UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For the quarterly period endedOctober 31, 2004
¨ Transition Report Under Section 13 Or 15(D) Of The Securities Exchange Act Of 1934
For the transition period from_____to_____
Commission File Number:000-50026
XLR MEDICAL CORP.
(Exact Name of Small Business Issuer as Specified in Its Charter)
| Nevada | 88-0488851 |
| (State or Other Jurisdiction of | (I.R.S. Employer |
| Incorporation or Organization) | Identification No.) |
(604) 676-5247
(Issuer's Telephone Number, Including Area Code)
Former Fiscal Year: June 30, 2004
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 25,799,880 shares of common stock, $0.00001 par value per share, issued and outstanding as of December 22, 2004.
Transitional Small Business Disclosure Format (check one): Yes ¨ No x
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Consolidated Balance Sheets
(expressed in U.S. dollars)
| October 31, | January 31, | |||
| 2004 | 2004 | |||
| $ | $ | |||
| (unaudited) | (audited) | |||
| ASSETS | ||||
| Current Assets | ||||
| Cash | 18,901 | 6,455 | ||
| Total Current Assets | 18,901 | 6,455 | ||
| Investment in TechniScan Inc. (Note 3) | 330,568 | 385,568 | ||
| Investment in Exelar Medical Corp. (Note 4) | 900,000 | – | ||
| Total Assets | 1,249,469 | 392,023 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||
| Current Liabilities | ||||
| Accounts payable | 57,863 | 3,316 | ||
| Accrued liabilities | 50,784 | – | ||
| Due to related parties (Note 6) | 433,210 | 266,877 | ||
| Loans payable (Note 7) | 776,000 | 155,000 | ||
| Total Liabilities | 1,317,857 | 425,193 | ||
| Contingencies and Commitments (Notes 1 and 4) | ||||
| Stockholders’ Equity (Deficit) | ||||
| Common Stock (Note 8) | ||||
| Authorized: 100,000,000 shares, par value of $0.00001 | ||||
| Issued and outstanding: 25,799,880 and 9,492,667 shares, respectively | 258 | 95 | ||
| Additional Paid-in Capital | 1,724,096 | 866,811 | ||
| Additional Common Stock Subscribed | 6,000 | – | ||
| Deficit Accumulated During the Development Stage | (1,798,742 | ) | (900,076 | ) |
| Total Stockholders’ Equity (Deficit) | (68,388 | ) | (33,170 | ) |
| Total Liabilities and Stockholders’ Equity (Deficit) | 1,249,469 | 392,023 | ||
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-1
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Consolidated Statements of Operations
(expressed in U.S. dollars) (unaudited)
| Accumulated from | ||||||||||
| December 21, 2000 | For the Three | For the Nine | ||||||||
| (Date of Inception) | Months Ended | Months Ended | ||||||||
| to October 31, | October 31, | October 31, | ||||||||
| 2004 | 2004 | 2003 | 2004 | 2003 | ||||||
| $ | $ | $ | $ | $ | ||||||
| Revenue | – | – | – | – | – | |||||
| Expenses | ||||||||||
| Consulting | 483,790 | 173,940 | 20,500 | 235,740 | 62,350 | |||||
| General and administrative | 94,443 | 5,770 | 12,287 | 9,850 | 20,665 | |||||
| Impairment of investment | 55,000 | 55,000 | – | 55,000 | – | |||||
| Investor relations | 38,120 | – | 21,500 | 4,120 | 34,000 | |||||
| Loan bonus (Note 7(a)) | 80,000 | 80,000 | – | 80,000 | – | |||||
| Management fees | 180,000 | 40,000 | 10,000 | 90,000 | 50,000 | |||||
| Professional fees | 251,158 | 117,829 | 25,000 | 143,754 | 61,587 | |||||
| Travel and promotion | 427,906 | 183,869 | 3,846 | 229,591 | 76,164 | |||||
| Total Expenses | 1,610,417 | 656,408 | 93,133 | 848,055 | 304,766 | |||||
| Loss Before Other Items | (1,610,417 | ) | (656,408 | ) | (93,133 | ) | (848,055 | ) | (304,766 | ) |
| Interest expense | (65,325 | ) | (23,646 | ) | – | (50,611 | ) | (5,040 | ) | |
| Write-off of advances to joint venture | (123,000 | ) | – | – | – | – | ||||
| Net Loss for the Period | (1,798,742 | ) | (680,054 | ) | (93,133 | ) | (898,666 | ) | (309,866 | ) |
| Net Loss Per Share – Basic and Diluted | (0.03 | ) | (0.01 | ) | (0.04 | ) | (0.04 | ) | ||
| Weighted Average Shares Outstanding | 23,670,000 | 9,130,000 | 23,133,000 | 8,781,000 | ||||||
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-2
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
(unaudited)
| Accumulated from | ||||||
| December 21, 2000 | ||||||
| (Date of Inception) | Nine Months Ended | |||||
| to October 31, | October 31, | |||||
| 2004 | 2004 | 2003 | ||||
| $ | $ | $ | ||||
| Cash Flows Used in Operating Activities | ||||||
| Net loss | (1,798,742 | ) | (898,666 | ) | (309,806 | ) |
| Adjustments to reconcile net loss to net cash used in operating | ||||||
| activities: | ||||||
| Impairment of investment | 55,000 | 55,000 | – | |||
| Stock-based compensation | 103,440 | 103,440 | – | |||
| Changes in operating assets and liabilities | ||||||
| Accounts payable and accrued liabilities | 108,647 | 105,331 | 6,847 | |||
| Due to related parties | 433,210 | 166,333 | 41,913 | |||
| Net Cash Used in Operating Activities | (1,098,445 | ) | (468,562 | ) | (261,046 | ) |
| Cash Flows Used In Investing Activities | ||||||
| Net book value of assets acquired in reverse acquisition, | ||||||
| net of cash | 599,990 | 599,990 | – | |||
| Investment in Exelar Medical Corp. | (900,000 | ) | (900,000 | ) | – | |
| Investment in TechniScan Inc. | (385,568 | ) | – | (267,000 | ) | |
| Net Cash Used in Investing Activities | (685,578 | ) | (300,010 | ) | (267,000 | ) |
| Cash Flows From Financing Activities | ||||||
| Cash received in reverse acquisition | 18 | 18 | – | |||
| Proceeds from loans payable | 776,000 | 621,000 | (750 | ) | ||
| Proceeds from sale of common stock | 1,026,906 | 160,000 | 529,067 | |||
| Net Cash Provided by Financing Activities | 1,802,924 | 781,018 | 528,317 | |||
| Increase in Cash | 18,901 | 12,446 | 271 | |||
| Cash – Beginning of Period | – | 6,455 | 32 | |||
| Cash – End of Period | 18,901 | 18,901 | 303 | |||
| Non-Cash Investing and Financing Activities | ||||||
| Stock-based compensation | 103,440 | 103,440 | – | |||
| Supplemental Disclosures | ||||||
| Interest paid | – | – | – | |||
| Income taxes paid | – | – | – | |||
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-3
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Consolidated Statement of Stockholder’s Equity (Deficit)
From December 21, 2000 (Date of Inception) to October 31, 2004
(expressed in U.S. dollars)
| Accumulated | ||||||||||||
| Common Stock | Additional | Deficit | ||||||||||
| Number | Additional | Common | During the | |||||||||
| Of | Paid-In | Stock | Development | Total | ||||||||
| Shares | Amount | Capital | Subscribed | Stage | $ | |||||||
| $ | $ | $ | ||||||||||
| Balance, December 21, 2000 (Date of | ||||||||||||
| inception) | – | – | – | – | – | – | ||||||
| Balance, January 31, 2001 (audited) | – | – | – | – | – | – | ||||||
| January 11, 2002 - Shares issued for cash | ||||||||||||
| at $0.001 | 5,000,000 | 5,000 | – | – | – | 5,000 | ||||||
| January 29, 2002 - Shares issued for cash | ||||||||||||
| at $0.01 | 3,000,000 | 3,000 | 27,000 | – | – | 30,000 | ||||||
| Net loss for the year | – | – | – | – | (14,573 | ) | (14,573 | ) | ||||
| Balance, January 31, 2002 (audited) | 8,000,000 | 8,000 | 27,000 | – | (14,573 | ) | 20,427 | |||||
| – | ||||||||||||
| Shares issued for cash at $0.50 | 512,500 | 513 | 255,737 | – | – | 256,250 | ||||||
| Net loss for the year | – | – | – | – | (340,450 | ) | (340,450 | ) | ||||
| Balance, January 31, 2003 (audited) | 8,512,500 | 8,513 | 282,737 | – | (355,023 | ) | (63,773 | ) | ||||
| – | ||||||||||||
| June 23, 2003 – Shares issued for cash at | ||||||||||||
| $0.50 | 432,500 | 432 | 215,818 | – | – | 216,250 | ||||||
| September 30, 2003 – Shares issued for | ||||||||||||
| cash at $0.75 | 547,667 | 548 | 410,202 | – | – | 410,750 | ||||||
| September 30, 2003 – Share issuance | ||||||||||||
| costs | – | – | (51,344 | ) | – | – | (51,344 | ) | ||||
| Net loss for the year | – | – | – | – | (545,053 | ) | (545,053 | ) | ||||
| Balance, January 31, 2004 (audited) | 9,492,667 | 9,493 | 857,413 | – | (900,076 | ) | (33,170 | ) | ||||
| Adjustment for change in par value | – | (9,398 | ) | 9,398 | – | – | – | |||||
| Recapitalization transactions – September | ||||||||||||
| 13, 2004 | ||||||||||||
| Shares of Relay Mines Limited | 73,367,208 | 734 | (734 | ) | – | – | – | |||||
| Cancellation of shares to two directors | (60,000,000 | ) | (600 | ) | 600 | – | – | – | ||||
| Shares issued pursuant to subscriptions | ||||||||||||
