Notes
to Consolidated Financial Statements
Note
1: ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
Attention
is drawn to the detailed disclosures in this Note and elsewhere in these
Financial Statements which creates substantial doubt concerning the Company’s
ability to continue to finance and maintain its current operations.
The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of October 31,
2007, the results of operations for the three months ended October 31, 2007 and
2006 and the period from March 26, 1997 (inception) through October 31, 2007,
and cash flows for the three months ended October 31, 2007 and 2006 and the
period from March 26, 1997 (inception) through October 31, 2007. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto contained in the Company's annual report on Form 10-KSB for
the year ended July 31, 2007. There have been no updates or changes to our
audited financial statements for the year ended July 31, 2007.
There is
no provision for dividends for the quarter to which this quarterly report
relates.
The
results of operations for the three month period ended October 31, 2007 is not
necessarily indicative of the results to be expected for the full
year.
We are a
development stage company as defined in Statement of Financial Accounting
Standards No. 7. We are devoting substantially all of our present efforts to
developing new products. Our planned principal operations have not commenced
and, accordingly, no significant revenue has been derived
therefrom.
We have
reported net losses of $3,670,764, $1,848,797 and $12,426,134 for the fiscal
years ended July 31, 2007, 2006 and for the period from the date of inception,
March 26, 1997 to July 31, 2007, respectively. The loss from date of inception,
March 26, 1997 to October 31, 2007 amounts to $13,082,158. We have a net capital
deficit at October 31, 2007 ($7,598,303) and had substantial net current
liabilities of $7,031,174 and cash balances of $nil at October 31, 2007. In
addition, as explained in Note 10 we are in default under the terms of Loan
Notes with total amounts outstanding at October 31, 2007 of
$873,800. These factors, among others, raise substantial doubt about
our ability to continue as a going concern.
We
require ongoing capital to continue our development activities but have been
unable to raise adequate new capital to support operational needs and are
currently dependent upon minimal advances being made by Westek as described in
Note 9, which simply maintain very basic operations and compliance. As described
in Note 11 Westek has put us and our other loan note holders on notice of its
inability to continue to provide such finance on an ongoing basis unless our
other loan note holders agree to join in the provision of working capital
finance or to restructure or convert their loans to allow us to negotiate with
other financiers to provide fresh capital from a clean balance sheet. The other
Loan Note Holders have declined to do this and the Company and its Loan Note
Holders are in the advanced stages of negotiating a transaction, which is
described in outline on Note 11, that would return the Company to a shell, with
reduced and simplified debt and other obligations, as an alternative to imminent
insolvency by threatened loan note foreclosure.
There can
be no assurance that this proposed transaction will take place and it remains
possible that terms of the proposed transaction may change or that it will not
take place at all. In the event that the proposed transaction does occur the
Company’s financial statements would change materially, as outlined in Note 11.
In the event that the proposed transaction does not occur, then, in the absence
of any further initiatives taken by the loan note holders, it seems likely that
the Company and its subsidiaries will become insolvent and certain adjustments
would need to be made to the carrying value of the assets included in the
consolidated balance sheet in such an event.
As
explained in Note 10 we are in default on several of our Loan Notes at July 31,
2007. Our major creditors and Loan Note holders have continued to work with us
during the three month period ended October 31, 2007 to restructure our
obligations to enable us to match future payments with our future working
capital plans and several Loan Note holders formally restructured their advances
to us in the period ended October 31, 2007. In addition the directors,
management team and key contractors have deferred payment of compensation due to
them since October 2006 (and in certain cases previously) and many key suppliers
are providing us with valued and ongoing support and forbearance with respect to
our payment obligations.
Prior to July 31, 2006 we recorded revenues from
billings made under a Research and Development Contract with Inverness Medical
Innovations (IMI), dated November 2002. Under the terms of this contract (and a
related Patent License Agreement, both subsequently amended throughout the
contract field work) we jointly developed, with IMI, the technology underlying a
new product (a prothrombin measurement device which is used for the measurement
of coagulation of blood in patients at risk of heart disease and stroke) ("The
PT Product"). In July 31, 2006 our involvement in the development of this
product ended and we anticipate that the product will be launched into the
global markets in 2007/2008. The product is to be sold by IMI and we have no
influence over the marketing and sales process. Under the terms of our
agreements with IMI we are entitled to participate in the following revenue
streams: (a) billings to IMI for our development work during the product
development phase ("Development Revenues") and (b) the receipt of 2% of all
future net sales proceeds arising from the sale of The PT Product ("Royalty
Income"). Development Revenues ceased with the completion of the development of
the PT Product in July, 2006. We will begin to earn Royalty Income
simultaneously with the commencement of sales of the PT Product. The
commencement of the sale of this product will result in a change of our status
from a "Development-stage Enterprise". We are currently developing other hand
held and portable products which are focused on (a) the measurement and
detection of pregnancy and labor and (b) the detection of diseases and medical
conditions using magnetic detection techniques applied to tissue and blood. We
intend to engage in discussions with several parties which management believes
may result in commercial, revenue earning contracts.
