Note
1: Summary
of Significant Accounting Policies
Organization
and Basis of Presentation
Background
Effective
July 31, 2004, Hall Effect Medical Products, Inc. ("HEMP"), a Delaware
corporation, merged with Sports Information Publishing Corp. (“SIPC”), which was
incorporated under the laws of Colorado on November 7,
2003. Subsequent to the merger SIPC changed its name to In Vivo
Medical Diagnostics, Inc. and later In Veritas Medical Diagnostics, Inc.
(“IVMD”
“we” “us” or “our”)
SIPC
was
originally incorporated for the purpose of engaging in the sports
industry. In 2002, SIPC filed a Form SB-2 registration statement with
the Securities and Exchange Commission relating to the registration of
up to
1,000,000 previously issued shares of common stock at a price of $0.15
per
share. The SEC declared the offering effective in August
2003.
We
are a
development stage company as defined in Statement of Financial Accounting
Standards No. 7 located in Inverness, Scotland. 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
are
developing medical diagnostic products for personal and professional use.
Certain of our products under development are based on technology that
utilizes
the Hall Effect, discovered more than a hundred years ago, for which we
are
developing practical applications. Prior to the merger, we were funded
by a
private UK company, Westek Limited, and Abacus Trust Company Limited was
our
majority shareholder.
Shares
of
our common stock trade in the Over the Counter (“OTCBB”)
market. Because of the nature of the OTCBB market there was only a
limited trading market for our stock during the periods presented. For
similar
reasons the quoted price of our stock was inevitably subject to considerable
short term volatility.
Principles
of consolidation
Our
consolidated financial statements include our accounts and the accounts
of our
two wholly owned foreign subsidiaries; IVMD UK Limited (“IVMD”) and Jopejo
Limited (“Jopejo”), both UK companies. The assets and liabilities of
our foreign subsidiaries have been translated at the exchange rate in effect
at
July 31, 2007 (as appropriate) with the related translation adjustments
reported
as a separate component of shareholders’ deficit. Operating statement
accounts have been translated at the average exchange rate in effect during
the
period presented. All significant intercompany transactions have been
eliminated.
Basis
of presentation
Our
research and development is conducted in Inverness, Scotland through our
subsidiaries: IVMD UK Limited and Jopejo Limited. Development-stage
activities consist of raising capital, obtaining financing, medical products
research and development and administrative matters.
In
common
with most Development-stage entities we have incurred losses (largely
represented by research and development expenditures and supporting general
and
administrative costs) since inception and we have a net capital deficit
at July
31, 2007 ($7,007,981). We also had substantial net current liabilities
at July
31, 2007 ($4,662,298
). In
addition
, as explained in Note 11 we are in default under the terms of
Loan Notes with total amounts outstanding at July 31, 2007 of
$858,800. 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 10, 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 Note 12, 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 12.
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.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and the disclosure
of
contingent assets and liabilities at the date of financial statements and
the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
We
consider all highly liquid securities with original maturities of three
months
or less when acquired to be cash equivalents. There were no cash
equivalents at July 31, 2007.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related
assets,
generally ranging from three to five years. Property and equipment
under capital leases are stated at the present value of minimum lease payments
and are amortized using the straight-line method over the shorter of the
lease
term or the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is
shorter.
Patent
Costs
The
legal, professional and registration costs involved in registering patents
which
are important to our product development program are capitalized and written
off
on a straight line basis over the lesser of the estimated commercial life
or
legal life of the underlying patents, on a patent by patent basis. We adopted
this accounting policy for the first time in the balance sheet at July
31, 2005
since we previously judged that the costs were immaterial. Prior to
July 31, 2005, we expensed patent costs as incurred.
Capitalized
costs are expensed if patents are not granted and they are written off
if and
when a patent becomes of no commercial value due to technology advancement
or
for commercial reasons.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate
our
long-lived assets, including related intangibles, of identifiable business
activities for impairment when events or changes in circumstances indicate,
in
management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether impairment has occurred is based
on
management's estimate of undiscounted future cash flows attributable to
the
assets as compared to the carrying value of the assets. If impairment has
occurred, estimating the fair value for the assets and recording a provision
for
loss if the carrying value is greater than fair value determine the amount
of
the impairment recognized. For assets identified to be disposed of in the
future, the carrying value of these assets is compared to the estimated
fair
value less the cost to sell to determine if impairment is required. Until
the
assets are disposed of, an estimate of the fair value is re-determined
when
related events or circumstances change.