| received prior to the recapitalization | 2,500,000 | 25 | (25 | ) | – | – | – | |||||
| Net assets of Relay Mines Limited | ||||||||||||
| acquired (Note 5) | – | – | 600,008 | – | – | 600,008 | ||||||
| Shares issued for cash on October 15, | ||||||||||||
| 2004 | 440,005 | 4 | 153,996 | – | – | 154,000 | ||||||
| Share subscriptions received | – | – | – | 6,000 | – | 6,000 | ||||||
| Stock options issued for services on | ||||||||||||
| October 19, 2004 | – | – | 103,440 | – | – | 103,440 | ||||||
| Net loss for the period | – | – | – | – | (898,666 | ) | (898,666 | ) | ||||
| Balance, October 31, 2004 (unaudited) | 25,799,880 | 258 | 1,730,096 | 6,000 | (1,798,742 | ) | (68,388 | ) | ||||
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-4
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 1. | Nature of Operations, Recapitalization and Continuance of Business | |
| Relay Mines Limited was incorporated in the State of Nevada on February 2, 2001. Pursuant to an Agreement and Plan of Merger dated August 12, 2004 and an Agreement and Plan of Merger dated September 13, 2004 (the “Merger”), Relay Mines Limited acquired and merged with, by way of reverse merger, TSI Medical Corp., a Nevada corporation (“TSI”). The Merger of TSI by Relay Mines Limited is considered a reverse merger and TSI is considered the acquirer for accounting and financial reporting purposes. The consolidated financial statements include the accounts of the Company since the reverse merger (September 13, 2004) and the historical accounts of TSI since the date of its inception, December 21, 2000. All significant intercompany balances and transfers have been eliminated in consolidation. The name of the merged company was changed to XLR Medical Corp. (the “Company” or “TSI” for transactions entered into prior to the Merger) and changed its trading symbol to XLRC. | ||
| TSI is involved in a joint venture with Exelar Corporation (“Exelar”) for the purpose of developing a patented technology that utilizes small superconducting magnets to focus and control dosages of therapeutic radiation for the treatment of cancerous tumours (the “Technology”). Under a Technology Acquisition and Funding Agreement, dated March 22, 2004, with Exelar Corporation (the “Exelar Agreement”), Exelar transferred the Technology to its wholly owned subsidiary Exelar Medical Corporation (“EMC”) and TSI agreed to provide funding to EMC in exchange for rights to acquire up to a 60% interest in EMC. | ||
| Upon completion of the Merger on September 13, 2004 with TSI, the Company: | ||
| a) | caused 60,000,000 common shares, previously issued to two directors of the Company, to be returned to treasury and cancelled for no consideration; | |
| b) | issued 9,492,667 common shares to the shareholders of TSI to acquire 100% of the issued and outstanding shares of TSI on a one-for-one basis; | |
| c) | agreed to adopt a stock option plan providing for the grant of options to purchase up to 1,450,000 common shares at $0.50 per share expiring May 31, 2009 to the holders of outstanding TSI options; | |
| d) | issued warrants to acquire 54,367 common shares at $0.75 per share expiring October 1, 2006 to the holders of outstanding TSI warrants; | |
| e) | assumed an obligation of TSI to issue units at $0.35 per unit. A total of 440,005 units were subscribed for and $154,002 was received. These units have been issued. Each unit consists of one common share and one warrant. The warrant allows the holder to acquire one additional common share at $0.35 per share; and | |
| f) | assumed an obligation of TSI to issue 300,000 common shares as a finder’s fee in connection with TSI’s acquisition of its interest in EMC. | |
| The Company is a development stage company as defined by Statement of Financial Accountings Standards (“SFAS”) No. 7 “Accounting and Reporting by Development Stage Enterprises”. In a development stage company, management devotes most of its activities in developing a market for its products and/or services. The Company is presently in its developmental stage and currently has no sources of revenue to provide incoming cash flows to sustain future operations. The ability of the Company to emerge from the development stage with respect to any planned principal business activity is dependent upon its successful efforts to raise additional equity financing and then generate significant revenue. Management has plans to seek additional capital through equity and/or debt offerings. There is no guarantee that the Company will be able to complete any of the above objectives. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. | ||
| At October 31, 2004, the Company had a working capital deficit of $1,298,956 and has incurred losses of $1,798,742 since inception. The Company will not be able to complete its funding obligations under the Exelar Agreement without acquiring substantial additional financing in the near future. If financing is not available or attainable, the Company’s ability to acquire or retain its interest in EMC will be substantially limited. The Company currently does not have sufficient financing arrangements in place to meet its funding obligations to EMC and there is no assurance that the Company will be able to acquire the required financing on acceptable terms or at all. The Company expects to fund itself by sales of shares. | ||
F-5
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 2. | Summary of Significant Accounting Principles | |
| a) | Basis of Accounting and Fiscal Year End | |
| These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and are presented in US dollars. Being a reverse acquisition, the Company has changed its fiscal year end of June 30 to that of TSI, which is January 31. In connection with the reverse merger, the historical financial statements presented will be those of TSI Medical Corp. | ||
| b) | Use of Estimates | |
| The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
| c) | Cash and Cash Equivalents | |
| The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. | ||
| d) | Long-Lived Assets | |
| In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets”, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes an impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. | ||
| e) | Foreign Currency Transactions/Balances | |
| The Company’s functional and reporting currency is the United States dollar. Foreign currency transactions are primarily undertaken in Canadian dollars and are translated into United States dollars using exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are remeasured at each balance sheet date at the exchange rate prevailing at the balance sheet date. Foreign currency exchange gains and losses are charged to operations. The Company has not, to the date of these financials statements, entered into derivative instruments to offset the impact of foreign currency fluctuations. | ||
| f) | Basic and Diluted Net Income (Loss) Per Share | |
The Company computes net income (loss) per share in accordance with SFAS No. 128, "Earnings per Share". SFAS No. 128 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. | ||
| g) | Financial Instruments | |
| The carrying value of cash, accounts payable, accrued liabilities, due to related parties, and loans payable approximate fair value due to the relatively short maturity of these instruments. | ||
| h) | Comprehensive Loss | |
| SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at October 31, 2004 and 2003, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements. | ||
F-6
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 2. | Summary of Significant Accounting Principles (continued) | |
| i) | Stock-Based Compensation | |
| The Company has adopted a stock option plan to fulfill an obligation under the Merger with TSI. The Company accounts for stock-based awards using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price of the Company’s employee stock options is less than the market price of the underlying common stock on the date of grant. | ||
| Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), established a fair value based method of accounting for stock-based awards. Under the provisions of SFAS 123, companies that elect to account for stock-based awards in accordance with the provisions of APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method under SFAS 123. | ||