Note
2: Related Party Transactions
As of
October 31, 2007, $215,163 was due to related parties and we purchased services
from related parties during the three month period ended October 31, 2007
amounting to $nil. During the three month period ended October 31,
2006 we purchased services amounting to $112,999.
In July
2004, Westek, a related party, agreed to release us from $2,030,298 of
previously accumulated advances in exchange for a non interest-bearing
promissory note totaling $1,800,000. We reflected a capital contribution
totaling $2,030,298 in our financial statements at that time. The promissory
note was payable in full by September 30, 2006.
On
November 13, 2006 we reached and agreement with Westek to amend the terms of the
Promissory Note to extend the maturity date until March 31, 2008. The amended
Promissory note carries interest at a rate of 10% per annum from October 1, 2006
which is payable quarterly in arrears. Unpaid interest may, at the option of
Westek, be converted into shares of the Company’s common Stock at a price of $
0.05 per share. The market value of the common stock at the date of
the amendment was $0.072 and therefore there is a beneficial discount underlying
the conversion option. We have valued that discount at $113,400, (using the
Black Scholes method). The inherent discount has been charged to Additional Paid
in Capital within shareholders funds in the balance sheet and is being charged
in the profit and loss account as interest expense on a straight line basis
across the life of the amended Promissory Note.
During
the three month period ended October 31, 2007 Westek advanced $149,776 to the
Company. These advances are interest free and are payable on demand. The
advances are intended to enable the Company to maintain a basic level of
operation ahead of securing new commercial contracts. These short term advances
are described more fully in Note 9.
Note
3: Property and Equipment
Major
classes of property and equipment as of October 31, 2007 are listed
below:
|
Furniture
and Fixtures
|
|
$
|
16,523
|
|
|
Office
Equipment
|
|
|
89,814
|
|
|
Plant
and Equipment
|
|
|
20,939
|
|
|
|
|
|
127,276
|
|
|
Less:
accumulated depreciation
|
|
|
122,631
|
|
|
|
|
$
|
4,645
|
|
Depreciation
expense was $607 and $3,700 for the three month periods ended October 31, 2007
and 2006.
Note
4: Intangible Assets - Patent Costs
Changes
in Intangible assets - Patent Costs for the three month period ended October 31,
2007 were as follows:
|
Cost
- start of year
|
|
$
|
95,545
|
|
|
|
|
|
|
|
|
Costs
incurred during the period
|
|
|
33,946
|
|
|
Amortization
|
|
|
-
|
|
|
Retirements
|
|
|
-
|
|
|
Cost
- end of period
|
|
$
|
129,491
|
|
No
amortization is recorded because the economic life of the underlying patents is
expected to be less than their legal life and the company has yet to derive
revenue from the commercial applications of the underlying patents. At such time
as we begin earning revenues, the cost of the underlying patents will be
amortized over their estimated economic life.
Note
5: Preferred Stock
We are
authorized to issue 50,000,000 shares of preferred stock.
4%
Convertible Preferred Stock
As of
October 31, 2007, the Company had 34,343,662 shares of Series A 4% voting
redeemable convertible preferred stock outstanding. Such shares pay an annual
dividend of 4% and are convertible at any time at the option of the holder into
Common Stock at the rate of one share Common Stock for each outstanding share of
Series A Preferred Stock. Holders of Series A Preferred Stock have priority over
all of the shares of the Company on liquidation or sale at the rate of $0.233
per share. Holders of Series A Preferred Stock are entitled to vote on all
matters as to which Common Stock shareholders are entitled to vote.
The
aggregate of arrearages in cumulative preferred dividends on the Series A
Preferred Shares through October 31, 2007, are $22,413.
Note
6: Common Stock
We are
authorized to issue 500,000,000 shares of common stock.
We issued
the following shares of common stock for services during the three month periods
ended October 31, 2007 and 2006, respectively:
|
|
October
31, 2007
|
October
31, 2006
|
|
|
|
Number
|
Fair
Value
|
Number
|
|
Fair
Value
|
|
|
|
of
Shares
|
of
Shares
|
of
Shares
|
|
of
Shares
|
|
|
Shareholder
|
Issued
|
Issued
|
Issued
|
|
Issued
|
|
|
Crown
Capital Group Ltd
|
|
|
|
|
|
1,000,000
|
|
|
|
|
68,000
|
|
|
UTEK
Corporation
|
|
|
|
|
|
1,250,000
|
|
|
|
|
150,000
|
|
|
|
0
|
$
|
0
|
|
|
2,250,000
|
|
|
|
$
|
218,000
|
|
We value
the shares of common stock issued for services at the quoted market price of the
stock at the issue date or at the contracted value of the services where this is
clearly defined in the underlying contract.
