, and thus the revenue earned by the Company, trends higher in the third and fourth quarters of the year. While subscriber activity is subject to seasonal fluctuations, it may also be affected by competition and varying amounts of promotional activity undertaken by the Company’s customers.

      Change in Accounting Estimate

     In the first quarter of 2007, the Company changed its depreciation period on its leased vehicles from 48 months to 60 months, resulting in a decrease of approximately $0.7 million and $2.1 million in depreciation expense and an increase of $0.03 and $0.12 in earnings per share for the three and nine months ended September 30, 2007, respectively. This change in accounting estimate was adopted to better reflect the useful life of the asset and was applied prospectively from January 1, 2007.

2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 2006, the FASB issued SFAS 155 — Accounting for Certain Hybrid Financial instruments — an amendment of FASB Statements No. 133 and 140 (“SFAS 155”). This Statement:

	•		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.

     SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the Company’s fiscal year that commences on January 1, 2007. The application of this pronouncement had no material impact on the financial position or results of operations of the Company.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective for the fiscal years beginning after November 15, 2007. The Company is currently reviewing SFAS 157, but has not yet determined the impact on the consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) including an amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.

The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing SFAS 159, but has not yet determined the impact on the consolidated financial statements.

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”, and prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 and were adopted by the Company effective January 1, 2007. The impact of adoption of FIN 48 is disclosed in Note 12.

3. RESTRICTED CASH

     As at September 30, 2007 and December 31, 2006, the Company had restricted cash, in the form of term deposits of approximately $11.9 million and $14.5 million, respectively. These term deposits are used to collateralize obligations associated with its insurance program and for contractor licensing surety bonds in several states. Interest earned of 3% to 5% on these funds is received monthly and is not subject to restriction.

     On February 8, 2007, as a result of a reduction in its insurance obligations, the Company negotiated a reduction in its required letter of credit (“LOC”). The LOC requirement, which is collateralized with the Company’s restricted cash, has been reduced by $3.2 million. This reduction in the Company’s restricted cash balance has been offset by a $1.6 million increase in restricted cash as collateral for a $1.6 million bond for the Boise Airport project currently in progress by the Company’s Network Services operation.

4. GOODWILL AND CUSTOMER CONTRACTS

     The carrying amount of intangibles is as follows:

						Customer
		Goodwill				Contracts
Balance as of December 31, 2006		$	11,034,723			$	25,072,756
Amortization expense			—				(2,761,122	)
Balance at of September 30, 2007		$	11,034,723			$	22,311,634

     Amortization expense charged to continuing operations for the three and nine months ended September 30, 2007 was $920,376 and $2,761,122, respectively, and for the three and nine months ended September 30, 2006 was $929,727 and $2,789,180, respectively.

     Estimated future amortization expense is as follows:

2007 (remainder)		$	920,381
2008			3,681,503
2009			3,681,503
2010			3,681,503
2011			3,681,503
Thereafter			6,665,241
Total		$	22,311,634

     Operating lease expense for the three months ended September 30, 2007 and September 30, 2006, was $972,008 and $1,029,473, respectively, and $2,916,620 and $2,931,876 for the nine months ended September 30, 2007 and September 30, 2006, respectively.

5. LONG-TERM DEBT AND COMMON STOCK PURCHASE WARRANTS

     Long-term debt consists of the following:

		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			$	19,758,475
Term 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				19,008,242
Total debt			25,485,196				38,766,717
Less: current portion			(23,939,882	)			(26,502,096	)
Total long-term debt		$	1,545,314			$	12,264,621

     Pursuant to the original terms of the debt agreement with Laurus Master Fund, Ltd (“Laurus”), the Company, through its wholly-owned subsidiary 180 Connect, Inc. (“180 Connect Nevada”), had available a maximum amount of $57 million of debt comprising a term facility of $20 million and a combined revolving credit facility and over-advance facility of up to $37 million. The revolving credit facility is subject to the Company’s eligible trade receivables and inventory as per the debt agreement. For the period of August 1, 2006 to July 31, 2007, 180 Connect (Canada) was able to draw in excess of the eligible trade receivables and inventory an over-advance amount up to $9 million but not to exceed an aggregate amount of $37 million. After July 31, 2007, the over advance became part of the revolving facility, this date was further extended to August 24, 2007. The interest rates on the new debt range from prime plus 3% to prime plus 5%, subject to a minimum interest rate of 10% to 12%, and are therefore subject to risk relating to interest rate fluctuations. Monthly term loan repayments commenced February 1, 2007 for $666,667.

     The debt agreement states that there are no financial covenants of the Company with respect to such facilities but includes other covenants and events of default typical for credit facilities of this nature. This facility is collateralized by a security interest in all of the assets of 180 Connect Nevada. 180 Connect Nevada obtained a waiver from Laurus, with regards to the Arrangement, as such transaction may have constituted a change of control as defined in the debt agreement.

     In connection with the debt agreement, in August, 2006 the Company issued warrants to Laurus to purchase up to 1,200,000 common shares for nominal consideration of Canadian $0.01 per share, having a term of seven years. Laurus agreed not to sell any common shares of the Company issuable upon exercise of the warrants for a period of 12 months following the date of issuance of the warrants. Thereafter, Laurus may, at its option and assuming exercise of the warrants, sell up to 150,000 common shares of the Company per calendar quarter (on a cumulative basis) over each of the following eight quarters. On April 2, 2007, Laurus exercised its right under the warrants to purchase the 1,200,000 common shares (Note 8).