| The Company issues stock to non-employees for services. The Company accounts for stock issued for services to non-employees in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation”. Compensation expense is based on the fair market value of the stock award or fair market value of the good and services received whichever is more reliably measurable. | ||
| The Company will also adopt the disclosure requirements of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123” (SFAS 148), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. | ||
2004 Stock Option Plan | ||
| The Company adopted a Stock Option Plan dated September 13, 2004 under which the Company is authorized to grant options to acquire up to a total of 1,450,000 common shares. | ||
| The following table illustrates the effect on net loss per share as if the fair value method had been applied to all outstanding and vested awards in each period. | ||
| Three months ended | Nine months ended | |||||||||
| October 31, | October 31, | |||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||
| $ | $ | $ | $ | |||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||
| Net loss — as reported | (680,054 | ) | (93,133 | ) | (898,666 | ) | (309,806 | ) | ||
| Add: Stock-based compensation expense included in | ||||||||||
| net loss — as reported | 103,440 | – | 103,440 | – | ||||||
| Deduct: Stock-based compensation expense | ||||||||||
| determined under fair value method | (499,960 | ) | – | (499,960 | ) | – | ||||
| Net loss — pro forma | (1,076,574 | ) | (93,133 | ) | (1,295,186 | ) | (309,806 | ) | ||
| Net loss per share (basic and diluted) — as reported | (0.03 | ) | (0.01 | ) | (0.04 | ) | (0.04 | ) | ||
| Net loss per share (basic and diluted) — pro forma | (0.05 | ) | (0.01 | ) | (0.06 | ) | (0.04 | ) | ||
| The fair value of the options granted during the period was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: risk free interest rate of 2.40%, expected volatility of 152%, an expected option life of 2.5 years and no expected dividends. The weighted average fair value of options granted was $0.34 per share. Had the Company determined compensation cost based on the fair value at the date of grant for its employee stock options, the net loss would have increased by $396,520 for the period ended October 31, 2004. There was no dilutive impact of potential common shares associated with stock options, by application of the treasury stock method, as the Company had net losses. |
F-7
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 2. | Summary of Significant Accounting Principles (continued) | |
| j) | Recent Accounting Pronouncements | |
| In December 2003, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" (“SAB 104”), which supersedes SAB 101, "Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's financial statements. | ||
| In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The requirements of SFAS No. 150 apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of non-public entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position. | ||
| k) | Interim Financial Statements | |
| These interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. | ||
| 3. | Investment in TechniScan Inc. | |
| On June 25, 2003, TSI and TechniScan, Inc. (“TechniScan”) executed an operating agreement (the “Operating Agreement”) to effect a joint venture to form a Utah limited liability company called SafeScan Medical Systems, LLC (“SafeScan”) for the purposes of commercializing TechniScan’s Proprietary Inverse Scattering Technology (the “Technology”). However, as of November 15, 2003, TSI failed to comply with the capital contribution obligation of the operating agreement. As a result, TSI converted its capital contribution to the joint venture into an investment in the common shares of TechniScan. TSI acquired 826,420 shares at $0.40 per share. Upon the conversion, TSI had no further interest in SafeScan and any of its assets. These shares are lodged as security for a loan (Note 7(a)). During the period ending October 31, 2004, an impairment loss of $55,000 was charged to operations. | ||
| 4. | Investment in Exelar Medical Corp. | |
| On March 22, 2004, TSI entered into a Technology Acquisition and Funding Agreement (“Exelar Agreement”) with Exelar Corporation (“Exelar”) and Exelar Medical Corporation (“EMC”) to acquire and develop a technology utilizing super-conducting magnets to control therapeutic radiation doses delivered by photon linear accelerators (the “Technology”). TSI will participate in the development and commercialization of the Technology by funding the acquisition and development of the Technology. Under the Exelar Agreement, Exelar transferred the Technology to its wholly owned subsidiary, EMC, and TSI agreed to provide funding to EMC in exchange for rights to acquire up to a 60% interest in EMC. Under the Exelar Agreement, to complete the acquisition of the first 51% of EMC, TSI must: | ||
| i) | fund EMC $900,000 by June 23, 2004 (funded) to earn a 16.5% interest (earned); | |
| ii) | fund EMC a further $1,550,000 by September 21, 2004 to earn an additional 18.5% interest (extended but not in default); | |
F-8
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 4. | Investment in Exelar Medical Corp. (continued) | |
| iii) | fund EMC a further $1,000,000 by December 20, 2004 to earn an additional 8.1% interest; and | |
| iv) | fund EMC a further $1,300,000 by March 20, 2005 to earn an additional 7.9% interest. | |
| Under the Exelar Agreement the Company will receive one share of EMC for every $2 of funding. If the Company defaults on any of its funding obligations, Exelar may, at its option, convert the Company’s shares of EMC into non-voting shares, remove the Company’s nominees from the Board of EMC and reduce the Company’s interest in EMC by 1/3 if the default occurs on or before the September 21, 2004 funding deadline and by 1/5 if the default occurs after the September 21, 2004 funding deadline. | ||
| If EMC requires additional funding, the Company has the option to acquire an additional 9% interest, for a total of 60%, by funding EMC a further $1,500,000. Exelar has the option to convert its shares of EMC into that number of shares of the Company equal to Exelar’s % interest in EMC. Exelar’s option to convert cannot be exercised until the earliest of the following events has occurred: | ||
| i) | completion of the Company’s funding obligations to EMC; | |
| ii) | default by the Company of any of its funding obligations to EMC; | |
| iii) | March 1, 2005; or | |
| iv) | an initial public offering of the Company’s shares. | |
| 5. | Recapitalization Transaction | |
| On September 13, 2004 XLR Medical Corp. (formerly TSI Medical Corp.), recapitalized itself by merging with a publicly listed company Relay Mines Limited (“Relay”). | ||
| The following table provides a reconciliation of the net assets acquired of Relay in this recapitalization transaction. | ||
| Transactions from | |||||||
| Relay | July 1, 2004 to | Relay | |||||
| June 30, 2004 | September 13, 2004 | September 13, 2004 | |||||
| (audited) | (unaudited) | (unaudited) | |||||
| $ | $ | $ | |||||
| Cash | 18 | – | 18 | ||||
| Advance to TSI Medical Corp. | 625,000 | 97,320 | 722,320 | ||||
| Total Assets | 625,018 | 97,320 | 722,338 | ||||
| Less liabilities | (21,254 | ) | (1,076 | ) | (22,330 | ) | |
| Less loan from Aton Select Fund Ltd. | – | (100,000 | ) | (100,000 | ) | ||
| Net assets acquired | 603,764 | (3,756 | ) | 600,008 |
| Summary of Transactions: | ||
| a) | On July 27, 2004, Relay received a loan from Aton Select Fund Ltd. In the amount of $100,000. These funds were advanced to TSI prior to the recapitalization of TSI. | |
| b) | Professional fees of $3,756 were incurred and charged to operations. | |
| 6. | Related Party Transactions/Balances | |
| a) | Various officers, directors and the former President of the Company are due a total of $433,210 for expenses paid on behalf of the Company or for services performed for the Company. These amounts are non-interest bearing, unsecured and due on demand. | |
| b) | The Company incurred consulting fees of $54,000 (2003 - $Nil) to the President of the Company during the nine months ended October 31, 2004 and 2003, respectively. | |
F-9
XLR Medical Corp.