No other
shares of common stock, other than those described above, were issued during the
three month periods ended October 31, 2007 and 2006.
Note
7: Stock Options and Warrants
Stock
Options - Employees and contractors (“Staff”)
Since
inception, stock options have been granted to staff members under the Company's
2005 Stock Incentive Plan as follows:
|
|
·
|
During
May 2004, the Company granted 9,659,000 common stock options to two
officers with an exercise price of $1.00 per share. The Company's common
stock had no traded market value on the date of grant. The market value of
the stock was determined to be $1.00 per share based on estimates made by
the directors at that time. In March 2006 one of the officers resigned and
the 4,829,500 options granted to him lapsed. Under the terms of the option
award the remaining 4,829,500 options vest in three equal installments of
1,609,834 each in May 2006, 2007 and 2008, subject to certain operating
performance criteria having been met. The performance criteria were not
met by the first vesting date and therefore 1,609,834 of these options
have lapsed. Management is of the view that the performance criteria are
unlikely to be met by each of the future vesting
periods.
|
The
Company adopted and reserved 21,434,788 shares of Common Stock for issuance
under its 2005 Stock Incentive Plan. Under the plan, options may be granted
which are intended to qualify as Incentive Stock Options under Section 422 of
the Internal Revenue Code of 1986 or options which are not intended to qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code of
1986.
The 2005
Stock Incentive Plan and the right of participants to make purchases thereunder
are intended to qualify as an “employee stock purchase plan” under Section 423
of the Internal Revenue Code of 1986, as amended. The 2005 Stock Incentive Plan
is not a qualified deferred compensation plan under Section 401(a) of the
Internal Revenue Code and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974 (“ERISA”).
|
|
·
|
On
June 1, 2005, the Company issued 650,000 options to its staff under the
plan, with an exercise price of $0.55 per share. The market price on June
1, 2005 was also $0.55 per share.
|
|
|
·
|
On
January 3, 2006, the Company issued 725,000 options to its staff under the
plan, with an exercise price of $0.10 per share. The market price on
January 3, 2006 was also $0.10 per
share.
|
|
|
·
|
On
October 10, 2006, the Company issued 16,015,000 options to its staff under
the plan, with an exercise price of $0.065 per share. The market price on
October 10, 2006 was also $0.065 per share. The vesting date of these
options varies as set out in the table
below:
|
|
Vesting
Date
|
|
No
of options
|
|
|
October
10, 2006
|
|
|
2,500,000
|
|
|
November
30, 2006
|
|
|
500,000
|
|
|
December
31, 2006
|
|
|
150,000
|
|
|
September
30, 2007
|
|
|
5,515,000
|
|
|
September
30, 2008
|
|
|
3,750,000
|
|
|
September
30, 2009
|
|
|
3,600,000
|
|
|
Total
|
|
|
16,015,000
|
|
Options
that vested on the day of grant were granted primarily (2,000,000 of the total
options which vest on the grant date of October 10, 2006) to Martin Thorp, the
Company’s CFO, to provide Mr. Thorp with a significant equity interest in the
Company in line with the other members of the Company’s Board of Directors, in
order to provide mutuality of interest going forward and to reward him for past
performance.
The fair
value for the options granted is estimated at the date of grant using the
Black-Scholes option-pricing model with the assumptions set out in the table
below.
|
|
|
Grant
Date
|
|
|
|
|
May,
2004
|
|
|
June,
2005
|
|
|
January,
2006
|
|
|
October,
2006
|
|
|
Risk
Free Interest Rate
|
|
|
2.3
|
%
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
|
|
4.7
|
%
|
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Volatility
Factor
|
|
|
0
|
%
|
|
|
55
|
%
|
|
|
88
|
%
|
|
|
314
|
%
|
|
Weighted
Average Expected Life (yrs)
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
No
of options expected to vest on vesting date
|
|
|
0
|
|
|
|
650,000
|
|
|
|
725,000
|
|
|
|
16,015,000
|
|
|
Value
of one option (Black Scholes)
|
|
$
|
0.000
|
|
|
$
|
0.289
|
|
|
$
|
0.070
|
|
|
$
|
0.065
|
|
|
Value
of option grant (aggregate)
|
|
$
|
0
|
|
|
$
|
187,850
|
|
|
$
|
50,750
|
|
|
$
|
1,040,975
|
|
From
August 1, 2006 we were required to adopt SFAS No. 123(R) whereby we account for
stock option expense for employees and contractors by charging the fair value of
options granted and expected to vest equally over the vesting period. In the
case of options that vest on grant the fair value of the option is expensed
immediately. The expense is shown as stock option expense in the consolidated
statement of operations with the credit posted to Additional Paid In Capital.