When
determining whether impairment of one of our long-lived assets has occurred,
we
must estimate the undiscounted cash flows attributable to the asset or
asset
group. Our estimate of cash flows is based on a commercial evaluation of
the
likely cash flows based on market research and our in-house projections,
any
significant variance in any of the above assumptions or factors could materially
affect our cash flows, which could require us to record an impairment of
an
asset.
No
impairment charges were recognized during the years ended July 31, 2007
and
2006.
Deferred
Offering Costs
Costs
incurred in connection with proposed common stock offerings that straddle
the
year end are deferred in the accompanying financial statements and are
offset
against the proceeds from the offering or written off against earnings,
if the
offering is unsuccessful, as appropriate, in future periods.
Income
Taxes
We
account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109,
Accounting for Income Taxes
(SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Revenue
Recognition
Our
revenue has been generated through billings made under development projects
with
commercial partners further described in “Basis of Preparation” above. We
recognize such revenue based on the terms of the underlying agreement.
We also
receive grants from UK government for job creation and economic development.
These are credited to “non operating income” when received.
Financial
Instruments and Concentration of Credit Risk
At
July
31, 2007 the fair value of our financial instruments approximate their
carrying
value based on their terms and interest rates. We had no revenues in
the year ended July 31, 2007.
Stock
based Compensation
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.
Foreign
Currency Translation
Our
assets and liabilities, which have the British Pound as its functional
currency,
are translated into United States Dollars at the foreign currency exchange
rate
in effect at the applicable reporting date, and the statements of operations
are
translated at the average rates in effect during the applicable period.
The
resulting cumulative translation adjustment is recorded as a separate component
of Other Comprehensive Income.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Earnings
(Loss) per Share
Basic
net
income or loss per share is computed by dividing the net income or loss
available to common shareholders (the numerator) for the period by the
weighted
average number of common shares outstanding (the denominator) during the
period. The computation of diluted earnings is similar to basic
earnings per share, except that the denominator is increased to include
the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
At
July
31, 2007, there was no variance between basic and diluted loss per share
as the
securities in our capital structure are antidilutive.
Note
2: Related Party Transactions
We
recorded the purchase of services from related parties in the normal course
of
business and on an arm’s length basis totaling $296,520 and $305,788 during the
year ended July 31, 2007 and 2006, respectively. As of July 31, 2007,
$215,163 was due to related parties. However, both ARM and AWY Ltd
have agreed to defer or forego, in part or in full, these amounts pending
the
ability of the Company or its subsidiaries to make such payments.
Related
Parties from whom we purchased services during the year ended July 31,
2007 were
as follows:
|
Related
Party
|
|
Purchases
year ended July 31, 2007
|
|
|
Purchases
year ended July 31, 2006
|
|
|
Westek
Ltd
|
|
$
|
-0-
|
|
|
$
|
23,301
|
|
|
The
ARM Partnership
|
|
$
|
180,049
|
|
|
$
|
175,042
|
|
|
Sound
Alert Technology Ltd
|
|
$
|
-0-
|
|
|
$
|
119,352
|
|
|
AWY
Ltd
|
|
$
|
116,471
|
|
|
$
|
25,801
|
|
|
|
|
$
|
296,520
|
|
|
$
|
305,788
|
|
Westek
Ltd., AWY Ltd. and Sound Alert Technology Ltd. are Companies Incorporated
in
England and Wales in which Graham Cooper, our President and Chief Executive
Officer is a material shareholder. The ARM Partnership is a partnership
established under the laws of England and Wales of which Martin Thorp,
our Chief
Financial Officer, is the Managing Partner.
Westek
Ltd provides book-keeping services to the UK subsidiaries of IVMD Inc.;
Sound
Alert Technology Ltd. provides outsourced technology consulting services
to
Jopejo Ltd.; AWY Ltd is Graham Cooper’s service Company through which he
provides his executive services to the Group; and The ARM Partnership provides
CFO, Corporate Financial Advisory and Project, Financial Controller and
various
administrative services on an outsourced basis to the Group.