(formerly Relay Mines Limited)
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(expressed in U.S. dollars)
| 6. | Related Party Transactions/Balances (continued) | |
| c) | The Company incurred consulting fees of $60,000 (2003 - $39,000) to the Secretary and director of the Company during the nine months ended October 31, 2004 and 2003, respectively. | |
| d) | The Company incurred management fees of $90,000 (2003 - $50,000) to a director during the nine months ended October 31, 2004 and 2003, respectively. | |
| 7. | Loans Payable | |
| a) | By a loan agreement dated March 8, 2004, TSI’s subsidiary, 689158 B.C. Ltd., borrowed $500,000 from Charles F. White Corp. (“CFW”). The loan was guaranteed by TSI and was repayable on July 2, 2004 with interest at 12% per annum and a bonus of $80,000 payable at maturity. As security for the guarantee, TSI pledged its shares in the common stock of TechniScan (Note 3). TSI has received notice that the loan is in default. TSI is currently in negotiations with CFW to extend the term of the loan, however, there are no assurances that these negotiations will be successful. In addition, a person related to CFW loaned the Company $25,000. This amount is non-interest bearing, unsecured and due on demand. | |
| b) | On July 27, 2004, Relay received a loan from Aton Select Fund Ltd. in the amount of $100,000, which is non- interest bearing, unsecured and due on demand. These funds were advanced to TSI to assist TSI in funding the obligations due pursuant to the Exelar Agreement as discussed in Note 4. | |
| c) | On October 19, 2004, the Company received a loan from Carnavon Trust Reg. in the amount of $71,000 which is interest bearing at 5% per annum, secured by a promissory note, and due on demand. | |
| 8. | Common Stock | |
| a) | Prior to the reverse acquisition, the Company had 73,367,208 shares of common stock issued and outstanding. Pursuant to the Agreement and Plan of Merger dated August 12, 2004 and the Agreement and Plan of Merger dated September 13, 2004, a total of 60,000,000 shares of common stock were cancelled by two previous directors without payment of consideration and 9,492,667 shares of TSI’s common stock were exchanged for 9,492,667 shares of the Company’s common stock. | |
| b) | On June 23, 2004, the Company received stock subscriptions for 2,500,000 units at a price of $0.25 per unit for total proceeds of $625,000. These funds were wired to the Company’s lawyer’s trust account and then advanced to TSI Medical Corp. ahead of a Plan of Merger with TSI. These units were issued on October 4, 2004 pursuant to a director’s resolution. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder to purchase an additional share of common stock at a price of $0.25 per share for a period of one year. | |
| c) | Prior to the Merger, TSI offered for sale a private placement of 500,000 units at a price of $0.35 per unit. Each unit consists of one share and one warrant. The warrant allows the warrant holder to acquire one additional share at $0.35 per share. Pursuant to the Agreement and Plan of Merger dated August 12, 2004 and the Agreement and Plan of Merger dated September 13, 2004, the Company assumed the obligation of TSI to issue units. On October 15, 2004, the Company issued 440,005 units for total cash proceeds of $154,000. Each unit issued consists of one share of the Company and one warrant, which allows the warrant holder to acquire one additional share of the Company at $0.35 per share. | |
F-10
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information disclosed in this Quarterly Report includes “forward looking statements”, which may be identified by words such as “plan”, “anticipate”, “believe”, “estimate”, should”, “expect” and other similar expressions. These statements include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risk, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those forward looking statements set forth under the caption “Management’s Discussion and Analysis or Plan of Operation” and elsewhere in this Quarterly Report. We do not intend to update the forward looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the Securities and Exchange Commission (the “SEC”), particularly our Annual Reports on Form 10-KSB, our Quarterly Reports on Form 10-QSB and our Current Reports on Form 8-K.
As used in this Quarterly Report, the terms "we", "us", "our", “Company” and “XLR” mean XLR Medical Corp. unless otherwise indicated. All dollar amounts in this Quarterly Report are in U.S. dollars unless otherwise stated.
INTRODUCTION
We were incorporated on February 2, 2001 under the laws of the State of Nevada. Until September 13, 2004, our business was focused on the acquisition, exploration and development of mineral properties. Following a recent review of our business, our Board of Directors determined that it was in the Company’s best interests to discontinue our mineral exploration business and to change the focus of our operations to the pursuit of opportunities in the biotechnology field.
Effective on September 13, 2004, we abandoned our mineral exploration business to focus on the business opportunities presented by our acquisition of TSI Medical Corp. (“TSI”) and by the unique technology for use in the treatment of cancer currently being developed by Exelar Medical Corporation (“EMC”). EMC is a joint venture company established by TSI and the Exelar Corporation (“Exelar”), the original developers of the technology.
Under generally accepted accounting principles, our acquisition of and merger with TSI has been accounted for as a reverse acquisition. As such, TSI has been treated as the acquiring entity for accounting and financial reporting purposes. See “Critical Accounting Policies” below. As such, the fiscal year end of TSI, being January 31, 2004, has been adopted for purposes of our reporting obligations under the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commencing on September 15, 2004.
The following discussion and analysis summarizes our plan of operations for the next 12 months, our results of operations for the interim period ended October 31, 2004 and changes in our financial condition from January 31, 2004. This discussion should be read in conjunction with the Management’s Discussion and Analysis or Plan of Operations included in our Annual Report on Form 10-KSB filed with the SEC on October 29, 2004.
Acquisition of and Merger with TSI Medical Corp.
Effective on September 13, 2004, we acquired all of the outstanding shares of TSI. The acquisition of TSI was effected pursuant to an Agreement and Plan of Merger (the “First Merger Agreement”) between us, Carlo Civelli, Bruno Mosimann, TSI and our wholly owned subsidiary incorporated specifically for the purpose of acquiring TSI, TSI Med Acquisition Corp. (“Acquisition Sub”). Pursuant to the First Merger Agreement, TSI merged with and into Acquisition Sub (the “First Merger”), with Acquisition Sub continuing as the surviving
3
corporation and as our wholly-owned subsidiary. On September 15, 2004, we completed a “short form” merger (the “Second Merger”) with Acquisition Sub under the laws of Nevada and changed our name to XLR Medical Corp. Effective on September 15, 2004, the symbol under which we trade on the OTC Bulletin Board was changed to “XLRC”.
