Iq Micro (IQMC) 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________

Commission file number: 000-51796

IQ MICRO INC.

(Exact name of small business issuer as specified in its charter)

Colorado	20-3353942
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

500 Australian Ave., Suite 700, West Palm Beach, Florida 33401

(Address of principal executive offices)

(561)514-0118

(Issuer’s telephone number)

Not applicable

(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.Yes xNo o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEDINGS

DURING THE PAST FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(b) of the Exchange Act after the distribution of securities under a plan confirmed by a court.Yes oNo o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of April 30, 2007 the issuer had 50,315,241 shares of common stock outstanding.

Transitional Small Business Disclosure Format:Yeso No x

PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Stockholders’ Deficit	F-3
Consolidated Statements of Cash Flows	F-4
Notes to Consolidated Financial Statements	F-5
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OR OPERATION	2
ITEM 3. CONTROLS AND PROCEDURES	17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	17
ITEM 5. OTHER INFORMATION	17
ITEM 6. EXHIBITS	17

PART I

ITEM 1. FINANCIAL STATEMENTS

IQ MICRO INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

As of March 31, 2007 and September 30, 2006

	September 30,			March 31,
	2006			2007
ASSETS
Current assets
Cash	$	6,473		$	1,892
Prepaid expenses		2,500			-
Total current assets		8,973			1,892
Licensed rights, net		255,552			238,884
Deferred finance charges, net		147,681			99,768
Total assets	$	412,206		$	340,544
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Trade payables	$	338,282		$	573,075
Accrued interest		95,222			156,172
Accounts payable to parent company		62,255			137,255
License fee payable to parent company		20,280			20,280
Shareholder loan		44,867			93,867
Total current liabilities		560,906			980,649
Long-term liabilities
Secured convertible debenture, net $685,166 and $535,797 discounts		814,834			1,034,203
Beneficial conversion liability		530,187			931,713
Total long-term liabilities		1,345,021			1,965,916
Total liabilities		1,905,927			2,946,565
Commitments and contingencies
Stockholders’ deficit
Preferred stock, $0.0001 par value
Authorized 25,000,000 shares none issued and outstanding		-			-
Common stock, $0.0001 par value
Authorized 300,000,000 shares; 50,315,241 issued and outstanding, respectively		5,020			5,031
Additional paid-in capital in excess of par value		214,240			242,311
Deficit accumulated		(17,488	)		(17,488	)
Deficit accumulated during the development stage		(1,695,493	)		(2,835,875	)
Total stockholders' deficit		(1,493,721	)		(2,606,021	)
Total liabilities and stockholders' deficit	$	412,206		$	340,544

 

See accompanying notes to financial statements

F-1

IQ MICRO INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

FOR THE PERIODS FROM JANUARY 1, 2007 TO MARCH 31, 2007, FROM OCTOBER 1, 2006 TO MARCH 31,

2007 AND FROM JUNE 9, 2005 TO MARCH 31, 2007 (Development Stage Period)

	January 1, 2007 to March 31, 2007			October 1, 2006 to March 31, 2007			(Development Stage Period) June 9, 2005 to March 31, 2007
Revenues	$	-		$	-		$	-
Operating expenses
General and administrative		17,861			36,802			157,229
Management and consulting fees		89,907			217,197			847,841
Legal and audit fees		68,235			117,605			574,009
Investor relations		-			47,036			246,370
Loan interest and finance fees		208,767			364,277			890,648
Amortization of license fee		8,334			16,668			61,116
(Gain) loss on fair value adjustments
to beneficial conversion feature		236,607			313,563			(76,674	)
Travel		4,114			27,234			135,336
Total expenses		633,825			1,140,382			2,835,875
Net (loss) from operations		(633,825	)		(1,140,382	)		(2,835,875	)
Income taxes		-			-			-
Net (loss)	$	(633,825	)	$	(1,140,382	)	$	(2,835,875	)
(Loss) per weighted average
common share (basic and diluted)	$	(0.01	)	$	(0.02	)
Number of weighted average common
Shares outstanding		50,315,241			50,315,241

 

See accompanying notes to financial statements

F-2

IQ MICRO INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (unaudited)

FOR THE PERIODS FROM OCTOBER 1, 2004 TO JUNE 8, 2005 AND FROM

JUNE 9, 2005 TO MARCH 31, 2007

	Common Stock						Additional Paid-in			Accumulated
	Shares			Amount			Capital			Deficit			Total
PRE-DEVELOPMENT STAGE PERIOD
Balance at October 1, 2004		60,377		$	6		$	1,182		$	(14,988	)	$	(13,800	)
Restricted shares issued for services (October 20/04)		25,000,000			2,500			-			-			2,500
Restricted shares issued to settle debt (March 4/05)		13,800,000			1,380			12,420			-			13,800
Net loss: October 1, 2004 to March 31,2005		-			-			-			(2,500	)		(2,500	)
Balance at March 31, 2005 and June 8, 2005		38,860,377			3,886			13,602			(17,488	)		-
DEVELOPMENT STAGE PERIOD
Balance at June 9, 2005		38,860,377			3,886			13,602			(17,488	)		-
Cancellation of restricted shares (June 9/05)		(31,330,877	)		(3,133	)		3,133			-			-
New restricted shares issued (June 9/05)		42,670,000			4,267			(4,267	)		-			-
Warrants issued (August 1/05)		-			-			18,060			-			18,060
Warrants issued (August 12/05)		-			-			68,200			-			68,200
Net loss: June 9, 2005 to September 30, 2005		-			-			-			(197,320	)		(199,620	)
Balance at September 30, 2005 (Restated)		50,199,500			5,020			98,728			(214,808	)		(111,060	)
Warrants issued (November 30, 2005)		-			-			15,954			-			15,954
Warrants issued (March 29, 2006)								99,558						99,558
Net loss: October 1, 2005 to June 30, 2006		-			-			-			(1,498,173	)		(1,498,173	)
Balance at September 30, 2006		50,199,500			5,020			214,240			(1,712,981	)		(1,493,721	)
Net loss: October 1, 2006 to December 31, 2006		-			-			-			(506,557	)		(506,557	)
Balance at December 31, 2006		50,199,500			5,020			214,240			(2,219,538	)		(2,000,278	)
Warrants issued (February 15, 2007)		-			-			3,082			-			3,082
Conversion of secured debenture (March 28, 2007)		115,741			11			24,989			-			25,000
Net loss: December 31, 2006 to March 31, 2007		-			-			-			(633,825	)		(633,825	)
Balance at March 31, 2007		50,315,241		$	5,031		$	242,311		$	(2,853,363	)	$	(2,606,021	)

 

See accompanying notes to financial statements

F-3

IQ MICRO INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE PERIODS FROM OCTOBER 1, 2006 TO MARCH 31, 2007 AND FROM

JUNE 9, 2005 TO MARCH 31, 2007 (Development Stage Period)

	October 1, 2006 to March 31, 2007			(Development Stage Period) June 9, 2005 to March 31, 2007
Cash flows from operating activities:
Net loss	$	(1,140,382	)	$	(2,835,875	)
Items not affecting cash:
Amortization of license fee		16,668			61,116
Amortization of deferred financing costs		47,913			110,232
Amortization of warrants for investor relations		-			68,200
Common stock issued for services		-			(390,235	)
Change in fair value of the beneficial conversion feature		313,563			682,391
Amortization of discount on debentures		240,414			240,414
Changes in non-cash working capital:
Prepaid expenses		2,500			-
Trade payables		234,793			573,075
Accrued interest		60,950			156,172
Net cash used in operating activities		(223,581	)		(1,334,510	)
Cash flows from investing activities:
Purchase of licensed rights		-			(279,720	)
Cash flows from financing activites:
Shareholder advance		49,000			93,867
Increase in deferred financing costs		-			(210,000	)
Accounts payable to parent company		75,000			137,255
Proceeds from issuance of
secured convertible debentures		95,000			1,595,000
Net cash provided by financing activities		219,000			1,616,122
Net (decrease) increase in cash		(4,581	)		1,892
Cash, beginning of period		6,473			-
Cash, end of period	$	1,892		$	1,892
Supplemental cash flow information:
cash paid during the period:
Interest	$	-		$	-
Income taxes	$	-		$	-
Non-cash investing and financing activities:
Acquisition of license through payable to parent	$	-		$	80,280
Issuance of warrants in exhange for services	$	-		$	68,200
Issuance of warrants with debentures	$	3,082		$	136,654
Conversion of debentures	$	25,000		$	25,000

 

See accompanying notes to financial statements

F-4

IQ MICRO INC.

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Description of the Planned Business and Basis of Presentation

IQ Micro Inc. (the “Company”) is an international licensing company established to commercialize technology that precisely controls the movement of fluids on a micro scale. The Company was originally formed as Enclave Products, Ltd. (the “Old Corporation”), a Colorado corporation, on March 22, 1996. Pursuant to a Plan of Merger dated March 29, 2004, on April 21, 2004 the Old Corporation filed Articles and Certificate of Merger with the Secretary of State of the State of Colorado merging the Old Corporation into Enclave Products, Ltd., a Colorado corporation (the “Surviving Corporation”). A previous controlling shareholder group of the Old Corporation arranged the merger for business reasons that did not materialize.

On October 18, 2004, a Florida-based shareholder group acquired controlling interest in the Surviving Corporation and on November 5, 2004, affected a 1-for-200 reverse stock split. On November 5, 2004, the Surviving Corporation changed its name to IQ Medical Corp. and then, on October 3, 2005, to IQ Micro Inc. The Company became qualified to do business in Florida on October 12, 2005. The Company’s common stock is currently trading on the OTC Bulletin Board under the symbol “IQMC.” All common stock share amounts have been restated to reflect the reverse stock split.

Until June 8, 2005, the Company had no operations. On June 9, 2005, the Company commenced development activities when it acquired exclusive, worldwide sales and marketing licensing rights to microfluidics technology developed and patented by Osmotex AS ("Osmotex"), incorporated in Norway in 1999, as well as additional intellectual property rights of Osmotex together with such patents, (the "Licensed Rights").

