SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP
(unaudited)
Dated September 1, 2011
The Company follows Canadian generally accepted accounting principles ("Canadian GAAP") which is different in some respects from the accounting principles applicable in the United States ("U.S. GAAP") and from practices prescribed by the United States Securities and Exchange Commission. These differences in Canadian GAAP and U.S. GAAP that would require restatement of any of the Company's reported financial statements and certain additional disclosures required under U.S. GAAP are detailed below:
The company amortizes leasehold improvements over their expected useful life. U.S. GAAP requires that leasehold improvements be amortized over the lesser of their useful life or the term of the lease. As the Company does not have a term lease in place for its premises, expenditures relating to leasehold improvements are booked to general and administrative expense in the statement of operations. Accordingly, the following adjustments would be required under U.S. GAAP:
(amounts in thousands of dollars)
| | June 30, 2011 | September 30, 2010 | ||||||
|---|---|---|---|---|---|---|---|---|
Property and equipment — Canadian GAAP | $ | 2,717 | $ | 2,731 | ||||
Remove net book value of Leasehold Improvements | (93 | ) | (106 | ) | ||||
Property and equipment — U.S. GAAP | $ | 2,624 | $ | 2,625 | ||||
| | June 30, 2011 | September 30, 2010 | ||||||
|---|---|---|---|---|---|---|---|---|
Deficit — Canadian GAAP | $ | (40,305 | ) | $ | (33,485 | ) | ||
Net Adjustment | (93 | ) | (106 | ) | ||||
Deficit — U.S. GAAP | $ | (40,398 | ) | $ | (33,591 | ) | ||
| | Three Month Period Ended June 30, 2011 | Three Month Period Ended June 30, 2010 | Nine Month Period Ended June 30, 2011 | Nine Month Period Ended June 30, 2010 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net loss — Canadian GAAP | $ | (2,691 | ) | $ | (1,812 | ) | $ | (6,820 | ) | $ | (5,452 | ) | ||
Net adjustment to expense Leasehold Improvements and remove amortization of Leasehold Improvements | 3 | (9 | ) | 13 | (4 | ) | ||||||||
Net loss — U.S. GAAP | $ | (2,688 | ) | $ | (1,821 | ) | $ | (6,807 | ) | $ | (5,456 | ) | ||
| | Three Month Period Ended June 30, 2011 | Three Month Period Ended June 30, 2011 | Nine Month Period Ended June 30, 2011 | Nine Month Period Ended June 30, 2011 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash provided by (used in) operations — Canadian GAAP | $ | (1,339 | ) | $ | (2,083 | ) | $ | (5,847 | ) | $ | (5,504 | ) | ||
Expense Leasehold Improvements | — | (16 | ) | (2 | ) | (23 | ) | |||||||
Cash used in operations — U.S. GAAP | $ | (1,339 | ) | $ | (2,099 | ) | $ | (5,849 | ) | $ | (5,527 | ) | ||
Cash provided by (used in) investing — Canadian GAAP | $ | (130 | ) | $ | (287 | ) | $ | (557 | ) | $ | (468 | ) | ||
Remove additions to Leasehold Improvements | — | 16 | 2 | 23 | ||||||||||
Cash provided by (used in) investing — U.S. GAAP | $ | (130 | ) | $ | (271 | ) | $ | (555 | ) | $ | (445 | ) | ||
F-1
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
Statement of Operations
(amounts in thousands of dollars)
| | From Inception to June 30, 2011 | |||||
|---|---|---|---|---|---|---|
Revenue | ||||||
Product Sales | $ | 32 | ||||
Consulting Fees | 1,269 | |||||
| 1,301 | ||||||
Expenses | ||||||
Salaries and wages | 4,462 | |||||
General and administrative | 3,671 | |||||
Professional and consulting fees | 3,680 | |||||
Sales and marketing | 1,211 | |||||
Stock-based compensation | 1,972 | |||||
Research and development costs | 23,231 | |||||
Amortization — patents and trademarks | 817 | |||||
Amortization — property and equipment | 2,618 | |||||
| 41,662 | ||||||
Loss before the undernoted items | $ | (40,361 | ) | |||