     The common stock purchase warrants were valued at $3,286,967, net of issuance costs of $299,165, using the Black-Scholes option pricing model using the following variables: volatility of 76.64%, expected life of seven years, a risk free interest rate of 4.5% and a dividend of nil. The fair value of the loan was measured using a three-year maturity and the present value of the cash payments of interest and principal due under the terms of the debt agreement discounted at a rate of 17.5% which approximates a similar non-convertible financial instrument with comparable terms and risk. Under Emerging Issues Task Force No.00-19 and APB Opinion No.14, the fair value of warrants issued in connection with the stock purchase warrants would be recorded as a reduction to the proceeds from the issuance of long-term debt, with the offset to additional paid-in capital. At September 30, 2007, the Company had recorded $1,635,511 of accretion expense in the consolidated statements of operations and comprehensive income (loss). The Company paid $3,515,471 of issuance costs to complete the long-term debt financing, these costs are in other assets and are being amortized over the three-year period to maturity of the debt agreement with Laurus.

     On July 2, 2007, 180 Connect (Canada) entered into an amendment agreement with Laurus securing additional interim financing to fund working capital until August 24, 2007.

     Pursuant to the terms of the amendment agreement, Laurus agreed to provide an additional $8.0 million to 180 Connect (Canada) as an increase to the $37.0 million revolving loan, for a total revolving loan of $45.0 million. As part of this arrangement, Laurus also agreed to extend the maturity of the existing $9.0 million over-advance on the revolving loan from July 31, 2007 until August 24, 2007.

     Certain shareholders of AVP (“the AVP Shareholders”) agreed to provide a limited recourse guaranty for the additional financing Laurus provided to 180 Connect (Canada) by placing $7.0 million in a brokerage account pledged to Laurus which was to be used solely to purchase shares of common stock of AVP. As consideration for the guaranty and pledge, 180 Connect agreed to reimburse the AVP Shareholders up to $150,000 for their fees and expenses in connection with the guaranty and pledge.

     On July 2, 2007 in connection with the amendment agreement, 180 Connect (Canada) issued Laurus warrants to purchase 600,000 common shares of 180 Connect (Canada) with a five-year term, exercisable at $4.35 per share, the adjusted market price of 180 Connect (Canada)’s common stock at the time of issue, with the shares issuable thereunder subject to a one-year lock-up. The common stock purchase warrants were valued at $1,525,639, using the Black-Scholes option pricing model using the following variables: volatility of 61%, expected life of five years, a risk free interest rate of 4.25% and a dividend of nil. On August 24, 2007 the Company issued an additional 250,000 warrants exercisable at $4.01, the closing price on the first date after consummation of the Arrangement, which were valued at $558,258 using the same pricing model and variables as the 600,000 warrants described above. At September 30, 2007, the Company had recorded an expense in interest and loan fees in the consolidated statements of operations and comprehensive income (loss) for $2,083,897 and a credit to paid in capital, respectively, as the bridge financing loans have expired.

     During the third quarter of 2007, the Company and Laurus entered into a settlement with regard to a dispute over an alleged misrepresentation and event of default under the provisions of the Laurus debt agreements that Laurus alleged occurred as a result of the repayment of the convertible debentures after consummation of the Arrangement. Under the settlement, the Company agreed to reduce the exercise price of the 850,000 warrants that Laurus holds in the Company. Of the original 600,000 warrants issued to Laurus on July 2, 2007, 450,000 warrants were re-priced with the exercise prices reduced from $4.35 to $0.01 and 150,000 warrants were re-priced with the exercise prices reduced from $4.35 to $3.00. The 250,000 warrants issued on August 24, 2007 were re-priced with the exercise price reduced from $4.01 to $3.00. The common stock purchase warrants were re-valued immediately before and after the re-pricing, using the Black-Scholes option pricing model using the following variables:

volatility of 61%, expected life of five years, a risk free interest rate of 4.25% and a dividend of nil. The re-pricing of the warrants increased the fair value of warrants by an additional $1,003,763 and is recorded as an expense in interest and loan fees in the consolidated statement of operations and comprehensive income (loss) and a credit to paid-in capital.

     Laurus also received a 2.5% management fee on the $8.0 million increase to the revolver or $200,000 and a $1.4 million commitment fee which was paid on August 27, 2007, and expensed in interest and loan fees in the consolidated statements of operations and comprehensive income (loss).

     Upon consummation of the Arrangement, the Company had no outstanding balance on the additional $8.0 million revolving loan or the existing $9.0 million over-advance facility. Additionally, the Company paid down $5.0 million of principal on its term loan. For the three months ended September 30, 2007 the Company repaid a total of $7.0 million of term debt, $10.4 million of convertible debt and a portion of the Company’s revolving credit facility, which may be re-borrowed subject to the provisions of the debt agreement.