The
amounts shown in the table above relating to ARM Partnership and AWY
Ltd
represents amounts accrued in the financial statements which are only
payable in
the event that the Company becomes able to make such payments, other
than
$10,000 which was paid to ARM Partnership and $ 28,000 paid to AWY Ltd
in the
year ended July 31, 2007 ($257,720 and $25,801 respectively during the
year
ended July 31, 2006).
The
Officers of the Company received compensation for their services as
follows:
|
Officers
name
|
Title
|
Compensation
Year
ended
July
31, 2007
|
Compensation
Year
ended
July
31, 2006
|
|
Graham
Cooper
|
President
and Chief Executive Officer from June, 2006 and Chairman
|
$116,471
|
$27,000
|
|
|
|
|
|
|
Martin
Thorp
|
Chief
Financial Officer
|
$-0-
|
$-0-
|
In
July
2004, Westek agreed to release us from $2,030,298 of accumulated advances
in
exchange for a non interest-bearing promissory note totaling $1,800,000
(The
“Promissory Note”). We reflected a capital contribution totaling
$2,030,298 in the accompanying financial statements. The promissory
note was payable in full by September 30, 2006. On November 13, 2006 we
reached
agreement with Westek to amend the terms of the Promissory Note such that
its
maturity date is extended until March 31, 2008 and it carries interest
at 10%
p.a. 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. 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. 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.
The
fair
value for the discount is estimated at the date of grant using the Black-Scholes
option-pricing model with the assumptions set out in the table
below.
|
Risk
Free Interest Rate
|
4.7
|
%
|
|
Dividend
Yield
|
0
|
%
|
|
Volatility
Factor
|
314
|
%
|
During
the year ended July 31, 2007 Westek advanced $370,853 to the Company and
its
subsidiaries. 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:
Intangible Assets – Patent Costs
Changes
in Intangible assets - Patent Costs for the years ended July 31, 2007 and
2006
respectively were as follows:
|
|
|
July
31, 2007
|
|
|
Cost
- start of year
|
|
$
|
99,077
|
|
|
Costs
incurred during the year
|
|
|
69,039
|
|
|
Amortization
|
|
|
0
|
|
|
Retirements
|
|
|
(72,571
|
)
|
|
Cost
- end of year
|
|
$
|
95,545
|
|
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
4: Preferred Stock
We
are
authorized to issue 50,000,000 shares of preferred stock.
4%
Convertible Preferred Stock
As
of
April 30, 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 and per-share amounts of arrearages in cumulative preferred dividends
on the Series A Preferred Shares through July 31, 2007, are $22,070 and
$0.001,
respectively.
Note
5: Common Stock
We
are
authorized to issue 500,000,000 shares of common stock. At July 31,
2007 we had 60,418,457 shares of common stock which were issued and outstanding.
We had a further 25,685,000 shares which were issued but treated as not
outstanding since they are held in escrow as security against our indebtedness
under our September 2005 financing (see Note 10) and will be released from
escrow and cancelled upon the repayment of the debenture.
|
|
|
July
31, 2007
|
|
|
July
31, 2006
|
|
|
|
|
Number
|
|
|
Fair
Value
|
|
|
Number
|
|
|
Fair
Value
|
|
|
|
|
of
Shares
|
|
|
of
Shares
|
|
|
of
Shares
|
|
|
of
Shares
|
|
|
Shareholder
|
|
Issued
|
|
|
Issued
|
|
|
Issued
|
|
|
Issued
|
|
|
CLX
& Associates Inc
|
|
|
|
|
|
|
|
$
|
750,000
|
|
|
$
|
255,000
|
|
|
Sichenzia
Ross Friedman Ference LLP
|
|
|
|
|
|
|
|
|
1,680,000
|
|
|
|
220,325
|
|
|
Cornell
Capital Partners LP
|
|
|
|
|
|
|
|
|
472,000
|
|
|
|
61,360
|
|
|
Monitor
Capital Inc
|
|
|
|
|
|
|
|
|
28,000
|
|
|
|
3,640
|
|
|
Crown
Capital Group Ltd
|
|
|
1,000,000
|
|
|
|
68,000
|
|
|
|
|
|
|
|
|
|
|
UTEK
Corporation
|
|
|
1,250,000
|
|
|
|
150,000
|
|
|
|
83,334
|
|
|
|
8,334
|
|
|
Sichenzia
Ross Friedman Ference LLP
|
|
|
850,000
|
|
|
|
51,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,100,000
|
|
|
$
|
269,850
|
|
|
|
3,013,334
|
|
|
$
|
548,659
|
|
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. During the year ended July
31, 2007
we issued:
(a)
1,000,000 shares to Crown Capital Group Ltd as consideration for market
information and promotional services to be provided over a twelve month
period.