In order to effect the acquisition of TSI, we issued the following securities to the former security holders of TSI:
| (a) | 9,492,667 shares of our common stock (the “Company Shares”) were issued in exchange for 9,492,667 shares of TSI’s common stock (the “TSI Shares”); |
| (b) | Options to purchase an aggregate of 1,450,000 Company Shares at $0.50 per share expiring on May 31, 2009 (the “Company Options”) were issued in exchange for options to purchase a total of 1,450,000 TSI Shares at the same price and with the same expiration date (the “TSI Options”); and |
| (c) | 54,367 warrants entitling the holder to purchase one Company Share at $0.75 per share, expiring on October 1, 2006 (the “Company Warrants”), were issued in exchange for 54,367 warrants to purchase one TSI Share at the same price and with the same expiration date (the “TSI Warrants”). |
Concurrent with the First Merger, Mr. Civelli and Mr. Mosimann each surrendered 30,000,000 Company Shares (60,000,000 Company Shares in total) for cancellation without the payment of any consideration and Mr. Civelli and Mr. Mosimann resigned as directors and officers of the Company and new directors and officers were appointed.
As TSI’s successor, we have assumed all of TSI’s liabilities and obligations, including TSI’s obligations with respect to a finder’s fee payable to Imaging Technology Ventures, Inc. (“ITV”) for introducing TSI to the business opportunities presented by the EMC Technology. In satisfaction of the finder’s fee, we will issue 300,000 Company Shares to ITV. We have also assumed TSI’s obligations with respect to a private placement of securities completed by TSI shortly before the First Merger (the “TSI Private Placement”). Under the TSI Private Placement, TSI offered for sale 500,000 units at $0.35 per unit, with each consisting of one TSI Share and one share purchase warrant entitling the holder to acquire one additional TSI Share at a price of $0.35 per share. As of the date of filing of this Quarterly Report, we have received subscription funds for a total of 440,005 units in connection with the TSI Private Placement. As such, we have issued to subscribers 440,005 units consisting of one Company Share and one share purchase warrant entitling the holder to acquire one additional Company Share at a price of $0.35 per share. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds.”
We have also assumed TSI’s liabilities with respect to a loan agreement dated March 8, 2004 (the “CFW Loan”), pursuant to which TSI’s subsidiary, 689158 B.C. Ltd., borrowed $500,000 from The Charles F. White Corporation (“CFW”). The loan was guaranteed by TSI and was repayable on July 2, 2004 with interest at 12% per annum and a bonus of $80,000. As security for the guarantee, TSI pledged 826,420 shares in the common stock of TechniScan, Inc. (“TechniScan”). TechniScan is a medical technology company engaged in the business of developing and marketing a proprietary imaging system for detecting breast cancer. We have received notice from CFW that the loan is in default. CFW has demanded payment of the total indebtedness outstanding as at July 2, 2004, being $602,121.24, plus interest accrued from that date. We are currently in negotiations with CFW to extend the term of the loan, however there is no assurance that these negotiations will be successful.
TSI Medical Corp.
TSI was incorporated in the State of Nevada under the name Purcell Ventures Inc. on December 21, 2000 for the purpose of pursuing business opportunities presented by emerging technologies.
On March 22, 2004, TSI entered into a Technology Acquisition and Funding Agreement (the “Funding Agreement”) with EMC and Exelar, pursuant to which Exelar transferred the EMC Technology to EMC and TSI agreed to provide EMC with periodic equity financing.
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The EMC Technology
EMC is currently developing a unique technology for use in the treatment of cancerous tumors (the “EMC Technology”). The EMC Technology utilizes small super-conducting magnets to control therapeutic radiation doses delivered by photon linear accelerators. Accelerators generate therapeutic beams of X-rays (technically called high energy photon beams). Photons are packets of energy that travel though space at the speed of light. An accelerator is to a radiation therapy beam what a flashlight is to a beam of visible light. However, each photon in a flashlight beam carries only about 1/10,000,000th of the energy of a single photon in an accelerator beam. It is this huge scale-up in photon energy that allows an accelerator beam to penetrate into the body to destroy cancer cells within it. The photons from an accelerator are so energetic that when one collides with an electron in a DNA molecule (or any other chemical) in the body, the electron is ejected with great speed and the molecule is disrupted. The recoiling electron travels onward, predominantly in the same direction as the incoming photon. The recoiling electron can penetrate through downstream tissue for some centimeters and on its way destroy many additional molecules. If the molecules are part of the cancer, this contributes to curative effects. If, however, the recoiling electrons travel into healthy tissue belonging to important organs, this can lead to immediately deleterious side-effects and/or significant long-term consequences to the patient.
The EMC Technology is based upon a unique realization that, by applying a locally intense magnetic field to the exterior of the patient's body in the near vicinity of where the photon beam passes through the cancer, one can locally trap significant numbers of the recoiling electrons. The magnetic field causes the recoiling electrons to spiral within the tumor region rather than traveling more or less straight ahead beyond the tumor and into healthy tissue. This patented concept can therefore potentially increase the dosage to a tumor while reducing the exposure of nearby healthy tissue. The magnetic field can also be utilized to simplify alignment of the beam with the tumor and enhance the targeting of moving tumors like those in the lung that shift during respiration.
A prototype device incorporating the EMC Technology (the “Device”) has been developed by Exelar. The Device employs a single, super-conducting magnet slightly larger than the size of a hockey puck. It operates at near absolute 0° (Kelvin). It is cooled by a commercial low temperature refrigerator (cryo-cooler) and is insulated by an evacuated metal case (thermos bottle). Physically, the Device is the size of a beer keg, with the magnet enclosure the size of a stein. Two pizza box sized units hold the evacuation pump and power source. The unit is attached to a gantry, is easily maneuverable and operates as an add-on device in conjunction with a photon accelerator.
Testing of the Device has been done on “phantom” synthetic tissue. Precision dose data is collected in three dimensions inside the phantom. The results of the testing show these effects:
| 1. | The creation of a “hot spot” of radiation inside the body along the beam with the magnetic field as compared to the beam without the magnetic field. | |
| 2. | A significant reduction in the radiation dose “downstream” beyond the hotspot. | |
| 3. | An indication that the recoiling elections congregate in higher density tissue (such as tumors). |
The data from phantom testing indicates 25% to 40% dose enhancement.
The prototype is currently running in a clinical environment on a Varion 2100 C accelerator at Rush-Presbyterian-St. Luke’s Medical Centre in Chicago.