     Subsequent to the issuance of the Company’s audited and unaudited consolidated financial statements as of and for the year ended December 31, 2006, and as of and for the nine months ended September 30, 2007, respectively, the Company’s management determined that an error existed in previously issued consolidated balance sheets. The Company determined that the long-term debt for the Revolver credit facility should be classified as current in accordance with EITF-95-22, “ Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lockbox Arrangement” (“EITF 95-22”) . As a result, the accompanying balance sheets as of December 31, 2006 and September 30, 2007 have been restated from amounts previously reported in Form 8-K dated August 24, 2007 and in the Form 10-Q dated November 14, 2007, respectively. The restatement had no impact on the previously reported consolidated statements of operations and comprehensive income (loss), shareholders’ equity or cash flows. A summary of the effects of these restatements are as follows:

		Previously Reported				As restated
		September 30, 2007				September 30, 2007
Current portion of long-term debt		$	6,817,352			$	23,939,882
Long-term debt			18,667,844				1,545,314

		Previously Reported				As restated
		December 31, 2006				December 31, 2006
Current portion of long-term debt		$	5,967,674			$	26,502,096
Long-term debt			32,799,043				12,264,621

     The Company’s revolving credit facility (the ‘Revolver”) requires a lockbox arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the credit facility. This arrangement, combined with the existence of a subjective acceleration clause in the revolving credit facility, requires that the borrowings under the Revolver be classified as a current liability on the balance sheet in accordance with EITF 95-22. The acceleration clause could allow the Company’s lender to forego additional advances should they determine there has been a material adverse change in the Company’s financial position or prospects reasonably likely to result in a material adverse effect on the Company’s business, condition (financial or otherwise), operations, performance or properties. The Company believes that no such material adverse change has occurred; further, as of March 27, 2008, the Company’s lender had not informed the Company that any such event had occurred.

6. CONVERTIBLE DEBENTURES

     On March 22, 2006, the Company completed a private placement with a group of qualified, accredited institutional investors of $10,686,101 of convertible debentures and warrants (Note 7). During the second quarter of 2007, one of the convertible debentures holders exercised its option to convert in total $2,024,785 of principal under the convertible debentures into 510,000 common shares.

     The consummation of the Arrangement constituted an event of default under 180 Connect (Canada)’s convertible debentures. In the third quarter of 2007, the convertible debenture holders exercised their right to redeem the convertible debentures in full. The Company paid the holders of the convertible debentures $10,393,577 which included outstanding principal and a 20% redemption premium, excluding accrued but unpaid interest.

7. WARRANTS AND DERIVATIVE FINANCIAL INSTRUMENTS

     The warrants issued in connection with the Company’s March 22, 2006 private placement (“the PIPE Warrants”) are presented as a liability because they do not meet the criteria of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, for equity classification. Subsequent changes in fair value are recorded in the consolidated statements of operations and comprehensive income (loss). The PIPE Warrants, which have a four-year term, are exercisable into 942,060 common shares of the Company at an exercise price of $4.3311 per share.

     The Company determined the fair value of the PIPE Warrants at September 30, 2007 using a Black-Scholes pricing model. The following assumptions were used for the Black-Scholes pricing model: an expected life of 2.5 years, volatility of 61% and a risk-free rate of 4.25%.

     Each of the publicly traded warrants issued in connection with the initial public offering of AVP (the “public warrants”) and the unit purchase option issued to the underwriters in connection with such initial public offering, were classified as a derivative liability, as required under EITF No. 00-19, because in the absence of explicit provisions to the contrary in the warrant and purchase option agreement, the Company must assume that it could be required to settle the warrants and the unit purchase option on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. Subsequent to September 30, 2007, the Company entered into a Warrant Clarification Agreement which amended the warrant agreement governing the public warrants to clarify that no obligation exists for cash settlement of the public warrants; a similar amendment was entered into with respect to the unit purchase option (Note 19).

     Under the provisions of EITF No. 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. The fair value of the public warrants and the unit purchase option are shown on the Company’s balance sheet as fair value of derivative financial instruments and the changes in the fair values of these derivatives are shown in the Company’s consolidated statements of operations as “Gain (loss) on change in fair value of derivative liabilities.” Since the public warrants are quoted on the Over-the-Counter Bulletin Board, the fair value of the public warrants was determined based on the market price of the warrants at the end of each period. To the extent that the market price increases or decreases, the Company’s derivative liability will also increase or decrease, impacting the Company’s consolidated statement of operations. As of September 30, 2007, the closing sale price for the warrants was $0.40, resulting in a total warrant liability of $7,200,000.

     The Company determined the fair value of the unit purchase option at September 30, 2007 using a Black- Scholes pricing model adjusted to include a separate valuation of the embedded warrants. The following assumptions were used for the Black Scholes pricing model: an expected life of 2.9 years, volatility of 62% and a risk-free rate of 4.02%. Valuations derived from this model are subject to ongoing internal and external verification and review. Selection of these inputs involves management’s judgment and may impact net income (loss). The volatility factor used in the Black-Scholes model has a significant effect on the resulting valuation of the derivative liabilities on the Company’s consolidated balance sheet. For the embedded warrants, the Company based the valuation on the closing sale price for the public warrants as of September 30, 2007 adjusted by the percentage difference between the valuations obtained using a Black-Scholes pricing model (with the same assumptions) for the public warrants and the embedded warrants.

     The Company determined the fair value of the unit purchase option at August 24, 2007 using a Black-Scholes pricing model adjusted to include a separate valuation of the embedded warrants. The following assumptions were used for the Black-Scholes pricing model: an expected life of 3.01 years, volatility of 63% and a risk-free rate of 4.31% resulting in a valuation of $636,225. As of August 24, 2007, the closing sale price for the public warrants was $0.35, resulting in a total warrant liability of $6,300,000. The fair market value of the total derivative of $6,936,225 was recorded as a credit to the fair value of derivative financial instruments and a debit to paid-in capital, as it represents the fair market value of the derivative liability just prior to the Arrangement.