The Company acquired the Licensed Rights through the issuance of shares representing approximately 85% of the outstanding shares of the Company, in addition to a cash payment of $300,000.

The Company has established a sales and marketing office in West Palm Beach, Florida and is actively pursuing global licensing opportunities. Microfluidics technology has a wide range of consumer, medical and industrial applications. The Company intends to become a specialized supplier of low voltage microfluidics technology.

The accompanying unaudited condensed financial statements of the company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, the accompanying unaudited financial statements contain all the adjustments (which are of a normal recurring nature) necessary for a fair presentation. Financial results for the six months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007. For further information, refer to the financial statements and the footnotes thereto contained in the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2006, as filed with the Securities and Exchange Commission.

NOTE 2 - Going Concern

As reflected in the accompanying consolidated financial statements, the Company is a Development Stage Corporation and has incurred substantial losses during the development stage period and had a stockholders’ deficit of $2,606,021 at March 31, 2007. These conditions raise substantial doubt as to the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon generating revenues and obtaining additional capital and financing.

The Company is pursuing various alternatives to meet its capital requirements. During the period from June 9, 2005 to March 31, 2007, the Company realized net cash proceeds of $1,616,122 from financing activities, substantially from the issuance of Secured Convertible Debentures. However, there can be no assurance that the Company will be able to continue arranging the capital necessary to meet its requirements until revenues are generated to the level adequate to fund cash outflows. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

F-5

Note 3 - Significant Accounting Policies

Principles of Consolidation

These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, IQ Micro USA, Inc. All inter-company balances and transactions have been eliminated.

Cash and Cash Equivalents

The Company defines cash and cash equivalents as investments in short-term investments with a term to maturity when acquired of three months or less. At September 30, 2006 and March 31, 2007, the Company had no cash equivalents.

Long-Lived Assets

The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the anticipated undiscounted future net cash flows of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows. As of September 30, 2006 and March 31, 2007 the Company determined that there was no impairment.

Warrant Valuation

The fair value of the warrants issued is valued using the Black Scholes-Merton methodology without a vesting period. The related expenses are being amortized over the term of the contract.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued expenses at September 30, 2006 and March 31, 2007 approximate their fair value because of their relatively short-term nature.

Derivatives

The Company accounts for the conversion feature of the Secured Convertible Debenture issued in a private placement as a derivative under the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities. The conversion feature is treated as a liability in the condensed consolidated balance sheet for the periods presented and is recorded at fair value. The change in fair value for each reporting period is recorded as a loan interest and financing expense in the consolidated statements of operations.

Loss Per Common Share

Net loss per common share (basic and diluted) is based on the net loss, divided by the weighted average number of common shares outstanding during each period. Certain common stock equivalents and 1,000,000 shares held in escrow were not included in the calculation of diluted loss per share as their effect would not be dilutive. For the period ended March 31, 2007, there were 28,212,000 anti-dilutive shares excluded from the computation of diluted EPS.

Use of Estimates

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

F-6

Note 3 - Significant Accounting Policies, Continued

Recent Pronouncements

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions that they have taken or expect to take in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company beginning in the first quarter of fiscal 2008. Although the Company will continue to evaluate the application of FIN No. 48, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the first quarter of fiscal 2009. Although the Company will continue to evaluate the application of SFAS No. 157, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position.

In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Although the Company will continue to evaluate the application of SAB No. 108, management does not currently believe adoption will have a material impact on the Company’s results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits all entities to choose to measure and report many financial instruments and certain other items at fair value at specified election dates. If such an election is made, any unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each subsequent reporting date. In addition, SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The Company is required to adopt the provisions of SFAS No. 159 for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s results of operations or financial position.

Note 4 - Licensed Rights

On June 9, 2005, Osmotex entered into a Technology License Agreement with its wholly-owned subsidiary, Osmotex USA, Inc. (“Osmotex USA”). Under this agreement, the parent company granted the Licensed Rights to its subsidiary to commercialize its patented microfluidics technologies.

Also on June 9, 2005, Osmotex entered into a Capital Contribution Agreement with the Company in which its wholly-owned subsidiary, Osmotex USA, contributed its Licensed Rights to the Company as a capital contribution in exchange for an 85% equity position in the Company. A total of 31,330,877 issued restricted shares were tendered for cancellation and 42,670,000 new restricted shares were issued in connection with the Capital Contribution Agreement.

F-7

Note 4 - Licensed Rights, Continued

In an agreed-upon amendment to Capital Contribution Agreement prior to September 30, 2005, memorialized on January 12, 2006, the Company was required to pay Osmotex USA $300,000 in cash as an additional payment for the Licensed Rights. At March 31, 2007, the Company had paid $279,720 to Osmotex USA leaving a balance outstanding of $20,280.

The Licensed Rights is carried at cost on the balance sheet less straight-line amortization based on nine years of life remaining on the Osmotex patent that expires in 2015. Amortization expense of the Licensed Rights were $16,668 and $61,116 for the periods from October 1, 2006 to March 31, 2007 and June 9, 2005 to March 31, 2007, respectively.

Estimated annual amortization expense of its intangible Licensed Rights will be as follows for the years ending September 30, 2007 thru 2010 and thereafter:

2007		33,333
2008		33,333
2009		33,333
2010		33,333
2011		33,333
Thereafter		88,887
	$	255,552

Note 5 - Deferred Income Taxes

The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s consolidated financial statements or tax returns. The Company has a substantial net operating loss carry-forward of approximately $615,000 and $2,200,000 at March 31, 2006 and March 31, 2007, respectively. The carry-forwards begin to expire in 2024. The Company has a 100% valuation allowance against net deferred income tax assets due to the uncertainty of their ultimate realization.

Note 6 - Secured Convertible Debentures

On August 12, 2005, the Company closed its first private placement with Cornell Capital Partners, LP (sometimes referred to herein as "Cornell") via the issuance of an 8% Secured Convertible Debenture pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended, for gross proceeds of $500,000. Net cash proceeds from the Secured Convertible Debenture were $430,000. The term of the Secured Convertible Debenture is two years. In connection with the offering of this Secured Convertible Debenture, the Company issued 100,000 common share purchase warrants that are exercisable at a price of $0.001 per share and that expire on August 12, 2008. Principal and interest on the Secured Convertible Debenture may be converted into an aggregate of up to 9,800,000 shares of common stock by the investor at a conversion price per share equal to the lesser of (a) $0.64 or (b) an amount equal to 80% of the lowest closing bid price of the common stock (on the OTCBB or on the exchange which the common stock is then listed, including the "Pink Sheets"), as quoted by Bloomberg L.P for the five trading days proceeding the conversion date. The number of shares of common stock issuable upon conversion equals the quotient obtained by dividing the outstanding amount of the Secured Convertible Debenture to be converted by the conversion price.

F-8

Note 6 - Secured Convertible Debentures, Continued

On November 30, 2005, the Company closed its second private placement with Cornell Capital Partners, LP via the issuance of an 8% Secured Convertible Debenture pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended, for gross proceeds of $250,000. Net cash proceeds from the Secured Convertible Debenture were $205,000. The term of the Secured Convertible Debenture is two years. In connection with the offering of this Secured Convertible Debenture, the Company issued 100,000 common share purchase warrants which are exercisable at a price of $0.001 per share and which expire on November 30, 2008. The investor has the sole right to convert the principal and interest on the Secured Convertible Debenture into an aggregate of 4,900,000 shares of common stock at the lesser of (a) $0.48 or (b) an amount equal to 80% of the lowest closing bid price of the common stock (on the OTCBB or on the exchange which the common stock is then listed, including the "Pink Sheets") as quoted by Bloomberg L.P for the five trading days proceeding the conversion date. The number of shares of common stock issuable upon conversion equals the quotient obtained by dividing the outstanding amount of the Secured Convertible Debenture to be converted by the conversion price.

As part of the second private placement, the Company committed to issue to the same investor another Secured Convertible Debenture in the principal amount of $250,000 to the same investor upon the fulfillment of certain conditions set forth in the Securities Purchase Agreement. The second 8% Secured Convertible Debenture of $250,000 was issued on February 8, 2006 resulting in net proceeds of $225,000. The term of this Secured Convertible Debenture is two years.

Principal and interest on this Secured Convertible Debenture may be converted into an aggregate of up to 4,900,000 shares of common stock by the investor at a conversion price per share equal to the lesser of (a) $0.42 or (b) an amount equal to 80% of the lowest closing bid price of the common stock (on the OTCBB or on the exchange which the common stock is then listed, including the "Pink Sheets"), as quoted by Bloomberg L.P. The number of shares of common stock issuable upon conversion equals the quotient obtained by dividing the outstanding amount of the Secured Convertible Debenture to be converted by the conversion price.

On March 29, 2006, the Company completed its third private placement with Cornell Capital Partners, LP via the issuance of an 8% Secured Convertible Debenture in the principal amount of $500,000 pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended. Net cash proceeds from this Secured Convertible Debenture were $430,000. The term of the Secured Convertible Debenture is three years. In connection with the offering this Secured Convertible Debenture, the Company issued 3,000,000 common stock purchase warrants that are exercisable at a price of $0.30 per share and that expire on March 29, 2011. Principal and interest on the Secured Convertible Debentures may be converted into an aggregate of up to 7,400,000 shares of common stock by the investor at a conversion price per share equal to the lesser of (a) $0.42 or (b) an amount equal to 80% of the lowest closing bid price of the common stock (on the OTCBB or on the exchange which the common stock is then listed, including the "Pink Sheets"), as quoted by Bloomberg L.P for the five trading days proceeding the conversion date. The number of shares of common stock issuable upon conversion equals the quotient obtained by dividing the outstanding amount of the Secured Convertible Debenture to be converted by the conversion price. On March 28, 2007, Cornell Capital Partners, LP converted $25,000 of this debenture at a conversion price per share of $0.216 that resulted in the issuance of 115,741 shares.