5
Technology Acquisition and Funding Agreement
Pursuant to the Funding Agreement with Exelar and EMC, we have the right to acquire up to a 51% interest in EMC by providing funding to EMC as follows:
| Funding Date | Amount to be Paid | Number of Shares of EMC to be Acquired | Cumulative % Ownership of EMC |
| March 25, 2004 | $325,000 (already paid) | 162,500 | 6.7 % |
| June 23, 2004 | $575,000 (already paid) | 287,500 | 16.5% |
| September 21, 2004 | $1,550,000(1) | 775,000 | 35.0% |
| December 20, 2004 | $1,000,000(1) | 500,000 | 43.1% |
| March 20, 2005 | $1,300,000 | 650,000 | 51.0% |
| Total | $4,750,000 | 2,375,000 | 51.0% |
| (1) | As of the date of filing this Quarterly Report, we have not provided EMC with the September 21, 2004 financing payment of $1,550,000 or the December 20, 2004 financing payment of $1,000,000. Exelar had previously agreed not to exercise its default rights with respect to the September 21 payment in exchange for our agreement to shorten the period during which we may cure a default under the Funding Agreement from 20 days after receipt of notice of default to 3 days after receipt of such notice. We are currently in discussions with Exelar to extend the financing periods under the Funding Agreement, however there are no assurances that we will be able to reach such an agreement. As of the date of filing this Quarterly Report, Exelar has not exercised their default rights with respect to the September 21 and December 20 payments, however there are no assurances that they will continue to refrain from exercising their default rights. We are currently in the process of seeking financing sufficient to enable us to make the September 21 and December 20 payments to EMC, however there is no assurance that we will be able to acquire sufficient financing to make this payment or any future payment under the Funding Agreement. |
Under the terms of the Funding Agreement, we will receive one share of EMC for each $2.00 of funding provided until a total of $4,750,000 in funding is provided. If we default on any of our funding obligations, Exelar may, at its option, convert our shares of EMC into non-voting shares, remove all of our nominees to EMC’s board of directors and reduce our percentage interest in EMC such that the effective price of the EMC shares will be increased to:
| (a) | $3.00 per share if we default on any of the financing payments to be made on or before September 21, 2004; and |
| (b) | $2.50 per share if we default on any of the financing payments to be made after September 21, 2004. |
If we complete our funding obligations and the board of the directors of EMC determines that additional funding is required to complete the development and commercialization of the EMC Technology, we will have the option of increasing our percentage ownership in EMC to 60% by providing an additional $1,500,000 in financing.
Also under the Funding Agreement, Exelar will have the option to convert its shares of EMC into that number of Company Shares equal to 49% of the Company Shares then outstanding at the time of conversion. Exelar’s option to convert cannot be exercised until the earliest of the following events has occurred:
| (a) | completion of our funding obligations to EMC; |
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| (b) | default by us of any of our funding obligations to EMC; |
| (c) | March 1, 2005; or |
| (d) | an initial public offering of our stock. |
Currently TSI has provided $900,000 in financing under the Funding Agreement. As a result we own approximately 16.5% of EMC, with Exelar owning the remaining 83.5% .
PLAN OF OPERATIONS
Subject to our receiving the necessary financing, our plan of operations for the next twelve months is to meet our funding obligations to EMC under the Funding Agreement. Under the Funding Agreement, we are required to provide EMC with aggregate financing in the amount of $3,850,000 between September 21, 2004 and March 20, 2005. See “Technology Acquisition and Funding Agreement,” above. As of the date of filing this Quarterly Report, we had not provided EMC with the September 21, 2004 financing payment of $1,550,000 or the December 20, 2004 financing payment of $1,000,000. Exelar had previously agreed not to exercise its default rights with respect to the September 21 payment in exchange for our agreement to shorten the period during which we may cure a default under the Funding Agreement from 20 days after receipt of notice of default to 3 days after receipt of such notice. We are currently in discussions with Exelar to extend the financing periods under the Funding Agreement, however there are no assurances that we will be able to reach such an agreement. As of the date of filing this Quarterly Report, Exelar has not exercised their default rights with respect to the September 21 and December 20 payments, however there are no assurances that they will continue to refrain from exercising their default rights under the Funding Agreement. The amounts payable to EMC under the Funding Agreement are in excess of our current financial resources and we will not be able to proceed with our plan of operations unless we acquire significant additional financing.
We plan to pursue equity financing through the sale of Company Shares on a private placement basis as it is anticipated that substantive debt financing will not be available to us at this stage of our business. Through TSI, we have received subscription funds for the private placement of 440,005 units to be issued at $0.35 per unit for total proceeds net of commissions equal to $138,601.58. Our Board of Directors has also approved the Offering of up to 8,000,000 units to be issued at a price of $0.40 per unit for total potential proceeds net of commissions of $2,880,000. However, there is no assurance that the Offering will be completed or that all of the units offered will be sold. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds.”
On October 19, 2004, we received a loan of $71,000 from Carnavon Trust Reg. (“Carnavon”). Pursuant to the terms of our loan agreement with Carnavon, the loan is payable upon demand, with interest payable at the rate of 5%, calculated annually.
Currently we do not have any other financing arrangements in place and there is no assurance that we will be able to acquire sufficient financing in order to allow us to meet our funding obligations to EMC. If we are not able to obtain the necessary financing, Exelar may, at its option, reduce our percentage interest in EMC, convert our EMC shares into non-voting shares and/or remove any of our nominees from EMC’s board of directors as provided under the Funding Agreement.
RESULTS OF OPERATIONS
The financial statements accompanying this Quarterly Report contemplate our continuation as a going concern. However, we have sustained substantial losses and are still in the development stage. Additional funding will be necessary to meet our funding obligations to EMC and to allow EMC to continue development and marketing of the EMC Technology. We intend to arrange for the sale of additional Company Shares to obtain additional operating capital for at least the next twelve months. There can be no assurance that we will be able to raise the capital necessary to continue our operations.
7
In accordance with generally accepted accounting principles, TSI has been treated as the acquiring entity for accounting purposes. See “Critical Accounting Policies” below. As such, the results of operations presented in this Quarterly Report reflect the financial results of TSI for the period from inception on December 21, 2000 to October 31, 2004 and the financial results of Relay Mines Limited from the date of the Second Merger on September 15, 2004 to October 21, 2004.
Third Quarter and Nine Months Summary
| Third Quarter Ended October 31 | Nine Months Ended October 31 | |||||||||||||||
| Percentage | Percentage | |||||||||||||||
| 2004 | 2003 | Inc. / (Dec.) | 2004 | 2003 | Inc. / (Dec.) | |||||||||||
| Revenue | $ | -- | $ | -- | N/A | $ | -- | $ | -- | N/A | ||||||
| Expenses | $ | 656,408 | $ | 93,133 | 604.8 | % | $ | 848,055 | $ | 304,766 | 178.3 | % | ||||
| Interest Expense | $ | 23,646 | $ | -- | N/A | $ | 50,611 | $ | 5,040 | 904.2 | % | |||||
| Net Income (Loss) | $ | (680,054 | ) | $ | (93,133 | ) | (630.2 | )% | $ | (898,666 | ) | $ | (309,806 | ) | (190.1 | )% |
Revenues
We have not earned any revenues to date and we do not anticipate earning revenues until such time as we have completed testing and development of the EMC Technology. We are presently in the development stage of our business and we can provide no assurance that we will be able to complete commercial development or successfully sell or license products incorporating the EMC Technology once development is complete.