     In connection with the Arrangement, two unrelated third parties agreed with180 Connect (Canada) to purchase 400,000 and 100,000 shares, respectively, of common stock of AVP and to vote these shares in favor of the Arrangement at the August 24, 2007 AVP shareholders meeting. 180 Connect (Canada) agreed to a make whole formula with these individuals to be settled within 30 days of consummation of the Arrangement. One of the individuals also received an option to acquire 16,000 AVP shares for $0.01 per share from Messrs. Balter and Slasky (initial stockholders and officers and directors of AVP and, after consummation of the Arrangement, directors of the Company).

     At the maturity date of this arrangement, which was the 30 ^th day following consummation of the Arrangement, the Company’s make whole liability was $2.8 million, and the Company agreed with each of such parties, in lieu of satisfaction of the make whole arrangement, to repurchase the shares and the option held by such parties for $3.0 million. The transaction resulted in a loss of $2.8 million on the settlement of derivative liabilities and $0.2 million has been recorded as a stock repurchase. The option remains outstanding.

     The following tables show the changes in the fair values of derivative instruments recorded in the consolidated financial statements for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

										Embedded
		PIPE				Public				Derivatives of				Stock
		Warrants				Warrants				Convertible Debt				Repurchase				Total
Three months ended September 30, 2007 and September 30, 2006, respectively:
Fair value, June 30, 2007		$	2,396,406			$	—			$	5,245,338			$	—			$	7,641,744
Fair value, August 24, 2007			—				6,936,225				—				—				6,936,225
Changes in fair value			(1,718,460	)			580,585				(741,636	)			2,766,573				887,062
Settlement 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			$	8,194,756
Fair value, June 30, 2006		$	1,648,227			$	—			$	4,947,013			$	—			$	6,595,240
Changes in fair value			(1,191,885	)			—				(3,407,445	)			—				(4,599,330	)
Fair value, September 30, 2006		$	456,342			$	—			$	1,539,568			$	—			$	1,995,910
Nine months ended September 30, 2007 and September 30, 2006, respectively:
Fair value at December 31, 2006		$	1,035,207			$	—			$	3,030,522			$	—			$	4,065,729
Fair value, August 24, 2007			—				6,936,225				—				—				6,936,225
Changes in fair value			(357,261	)			580,585				2,586,826				2,766,573				5,576,573
Settlement 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			$	8,194,756
Fair value at March 22, 2006		$	1,076,693			$	—			$	4,352,972			$	—			$	5,429,665
Changes in fair value			(620,351	)			—				(2,813,404	)			—				(3,433,755	)
Fair value, September 30, 2006		$	456,342			$	—			$	1,539,568			$	—			$	1,995,910

8. CHANGES IN SHAREHOLDERS’ EQUITY

180 Connect Inc.
Consolidated Statements of Shareholders’ Equity
(in United States Dollars)
(Unaudited)

																		Accumulated
																		Other
		Common				Paid in				Treasury								Comprehensive
		Stock				Capital				Stock				Deficit				Income				Total
Balance, December 31, 2006		$	1,469			$	91,871,813			$	—			$	(82,956,231	)		$	485,030			$	9,402,081
Issuance on exercise of stock options for cash							44,112																44,112
Issuance on exercise of warrants for cash							17,260																17,260
Issuance on conversion of convertible debt							2,293,230								—								2,293,230
Stock-based compensation							227,019																227,019
Net proceeds from reverse merger							37,933,165																37,933,165
Issuance 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																3,087,660
Acquisition 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

     On April 2, 2007, Laurus exercised its right under the warrants held by it to purchase 1,200,000 common shares for $17,260, resulting in a debit to cash for $17,260, and a credit to paid-in capital of $17,260. During the second quarter of 2007, one of the holders of the convertible debentures and PIPE warrants exercised its option to convert in total $2,024,785 of principal under the 9.33% convertible debentures into 510,000 common shares. This was recorded as a debit to convertible debt and embedded derivative liabilities and a credit to paid-in capital of $2,452,205. In addition, $158,975 of the associated issuance costs were reclassified from other assets to paid-in capital.

     On August 24, 2007, the Arrangement was consummated. The Arrangement is accounted for under the reverse acquisition application of the equity recapitalization method of accounting in accordance with U.S. GAAP for accounting and financial reporting purposes. As a result of the transaction, the Company received $37,933,165 in proceeds net of AVP’s transaction costs related to the Arrangement and incurred $6,976,440 in issuance costs attributed to equity. The acquisition of the net assets of AVP reduced paid-in capital by $6,797,958 primarily for the net fair value of derivative financial instruments associated with the public warrants that existed before the Arrangement (Note 7).

     In the third quarter, the Company re-purchased 500,000 shares of common stock resulting in a charge to equity of $224,019 (Note 7), and issued a total of 850,000 warrants to Laurus for $3,087,660 (Note 5). The Company also recorded non-cash stock-based compensation expense of $227,019 upon approval of the Long-Term Share Compensation Plan (Note 9).