The shares were valued at the mid-market quoted share price on the day
of issue;
and
(b)
1,250,000 shares to UTEK Corporation for technology search services as
consideration under the terms of a contract entered into in May 2006 and
covering services to be provided over 15 months. This consideration was
valued
at the contract price, which was approximately equal to the market price
of the
companies stock in May, 2006 and, at the Companies option could have been
settled in cash rather than stock.
(c)
850,000 shares to Sichenzia Ross Friedman Ference LLP as consideration
for the
provision of legal services.
The
cost
of the stock issues described in (a) and (b) above is spread over the periods
over which the service is to be provided and a prepayment established
accordingly. This prepayment is shown as a deduction in shareholders funds
on
the face of the balance sheet on the line “Prepaid element of expenses settled
in stock”. This balance is now zero in the balance
sheet.
On
December 11, 2006 one of our Loan Note holders, Triumph Small Cap Fund
Inc
converted $50,000 of the principal value of their Loan Note into 1,000,0000
shares of Common Stock in accordance with their conversion rights (see
Note
9).
On
October 27, 2006 we issued to Montgomery Equity Partners Ltd 345,000 shares
of
common stock upon its exercise of warrants which were issued to Montgomery
Equity Partners as part of a prior financing, as more fully described in
Note
7.
Note
6: Stock Options
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 $1.00per 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
have not
been met and therefore the options which were due to vest in
2006 and 2007
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 $0.065per 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. The impact on a proforma
basis for
the years ended July 31, 2005 and 2006 are shown below:
|
|
|
For
The Years Ended
|
|
|
|
|
July
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net
loss, as reported
|
|
$
|
(1,848,797
|
)
|
|
$
|
(2,483,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(1,958,103
|
)
|
|
$
|
(2,483,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common
|
|
|
|
|
|
|
|
|
|
share,
as reported.
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma basic and diluted net loss
|
|
|
|
|
|
|
|
|
|
per
common share.
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
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.
Stock
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, 2006
|
|
|
|
|
|
|
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, 2006
|
|
|
4,996,436
|
|
$
|
0.001-$1.50
|
|
$
|
0.750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
Granted to Staff
|
|
|
16,015,000
|
|
$
|
0.065
|
|
$
|
0.065
|
|
|
|
|
|
|
|
|
Awards
cancelled/expired
|
|
|
1,609,833
|
|
$
|
1.000
|
|
$ $
|
1.000
|
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
(350,000
|
)
|
$
|
0.001
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at July 31, 2007
|
|
|
19,401,603
|
|
$
|
0.055-$1.50
|
|
$
|
0.1636
|
|
|
8.06
years
|
|
$
|
1,296,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
exercisable at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31, 2007
|
|
|
4,586,769
|
|
$
|
0.550-1.50
|
|
$
|
0.1586
|
|
|
6.91
years
|
|
$
|
460,949
|
|
Note
7: Income Taxes
A
reconciliation of U.K. statutory income tax rate to the effective rate
follows
for the years ended July 31, 2006 and 2007:
|
|
|
Years
Ended
|
|
|
|
|
|
|
|
July
30,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
U.K.
statutory federal rate
|
|
|
30.00
|
%
|
|
|
30.00
|
%
|
|
Net
operating loss for which no tax
|
|
|
|
|
|
|
|
|
|
benefit
is currently available
|
|
|
-30.00
|
%
|
|
|
-30.00
|
%
|
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
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 of $5.6 million at July 31, 2006
and we
continued to incur tax losses in the year ended July 31, 2007. We have
therefore
not recorded any tax charge of liability in the year ended July 31,
2007.