Operating Expenses
The major components of our operating expenses for the year are outlined in the table below:
| Third Quarter Ended October 31 | Nine Months Ended October 31 | |||||||||||||||
| Percentage | Percentage | |||||||||||||||
| 2004 | 2003 | Increase / | 2004 | 2003 | Increase / | |||||||||||
| (Decrease) | (Decrease) | |||||||||||||||
| Consulting Fees | $ | 173,940 | $ | 20,500 | 748.5 | % | $ | 235,740 | $ | 62,350 | 278.1 | % | ||||
| General and Administrative | 5,770 | 12,287 | (53.0) | % | 9,850 | 20,665 | (52.3) | % | ||||||||
| Impairment of Investment | 55,000 | - -- | N/A | 55,000 | - -- | N/A | ||||||||||
| Loan Bonus | 80,000 | - -- | N/A | 80,000 | - -- | N/A | ||||||||||
| Management Fees | 40,000 | 10,000 | 300 | % | 90,000 | 50,000 | 80 | % | ||||||||
| Professional Fees | 117,829 | 25,000 | 371.3 | % | 143,754 | 61,587 | 133.4 | % | ||||||||
| Investor Relations | - -- | 21,500 | (100) | % | 4,120 | 34,000 | (87.9) | % | ||||||||
| Travel and Promotion | 183,869 | 3,846 | 4,680.8 | % | 229,591 | 76,164 | 201.4 | % | ||||||||
| $ | 656,408 | $ | 93,133 | 604.8 | % | $ | 848,055 | $ | 304,766 | 178.3 | % | |||||
The increase in our expenses is primarily the result of an increase in our business and financing activities in 2004. The increase in travel and promotion expenses and consulting fees is primarily attributable to amounts paid to various consultants in connection with the acquisition by TSI of its interest in EMC and in connection with seeking and obtaining private equity financing in order to meet our obligations under the Funding Agreement.
8
Professional fees for 2004 are comprised primarily of legal and accounting fees associated with the acquisition by TSI of its interest in EMC, the merger between our predecessor, Relay Mines Limited (“Relay Mines”), and TSI and with meeting our reporting obligations under the Securities Act and the Exchange Act.
The loan bonus of $80,000 constitutes a bonus that was payable to CFW under the terms of the CFW Loan upon its maturity on July 2, 2004. See “Acquisition of and Merger with TSI Medical Corp.” above.
During the period ended October 31, 2004, we recorded an impairment of investment in the amount of $55,000 in order to account for a decrease in the value of the 826,420 shares of TechniScan which have been pledged as security for the CFW Loan.
LIQUIDITY AND CAPITAL RESOURCES
| Cash Flows | Nine Months Ended October 31, 2004 | |||||
| 2004 | 2003 | |||||
| Net Cash from (used in) Operating Activities | $ | (468,562 | ) | $ | (261,046 | ) |
| Net Cash from (used in) Investing Activities | (300,010 | ) | (267,000 | ) | ||
| Net Cash from (used in) Financing Activities | 781,018 | 528,317 | ||||
| Net Increase (decrease) in Cash During Period | $ | 12,446 | $ | 271 | ||
On June 23, 2004, Relay Mines received financing in the amount of $625,000, which was advanced in anticipation of the First Merger. See Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds.” These funds were immediately forwarded by Relay Mines to TSI in order to provide TSI with sufficient capital to make the June 23, 2004 financing payment to EMC under the Funding Agreement and to provide TSI with general working capital.
On July 28, 2004, Relay Mines obtained a loan from Aton Select Fund Ltd. in the amount of $100,000, which was advanced in anticipation of the First Merger. These funds were immediately forwarded by Relay Mines to TSI for use by TSI as general working capital.
On October 19, 2004, we obtained a loan from Carnavon Trust Reg. (“Carnavon”) in the amount of $71,000. Pursuant to the terms of our loan agreement with Carnavon, the loan is payable upon demand, with interest payable at the rate of 5%, calculated annually. These funds are being used by us as general working capital.
Working Capital
| Percentage | |||||||||
| At October 31, 2004 | At January 31, 2004 | Increase / (Decrease) | |||||||
| Current Assets | $ | 18,901 | $ | 6,455 | 192.8 | % | |||
| Current Liabilities | (1,317,857 | ) | (425,193 | ) | 209.9 | % | |||
| Working Capital Surplus (Deficit) | $ | (1,298,956 | ) | $ | (418,738 | ) | 210.2 | % | |
As at October 31, 2004, we had cash on hand of $18,901. The increase to our working capital deficit is primarily attributable to the following:
9
an increase in amounts payable to various former and current officers and directors of the Company and TSI to $433,210 at October 31, 2004 from $266,877 at January 31, 2004, attributable to expenses paid on behalf of the Company or for services performed for the Company; and
an increase in loans payable to $776,000 at October 31, 2004 from $155,000 at January 31, 2004, consisting primarily of the amounts payable on the CFW Loan, the $100,000 loaned from Aton Select Fund Ltd. and the $71,000 received from Carnavon.
We currently have insufficient cash reserves to make the September 21 financing payment of $1,550,000 or the December 20, 2004 financing payment of $1,000,000 to EMC as required under the Funding Agreement. We are currently in discussions with Exelar to extend the financing periods under the Funding Agreement, however there are no assurances that we will be able reach such an agreement. As of the date of filing this Quarterly Report, Exelar has not exercised their default rights with respect to the September 21 and December 20 payments, however there are no assurances that they will continue to refrain from exercising their default rights under the Funding Agreement.
On September 20, 2004, our Board of Directors approved a private placement offering of 8,000,000 units at $0.40 per unit for total potential proceeds of $2,880,000 net of commissions. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.” However, there is no assurance that the private placement offering will be completed or that we will be able to sell all units offered under the private placement. Even if all units offered are sold under the proposed private placement, the funds received will be insufficient to allow us to meet all of our obligations under the Funding Agreement.
If we are not able to complete the private placement offering or if the private placement offering does not provide us with sufficient financing to enable us to meet our obligations under the Funding Agreement, then we will have to seek additional sources of financing.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reverse Acquisition Accounting Policies
Under generally accepted accounting principles, our acquisition of and merger with TSI, which was completed on September 15, 2004, has been accounted for as a reverse acquisition. As such, TSI has been treated as the acquiring entity for accounting purposes and the fiscal year end of TSI, being January 31, 2005, has been adopted for purposes of our reporting obligations under the Securities Act and the Exchange Act. In addition, the consolidated interim financial statements presented in this Quarterly Report represent the historical financial information of TSI from the date of its inception on December 21, 2000 to October 31, 2004 and the historical financial information of Relay Mines Limited from the date of the Second Merger on September 15, 2004 to October 31, 2004.
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All significant intercompany balances and transfers have been eliminated in consolidation.
Long-Lived Assets
In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets”, the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes an impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.
Stock-Based Compensation
The Company has adopted a stock option plan to fulfill an obligation under the Merger with TSI. The Company accounts for stock-based awards using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under the intrinsic value method of accounting, compensation expense is recognized if the exercise price of the Company’s employee stock options is less than the market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123), established a fair value based method of accounting for stock-based awards. Under the provisions of SFAS 123, companies that elect to account for stock-based awards in accordance with the provisions of APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method under SFAS 123.
The Company issues stock to non-employees for services. The Company accounts for stock issued for services to non-employees in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation”. Compensation expense is based on the fair market value of the stock award or fair market value of the good and services received whichever is more reliably measurable.
The Company will also adopt the disclosure requirements of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an Amendment of FASB Statement No. 123” (SFAS 148), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
| ITEM 3. | CONTROLS AND PROCEDURES |
| (A) | Evaluation Of Disclosure Controls And Procedures |
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance that our disclosure control objectives are achieved. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are, in fact, effective at providing this reasonable level of assurance as of the period covered.
| (B) | Changes In Internal Controls Over Financial Reporting |
In connection with the evaluation of our internal controls during our last fiscal quarter, our principal executive officer and principal financial officer have determined that there are no changes to our internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On September 13, 2004, pursuant to the First Merger Agreement, we issued the following securities to the former security holders of TSI:
| (a) | 9,492,667 Company Shares in exchange for 9,492,667 TSI Shares, being all of the issued and outstanding shares of TSI; |
| (b) | Company Options to purchase an aggregate of 1,450,000 Company Shares at a price of $0.50 per share, expiring on May 31, 2009, in exchange for TSI Options to acquire an equal number of TSI Shares at the same exercise price and with the same expiry date; and |
| (c) | 54,367 Company Warrants entitling the holder to purchase one Company Share for each Company Warrant held, at a price of $0.75 per share, expiring on October 1, 2006, in exchange for 54,367 TSI Warrants to acquire an equal number of TSI Shares at the same exercise price and with the same expiry date. |
The Company Options and Company Warrants were issued with the same terms and conditions as the TSI Options and TSI Warrants.