On February 15, 2007, the Company issued another 8% Secured Convertible Debenture in the principal amount of $95,000 to Cornell Capital Partners. This debenture matures in three years and may be convertible into shares of common stock at a conversion price per share equal to the lesser of (a) $0.35 or (b) an amount equal to 80% of the lowest closing bid price of the common stock (on the OTC Bulletin Board or on the exchange on which the common stock is then listed, including the “Pink Sheets”), as quoted by Bloomberg, P.A. for the five (5) trading days immediately preceding the conversion date. In connection with this Secured Convertible Debenture (a) D.P. Martin & Associates (“DPM”) (a stockholder in the Company) pledged 1,000,000 shares of the Company’s common stock owned by DPM; the proceeds from the sale of these shares, if and as liquidated, will reduce the indebtedness under the debenture and will be applied against an obligation due the Company from DPM, (b) the Company’s Chief Financial Officer provided his personal guaranty of up to $25,000; and (c) the Company issued to Cornell Capital Partners, LP 212,000 warrants exercisable at $0.001 per share and with a five year term.

F-9

Note 6 - Secured Convertible Debentures, Continued

As of March 31, 2007, the Company had issued five Secured Convertible Debentures to Cornell Capital Partners, LP resulting in the receipt of gross proceeds of $1,595,000 and net proceeds of $1,370,000. The investor has been granted a security interest in the assets of the Company as evidenced by a UCC-1 filing.

The Company must redeem the Secured Convertible Debentures upon maturity. The Company has the right to redeem the Secured Convertible Debentures at any time prior to maturity based on a redemption price of 120% of the face amount plus any accrued interest.

The documents governing the issuance of the Secured Convertible Debentures contain restrictive covenants that among other things limit the Company’s ability to enter into capital transactions. In addition, pursuant to a Second Amended and Restated Investor Registration Rights Agreement with Cornell dated March 29, 2006 (the "March 2006 Registration Rights Agreement") the Company was required, no later than February 28, 2007, to file a registration statement on Form S-1 or Form SB-2 for the resale by Cornell Capital Partners, LP of up to 27,000,000 shares of common stock to be issued upon conversion of four of its Secured Convertible Debentures and Warrants. The Company also entered into a Registration Rights Agreement dated February 15, 2007 with Cornell Capital Partners, LP (the "February 2007 Registration Rights Agreement") which required the Company to file a registration statement with the SEC on or prior to the 30^th calendar day following the date that Cornell delivered a written notice requesting the Company to file such registration statement as to share underlying the debenture and warrant issued in February 2007.

The Company has consolidated its securities registration obligations into a demand registration right with Cornell governed by the February 2007 Registration Rights Agreement pursuant to which the Company is obligated to register the Registrable Securities (as defined in the March 2006 and February 2007 Registration Rights Agreement) within 45 days following the date that Cornell delivers written notice requesting the Company to file such registration statement. As of the date of this report, the Company has not received such written notice. The March 2006 Registration Rights Agreement was terminated by the parties as of May 21, 2007. The Company’s failure to file and ensure the effectiveness of the Form SB-2 would constitute an event of default that would require the payment of liquidated damages to Cornell Capital Partners, LP in either a cash amount or shares of our common stock within three (3) business days, after demand therefore, equal to 2% of the liquidated value of all of the Secured Convertible Debentures we issued to Cornell Capital Partners, LP outstanding for each thirty (30) day period from the date we were obligated to file the Form SB-2 or ensure effectiveness thereof, whichever is applicable.

In addition, the Company is obligated to obtain sponsorship for trading on the OTC Bulletin Board or listing our common stock on the Nasdaq SmallCap Market, New York Stock Exchange, American Stock Exchange or the Nasdaq National Market (each, a “Subsequent Market”). The Company’s failure to obtain OTC Bulletin Board sponsorship or listing on a Subsequent Market would constitute an event of default under the Secured Convertible Debentures. As such, and in the event of other events of default, as defined in the Secured Convertible Debentures, the Secured Convertible Debentures would become immediately payable in cash or, at the option Cornell Capital Partners, LP, in common stock of the Company. If an event of default, as defined in the Secured Convertible Debentures, occurs and remains uncured, the conversion price will be reduced by twenty percent (20%) of the conversion price.

The beneficial conversion features relating to the Secured Convertible Debentures are treated as embedded derivatives and is therefore classified as a liability in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” The beneficial conversion features were valued using the Black Scholes-Merton methodology. The total discount values assigned to the conversion features at the time of issuances were $1,008,387. As of March 31, 2007, the beneficial conversion features are valued have an aggregate value of $931,713.

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Note 7 - Share Capital

Warrants

On August 1, 2005, the Company engaged the firm of Hawk Associates, Inc. to provide a wide range of corporate communication services. In consideration for these services, the Company agreed to compensate Hawk Associates, Inc. with a monthly fee plus the issuance of 250,000 share purchase warrants with an exercise price of $0.51 and a term of five years. The fair value of the warrants was established at $68,200 using the Black Scholes - Merton methodology without a vesting period. This value was recorded as a deferred finance charge and was amortized over the six month initial term of the services contract.

On August 12, 2005, the Company consummated its first private placement with Cornell Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds of $500,000. In connection with the offering of this Secured Convertible Debenture, the Company issued 100,000 common share purchase warrants that are exercisable at a price of $0.001 per share and that expire on August 12, 2008. The fair value of the warrants was established at $18,060 using the Black Scholes - Merton methodology without a vesting period. This value was recorded as a discount to the convertible debentures and is being amortized over the term of the Debenture. For the six months ended March 31, 2007, $3,010 was included in interest expense with a deferred balance outstanding of $8,528.

On November 30, 2005, the Company consummated its second private placement with Cornell Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds of $250,000. In connection with the offering of this Secured

Convertible Debenture, the Company issued 100,000 common share purchase warrants that are exercisable at a price of $0.001 per share and that expire on November 30, 2008. The fair value of the warrants was established at $15,954 using the Black Scholes - Merton methodology without a vesting period. This value was recorded as a discount to the convertible debentures and is being amortized over the term of the Debenture. For the six months ended March 31, 2007, $2,659 was charged to interest expense with a deferred balance outstanding of $8,863.

On March 29, 2006, the Company consummated its third private placement with Cornell Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds of $500,000. In connection with the offering, the Company issued 3,000,000 common share purchase warrants that are exercisable at a price of $0.30 per share and that expire on March 29, 2011. The fair value of the warrants was established at $99,558 using the Black Scholes - Merton methodology without a vesting period. The value was recorded as a discount to the convertible debentures and is being amortized over the term of the Debenture at $2,766 per month. For the six months ended March 31, 2007 $16,593 was charged to interest expense and the balance of the discount was $66,371.

On February 15, 2007, the Company consummated its fourth private placement with Cornell Capital Partners, LP of an 8% Secured Convertible Debenture for gross proceeds of $95,000. In connection with the offering, the Company issued 212,000 common share purchase warrants that are exercisable at a price of $0.001 per share and that expire on February 15, 2012. The fair value of the warrants was established at $3,082 using the Black Scholes - Merton methodology without a vesting period. The value was recorded as a discount to the convertible debentures and is being amortized over the term of the Debenture at $51 per month. For the six months ended March 31, 2007 $51 was charged to interest expense and the balance of the discount was $3,031.

Of the total warrant values of $136,653, $23,496 was expensed during the six months ended March 31, 2007 and $86,793 is included in the accompanying balance sheet as a discount to the convertible debt at March 31, 2007.

Capital Transactions

In connection with the June 9, 2005 Capital Contribution Agreement, as amended January 12, 2006, the Company entered into a Financing and Listing Agreement with Osmotex USA and D.P. Martin & Associates, Inc. that obligated D.P. Martin & Associates, Inc. to locate at least $500,000 in external financing for the Company by December 31, 2005. Pursuant to the Financing and Listing Agreement, D.P. Martin & Associates, Inc. (1) assisted the Company in establishing Osmotex USA’s approximate 85% of the Company’s outstanding common stock and (2) placed 1,000,000 shares of the Company’s common stock beneficially owned by D.P. Martin & Associates, Inc. into escrow to be released to D.P. Martin & Associates, Inc. if and when it fulfils its financing commitment under the Financing and Listing Agreement. These shares are not included in the calculation of earnings per share.

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On December 30, 2005 the Company amended the Financing and Listing Agreement to extend the December 31, 2005 deadline to April 30, 2006. Subsequent to March 31, 2006 the agreement was further extended to September 30, 2006. As stated in Note 6, the 1,000,000 shares in escrow were transferred to Cornell Capital Partners as additional security pledged in respect to the February 15, 2007 Secured Convertible Debenture.  

Note 8 - Related Party Transactions

Management Agreements

The Company is party to a Management Agreement, dated May 1, 2005, with D.P. Martin & Associates, Inc., a Florida financial advisory firm. In that agreement, the Company engaged and appointed Robert Rudman, an employee of D.P. Martin & Associates, Inc., as its Chief Financial Officer. Mr. Rudman is also one of the Company's directors. IQ USA pays a $10,000 monthly management fee to D.P. Martin & Associates, Inc. Mr. Rudman is a Canadian Chartered Accountant and a Canadian citizen. Mr. Rudman's H-1B work authorization status was granted with D.P. Martin & Associates, Inc. For the six months ended March 31, 2007 the Company has accrued $60,000 in management fees payable to D.P. Martin & Associates, Inc.

The Company is party to a Management Agreement, dated October 1, 2005, with Visionaire AS. In that agreement, the Company engaged and appointed Johnny Christiansen, who resides in Norway and is an employee of Visionaire AS, as its Chief Executive Officer. Mr. Christiansen is also one of the Company’s directors. In addition, he serves as a director of Osmotex. Mr. Christiansen performs management services for the Company in his capacity as Chief Executive Officer from Norway and also performs management services for IQ USA, for which he is paid up to $8,000 in a monthly management fee. Mr. Christiansen is also a director of Osmotex. For the six months ended March 31, 2007 the Company has accrued $27,700 in management fees payable to Visionaire, AS.