     The table below shows the number of shares that would be outstanding if all potential dilutive instruments were exercised or converted:

		Number of Shares
Total Outstanding Shares as of September 30, 2007			25,500,152
Potentially Dilutive Securities
PIPE Warrants			942,060
Laurus Warrants			850,000
Employee stock options			1,487,729
Employee restricted stock units			815,750
Share appreciation rights			167,999
Public Warrants and Unit Options			19,350,000
Maximum Potential Diluted Shares Outstanding			49,113,690

9. STOCK -BASED COMPENSATION

     During 2007, the Company established the Long-Term Share Compensation Plan (the “LTIP”) for the benefit of executive officers and key employees. The LTIP was approved by the shareholders in conjunction with the consummation of the transaction with AVP. Outside directors of the Company and consultants to the Company are not entitled to participate in the LTIP. The LTIP was designed to strengthen the ability of the Company to attract and retain qualified officers and employees which the Company and its affiliates require; encourage the acquisition of a proprietary interest in the Company by such officers and employees, thereby aligning their interests with the interests of the Company’s shareholders; and focus management of the Company and its affiliates on operating and financial performance and total long-term shareholder return by providing an increased incentive to contribute to the Company’s growth and profitability. Pursuant to the LTIP, the Board of Directors may grant options to purchase common shares, share appreciation rights and restricted stock units up to 2,000,000 shares, of which 1,980,000 were granted during the three months ended September 30, 2007.

     In addition to the LTIP, during the fourth quarter of 2006, 180 Connect (Canada)’s Board of Directors granted 167,999 share appreciation rights to several of the Company’s officers and senior management. The share appreciation rights have an exercise price of $2.50, expire December 6, 2011 and are settleable in common shares of the Company. The fair value of the share appreciation rights is measured at the date of approval and compensation expense is recorded in the period. The share appreciation rights were measured at August 24, 2007 (the date of approval) and vest over a four-year term ending December 6, 2010. 180 Connect (Canada) had previously issued stock options or other stock-based compensation which was assumed by the Company pursuant to the terms of the Arrangement.

     The Company used the Black-Scholes option pricing model to estimate the fair value of stock options, restricted stock units, and share appreciation rights and used the ratable method to amortize compensation expense over the vesting period of the grant. Pursuant to the LTIP certain senior executives were granted accelerated stock options and restricted stock units on September 5, 2007 that vest over a three-year term. The remaining stock options and restricted stock units also granted on September 5, 2007 vest over a four-year term.

     Total non-cash stock compensation expense recorded as operating expense for the three and nine months ended September 30, 2007 was $227,019.

     The fair value of each stock option, restricted stock unit and share appreciation right granted was estimated using the following assumptions for the three and nine months ended September 30, 2007:

										3 Year								Share
		3 Year				4 Year				Restricted Stock				4 Year Restricted				Appreciation
		Stock Options				Stock Options				Units				Stock Units				Rights
Number granted			499,750				664,500				445,250				370,500				167,999
Stock price on day of grant		$	3.25			$	3.25			$	3.25			$	3.25			$	4.01
Exercise price		$	3.25			$	3.25				—				—			$	2.50
Expected life in years			4.5				4.75				3				3.25				3.75
Vesting period in years			3				4				3				4				4
Interest 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

     In connection with the 2003 acquisition of the remaining 7% interest in Cable Play Inc., the Company exchanged 2,726,592 of its options for 3,181,922 options of those previously granted by Cable Play Inc. The Company applied FASB interpretation No.44 (“FIN44”), “Accounting for Certain Transactions Involving Stock Compensation.” The fair value of the unvested options granted at the date of acquisition of $4,126,541 was recognized as compensation cost over the remaining vesting periods and the Company recorded compensation expense of nil and $91,214, for the nine months ended September 30, 2007 and 2006, respectively.

     As at September 30, 2007, the Company had 2,471,478 total options, restricted stock units and share appreciation rights outstanding to employees and directors of the Company (as of December 31, 2006 the Company has 349,946 stock options outstanding) to purchase an equal amount of common shares. The options have a life of up to 10 years from the date of grant. Vesting terms and conditions are determined by the Board of Directors at the time of grant and vesting terms range from three to five years. On October 2, 2007, 20,000 stock options granted as part of the Cable Play acquisition were exercised.

     The following table summarizes the Company’s stock option, restricted stock units and share appreciation rights activity:

		Nine Months Ended								Year Ended
		September 30, 2007								December 31, 2006
		Number of				Weighted Average				Number of				Weighted Average
		Options				Exercise Price				Options				Exercise Price
Outstanding, beginning of period			349,946			$	2.92				856,000			$	2.18
Granted			2,147,999			$	1.96				—				—
Exercised			(26,467	)		$	1.67				(155,827	)		$	1.67
Cancelled			—				—				(350,227	)		$	1.67
Outstanding, end of period			2,471,478			$	2.10				349,946			$	2.92
Options exercisable, end of period			323,479			$	3.01				349,946			$	2.92

     The following table summarizes information about stock options, restricted stock units and share appreciation rights outstanding as at September 30, 2007:

		Options Outstanding and Exercisable
						Weighted Average
						Remaining
		Number				Contractual Life				Weighted Average
Security		of Shares				(Years)				Exercise Price
Restricted stock units under LTIP			815,750				3.92				—
Stock options granted during Cable Play acquisition			323,479				2.51			$	3.01
Share appreciation rights			167,999				4.17			$	2.50
Stock options granted under LTIP			1,164,250				6.92			$	3.25

10. RELATED PARTY TRANSACTIONS

     During the second quarter of 2006, the Company entered into a one-year arrangement with a then member of its Board of Directors for professional services to be provided in connection with the Company’s long-term debt refinancing and strategic alternatives process. The agreement provided for maximum base compensation of $300,000. During 2006, in addition to base salary payments, the director earned and was paid $240,000 in connection with the Company’s debt refinancing and a $210,000 discretionary bonus, of which $60,000 was paid in 2006, $150,000 was paid in the first quarter of 2007 and $185,000 was paid in the third quarter of 2007.