Note
8: Acquisitions
July
22, 2004
On
July
22, 2004, Jopejo Limited and IVMD UK, Inc. and HEMP entered into a share
purchase agreement whereby HEMP purchased 100 percent of the issued and
outstanding preferred and ordinary shares of both Jopejo Limited and IVMD
UK
Limited (formerly Hall Effect Technologies Limited) for 8,000,000 shares
of
convertible Series A preferred stock, $0.001 par value. HEMP also
agreed to become a co-obligor of approximately $1.8 million in debt obligations
to Westek. As part of the acquisition, HEMP issued 3,000,000
shares of common stock to HEMP TL, an employee benefit plan valued at $3,000
by
the Board of Directors and an additional 6,000,000 shares of common stock
to
certain individuals for services valued at $6,000 by the Board of
Directors.
As
a
result of these transactions, Jopejo limited and IVMD UK, Inc. became wholly
owned subsidiaries of HEMP.
July
30, 2004
On
July
30, 2004, HEMP exchanged 100 percent of its outstanding shares of common
stock
for 38,397,164 shares of the common stock and 100 percent of its outstanding
shares of preferred stock for 34,363,662 shares of preferred stock of
SIPC. This acquisition has been treated as a recapitalization of
HEMP, a Delaware corporation, with SIPC the legal surviving entity. Since
SIPC
had, prior to the recapitalization, minimal net assets (consisting primarily
of
cash and trade payables) and no operations, the recapitalization has been
accounted for as the sale of 10,550,000 shares of HEMP common stock for
the net
assets of SIPC. Costs of the transaction have been charged to the
period.
Note
9: Financings
The
Company has substantial obligations under various financial instruments
arising
from the following financing agreements:
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.
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 April 30, 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 April 30, 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
assumptions applied to the Black Scholes model to calculate the estimated
discount were as follows:
Cornell/Montgomery
|
Risk
Free Interest Rate
|
4.7
|
%
|
|
Dividend
Yield
|
0
|
%
|
|
Volatility
Factor
|
413
|
%
|
Longview
|
Risk
Free Interest Rate
|
4.7
|
%
|
|
Dividend
Yield
|
0
|
%
|
|
Volatility
Factor
|
314
|
%
|
The
table
below details the unamortized discount figure shown in the balance
sheet:
|
|
|
Beneficial
|
|
|
|
|
|
Unamortized
|
|
|
|
|
Discount
|
|
|
Charge
|
|
|
Amount
|
|
|
Westek
(note 2)
|
|
$
|
113,400
|
|
|
$
|
56,700
|
|
|
$
|
56,700
|
|
|
Triumph
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Cornell
|
|
$
|
146,160
|
|
|
$
|
92,880
|
|
|
$
|
53,280
|
|
|
Longview
|
|
$
|
24,314
|
|
|
$
|
19,452
|
|
|
$
|
4,863
|
|
|
|
|
$
|
283,874
|
|
|
$
|
169,032
|
|
|
$
|
114,843
|
|
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.
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 April 30, 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.
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 year ended July 31, 2007 Westek advanced $305,788 to the Company and
its
subsidiaries, giving total short term indebtedness to Westek of $370,853
at July
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. As of October 31, 2007
Westek has made further total aggregate advance of $120,000 to the IVMD
(UK)
Ltd.
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 July 31, 2007.
|
Total
Amount Advanced
|
|
$
|
450,000
|
|
|
Interest
Imputed from inception until July 31, 2007
|
|
$
|
207,630
|
|
|
Included
in Long Term Debt at July 31, 2007
|
|
$
|
657,630
|
|
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 April 30, 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,
(using
assumptions that are set out above and in note 2 as appropriate), 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 ($114,847) 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 $1,208,957.
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 $552,116
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
July 31,
2007 we had a net capital deficit of $7,007,981 and net current liabilities
of
$
6,451,147
. We
are in default under the terms of certain convertible loan notes under
which we
owed $
1,425,916 (including interest and penalties) at July 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, and 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.