Prior to August 1, 2006 we were not required to treat employee stock options in
accordance with SFAS No. 123 (R) , and we disclosed the impact on pre-tax
results had we valued employee stock options on a proforma basis in the
footnotes to our Annual Financial Statements. In the three month period and nine
month period ended October 31, 2006 the stock option charge would have increased
by approximately $37,500 and $112,500, respectively, had we adopted SFAS No.
123(R) in that period.
In
determining which options are expected to vest we have taken account of the fact
that options have only been granted to relatively few key members of staff and
in the opinion of management all of those people are likely to stay with the
Company through the vesting period of their options and beyond. Therefore, it is
assumed that all options granted are likely to vest, except those that are not
expected to vest by virtue of underlying performance conditions (described
above).
The
Black-Scholes options valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
No
options have yet been exercised by any employees.
Warrants
On April
11, 2005, the Company granted to its former financial representative, Westor
Capital Group, Inc. warrants to purchase 61,769 shares of the Company’s common
stock. The warrants carry an exercise price of $1.50 per share, vest on the date
of grant and expire on April 15, 2008. No warrants have yet been
exercised.
The
Company’s common stock’s traded market value on the date of grant was $1.01. The
weighted average exercise price and weighted average fair value of these
warrants as of April 11, 2005 were $1.50 and $0.29, respectively.
The fair
value for these warrants was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
Risk-free
interest rate
|
4.35%
|
|
Dividend
yield
|
0.00%
|
|
Volatility
factor
|
55.10%
|
|
Weighted
average expected life
|
5
years
|
On
September 9, 2005, as part of the consideration for arranging a financing for
the Company, we issued to Montgomery Equity Partners Ltd (“Montgomery”),
three-year warrants to purchase 350,000 shares of Common Stock at an exercise
price of $0.001 per share. The market value of the Company's common stock on the
date of the negotiation of this transaction was $0.13. The weighted average
exercise price and fair value of the warrants at the date of their grant were
$0.001 and $0.076, respectively. On October 27, 2006 Montgomery exercised these
warrants by way of cashless conversion into 345,000 shares of Common
stock.
The fair
value for these warrants was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
Risk-free interest
rate
|
4.18%
|
|
Dividend
yield
|
0.00%
|
|
Volatility
factor
|
88.40%
|
|
Weighted
average expected life
|
3
years
|
Summary
of options and warrants outstanding
The
following schedule summarizes the changes in the Company's outstanding stock
awards since July 31, 2007.
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
|
Number
of
|
|
|
Exercise
Price
|
|
|
Exercise
Price
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Per
Share
|
|
Contractual
Life
|
|
Value
|
|
|
Balance
at July 31, 2007
|
|
|
19,401,603
|
|
|
$
|
|
|
|
$
|
0.055-1.50
|
|
|
$
|
0.1636
|
|
8.06
years
|
|
|
1,296,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
Granted to Staff
|
|
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
Awards
cancelled/expired
|
|
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
0
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 2007
|
|
|
19,401,603
|
|
|
$
|
|
|
|
$
|
0.055-1.50
|
|
|
$
|
0.1636
|
|
8.06
years
|
|
$
|
1,296,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
31, 2007
|
|
|
4,586,769
|
|
|
|
|
|
|
$
|
0.550-1.50
|
|
|
$
|
0.1586
|
|
6.66
years
|
|
$
|
460,949
|
|
Note
8: Income Taxes
We record
our income taxes in accordance with Statement of Financial Accounting Standard
No. 109, "Accounting for Income Taxes". We had tax losses available to carry
forward in our UK operating subsidiaries at July 31, 2007 and we continued to
incur tax losses in the three month period ended October 31, 2007. We have
therefore not recorded any tax charge of liability in the three month period
ended October 31, 2007.
Note
9: Financings
The
Company has substantial obligations under various financial instruments arising
from the following financing agreements:
A.