On March 1, 2006, the Company entered into a second Management Agreement with Visionaire AS. In that agreement, the Company engaged and appointed Per Arne Lislien, who resides in Norway and is an employee of Visionaire AS, as its Chief Operations Officer. Mr. Lislien performs management services for the Company in his capacity as Chief Operations Officer from Norway and also performs management services for IQ USA which pays his $10,000 monthly management fee. For the six months ended March 31, 2007, the Company has accrued $61,800 in management fees payable to Visionaire, AS. 

Lease Agreements

The Company is a party to a verbal lease agreement with D.P. Martin & Associates Inc. Under this arrangement, the Company leases one executive office including administrative support services in West Palm Beach, Florida at a monthly cost of $2,500. For the six months ended March 31, 2007, the Company has accrued the rental expense payable to D.P. Martin & Associates.

The Company is also a party to a verbal lease agreement with Visionaire AS. Under this arrangement, the Company leases two executive offices including administrative support in Horten, Norway at a monthly cost of $1,600. For the six months ended March 31, 2007, the Company has accrued the rental expense payable to Visionaire AS.

On January 12, 2006, the Company entered into an Amendment to Capital Contribution Agreement with Osmotex USA whereby the Company memorialized its agreement to pay the $300,000 License Fee to Osmotex, as partial consideration for the Licensed Rights, in addition to the Company’s issuance of the 42,760,000 common stock shares to Osmotex USA. As of March 31, 2007, the Company has paid $279,720 of this amount.

The Company’s shareholders, including a majority of the disinterested shareholders, ratified and approved the License Fee at a special meeting of the shareholders on January 12, 2006.

Also on January 12, 2006, the Company entered into an Amended and Restated Technology License Agreement (the “A&R License Agreement”) to which Osmotex and Osmotex USA are also parties. In the A&R License Agreement, the Licensed Rights Osmotex granted to Osmotex USA in the License Agreement dated June 9, 2005 remained the same, but Osmotex USA also sub-licensed to the Company the identical rights it had been granted from Osmotex.

Note 9 - Subsequent Event

On May 15, 2007, Cornell Capital Partners, LP converted $45,000 of its March 29, 2006 debenture at a conversion price per share of $0.096 that resulted in the issuance of 468,750 shares.

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ITEM 2. Management’s Discussion and Analysis or Plan of Operation

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and appearing in our annual report filed on Form 10-KSB for fiscal year ended September 30, 2006.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-QSB (this “Report”) contains “forward-looking statements,” including, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties, and no assurance is given that these events will occur. Our actual future results may differ materially from those set forth in our forward-looking statements.

In addition to those risks discussed in this Report under the heading “Risk Factors,” factors that could cause our actual results to differ materially from those in the forward-looking statements include, without limitation:

· our status as a development stage company;

· our ability to operate as a “going concern;”

· our need for additional capital;

· our substantial leverage and indebtedness;

· that our assets secure our indebtedness;

· restrictive covenants in our Securities Purchase Agreement and Secured Convertible Debentures;

· dilution to existing shareholders upon conversion of our Secured Convertible Debentures;

· our cash requirements;

· our ability to incur more debt;

· our lack of independent directors;

· our dependence on key personnel;

· that our executives are not our employees;

· immigration restrictions related to our senior officers;

· logistics related to our Chief Executive Officer and Chief Operations Officer residing in Norway;

· difficulties in making service of process or enforcing judgments;

· our lack of certain types of insurance coverage;

· our limited use of confidentiality agreements;

· limitations on patent protection and protection of other intellectual property;

· the outcome of possible intellectual property infringement claims;

· the success of our marketing and licensing operations;

· the reception in the industry of the technology we sub-license;

· possible defects in the technology we sub-license;

· the performance of sub-sub-licensees;

· our management of our growth;

· the effects of competition in our industry;

· currency exchange and tariff regulations;

· Food and Drug Administration (“FDA”) regulation of products or processes developed by sub-sub-licensees;

· the extent to which our controlling shareholder exerts its influence;

· the development of a trading market for our common stock;

· that we have not paid dividends on our common stock and do not intend to do so in the future;

· the effects of changing laws and regulations;

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· the costs associated with being a reporting company with the Securities and Exchange Commission (the “SEC”);

· the trading price of our common stock;

· dilution of our common stock upon conversion of warrants and debentures; and

· other risks described from time to time in our filings with the SEC.

However, other factors besides those listed in the Risk Factors section or discussed in this Report could also adversely affect our results and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

Unless otherwise noted, the terms “IQMC,” the “Company,” “we,” “us,” and “our,” as used in this document, refer to the past and ongoing business operations of IQ Micro Inc.

Certain industry data disclosed in this report have been obtained from industry and government publications, as indicated. Our management believes such data to be reasonably accurate. All references in this document to “Fiscal 2006,” “Fiscal 2005,” and “Fiscal 2004” refer to our fiscal years ending on September 30 of such years.

All common stock share amounts have been restated to reflect our 1-for-200 reverse stock split effected on November 5, 2004.

GENERAL

Plan of Operation

This Plan of Operation summarizes the significant factors affecting our plan of operation for the next 12 months. This Plan of Operation should be read in conjunction with our condensed consolidated financial statements and notes.

In the Plan of Operation, we refer to the period October 1, 2004 through June 8, 2005 as the “Pre-operations Period” and the time period of June 9, 2005 through March 31, 2007 as the “Development Stage Period.”

Description of the Planned Business

We are an international licensing company established to commercialize technology that precisely controls the movement of fluids on a micro scale. We were originally formed as Enclave Products, Ltd. (the “Old Corporation”), a Colorado corporation, on March 22, 1996. Pursuant to a Plan of Merger dated March 29, 2004, on April 21, 2004 the Old Corporation filed Articles and Certificate of Merger with the Secretary of State of the State of Colorado merging the Old Corporation into Enclave Products, Ltd., a Colorado corporation (the “Surviving Corporation”). A previous controlling shareholder group of the Old Corporation arranged the merger for business reasons that did not materialize.

On October 18, 2004, a Florida-based shareholder group acquired controlling interest in the Surviving Corporation and on November 5, 2004, effected a 1-for-200 reverse stock split. On November 5, 2004, the Surviving Corporation changed its name to IQ Medical Corp. and then, on October 3, 2005, to IQ Micro Inc. We became qualified to do business in Florida on October 12, 2005. Our common stock is currently traded on the NASD Over-the-Counter Bulletin Board under the symbol “IQMC.” All common stock share amounts have been restated to reflect the reverse stock split.

Until June 8, 2005, we had no operations. On June 9, 2005, we commenced development activities when we acquired exclusive, worldwide sales and marketing licensing rights to microfluidics technology developed and patented by Osmotex AS (“Osmotex”), incorporated in Norway in 1999, as well as additional intellectual property rights of Osmotex (the “Licensed Rights”).

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We acquired the Licensed Rights through the issuance of shares representing approximately 85% of our outstanding shares of common stock, in addition to a cash payment of $300,000.

We have established a sales and marketing office in West Palm Beach, Florida and through IQ Micro (USA) Inc. (“IQ USA”), our wholly-owned subsidiary, are actively pursuing global licensing opportunities. Microfluidics technology has a wide range of consumer, medical and industrial applications. We intend to become a specialized supplier of low voltage microfluidics technology.

Discussion of Cash Requirements and Financial Plan

During our Development Stage Period, we completed five private placements with Cornell Capital Partners, LP consisting of 8% Secured Convertible Debentures  (collectively, the "Secured Convertible Debentures") pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as amended. These private placements to one accredited investor resulted in gross proceeds to us of $1,595,000 and net proceeds of $1,370,000.

Cornell Capital Partners, LP Private Placements
Closing Date	Gross Proceeds
August 12, 2005	$	500,000
November 30, 2005	$	250,000
February 8, 2006	$	250,000
March 29, 2006	$	500,000
February 15, 2007	$	95,000

Of the total net proceeds of $1,370,000 received as at March 31, 2007, approximately $280,000 has been paid to Osmotex as partial payment for the purchase of the Licensing Rights and approximately $1,088,000 has been required for operating activities during the Development Stage Period. As a result, we had approximately $2,000 in cash as of March 31, 2007. We had approximately $1,000 in cash as of April 30, 2007. We also had total current liabilities of approximately $980,000 as of March 31, 2007. We had total current liabilities of approximately $1,000,000 as of April 30, 2007. We have not generated revenue during the Development Stage Period.

The following schedule is our estimate of operating expenses for the 12 months ending March 31, 2008. These estimates are based on our actual experience during the past 12 months. These estimates do not include up to approximately $135,000 in potential interest expense related to the five Secured Convertible Debentures issued to Cornell Capital Partners, LP that would be due if Cornell Capital Partners, LP does not exercise its right to convert the Secured Convertible Debentures into shares of our common stock. The schedule is only an estimate and actual expenses may be greater due to a number of factors as described in the “Risk Factors” section and in the Introductory Note.

General and administrative costs	$	100,000
Management and consulting fees		560,000
Professional fees		240,000
Travel costs		180,000
Investor relations expenses		120,000
TOTAL	$	1,200,000

On a monthly basis, we require approximately $100,000 in cash to sustain our development stage activities. We do not expect this amount to increase or decrease materially during the next 12 months. Our estimate for professional fees includes legal and accounting fees related to our being a public reporting company, including preparation of reports filed with the SEC under the Securities Exchange Act of 1934, as amended. The technology we have licensed from Osmotex does not require additional research or development. As our business model involves the sub-sub-licensing of technology, we have no plans to purchase plant equipment or significant assets. In addition, the number of employees and consultants is expected to remain constant during the next 12 months.