11. RESTRUCTURING COSTS

     Restructuring costs and remaining reserve as at September 30, 2007 consist of the following:

						Restructuring
		Reserve				Costs Incurred								Reserve
		December 31, 2006				in 2007				Paid During 2007				September 30, 2007
Rent		$	—			$	275,000			$	218,750			$	56,250
Moving expenses			500				—				500				—
Other			6,325				—				6,325				—
Total restructuring		$	6,825			$	275,000			$	225,575			$	56,250

     In the first quarter of 2007, there was a $0.3 million charge for additional costs associated with completion of the Company’s relocation of its back office operations and corporate offices to Denver related to a lease termination.

12. INCOME TAXES

		Three Months Ended								Nine Months Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Allocation of income tax expense (recovery)
Current income tax expense		$	130,583			$	83,035			$	272,423			$	121,835
Future 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	)

     The Company recorded a current income tax expense of $0.1 million and a $0.1 million recovery for the three months ended September 30, 2007 and September 30, 2006 respectively, and a $0.4 million tax expense and a $0.06 million recovery for the nine months ended September 30, 2007 and September 30, 2006, respectively.

     The adoption of FIN 48 effective January 1, 2007 resulted in an increase of tax liabilities of $387,212 and a corresponding decrease of the valuation allowance of $276,608 and an income tax expense of $110,604 as at January 1, 2007.

     As of the date of adoption, the Company’s total gross unrecognized benefit is $1,153,269 of which $110,604, if recognized, would impact the effective tax rate. There are no material changes to the total gross unrecognized tax benefits during the nine months ended September 30, 2007. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. The Company is not subject to, and therefore, has not accrued an amount in respect of interest and penalties.

     As of the date of adoption of FIN 48, tax years 2004 through 2007 remain subject to examination in the U.S. and tax years 2001 through 2006 remain subject to examination in Canada. The Company does not currently anticipate that its unrecognized tax benefits will significantly change within the next 12 months. Therefore, the FIN 48 liability is recognized as a non-current liability on the consolidated balance sheets.

13. INCOME (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2007 and September 30, 2006, respectively.

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Numerator:
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				14,625,856
Effect 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				14,625,856
Income (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	)

     Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is derived by using the weighted average number of common shares during the period plus the effect of dilutive stock options and warrants using the treasury stock method. For the nine months ended September 30, 2007 and September 30, 2006, respectively, the diluted net income (loss) per share is equivalent to basic net income (loss) per share as the outstanding options, and warrants are anti-dilutive. The potential dilution of warrants, employee stock options, restricted stock units and share appreciation rights could result in an additional 23.6 million common shares of the Company outstanding.

14. (GAIN) LOSS ON SALE OF INVESTMENTS AND ASSETS

     (Gain) loss on sale of investments and assets consists of the following:

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Gain 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	)

     For the three and nine months ended September 30, 2007, the Company has a gain of $7,336, and a loss of $491,884, respectively, on the disposal of leased vehicles (three and nine months ended September 30, 2006 loss of $135,696 and $205,726, respectively).

     During the first quarter of 2006, the Company sold its remaining interest in Control F-1 Corporation. This resulted in net proceeds of $1,327,693. The investment had been previously written down to nil in 2004 due to prevailing market conditions. However, during the first quarter of 2006, an agreement was reached between the Company and Computer Associates International, Inc. and Computer Associates Canada Company for the Company’s holding in Control F-1 Corporation. The Company recognized a pre-tax gain of $1,320,193 on the sale of the investment in the first quarter of 2006.

15. OTHER EXPENSE

     For the three and nine months ended September 30, 2007 the Company had $4.4 million in other expense, primarily attributed to bonuses of $3.6 million earned by certain of the Company’s directors and employees as a result of the closing of the Arrangement and $0.8 million related to Magnetar Capital Master Fund, Ltd’s (“Magnetar”) support of 180 Connect (Canada)’s proposed Arrangement (Note 19).

16. DISCONTINUED OPERATIONS

     The Company discontinued its operations at certain non-profitable branches during 2007 and 2006. The revenues and expenses for these locations have been reclassified as discontinued operations for all periods presented on the consolidated financial statements. For the three and nine months ended September 30, 2007, loss from discontinued operations was $nil and $79,527 respectively (three and nine months ended September 30, 2006 loss of $538,899 and $1,876,694, respectively).

      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				2006
Revenue from discontinued operations		$	—			$	591,942			$	199,744			$	2,182,905
Loss 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

     The Company and its subsidiaries Ironwood Communications, Inc. and Mountain Center, Inc. are party to three class action lawsuits in federal court in Washington, California and Oregon brought by current and former employees alleging violations of state wage and hour laws and a class action suit alleging violations of state paycheck laws in federal court in California. The Company has established a reserve for estimated costs of $2.5 million for the Washington class action, of which $1.5 million was remaining as of September 30, 2007.