April 2005, Financing
On April
15, 2005, we completed the sale of 863,845 units (the “Units”), each Unit
consisting of one share of Series B 5% Convertible Preferred Stock, one warrant
to purchase one share of the Company’s common stock (“Stock Warrants”), and one
warrant to purchase an additional unit (“Unit Warrants”). Such shares paid an
annual dividend of 5% and were convertible at any time at the option of the
holder into Common Stock at the rate of one share Common Stock for each
outstanding share of Series B Preferred Stock commencing April 15, 2005. The
Stock Warrants were exercisable from April 15, 2005 until April 15, 2008 at an
exercise price of $1.50 per share, subject to adjustment. The Unit Warrants were
exercisable for a period of 180 days from the effective date of the registration
statement at an exercise price of $0.65 per unit, subject to adjustment. All
preferential amounts to be paid to the holders of Series B Preferred Stock were
to have been be paid on a pari-passu basis with any preferential amounts to be
paid to the holders of our Series A Preferred Stock, and prior to the common
stock. As explained below the Units were subsequently exchanged for Notes issued
under the September, 2005 Financing.
B.
September 2005 Financing and subsequent restructurings
In a
linked series of transactions dated September 7, 2005, the Company entered
into:
1. A
Standby Equity Distribution Agreement (the "Distribution Agreement") with
Cornell Capital Partners LP ("Cornell")providing for the sale and issuance to
Cornell of up to $10,000,000 of Common Stock over a period of up to 24
months.
2. A
Securities Purchase Agreement (the "Purchase Agreement") with Montgomery Equity
Partners Ltd. ("Montgomery"), an affiliated fund of Cornell, providing for the
sale by the Company to Montgomery of its 18% secured convertible debentures in
the aggregate principal amount of $750,000 (the "Debentures") of which $300,000
was funded on September 7, 2005; $200,000was to have been funded two business
days prior to the Company's completion of its audited financial statements for
the fiscal year ended July 31, 2005, and; $250,000 was to have been funded
within five business days of the date the Registration Statement is declared
effective by the SEC. Under the Purchase Agreement, the Company also issued to
Montgomery three-year warrants (the "Warrants") to purchase 350,000 shares of
Common Stock at $0.001 per share, which have subsequently been exercised. The
Debentures matured on September 7, 2006 and bear interest at the annual rate of
18%. Holders have the right to convert, at any time, the principal amount
outstanding under the Debentures into shares of Common Stock, at a conversion
price per share equal to $0.144, subject to adjustment. Upon three-business day
advance written notice, the Company may redeem the Debentures, in whole or in
part. In the event that the closing bid price of the Common Stock on the date
that the Company provides advance written notice of
redemption or on the date redemption is made
exceeds the conversion price then in effect. Redemption of Debentures is to be
calculated at 112% of the Debentures' face value.
3. A
Securities Purchase Agreement (the "Accredited Investor Purchase Agreement")
with the investors in a April 2005, Financing, pursuant to which these investors
agreed to exchange the securities that they purchased in the earlier financing
for an aggregate of $556,500 principal amount of Debentures.
As
further security for its obligations under the above mentioned facilities, the
Company has deposited into escrow 25,685,000 shares of common stock, these
shares are deemed issued but not outstanding.
Pursuant
to these agreements, the Company filed a registration statement on Form SB-2
with the Securities and Exchange Commission for the purpose of registering the
securities underlying the transactions. In connection therewith, the Company has
received comments from the Commission indicating that, in the Commission's view,
based upon the structure of the transactions, the Company may not register the
securities sold in the financing transactions. On March 6, 2006, we withdrew the
registration statement on Form SB-2 (File No. 333-128321) by filing a Form R-W
with the Commission. As a result, the Company has not been able to draw down any
further amounts under the Debenture (other than the initial $300,000) or the
related Distribution Agreement and was unable to pay interest and principal
payments on the debentures drawn down under this financing, as consequence it
became in default under the terms of the Debentures.
We have
held discussions with several of the Debenture Holders to restructure our
obligations to rectify the defaults and the following agreements have been
entered into:
1. On
October 19, 2006, the Company entered into a Termination, Settlement, and
Forbearance Agreement effective as of October 16 (the "Settlement Agreement"),
with Cornell and Montgomery. The Settlement Agreement relates to the
Distribution Agreement and the Purchase Agreement and included the following
principal terms:
|
|
·
|
The
Company shall pay Montgomery an aggregate of $348,000 (the "Funds") which
represents the agreed amounts owed by the Company to Montgomery under the
Debenture as of October 19, 2006 including outstanding principal and
interest. The Company shall pay the Funds to Montgomery monthly at the
rate of $29,000 ("Monthly Payment") per calendar month, with the first
payment being due and payable on November 15, 2006 and each subsequent
payment being due and payable on the first business day of each subsequent
month until the Funds are repaid in
full.
|
|
|
·
|
Montgomery
shall continue to have valid, enforceable and perfected first-priority
liens upon and security interests in the Pledged Property and the Pledged
Shares (each as defined in the Purchase Agreement transaction
documents).