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We are simultaneously pursuing the following alternatives with respect to obtaining additional capital:

· We are in active discussions with potential sub-sub-licensees and we anticipate the successful negotiation of our first licensing agreement to be completed by September 30, 2007. The revenue to be generated by this sub-sub-license will take the form of a licensing fee plus royalties. The licensing fee will vary depending on the application, the target market and the territory. Current discussions with potential sub-sub-licensees involve licensing fees in the $500,000 to $1 million range and royalties in the 7% - 10% range.

· A second potential source of capital involves a financial commitment from D.P. Martin & Associates Inc. (“D.P. Martin”). In connection with the June 9, 2005 Capital Contribution Agreement, we entered into a Financing and Listing Agreement with Osmotex USA and D.P. Martin that obligated D.P. Martin to locate at least $500,000 in external financing for us by December 31, 2005. Subsequent to March 31, 2006, the agreement was further extended to September 30, 2006. Pursuant to the Financing and Listing Agreement, D.P. Martin (1) assisted us in establishing Osmotex USA’s approximate 85% of our outstanding common stock and (2) placed 1,000,000 shares of our common stock beneficially owned by D.P. Martin into escrow to be released when it fulfils its financing commitment under the Financing and Listing Agreement. These 1,000,000 shares have been released from this escrow and have been pledged to Cornell Capital in connection with our February 2007 $95,000 Debenture. By March 31, 2007, D.P. Martin had advanced approximately $94,000 to the Company as a shareholder loan. Additional advances are being arranged by D.P. Martin and the objective is to arrange the total $500,000 in funding.

We are continuing to seek additional financing to meet our working capital needs and other elements of our business plan although we have no commitments for new financing. We expect that operating and development expenses will increase significantly as we continue to implement our plan. No assurance can be given that we will be successful in completing these or any other financings at the minimum level necessary to fund our working capital requirements or to complete our development plan or at all. If we are unsuccessful in completing these financings we will not be able to fund our working capital requirements or execute our business plan, we will run out of cash and have to substantially reduce or curtail the development of our projects.

Off-Balance Sheet Arrangements

Other than the financial commitment by D.P. Martin as described above, we have no off-balance sheet arrangements that have or are likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Future Operations

Presently, our revenues are not sufficient to meet operating expenses. The continuation of our business is dependent upon obtaining further financing and by market acceptance of our licensed technology allowing us to achieve a profitable level of operations.

The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current shareholders.

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Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

(a) Other Assets:

Other assets include the Licensed Rights. This asset is carried at amortized cost on the balance sheet.

(b) Financial instruments:

Financial instruments include beneficial conversion features and other potential cash-settled derivatives. These liabilities are carried at fair value on the balance sheet.

(c) Valuation of warrants and beneficial conversion features associated with the issuance of secured convertible debentures:

The fair value of the warrants is valued using the Black Scholes-Merton methodology which requires management to estimate volatility, risk free interest rate and forfeiture rates.

Going Concern

We have incurred recurring operating losses and at March 31, 2007, we had an accumulated deficit during the Pre-Development Period of $17,488, an accumulated deficit during the Development Stage Period of $2,835,875 and a working capital deficit of $978,757. During the Development Stage Period, we used cash of $1,334,510 in operating activities. During the Development Stage Period, we realized net proceeds of $1,370,000 from four Secured Convertible Debenture financings to fund our operations. We cannot assure that we can arrange future financings.

Our condensed consolidated financial statements have been prepared on the “going concern” basis which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, these condensed consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.

General

We have no revenues from our current operations, our operations during the development stage through March 31, 2007 have not generated a profit, and we have relied on, and will continue to rely on, significant external financing to fund our operations.

During the fiscal year ended September 30, 2006, and through the date of this report our financing came primarily from the sale of convertible debentures totaling $1,595,000 in gross proceeds and $1,370,000 in net proceeds. During the quarter ended March 31, 2007 we closed on $95,000 in gross proceeds from the sale of our convertible debentures. We will need to raise at least approximately $1.2 million in additional capital to finance operations and other expenses through March 31, 2008 excluding potential interest expense related to our secured convertible debenture financings.

We generated a net loss of $1,140,382 during the six months ended March 31, 2007 and a cumulative loss of $2,780,875 during the development stage.

We are continuing to seek additional financing to meet our working capital needs, debt repayment requirements, and other elements of our business plan. We expect that operating and development expenses will increase significantly as we continue to implement our plan. No assurance can be given that we will be successful in completing any financings at the minimum level necessary to fund our working capital requirements, debt repayment requirements, or to complete our development plan or at all. If we are unsuccessful in obtaining new financings, we will not be able to fund our working capital requirements, meet debt repayment requirements, or execute our business plan, we will run out of cash and have to substantially reduce or curtail the developments of our project. In such case we will assess all available alternatives including a sale of our assets or merger, the suspension of operations and possibly liquidation, auction, bankruptcy, or other measures. Any of these events will be materially harmful to our business and may result in a lower stock price.

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We will need to raise additional capital to fund our anticipated future development. No financing commitments for further capital needs have been obtained as of the date of this report except as noted above in “Plan of Operation - Discussion of Cash Requirements and Financial Plan”, however there is no assurance that we will obtain financing from some sources or from any other sources. There can be no assurance that the Company’s financial condition will improve. The Company is expected to continue to have minimal working capital or a working capital deficit as a result of current liabilities.

Financing Transactions

See “Plan of Operation - Discussion of Cash Requirements and Financial Plan” above for a general description of our most recent financing transactions resulting in a gross proceeds of $1,595,000 and net proceeds of $1,370,000. See also the Notes to the financial statements included with this report.

Liquidity and Financial Condition

At March 31, 2007, we had $1,892 in cash. Total liabilities at March 31, 2007 were $2,946,565 consisting of total current liabilities in the aggregate amount of $980,649 and total long term liabilities in the amount of $1,965,916. At March 31, 2007, assets included $238,884 of net licensed rights and $99,768 of net deferred finance charges. As of March 31, 2007 our working capital deficit was $978,757. We expect to incur substantial operating losses as we continue our development efforts. As of March 31, 2007, the accounts payable to our parent company was $137,255. Subsequent to that date, we received a $30,000 cash transfer from our parent company. These funds were used for working capital purposes.

Results of Operations-Six Months Ended March 31, 2007

Revenues

The Company generated no revenues during the six months ended March 31, 2007 and has generated no revenues during the development stage period to date of June 9, 2005 to March 31, 2007.

General and Administrative Expenses

General and administrative expenses during the six months ended March 31, 2007 were $36,802.

Management and Consulting Fees

Management and consulting fees were $217,197 during the six months ended March 31, 2007.

Legal and Audit Fees

Legal and audit fee expenses during the six months ended March 31, 2007 were $117,605.

Total Expenses; Net Loss to Common Shareholders

Total expenses were $1,140,382 for the six months ended March 31, 2007. Net loss to common shareholders was $1,140,382 or $0.02 per share for the six months ended March 31, 2007.

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Accumulated Deficit

During the development stage period through March 31, 2007, we have incurred substantial operating losses and expect to incur substantial additional operating losses over the next several years. As of March 31, 2007, our accumulated deficit during the development stage was $2,853,363.

RISK FACTORS

WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. IF ANY OF THESE RISKS OR UNCERTANTIES ACTUALLY OCCURS OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

Risk Factors

If any of the risks discussed in this Report actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the price of our shares could decline significantly and you may lose all or part of your investment. The risk factors described below are not the only ones that may affect us. Our forward-looking statements in this Report are subject to the following risks and uncertainties. Our actual results could differ materially from those anticipated by our forward-looking statements as a result of the risk factors below. See “Introductory Note” above.

Risks Related to Our Business and Operations

We are a development stage company with minimal operating history and you may have difficulty predicting our future operating income and expenses. You will have only limited historical information from which to assess our possible future results of operations.

Although our predecessor company was formed in March 1996, we commenced operations in June 2005 and are currently considered a development stage company. We have not generated any revenues from operations during the period of June 9, 2005 through March 31, 2007. During the period of June 9, 2005 through March 31, 2007, we incurred net losses of $2,835,875. Our future operations may never be profitable. We have a very limited operating history upon which to base an evaluation of our prospective operations or results. As a result, we may have difficulty in accurately predicting revenues or costs of operations for budgeting and planning purposes. This could result in unexpected fluctuation in our future results of operations and other difficulties, any of which could make it difficult for us to achieve or maintain profitability and could increase the volatility of our common stock. Our revenues and profits, if any, will depend upon various factors, including whether our sub-sub-licensing business strategy can be completed and whether Osmotex’s microfluidics technology will achieve market acceptance. We may not achieve our business objectives and the failure to achieve our goals would have an adverse impact on us. Similarly, prospective investors will not be able to review past operations as a gauge to evaluate our management’s execution, our ability to implement our business plan, the effectiveness of our financial controls or other salient information.

Our independent registered public accounting firm’s opinion expresses doubt about our ability to continue as a “going concern.”

Our independent registered public accounting firm’s report issued in connection with our audited consolidated financial statements as of September 30, 2006 and 2005 and for the periods from October 1, 2004 to June 8, 2005, June 9, 2005 to September 30, 2005 and October 1, 2005 to September 30, 2006 expresses “substantial doubt” about our ability to continue as a going concern, due to, among other things, our lack of revenue and our dependence on external financing to fund our operations. If we are unable to develop profitable operations, we may have to cease to exist, which would be detrimental to the value of our common stock. Our business operations may not develop and provide us with sufficient cash to continue operations.

8

We will need additional capital to execute our business plan, which we may be unable to obtain on terms acceptable to us, if at all.

We are required to raise additional capital from the sale of debt or equity securities in order to implement our business plan. Our management projected that a total capital investment of $2,000,000 was required to fund our business plan for the year ended September 30, 2006 by which time it was projected that we would begin earning initial licensing fees. Projected revenue stream was anticipated to commence by September 30, 2006. However, we have not generated any revenue by March 31, 2007 and we are required to arrange additional capital to fund our operating expenses.