     In September 2007, the Company was named as a defendant in a purported class action lawsuit in federal court in Orlando, Florida. The claims relate to alleged violations of the federal Fair Labor Standards Act. The purported class action period relates back to September 2004 and seeks to certify a nationwide class of similarly situated employees.

     In October 2007, our subsidiary, Ironwood Communications, Inc., was named as a defendant in a purported class action lawsuit in state court in Los Angeles, California brought by current and former employees. The claims relate to alleged violations of California wage and hour laws. The purported class action period allegedly relates back to October 2003, although the class period may be limited to after June 30, 2004 by virtue of settlement of previous wage and hour class action litigation in California.

     The Company intends to vigorously contest each of these claims. Other than with respect to the Washington class action, no reserves have been recorded for these cases as the Company is unable to estimate the amounts of probable and reasonably estimable losses.

     In addition to the foregoing, the Company is subject to a number of individual employment-related lawsuits. No reserve has been recorded for these cases as the Company is unable to estimate the amount of probable and reasonably estimable loss. These lawsuits are not expected to have a material impact on the Company’s results of operations, financial position or liquidity.

18. SEGMENT INFORMATION

     The Company provides installation, integration and fulfillment services to the home entertainment, communications and home integration service industries. As such the revenue derived from this business is part of an integrated service offering provided to the Company’s customers and thus is reported as one operating segment.

     The Company’s operations are located in the United States and Canada. Revenue is attributed to geographical segments based on the location of the customers.

     The following table sets out property, plant and equipment, goodwill and customer contracts from continuing operations by country as at September 30, 2007 and December 31, 2006 and revenue from continuing operations for the three and nine months ended September 30, 2007 and September 30, 2006.

Geographic information

		September 30, 2007				December 31, 2006
Property, plant and equipment, goodwill and customer contracts
Canada		$	1,817,599			$	1,468,498
United States			62,904,458				69,521,871
Total		$	64,722,057			$	70,990,369

		Three months ended								Nine months ended
		September 30, 2007				September 30, 2006				September 30, 2007				September 30, 2006
Revenue
Canada		$	4,441,292			$	2,752,547			$	10,848,835			$	6,418,920
United States			98,080,048				87,155,799				272,766,837				232,826,813
Total		$	102,521,340			$	89,908,346			$	283,615,672			$	239,245,733

19. SUBSEQUENT EVENTS

     On August 20, 2007, 180 Connect (Canada) offered to pay Magnetar $800,000 in connection with Magnetar’s support of 180 Connect (Canada)’s proposed Arrangement and, as a shareholder of AVP, for Magnetar to agree to vote the shares it held in AVP in favor of the Arrangement at the August 24, 2007 AVP shareholders meeting. On August 23, 2007, Messrs. Balter and Slasky (initial stockholders and officers and directors of AVP and, after consummation of the Arrangement, directors of the Company) agreed to issue to Magnetar an option to acquire 160,000 shares of AVP for $0.01per share in satisfaction of 180 Connect (Canada)’s agreement with Magnetar and 180 Connect (Canada) agreed to reimburse Messrs. Balter and Slasky for such issuance, but such option was never issued. On November 9, 2007, the Company issued Magnetar a warrant exercisable for 356,952 shares of common stock of the Company in full satisfaction of amounts owing by the Company to Magnetar. Such warrant was valued at $800,000 on November 9, 2007. In connection with such issuance, the Company withheld 90,559 of the shares underlying the warrant in order to satisfy U.S. tax withholding requirements and remitted $202,961 to the Internal Revenue Service on behalf of Magnetar. Accordingly, the warrant will only be exercisable for 266,393 shares.

     Subsequent to September 30, 2007, the Company entered into a Warrant Clarification Agreement which amended the warrant agreement governing the public warrants to clarify that the Company will have no obligation, under any circumstance, to pay the registered holder of a public warrant any cash or other consideration or otherwise “net cash settle” any public warrant. A similar amendment was entered into with respect to the unit purchase option issued to the underwriters in connection with AVP’s initial public offering.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Management’s Discussion and Analysis (“MD&A”’) of 180 Connect Inc. (the “Company”’) is prepared as of November 9, 2007 and should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes for the three and nine months ended September 30, 2007 and the audited consolidated financial statements for the year ended December 31, 2006 and the related notes thereto. You should read the following discussion and analysis of financial condition and results of operations in conjunction with the Company’s selected consolidated historical financial information and its audited consolidated financial statements and the related notes included as an exhibit to the Company’s current Report on Form 8-K filed with the SEC on August 30, 2007.

     Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to risks and uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions and estimates prove incorrect, actual results may vary significantly from those expected. Reference should be made to the section entitled “Forward-Looking Statements”. Reference should also be made to the section 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

     The Company provides installation, integration and fulfillment service to the home entertainment, communications and home integration services industries. Our customers include providers of satellite, cable and broadband media services as well as home builders, developers and municipalities.

     180 Connect generates substantially all of its revenue in the United States (“U.S.”) for which it receives payment in U.S. dollars. 180 Connect prepares its interim consolidated financial statements in U.S. dollars and in conformity with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial statements. Unless otherwise indicated, all dollar amounts in this MD&A are expressed in U.S. dollars. References to “$” and “US$” are to U.S. dollars.