|
|
|
·
|
The
Company and Montgomery agree that during the term of the Settlement
Agreement, the Debenture shall not bear any interest and no liquidated
damages shall accrue under any of the financing
documents.
|
|
|
·
|
The
Conversion Price (as set forth in the Debenture) in effect on any
Conversion Date (as set forth in the Debenture) from and after the date
hereof shall be adjusted to equal $0.05, which may be subsequently
adjusted pursuant to the other terms of the
Debenture.
|
|
|
·
|
Montgomery
shall retain the Warrants issued in accordance with the Securities
Purchase Agreement.
|
|
|
·
|
The
Company and Cornell agree to terminate the Distribution Agreement and
related transaction documents.
|
|
|
·
|
In
the event that the Company defaults under the terms of this agreement
penalties and redemption premiums payable under the original agreement
shall be reinstated.
|
2. On
November 29, 2006, the Company issued a secured subordinated convertible note to
Triumph Small Cap Fund Inc. ("Triumph"), (one of the investors in the Accredited
Investor Purchase Agreement referred to above) in the principal amount
of$165,000 in exchange for the interest and principal outstanding under the
Debenture previously issued to Triumph under the terms of the Accredited
Investor Purchase Agreement. The note (a) matures on October 31, 2008; (b) bears
interest at the rate of8% per annum, which is payable on maturity of the note
and (c) is convertible, at Triumph's option, into shares of the Company’s common
stock at a conversion price of $0.05 per share, subject to a 9.99% conversion
restriction.. On December 11, 2006Triumph converted $50,000 of the principal
amount outstanding under their note into 1,000,000 shares of the Company's
common stock in accordance with these conversion rights.
3. On
January 9, 2007, the Company issued two secured convertible notes to Longview
Fund L.P. (“Longview”)(one of the investors in the Accredited Investor Purchase
Agreement referred to above) in the aggregate principal amount of$309,300 as
follows:.
|
|
·
|
Secured
convertible note in the principal amount of $261,300 issued in exchange
for the interest and principal outstanding under the Debenture previously
issued to Longview under the terms of the Accredited Investor Purchase
Agreement. The note (a) matures on October 31, 2008; (b) bears interest at
the rate of 18% per annum, which is payable in accordance with the
repayment provisions described in the Note and (c) is convertible at
Longview's option, into shares of the Company’s common stock at a
conversion price of $0.05 per share. Minimum repayments are due under the
note as follows: (i) two installments of $12,500 each were due to be paid
on or before February 28, 2007 and March 30, 2007; (ii) monthly
installments of $15,000 commencing on November 30, 2007; and (iii) the
remaining principal balance plus unpaid interest on the maturity
date.
|
|
|
·
|
Secured
convertible note in the principal amount of $48,000 was issued in exchange
for liquidated damages payable as result of the default on the Debenture
previously issued to Longview under the terms of the Accredited Investor
Purchase Agreement. This note has the same interest and conversion terms
as described above, but is repayable on maturity (principal and
interest).
|
Subsequent
to the restructuring of the Loan Notes with Longview and Cornell / Montgomery,
both described above, the Company has been unable to comply with the payment
installments due under the terms of the restructured loan notes and is therefore
in default under these new Loan Notes.
The
conversion terms of the restructured loan notes from Longview and Cornell /
Montgomery enable the Loan Note holder to convert the amount outstanding under
the Notes into shares in the Company's common stock at a price of $0.05 cents
per share. The market price of the common stock at the dates that the
restructured loan notes were issued was, in the case of Cornell /Montgomery,
$0.072 and in the case of Longview $0.055 and therefore there is a beneficial
discount underlying these conversion options. We have valued that discount at
$170,474, using the Black Scholes method. The inherent discount has been charged
to Additional Paid in Capital within shareholders funds in the balance sheet and
is being charged in the profit and loss account as interest expense on a
straight line basis across the life of the amended Loan Note.