The capital requirement of $2,000,000 has been arranged with two funding sources. To date, we have completed five separate financings with Cornell Capital Partners, LP, totaling gross proceeds of $1,595,000. Those financings took place in August 2005, November 2005, February 2006, March 2006 and February 2007. In addition, we have a commitment from D.P. Martin, a Florida based financial advisory firm representing several existing shareholders, to arrange at least $500,000 in external financing for us no later than September 30, 2006.D.P. Martin has placed 1,000,000 shares of our common stock into escrow as security against this commitment. These 1,000,000 shares have been released from this escrow and have been pledged to Cornell Capital in connection with our February 2007 $95,000 Debenture. As at March 31, 2007, D.P. Martin had advanced the Company approximately $94,000 in cash and additional advances are being arranged.

We are currently seeking additional financing but we may be unable to raise those additional funds on terms acceptable to us, if at all. Our inability to obtain additional capital may reduce our ability to continue to conduct business operations, and it may possibly force us to evaluate a sale or liquidation of our assets, if any. Any future financing may involve substantial dilution to existing investors.

We have substantial leverage, which may affect our ability to use funds for other purposes.

We have a substantial amount of outstanding indebtedness. A substantial portion of our cash flow will be dedicated to the payment of principal and interest on our indebtedness, which will reduce funds available to us for other purposes, including capital expenditures. If we were to experience poor financial and operational results, the combination of the poor performance and our substantial leverage might create difficulties in complying with the covenants in the Secured Convertible Debenture or related Securities Purchase Agreement or result in an event of default under the Secured Convertible Debentures. Our failure to comply with such covenants or in the event of default, the Secured Convertible Debenture will become immediately payable in cash or, at the option of the holder, Cornell Capital Partners, LP, in our common stock.

Our obligations under our Secured Convertible Debentures are secured by all of our assets. If we default under the terms of the Secured Convertible Debentures, Cornell Capital Partners, LP could foreclose its security interest and liquidate all of our assets.

Our obligations under the Secured Convertible Debentures are secured by all of our assets. As a result, if we default under the terms of the Secured Convertible Debentures, Cornell Capital Partners, LP could foreclose its security interest and liquidate all of our assets. This would cause us to cease operations.

Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations.

Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness or other costs and expenses. Our substantial leverage could have significant consequences including:

· making it more difficult for us to satisfy our obligations with respect to the Secured Convertible Debentures;

· increasing our vulnerability to general adverse economic and industry conditions;

· limiting our ability to obtain additional financing;

9

· requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which will reduce the amount of our cash flow available for other purposes, including capital expenditures and other general corporate purposes;

· requiring us to sell debt securities or to sell some of our core assets, possibly on terms unfavorable to us;

· restricting us from making strategic acquisitions or exploiting business opportunities;

· limiting our flexibility in planning for, or reacting to, changes in our business and our industry; and

· placing us at a possible competitive disadvantage compared to our competitors that have less debt.

Restrictive covenants in our Securities Purchase Agreements and Secured Convertible Debentures could adversely affect our business by limiting our operating and strategic flexibility.

The Securities Purchase Agreements, Secured Convertible Debentures, and Security Agreements governing our outstanding indebtedness contain restrictive covenants that limit our ability to:

· issue or sell our common stock or preferred stock;

· issue or sell any warrant, option (except pursuant to an employee stock option plan), right, contract, call or other security convertible into shares of our common stock;

· file a Registration Statement on Form S-8;

· enter into certain transactions with affiliates;

· merge with another company, reorganize, restructure, consummate a reverse stock split consolidation, or sell all or substantially all of our assets;

· purchase or otherwise acquire all or substantially all of the assets or stock of, or any partnership or joint venture interest in, any other person, firm or entity;

· enter into any security instrument granting the holder of such security interest in any and all of our assets;

· materially change our management or ownership;

· declare dividends;

· amend our Articles of Incorporation and bylaws; and

· incur indebtedness in excess of $25,000.

These covenants could have an adverse effect on our business by limiting our ability to take advantage of a financing, merger and acquisition or other corporate opportunities.Upon the occurrence of an event of default under our Secured Convertible Debentures, the holder of such indebtedness could elect to declare all amounts outstanding under such indebtedness, together with accrued interest, to be immediately due and payable in cash or shares of our common stock. If the holder accelerates the payment of that indebtedness, our assets currently would be insufficient to repay in full that indebtedness and any other debt.

10

To service our indebtedness, make capital expenditures and fund our operations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on our indebtedness and to fund planned capital expenditures will depend on our ability to generate and have excess cash in the future, which is dependent on various factors. These factors include our ability to market and sub-sub-license the Licensed Rights to sub-sub-licensees, as well as general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We may not be able to generate sufficient cash flow from operations, we may not realize currently anticipated cost savings and operating improvements on schedule or at all, and future borrowings may not be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Despite current indebtedness levels, we and our subsidiary may still be able to incur substantially more debt, which could exacerbate the risks described above.

Our subsidiary and we may be able to incur substantial additional indebtedness in the future. The terms of the Securities Purchase Agreements, Secured Convertible Debentures and Security Agreements limit but do not fully prohibit our subsidiary or us from incurring additional indebtedness. If new debt is added to our or our subsidiary’s current debt levels, the related risks that we now face could intensify.

We do not have any independent directors on our Board of Directors.

Currently, we have no independent directors on our Board of Directors. By “independent director,” we mean a person other than an a shareholder, officer or consultant of ours or any other individual having a relationship that, in the opinion of our board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director.  Without independent directors, our Board of Directors may have no way to resolve conflicts of interest, including, without limitation, executive compensation, employment contracts and the like. In the absence of independent directors, our executive officers, could establish policies and enter into transactions without independent review and approval. This presents the potential for a conflict of interest between our shareholders and us generally and the controlling officers, shareholders or directors.

Svein Milford, Trond Eidsnes and Johnny Christiansen are members of our Board of Directors who are also directors of Osmotex. In addition, EKO, AS, a company that Mr. Eidsnes controls, is the beneficial owner of approximately 19.34% of Osmotex. Our fourth director, Robert Rudman, is our Chief Financial Officer. When making decisions on our behalf that are related to or involve a matter with Osmotex or its wholly-owned subsidiary, Osmotex USA, there is no independent director contributing to the vote on a decision about the matter.

We depend on certain key personnel, the loss of any of which could have a material adverse effect on our operations.

The development and marketing of our licensed technology will be dependent upon the skills and efforts of a small group of personnel, including Svein Milford, our Chairman, Johnny Christiansen, our President and Chief Executive Officer, Robert Rudman, our Chief Financial Officer, and Per Arne Lislien, our Chief Operations Officer. Losing the services of any of our key personnel could have a material adverse effect on our operations. Furthermore, we must be able to identify, attract, hire, train, retain and motivate highly skilled managerial, marketing and sales talent. The failure to retain and attract the necessary personnel could materially adversely affect our business, financial condition and operating results. Competition for qualified executives in the microfluidics industry is intense and there are a limited number of persons with applicable experience and motivation and commitment to the growth of this industry. We believe that our future success in the microfluidics business significantly depends on our ability to attract and retain highly skilled and qualified personnel who are knowledgeable about this technology and committed to growing the microfluidics industry.

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Our Chief Executive Officer, Chief Financial Officer and Chief Operations Officer operate under management agreements and are not our employees.

Mr. Rudman, Mr. Christiansen and Mr. Lislien are not our employees. Mr. Rudman is an employee of D.P. Martin, and Mr. Christiansen and Mr. Lislien are each an employee of Visionaire. Their respective employers have entered into management agreements with us in which their respective employers have assigned Mr. Rudman, Mr. Christiansen and Mr. Lislien the duties to act as our Chief Financial Officer, Chief Executive Officer and Chief Operations Office, respectively. Mr. Rudman and Mr. Christiansen do not devote 100% of their working time to us. Mr. Lislien does devote 100% of his time to us. If Mr. Rudman, Mr. Christiansen or Mr. Lislien were unable or unwilling to provide services to us for whatever reason, our business operations would be adversely affected.

Our Chief Financial Officer is a Canadian citizen currently residing in the United States. Immigration restrictions could limit his ability to conduct business in the United States.

Robert Rudman, who acts as our Chief Financial Officer, is a Canadian citizen. Mr. Rudman’s ability to continue to act as our Chief Financial Officer is dependent on the conditions under which his H-1B work authorization status was granted with D.P. Martin and whether the services provided to us through a Management Agreement are within the authorized scope of that work authorization status. Compliance with the H-1B conditions is beyond our control. As of the date of this Report, Mr. Rudman’s H-1B work authorization allows him to remain in the United States for three years from the date of approval, and apply for one three-year renewal, while he remains an employee of D.P. Martin.

If Mr. Rudman’s work authorization is revoked or expires, he may not be able to work in the United States. His relocation would disrupt our business operations and could adversely affect our business, financial condition and operating results. Mr. Rudman has indicated us that he is evaluating the steps necessary for him to secure permanent United States immigration status, but the timing and outcome of these steps is uncertain.

Our Chief Executive Officer and our Chief Operations Officer are Norwegian citizens currently residing in Norway, which may limit our ability to operate efficiently.

Our Chief Executive Officer, Johnny Christiansen, and our Chief Operations Officer, Per Arne Lislien, are Norwegian citizens who reside full-time in Norway. Given their physical distance from our office in Florida, their command of English as their second language and the six-hour time difference from that of our Florida office, we may not always be able to communicate with them in a timely or effective manner. Such limitations may at times affect our ability to operate our business efficiently.

United States shareholders may face substantial risks associated with effecting service of process or enforcing judgments against our directors and officers who reside outside of the United States.

One of our directors and executive officers is a Canadian citizen and certain of our directors and officers are not United States citizens and some reside in Norway. As a result, United States shareholders face substantial risks with respect to our officers or directors who are not United States citizens or who do not reside in the United States, including that it may difficult or impossible:

· to effect service of process on them within the United States;

· to enforce judgments obtained against them in the United States, either in the United States or in foreign jurisdictions; and

· to bring an original action in foreign jurisdictions to enforce liabilities against them based on the civil liability provisions of the United States federal securities laws.