     As used in this section, “we,” “us,” “our,” “180 Connect Inc.,” the “Company” and words of similar import refer to the consolidated business of 180 Connect Inc. (formerly known as Ad.Venture Partners, Inc.).

     Certain amounts have been reclassified from the consolidated financial statements previously presented to account for discontinued operations.

Principles of Consolidation and Basis of Presentation

     The accompanying interim consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of the Company and its subsidiaries. All inter-company items and transactions have been eliminated on consolidation.

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to fairly present the Company’s results for the interim periods presented. These unaudited interim consolidated financial statements have been prepared by management using the same accounting policies and methods of application as the most recent annual consolidated financial statements of the Company.

     On August 24, 2007 (the “Effective Date”), the Arrangement was consummated pursuant to which the Purchaser (i) acquired all of the outstanding common shares of 180 Connect (Canada) in exchange for either shares of Company common stock, exchangeable shares of Purchaser that are exchangeable into shares of Company common stock at the option of the holder, or a combination of Company common stock and exchangeable shares of Purchaser, and (ii) outstanding options to purchase 180 Connect (Canada) common shares were exchanged for options to purchase Company common stock. As a result of the closing of the Arrangement, based on an exchange ratio of 0.6, the 180 Connect (Canada) stockholders were issued an aggregate of 13,643,183 shares of Company common stock and 2,779,260 exchangeable shares. The AVP shareholders held 9,577,709 of common shares of the Company immediately after the consummation of the Arrangement. Effective upon the consummation of the Arrangement, AVP changed its name to 180 Connect Inc.

     Because the consummation of the Arrangement resulted in more than 50% of the voting securities of the Company being held by the shareholders of 180 Connect (Canada), the Arrangement has been accounted for under the reverse acquisition application of the equity recapitalization method of accounting in accordance with U.S. generally accepted accounting principles for accounting and financial reporting purposes. Under this method of accounting, AVP was treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, the Arrangement is considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Arrangement was treated as the equivalent of 180 Connect (Canada) issuing stock for the net monetary assets of AVP, accompanied by a recapitalization. The net monetary assets of AVP were recorded at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The accumulated deficit of 180 Connect (Canada) has been carried forward after the Closing. Operations prior to the Closing for all periods presented are those of 180 Connect (Canada). All common shares, warrants, options and earning per share amounts related to transactions and periods prior to August 24, 2007 and have been restated in these financial statements to reflect the 0.6 exchange ratio applied to 180 Connect (Canada’s) equity instruments.

     The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

Seasonality

     The Company’s revenue is subject to seasonal fluctuations. Our customers’ subscriber growth, and thus the revenue earned by the Company, trends higher in the third and fourth quarters of the year. While subscriber activity is subject to seasonal fluctuations, it may also be affected by competition and varying amounts of promotional activity undertaken by the Company’s customers.

Selected Financial Highlights — Third Quarter Ended September 30, 2007

     For the three months ended September 30, 2007 as compared to the three months ended September 30, 2006:

           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.

•

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.

(1) EBITDA from continuing operations excludes depreciation, amortization of customer contracts, interest, and loan fees, (gain) loss on fair market value of derivatives, gain on the extinguishment of debt, (gain) loss on sale of investments and assets, other expense and income tax expense (recovery). EBITDA from continuing operations is a non-GAAP measure and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA from continuing operations is not likely to be comparable to similar measures presented by other issuers. See “Non-GAAP Measures.” Management believes that this term provides a better assessment of cash flow from the Company’s operations by eliminating the charges for depreciation and amortization, which are non-cash expense items, (gain) loss on sale of investments and assets, (gain) loss on fair market value of derivatives, gain on the extinguishment of debt, and other expense which is not considered to be in the normal course of operating activity. The comparative GAAP measure is income (loss) from continuing operations. A reconciliation of EBITDA from continuing operations to income (loss) from continuing operations is contained in this MD&A under “EBITDA from continuing operations”.

Comparison of Quarters Ended September 30, 2007 and September 30, 2006

Selected Financial Information

     The following is a summary of the Company’s selected consolidated financial and operating information for the three and nine months ended September 30, 2007 and 2006 and should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes for the three and nine months ended September 30, 2007. The amounts presented below have been reclassified to reflect the adjustments associated with the discontinued operations of the Company.

      Financial Review

     Revenue from continuing operations is generated from providing installation, integration, fulfillment and long-term maintenance and support services to the home entertainment, communications and home integration service industries. The Company’s services are engaged by its customers pursuant to ongoing contracts and on a project-by-project basis.

     Direct cost of revenue is comprised primarily of direct labor costs including amounts paid to the Company’s extensive labor force of technicians and third-party subcontractors. Also included in direct costs are materials, supplies, insurance and costs associated with operating vehicles.

     General and administrative expenses consist of personnel and related costs associated with the Company’s administrative functions, professional fees, office rent and other corporate related expenses.

Results of Operations

Comparison of Quarters Ended September 30, 2007 and 2006

		For the Three Months Ended
		September 30, 2007				September 30, 2006				% Change
Revenue		$	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) expense
Interest 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 operations
Basic		$	(0.43	)		$	0.34
Diluted		$	(0.43	)		$	0.32
Net income (loss) per share
Basic		$	(0.43	)		$	0.30
Diluted		$	(0.43	)		$	0.29