We issued these Company Shares, Company Options and Company Warrants in connection with the First Merger pursuant to the exemptions to registration contained in Regulation D and Regulation S promulgated under the Securities Act on the basis that each of the former security holders of TSI has provided representations that they are either “Accredited Investors” as defined in Regulation D or that they are not “U.S. persons” as defined in Regulation S.
In satisfaction of the finder’s fee payable to ITV, we will issue 300,000 Company Shares to ITV. These shares are being issued to ITV in satisfaction of a commitment provided by TSI to ITV at the time that TSI entered into the Funding Agreement with EMC and Exelar. At that time, TSI promised to issue 300,000 shares of its common stock to ITV as a finder’s fee for introducing TSI to Exelar and the business opportunities presented by the EMC Technology. These shares will be issued to ITV pursuant to the exemptions to registration contained in Regulation D promulgated under the Securities Act on the basis that ITV has provided representations that it is an “Accredited Investor” as defined in Regulation D.
On October 15, 2004, we issued a total of 440,005 units at a price of $0.35 per unit for gross proceeds of $154,001.75. An aggregate of 10% of the gross proceeds of the TSI Private Placement were paid as an agent’s commission to Peter Hogendoorn and Harold Moll, each of whom was, at that time, a director of the Company. The units consist of one Company Share and one share purchase warrant entitling the holder to acquire one additional Company Share at a price of $0.35 per share, expiring on August 30, 2005. These units were issued to subscribers of the TSI Private Placement pursuant to the exemptions to registration contained in Regulation S promulgated under the Securities Act on the basis that each of the subscribers has provided representations that they are not “U.S. persons” as defined in Regulation S. The net proceeds of the TSI Private Placement are being used by us as general working capital.
On October 4, 2004, we issued a total of 2,500,000 units at a price of $0.25 per unit to subscribers pursuant to an agreement made by our predecessor, Relay Mines, on or around June 23, 2004. Relay Mines had agreed to issue these units to subscribers in consideration for an advance in the amount of $625,000 made to Relay Mines on June 23, 2004. Each unit consists of one Company Share and one-half of one share purchase warrant, with each one full share purchase warrant entitling the holder to purchase one additional Company Share at a price of $0.25 per share, expiring on October 4, 2005. These units were issued to subscribers pursuant to the exemptions to registration contained in Regulation S promulgated under the Securities Act on the basis that each of the subscribers has provided representations that they are not “U.S. persons” as defined in Regulation S. The total proceeds of this private placement were received by Relay
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Mines on June 23, 2004 and were advanced by Relay Mines to TSI in anticipation of the First Merger. These funds were used by TSI to complete its June 23, 2004 financing payment to EMC under the Funding Agreement and as general working capital. See Item 1. “Description of Business.”
Proposed Private Placement
On September 20, 2004, our Board of Directors approved a private placement offering of up to 8,000,000 units at a price of $0.40 per unit (the “Offering”). Total proceeds of the Offering, assuming all units offered are sold, net of commissions, is expected to be $2,880,000. Each unit issued under the Offering will consist of one Company Share and one-half of one share purchase warrant. Each one full share purchase warrant issued under the Offering will entitle the holder to purchase one additional Company Share at a price of $0.50 per share, expiring on September 30, 2005. The net proceeds of the Offering are intended to be used by us to meet our September 21, 2004 and December 20, 2004 financing obligations to EMC under the Funding Agreement and as general working capital. Although the Offering has been approved by our Board of Directors, there is no assurance that the Offering will be completed or that we will be able to sell all of the units offered.
If the Offering is completed, it is expected that any issuances of our securities will be made pursuant to the exemptions to registration contained in Regulation S promulgated under the Exchange Act on the basis that the Offering will be made only to people who are not “U.S. Persons”, as defined under Regulation S.
| ITEM 5. | OTHER INFORMATION |
REPORTS ON FORM 8-K
The following Current Reports on Form 8-K have been filed by us during the period covered by this Quarterly Report:
| Date of Form 8-K | Date of Filing with the SEC | Description of the Form 8-K |
| December 10, 2004 | December 14, 2004 | Departure of directors and principal officers and the appointment of new principal officers. |
| September 13, 2004 | November 23, 2004 | Amendment to the Current Report on Form 8-K originally filed with the SEC on September 17, 2004, disclosing the change to the Company’s year end resulting from the acquisition of and merger with TSI Medical Corp. |
| September 13, 2004 | September 17, 2004 | Disclosure of the acquisition of TSI, the First Merger and the Second Merger. |
| August 19, 2004 | August 20, 2004 | Disclosure of Agreement and Plan of Merger between the Company, Acquisition Sub, TSI, Carlo Civelli and Bruno Mosimann, dated effective as of August 12, 2004. |
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| ITEM 6. | EXHIBITS |
The following exhibits are either provided with this Annual Report or are incorporated herein by reference:
| Exhibit Number | Description of Exhibit | |
| 2.1 | Agreement and Plan of Merger between Relay Mines Limited and TSI Med Acquisition Corp., dated as of September 13, 2004.(4) | |
| 3.1 | Articles of Merger for Relay Mines Limited and TSI Med Acquisition Corp.(4) | |
| 3.2 | Articles of Incorporation for Relay Mines Limited.(1) | |
| 3.3 | Bylaws, As Amended, for Relay Mines Limited.(4) | |
| 10.1 | Technology Acquisition and Funding Agreement between TSI Medical Corp., Exelar Corporation and Exelar Medical Corporation dated for reference March 22, 2004.(4) | |
| 10.2 | Agreement and Plan of Merger between Carlo Civelli, Bruno Mosimann, TSI Medical Corp., Relay Mines Limited and TSI Med Acquisition Corp., dated effective as of August 12, 2004.(3) | |
| 10.3 | Letter Agreement, dated October 13, 2004, between XLR Medical Corp., Exelar Corporation and Exelar Medical Corporation amending the terms of the Technology Acquisition and Funding Agreement dated March 22, 2004.(5) | |
| 14.1 | Code of Ethics.(2) | |
| 31.1 | ||
| 31.2 | ||
| 32.1 | ||
| 32.2 | Certification of Chief Financial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Previously filed with the SEC as an exhibit to our Registration Statement on Form SB-2 originally filed on May 1, 2001, as amended. |
| (2) | Previously filed with the SEC on September 12, 2003 as an exhibit to our Annual Report on Form 10-KSB. |
| (3) | Previously filed with the SEC on August 20, 2004 as an exhibit to our Current Report on Form 8-K. |
| (4) | Previously filed with the SEC on September 17, 2004 as an exhibit to our Current Report on Form 8-K. |
| (5) | Previously filed with the SEC on October 29, 2004 as an exhibit to our Annual Report on Form 10-KSB. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| XLR MEDICAL CORP. | ||
| Date: December 23, 2004 | By: | /s/ Peter A. Hogendoorn |
| PETER A. HOGENDOORN | ||
| President and Chief Executive Officer | ||
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