The table
below details the unamortized discount figure shown in the balance
sheet:
|
|
|
Beneficial
|
|
|
|
|
|
Unamortized
|
|
|
|
|
Discount
|
|
|
Charge
|
|
|
Amount
|
|
|
Westek
|
|
$
|
113,400
|
|
|
$
|
75,600
|
|
|
$
|
37,800
|
|
|
Triumph
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Cornell
|
|
$
|
146,160
|
|
|
$
|
124,200
|
|
|
$
|
21,960
|
|
|
Longview
|
|
$
|
24,314
|
|
|
$
|
24,011
|
|
|
$
|
304
|
|
|
|
|
$
|
283,874
|
|
|
$
|
223,811
|
|
|
$
|
60,064
|
|
C. Royalty
Participation Agreement (May to November, 2006)
On May 5,
2006 , we completed the sale of a percentage of future royalties pursuant
to a Royalty Participation Agreement (the” Agreement") with The Rubin Family
Irrevocable Stock Trust The royalties to be paid pursuant to the Agreement
are derived from the Patent License Agreement with Inverness Medical
Innovations, Inc. (the "IMI Agreement") pursuant to which the Company’s
subsidiary, IVMD (UK) Limited, will receive royalties from the sale of a
Prothrombin blood clotting measuring device (the "IMI Royalties). The IMI
Agreement is further described in the "Organization and Basis of Presentation"
section of these financial statements. Subsequently, in November 2006, the
Company entered into a similar agreement with Triumph in respect of further
advances made to us during June and October 2006.
Pursuant
to these royalty participation agreements, the Company received the aggregate
sum of $450,000 in exchange for 10% of the future IMI Royalties received by the
Company, subject to the terms and conditions set forth in the Agreement (the
"Royalty Payments"). The Royalty Payments shall be paid to The Rubin Family
Irrevocable Stock Trust and Triumph Research Partners LLP ("The Investors")
within 15 days of the end of the month in which the Company receives future IMI
Royalties. The Company has the option to terminate the Agreement at any time,
without penalty, by making a lump sum payment to the Investors equal to 300% of
the funds received from the Investors pursuant to the Agreement, being
$1,350,000. If no Royalty payments are made to the Investors by December 31,
2007, or if $450,000 of Royalty payments are not made by December 31, 2008, the
Investors shall have the right to convert the advances made into a three year
note with a face value of $1,350,000 accruing interest at 4% above prime and
repayable in one lump sum at the end of the term. In addition, if the aggregate
payments made to the Investors under Agreements prior to December 31, 2007 are
less than $450,000 and provided that the Company has raised at least $3,000,000
in the form of new equity finance, we are obliged to make an advance payment to
the Investors (on account of future amounts payable to them) equal to the
difference between $450,000 and the aggregate payments made prior to December
31, 2007(capped at the amount by which the equity funding exceeds
$3,000,000).
On
November 8, 2006 The Rubin Family Irrevocable Stock Trust assigned its rights
under the Agreement to Harbor View Fund Inc, an entity which is unrelated to the
Company.
D.
Secured Subordinated Convertible Loan Notes (November 2006)
On
November 29, 2006, the Company issued a secured subordinated convertible note to
Triumph, in the principal amount of$335,000 in consideration of new cash
advances made to the Company by Triumph subsequent to July 31, 2006. This note
(a) matures on October 31, 2008; (b) bears interest at the rate of 8% per annum
which is payable on maturity of the notes; and (c) is convertible, at Triumph's
option, into shares of the Company's common stock at a conversion price of $0.05
per share (approximately the share price on the date of issue), subject to a
9.99% conversion restriction.
E.
Related Party Loans - Westek Limited
As more
fully discussed in Note 2, on November 14, 2006 the terms of our $1,800,000
Promissory Note with Westek Ltd were amended to address default conditions that
had arisen. Under the amended terms the Loan Note maturity has been extended
until March 31, 2008 (from September 30, 2006) and interest will now be charged
at 10% per annum from October 1, 2006 which is payable quarterly in arrears.
Unpaid interest may, at the option of Westek, be converted into shares of the
Companies common Stock at a price of $ 0.05 per share.
During
the three month period ended October 31, 2007 Westek advanced $149,776 to the
Company and its subsidiaries, giving a total short term indebtedness to Westek
of $528,888 at October 31, 2007. The intention of Westek in making such advances
was to maintain a basic level of operations in our main trading subsidiary (IVMD
UK Ltd) and to maintain compliance at IVMD Inc. Westek has continued to make
limited funding available to the Group subsequent to July 31, 2007
. These advances are interest free and are payable on
demand.
F.
Short Term Advance from Loan Note Holder
During
the year ended July 31, 2007, Triumph advanced a sum of $80,000 to the Company.
Triumph has subsequently indicated that it will not demand repayment of this
loan, but no formal arrangements have been entered into. Therefore, this loan is
treated as repayable on demand. The note does not bear interest and is not
convertible.
Presentation
of Financings in the Financial Statements
Accounting
for the Royalty Participation Agreement (May - July, 2006
Financings)
We have
accounted for these transactions in accordance with EITF 1988 Issue 88-18 as
debt and have classified them as Long Term Debt on the balance sheet. We have
calculated the maximum effective rate of interest underlying the Agreement at
37%per annum by taking what we consider to be the most prudent view of the
possible cash payments required to relinquish our obligations under the
Agreement (and therefore effectively repay the advances) and computing the
inherent interest rate within that future cash payment stream. Interest on the
amount advanced is included in interest expense and added to the amount of the
debt shown in the balance sheet. As payments are made to the Investors the debt
will be reduced accordingly and the estimated underlying interest rate may in
the future be amended.