We currently maintain no theft, casualty or key-man insurance coverage and therefore we could incur losses without having the resources to cover those losses.

We currently do not maintain theft or casualty insurance. As a result, in the event our property is damaged or stolen, we will bear the full cost of its repair or replacement. This cost could be significant and could have a material, adverse effect on our financial condition and our ability to continue business operations. In addition, we do not maintain key-man insurance. As a result, we would not be compensated in the event of the death or disability of Mr. Rudman, Mr. Christiansen or Mr. Lislien, on whom we believe our future success in the microfluidics business significantly depends. See the risk factor entitled, “We depend on certain key personnel, the loss of any of which could have a material adverse effect on our operations” above.

12

Our limited use of confidentiality agreements may not adequately protect our unpatented proprietary information.

Our reliance on confidentiality agreements and provisions to protect our unpatented proprietary information, know-how and trade secrets may not be adequate. Our competitors may either independently develop the same or similar information or obtain access to our proprietary information. In addition, we may not prevail if we assert challenges to intellectual property rights against third parties. Some of our key personnel’s employers have been required to enter into management agreements that include provisions providing for confidentiality. One of our consulting firms has agreed to keep confidential information we furnish to them pursuant to our consulting agreement with it. With the exception of sixpotential sub-sub-licensees, we have not required any other party to enter into a confidentiality agreement with us.

Foreign countries may not provide adequate patent protection.

Patent applications filed in certain foreign countries are subject to laws, rules and procedures, which differ from those of the United States. Foreign patent applications Osmotex files may not be issued. Furthermore, some foreign countries provide significantly less patent protection than the United States. Wecould incur substantial costs in defending patent infringement suits brought by others and in prosecuting patent infringement suits against third party infringers.

Our ability to protect our Licensed Rights and other proprietary rights is uncertain, exposing us to the possible loss of competitive advantage.

Our ability to compete effectively will depend in part on Osmotex’s, Osmotex USA’s, IQ USA’s and our ability to maintain the proprietary nature of the Licensed Rights, primarily through patent protection. Osmotex has granted the Licensed Rights to Osmotex USA, which has sub-licensed the Licensed Rights to us. Osmotex has filed, and we expect will continue to file, patent applications. If a particular patent is not granted, the value of the invention described in Osmotex’s patent application would be diminished. Further, even if these patents are granted, they may be difficult to enforce. Efforts to enforce any patent rights could be expensive, be distracting for our management, be unsuccessful, cause our sub-licensed patent rights to be invalidated, and frustrate our business plan. Additionally, even if patents are issued and are enforceable, others may independently develop similar, superior or parallel technologies and any technology Osmotex developed may prove to infringe upon patents or rights owned by others. Thus, the Licensed Rights may not afford us any meaningful competitive advantage.

We face the potential risk of infringement claims that can result in costly re-engineering, royalty agreements, or litigation.

We believe that our Licensed Rights and other proprietary rights do not infringe on the proprietary rights of third parties. Third parties may assert infringement claims against us, Osmotex or Osmotex USA in the future with respect to current or future technology or other works. Such an assertion may require us to enter into royalty arrangements or result in costly litigation.

We have limited licensing and marketing experience.

Achieving market acceptance for Osmotex’s microfluidics technology will require substantial marketing efforts and expenditure of significant funds to educate the Manufacturers as to the distinctive characteristics and anticipated benefits of Osmotex’s microfluidics technology. We currently have limited licensing and marketing experience and limited financial, personnel and other resources to undertake the extensive marketing activities that are necessary to market and license Osmotex’s microfluidics technology.

13

We may be unable to license technology that will gain acceptance in the marketplace.

Osmotex designs its own microfluidics technology and we have entered into a license agreement with Osmotex and Osmotex USA granting us a sub-license to the Licensed Rights; however, we have not fully implemented a licensing program for the microfluidics technology and may not be able to successfully market and license Osmotex’s microfluidics technology to third parties. We may not be able to generate revenues or profits under such an agreement. In addition, given our early stage of development and limited capital resources, we may not be able to fully utilize and implement the Licensed Rights. Furthermore, the end products utilize new microfluidics technology. As with any new technology, in order for us to be successful, the microfluidics technology must gain market acceptance. In order to survive, we must succeed at technology protection, marketing and customer acquisition, financial management, staff training and development and the management and growth of a development stage venture. We may not be successful in addressing all or any of these issues and the failure of any one could significantly impair our business, financial condition and operating results.

The technology we expect to sub-sub-license may contain defects.

The technology we expect to sub-sub-license to Manufacturers may contain deficiencies that become apparent subsequent to commercial use. Remedying such errors could hamper our further sub-sub-licensing efforts and cause us to incur additional costs, which would have a material adverse effect on our financial position.

Our sub-sub-licensees’ performances are uncertain.

While we believe that the sub-sub-licensees will have the financial resources and in-house capabilities to carry Osmotex’s microfluidics technology to market, the sub-sub-licensees may not perform in the manner we anticipate and we may not be able to generate royalty revenue.

We may not be able to manage growth and expansion effectively.

Rapid growth of our business may significantly strain our management, operational and technical resources. If we are successful in obtaining rapid market penetration of Osmotex’s microfluidics technology, we will be required to service customers on a timely basis at a reasonable cost. Our strategy is that we will not manufacture but create sub-sub-licensing arrangements with Manufacturers. This could potentially strain our operational, management and financial systems and controls.

Risk Factors Related to Our Industry

The microfluidics industry is highly competitive and inherently risky.

The microfluidics industry is made up of both large, well organized, well funded competitors and many small start-up companies, many of which have substantially greater financial, technical, marketing and human resource capabilities than we have. These or other companies may succeed in developing products or technologies that are more effective than those developed, or being developed, by our sub-sub-licensees, or us which would render our technology obsolete or non-competitive in the marketplace. There are a number of factors that impact a microfluidics company’s success, including research and development, funding, and industry expertise.Each of these factors represents an inherently uncertain risk.

We may become subject to risks inherent in international operations including currency exchange rate fluctuations and tariff regulations.

To the extent we sub-sub-license the microfluidics technology outside the United States, we likely will be subject to the risks associated with fluctuations in currency exchange rates. We may also be subject to tariff regulations and requirements for export licenses, (which licenses may on occasion be delayed or difficult to obtain), unexpected changes in regulatory requirements, longer accounts receivable requirements, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of foreign laws.

14

Food and Drug Administration approval may be required by sub-sub-licensees for end products created using Osmotex’s microfluidics technology.

Certain applications of Osmotex’s microfluidics technology by sub-sub-licensees of that technology (such as a glucose monitor) may require the sub-sub-licensees to seek FDA approval. Any delays or denials connected to the FDA’s approval would delay or potentially eliminate our ability to generate royalty revenue from the affected sub-sub-licensees.

Risk Factors Related to Our Common Stock

Osmotex USA controls a substantial interest in us and thus they heavily influence all actions that may require a shareholder vote.

Osmotex USA beneficially owns approximately 85% of our outstanding common stock. As a result, Osmotex USA has and will continue to have substantial control over our management and direction. It is not possible for any matter requiring a shareholder vote to be approved without the consent of Osmotex USA. Osmotex USA’s ownership and control of us may prevent or frustrate certain attempts to effect a transaction that is in the best interests of our minority shareholders.

There has not been an active trading market for our common stock and we may not be able to develop an active market that would provide liquidity and price protection to investors.

The trading market for our common stock on the OTC-BB has been thin and sporadic. As a result, transactions in our shares may reflect the vagaries of a particular circumstance and are less likely to reflect our intrinsic value. Moreover, the quotations for our common stock for such trades as exists may reflect inter-dealer prices, and may not necessarily represent actual transactions. In the event a regular public trading market does not develop, any investment in our common stock would remain highly illiquid. Accordingly, you may not be able to sell your shares readily.

We do not pay cash dividends to our shareholders and we have no plans to pay future cash dividends.

We plan to retain earnings to finance future growth and have no current plans to pay future cash dividends to shareholders. Because we do not pay cash dividends, holders of our common stock will experience a gain on their investment in our common stock only in the case of an appreciation of value of our common stock. Such an appreciation in value may not occur.

We may be unable to comply with changing laws, regulations and standards related to corporate governance and public disclosure.

Our common stock is currently quoted on the OTC-BB under the symbol “IQMC.” Our longer-term plan includes efforts to have the stock listed on an exchange such as the American Stock Exchange (“AMEX”) or the NASDAQ SmallCap Market. Each of these markets have specific listing criteria for companies, which include both financial thresholds and corporate governance requirements. Those listing standards are subject to amendment and modification from time to time. Corporate governance requirements include specific requirements for audit committees and audit committee members, enhanced processes for evaluating internal control over financial reporting and disclosure controls and procedures. We do not currently meet the requirements for listing on the AMEX or the NASDAQ SmallCap Market and we may not be able to meet the financial and corporate governance standards that are currently in place or that may be imposed from time to time in the future. Our inability to secure such a listing will likely limit the marketability of our common stock and may adversely impact both the market price of and the liquidity of the trading market for our common stock.

15

We incur substantial costs as a result of being a fully reporting company with the SEC.

Compliance with the reporting company obligations under the Securities Exchange Act of 1934, as amended, involves substantial costs, including the cost of engaging an independent registered public accounting firm to review quarterly financial reports and prepare audited annual reports, the cost of liability insurance and indemnification for directors and officers, the cost to implement procedures for internal control over financial reporting and disclosure controls and procedures, the cost of preparing and filing with the SEC quarterly, annual and periodic reports and the cost of printing and mailing information related to shareholders meetings. We believe that these costs will be offset by the benefit of greater access to capital and an improved trading market and liquidity for our shareholders. However, the costs related to being public are largely fixed, while the benefits are uncertain.

Our shares of common stock trade at a price that would classify them as “penny stock.”