The
following table shows the treatment of the Royalty Participation Agreement
Advances in the Financial Statements at October 31, 2007.
|
Total
Amount Advanced
|
|
$
|
450,000
|
|
|
Interest
Imputed from inception until October 31, 2007
|
|
$
|
268,202
|
|
|
Included
in Long Term Debt at October 31, 2007
|
|
$
|
718,202
|
|
Accounting
for September, 2005 Financing and subsequent restructurings
The
Principal amount of unpaid Loan Notes at July 31, 2007 is shown separately on
the balance sheet as Notes Payable. The total is classified within Current
Liabilities as “Current Portion of Notes Payable”, since all amounts are
repayable before October 31, 2008.
The
following table shows the composition and classification of the Principal
amounts of Notes Payable in the balance sheet at July 31, 2007:
|
|
|
Total
Principal
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
Montgomery
Capital Partners
|
|
|
348,000
|
|
|
Triumph
Small Cap Fund
|
|
|
450,000
|
|
|
Longview
|
|
|
309,300
|
|
|
Other
Accredited Investors*
|
|
|
216,500
|
|
|
Total
Notes payable
|
|
|
|
|
|
(before
beneficial conversion discount**)
|
|
|
1,323,800
|
|
*Described
in A above
** see
“Beneficial Conversion Rights” below
All
accrued interest and potential penalties payable under these Notes Payable is
included in Current Liabilities under Accrued Interest Payable
Beneficial
Conversion Rights
As
explained above and in Note 2 the conversion rights in certain of the Loan Notes
described above have been granted at a discount from the market price of the
shares of the Company's common stock at the date that the loan notes were
issued. Such beneficial discounts are recognized when the loan note is issued.
The value of the discount is estimated using the Black Scholes method and is
credited to Additional Paid in Capital on the balance sheet. The cost of the
discount is expensed (as interest expense) over the life of the loan note. The
unamortized portion of the value of the discount ($60,064) is show as a
deduction from the total principal value of the loan notes outstanding on the
balance sheet, resulting in a net balance of $1,263,736.
Note
10: Defaults upon Senior Securities
As
explained in Note 9, the Company has been unable to pay interest and principal
repayments when due under the terms of its September, 2005 financing and certain
of the subsequent restructurings of the loans made under the September 2005
financing. As of July 31, 2007, the arrears of due but unpaid interest and
penalties on Debentures and Loan Notes that were in default was $663,141 and the
arrears of unpaid but due principal on Debentures in default amounted to
$873,800.
Note
11: Recent Developments
In common
with most Development-stage entities we have incurred losses since inception. At
October 31, 2007 we had a net capital deficit of $7,598,303 and net current
liabilities of $7,031,174. We are in default under the terms of certain
convertible loan notes under which we owed $1,536,941 (including interest and
penalties) at October 31, 2007. These circumstances have effectively prevented
us, during the year, from raising adequate working capital to operate the
business effectively and we have been dependent upon advances from Westek Ltd, a
Company that is related to Mr. Graham Cooper, our Chief Executive Officer to
maintain basic operations and compliance and avoid insolvency. Westek provided
this support whilst the Company and its loan note holders sought to reach
agreement to restructure the Company’s borrowings to enable it to raise adequate
new capital. Such negotiations occurred throughout the year and subsequently,
and were exhaustive. However, they failed to produce a satisfactory
solution and, as a result, Westek has recently indicated to the Company and the
other loan note holders that it can not continue to advance funds. It proposed
that the loan note holders work together and with the Company and others to find
an alternative solution to avoid insolvency. Negotiations are now at an advanced
stage between all of the loan note holders, the Company and a new company,
Medical Diagnostic Innovations Limited (“MDI”) (a company incorporated under the
laws of England and Wales, which has been formed by the management and employees
of the subsidiaries, including Mr. Graham Cooper and Mr. Martin Thorp) to work
together with the objective of entering into a transaction which, if
consummated, would involve the sale of the share capital of the subsidiaries to
MDI and the simplification and reduction of the indebtedness of the Company so
as to enable the Company to return to a “shell” and pursue future merger
transactions. There can be no certainty that this potential a transaction will
take place, or what the precise terms will be, and, in the event that these or
similar negotiations fail, the Company and its subsidiaries face the prospect of
insolvency and complete loss of shareholder value.