“Penny stocks” generally are defined as equity securities with a price of less than $5.00. Broker-dealer practices in connection with transactions in penny stocks are regulated by certain penny stock rules adopted by the SEC. Excluded from the penny stock designation are securities registered on certain national securities exchanges or quoted on Nasdaq, provided that current price and volume information with respect to transactions in such securities are provided by the exchange or are sold to established customers or accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction, and the monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that, prior to a transaction in a penny stock, the broker-dealer must make a special written determination that such penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to the penny stock rules.

You may suffer additional dilution upon the exercise of Warrants and the conversion of our Secured Convertible Debentures.

As of the date of this Report, we had 50,315,241shares of our common stock issued and outstanding. As of the date of this Report, we had issued an aggregate principal amount of Secured Convertible Debentures and 3,662,000 Warrants. The conversion of the Secured Convertible Debentures, the exercise of the Warrants, or the issuance and conversion or exercise of any other convertible security, including any convertible preferred stock and any stock options we grant to Robert Rudman, Johnny Christiansen or anyone else, would further dilute your percentage equity ownership interest and voting power. The Secured Convertible Debentures may be converted into up to approximately 5.7 million shares of our common stock (with this number varying depending on the trading price of our common stock) by Cornell Capital Partners, LP at conversion prices per share as stated in this Report. On March 28, 2007, Cornell Capital Partners, LP converted $25,000 of this debenture at a conversion price per share of $0.216 that resulted in the issuance of 115,741 shares and on May 15, 2007, Cornell Capital Partners, LP converted $45,000 of its March 29, 2006 debenture at a conversion price per share of $0.096 that resulted in the issuance of 468,750 shares.

We have issued Warrants to purchase up to a total of 3,662,000 shares of our common stock in the aggregate. Two of our Warrants are each for 100,000 shares of our common stock and each are, exercisable at $0.001 per share. The third Warrant is for 3,000,000 shares of our common stock, exercisable at $0.30 per share. The fourth Warrant is for 250,000 shares of our common stock, which is exercisable at $0.51 per share. The fifth Warrant is for 212,000 shares of our common stock, exercisable at $0.001 per share. If, subject to the exceptions set forth in the Warrants, during the time the Warrants are outstanding we issue or sell, or are deemed to have issued or sold, any shares of common stock for a consideration per share less than a price equal to the exercise price of the Warrants, in effect immediately prior to such issuance or sale, then immediately after such issuance or sale, the exercise price will be reduced to an amount equal to such consideration per share. Upon each such adjustment, the number of shares issuable upon exercise of the Warrants will be adjusted to the number of shares determined by multiplying the exercise price in effect immediately prior to such adjustment by the number of shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product by the exercise price resulting from such adjustment. Similar adjustments will be made upon the issuance or sale by us of options to purchase our shares or convertible securities.

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ITEM 3. Controls and Procedures

As of March 31, 2007, an evaluation was carried out under the supervision and with participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. No changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses, occurred during the first quarter of fiscal 2007 or subsequent to the date of the evaluation by management.

Part II

ITEM 1. Legal Proceedings

None.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 28, 2007, Cornell Capital Partners, LP converted $25,000 of the March 29, 2006 8% Secured Convertible Debenture at a conversion price per share of $0.216 that resulted in the issuance of 115,741 shares of the Company's common stock in reliance upon an exemption from securities registration pursuant to Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

(a) EXHIBITS. The following exhibits are filed as part of this Report or incorporated herein by reference:

Exhibit No.	Description	Location
2.1	Plan of Merger Enclave Products, Ltd. by and between Enclave Products, Ltd., a Colorado corporation, and Enclave Products, Ltd., a Colorado corporation, dated as of March 29, 2004.	(2)
3.1	Articles of Incorporation and amendments thereto.	(2)
3.2	Bylaws and amendments thereto.	(2)

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10.1	Letter Agreement by and between Osmotex AS and Centre Suisse d’Electronique at de Microtechnique SA, dated as of April 11, 2005.	(2)
10.2	Management Agreement between IQ Micro Inc. and D.P. Martin & Associates Inc., effective as of May 1, 2005.	(2)
10.3	Capital Contribution Agreement by and among IQ Medical Corp. and Osmotex USA, Inc., entered into on June 9, 2005.	(2)
10.4	Financing and Listing Agreement by and among IQ Medical Corp., Osmotex USA, Inc. and D.P. Martin & Associates, Inc., entered into on June 9, 2005.	(2)
10.5	Description of Verbal Lease Agreement by and between IQ Micro Inc. and D.P. Martin & Associates, Inc., effective July 1, 2005.	(2)
10.6	Description of Verbal Lease Agreement by and between IQ Micro Inc. and Jochri Consult AS (now Visionaire Consult AS), effective August 1, 2005.	(2)
10.7	Letter Agreement between Hawk Associates, Inc. and IQ Micro, Inc. for investor relations and financial media relations services, made as of August 1, 2005.	(2)
10.8	Escrow Agreement by and among IQ Medical Corp. and David Gonzalez, Esq., made and entered into as of August 12, 2005.	(2)
10.9	Investor Registration Rights Agreement by and among IQ Medical Corp. and Cornell Capital Partners, LP, dated as of August 12, 2005.	(2)
10.10	Secured Convertible Debenture issued by IQ Medical Corp. to Cornell Capital Partners, LP, dated as of August 12, 2005.	(2)
10.11	Securities Purchase Agreement by and among IQ Medical Corp. and Cornell Capital Partners, LP, dated as of August 12, 2005.	(2)
10.12	Security Agreement by and between IQ Medical Corp. and Cornell Capital Partners, LP, entered into and made effective on August 12, 2005.	(2)
10.13	Warrant issued by IQ Medical Corp. to Cornell Capital Partners, LP, dated as of August 12, 2005.	(2)
10.14	Agreement by and between Osmotex AS and Centre Suisse d’Electronique at de Microtechnique SA for office space, lab usage, lab and research and development support, dated as of September 1, 2005.	(2)
10.15	Letter Agreement between Hawk Associates, Inc. and IQ Micro Inc. for website design, construction, delivery and maintenance, entered into as of September 1, 2005.	(2)
10.16	Management Agreement between I.Q. Micro Inc. and Jochri Consult AS (now Visionaire Consult AS), effective as of October 1, 2005.	(2)
10.17	Amended and Restated Investor Registration Rights Agreement by and among IQ Micro Inc. and Cornell Capital Partners, LP, dated as of November 30, 2005.	(2)
10.18	Amended and Restated Security Agreement by and between IQ Micro Inc. and Cornell Capital Partners, LP, entered into and made effective on November 30, 2005.	(2)
10.19	Escrow Agreement by and among IQ Micro Inc. and David Gonzalez, Esq., made and entered into as of November 30, 2005.	(2)
10.20	Secured Convertible Debenture issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of November 30, 2005.	(2)
10.21	Securities Purchase Agreement by and among IQ Micro Inc. and Cornell Capital Partners, LP, dated as of November 30, 2005.	(2)
10.22	Warrant issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of November 30, 2005.	(2)
10.23	Amendment to Financing and Listing Agreement by and among IQ Micro Inc., Osmotex USA, Inc. and D.P. Martin & Associates, Inc., entered into on December 30, 2005.	(2)
10.24	Amended and Restated Technology License Agreement by and among IQ Micro Inc., Osmotex AS and Osmotex USA, Inc. entered into on January 12, 2006.	(2)

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10.25	Amendment to Capital Contribution Agreement by and between IQ Micro Inc. and Osmotex USA, Inc., dated as of January 12, 2006.	(2)
10.26	Management Agreement between I.Q. Micro Inc. and Jochri Consult AS (now Visionaire Consult AS), effective as of March 1, 2006.	(2)
10.27	Second Amended and Restated Investor Registration Rights Agreement by and between IQ Micro Inc. and Cornell Capital Partners, LP, dated as of March 29, 2006.	(2)
10.28	Second Amended and Restated Security Agreement by and between IQ Micro Inc. and Cornell Capital Partners, LP, entered into and made effective on March 29, 2006.	(2)
10.29	Secured Convertible Debenture issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of March 29, 2006.	(2)
10.30	Securities Purchase Agreement by and among IQ Micro Inc. and Cornell Capital Partners, LP, dated as of March 29, 2006.	(2)
10.31	Warrant issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of March 29, 2006.	(2)
10.32	Securities Purchase Agreement by and between IQ Micro Inc. and Cornell Capital Partners, L.P., dated as of February 15, 2007	(3)
10.33	Secured Convertible Debenture issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of February 15, 2007	(3)
10.34	Registration Rights Agreement by and between IQ Micro Inc. and Cornell Capital Partners, LP, dated as of February 15, 2007	(3)
10.35	Security Agreement by and between IQ Micro Inc. and Cornell Capital Partners, LP, entered into and made effective on February 15, 2007	(3)
10.36	Warrant issued by IQ Micro Inc. to Cornell Capital Partners, LP, dated as of February 15, 2007	(3)
10.37	Pledge and Escrow Agreement by and among IQ Micro Inc., D.P. Martin & Associates, Inc., Cornell Capital Partners, LP, and David Gonzalez, Esq. (as escrow agent), dated as of February 15, 2007	(3)
10.38	Waiver and Agreement by and between IQ Micro Inc. and Cornell Capital Partners, L.P., dated May 21, 2007	(1)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	(1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	(1)
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(1)
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(1)

(1) Filed herewith.

(2) Filed as an exhibit to our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on July 17, 2006 and incorporated herein by reference.

(3) Filed as an exhibit to our Report on Form 10-KSB filed with the Securities Exchange Commission on February 16, 2007 and incorporated herein by reference.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	IQ MICRO INC.
	(Registrant)
Date: May 21, 2007	By:	/s/ Johnny Christiansen
		Johnny Christiansen, President and Chief Executive Officer (Principal Executive Officer)

Date: May 21, 2007	By:	/s/ Robert Rudman
		Robert Rudman, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

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