Interest income | 437 | |||||
Interest expense | (87 | ) | ||||
Settlement of litigation | (205 | ) | ||||
Loss on disposal of property and equipment | (182 | ) | ||||
| (37 | ) | |||||
Net loss and deficit accumulated during the development stage, end of period | $ | (40,398 | ) | |||
F-2
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
Statement of Shareholders' Equity
(amounts in thousands of dollars, shares in thousands)
| | Share Capital | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Defict Accumulated in Development Stage | ||||||||||||||
| | Number of shares | Amount | Contributed Surplus | Warrant Capital | |||||||||||||
Balance At Inception | 2 | $ | 850 | — | |||||||||||||
Net loss | $ | (4,631 | ) | ||||||||||||||
Balance Dec 14, 2002, 2001 and 2000 | 2 | $ | 850 | — | $ | (4,631 | ) | ||||||||||
Net loss | (3,112 | ) | |||||||||||||||
Balance December 14 2003 | 2 | $ | 850 | — | $ | (7,743 | ) | ||||||||||
Issued in connection with a private placement | 10 | 1,516 | |||||||||||||||
Stock split | 5,977 | — | |||||||||||||||
Issued in connection with a private placement | 669 | 2,788 | |||||||||||||||
Forgiveness of indebtedness to parent on reorganization | $ | 7,120 | |||||||||||||||
Share issuance costs | (342 | ) | |||||||||||||||
Stock based compensation | 9 | ||||||||||||||||
Net loss | (1,559 | ) | |||||||||||||||
Balance December 14, 2004 | 6,658 | $ | 4,812 | $ | 7,129 | — | $ | (9,302 | ) | ||||||||
Issued on exercise of warrants | 100 | 10 | |||||||||||||||
Stock based compensation | 341 | ||||||||||||||||
Net loss | (1,804 | ) | |||||||||||||||
Balance December 14, 2005 | 6,758 | $ | 4,822 | $ | 7,470 | — | $ | (11,106 | ) | ||||||||
Conversion of convertible debentures | 2,073 | 4,147 | |||||||||||||||
Convertible debenture issuance costs | (454 | ) | |||||||||||||||
Stock based compensation | 268 | ||||||||||||||||
Net loss | (1,653 | ) | |||||||||||||||
Balance December 14, 2006 | 8,831 | $ | 8,515 | $ | 7,738 | — | $ | (12,759 | ) | ||||||||
F-3
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
| | Share Capital | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Defict Accumulated in Development Stage | ||||||||||||||
| | Number of shares | Amount | Contributed Surplus | Warrant Capital | |||||||||||||
Shares of Emblem Capital | 8,000 | $ | 867 | ||||||||||||||
Share consolidation of Emblem Shares at 6 for 1 | (6,667 | ) | |||||||||||||||
Elimination of share capital due to reverse take over | (867 | ) | |||||||||||||||
Common shares of Umedik exchanged for shares SQI | (8,831 | ) | |||||||||||||||
Net asset value of SQI ascribed to issued shares | 595 | ||||||||||||||||
Issued on exercise of warrants | 78 | 8 | |||||||||||||||
Share issued to former shareholders of Umedik | 14,719 | ||||||||||||||||
Proceeds from private placement units | 3,568 | 5,212 | |||||||||||||||
Amount of private placement allocated to warrants | (89 | ) | 89 | ||||||||||||||
Share issuance costs | (128 | ) | |||||||||||||||
Stock based compensation | 53 | ||||||||||||||||
Net loss | (3,098 | ) | |||||||||||||||
Balance, September 30, 2007 | 19,698 | $ | 14,113 | $ | 7,791 | $ | 89 | $ | (15,857 | ) | |||||||
Issued on exercise of warrants | 52 | 5 | |||||||||||||||
Issued in connection with private placement | 2,439 | 3,660 | |||||||||||||||
Issued on exercise of options | 28 | 39 | (6 | ) | |||||||||||||
Share issuance costs, inluding broker warrants | (494 | ) | 185 | ||||||||||||||
Stock based compensation | 283 | ||||||||||||||||
Net loss | (3,765 | ) | |||||||||||||||
Balance, September 30, 2008 | 22,217 | $ | 17,323 | $ | 8,068 | $ | 274 | $ | (19,622 | ) | |||||||
Issued on exercise of warrants | 1,111 | 689 | |||||||||||||||
Issued in connection with private placement | 3,732 | 4,664 | |||||||||||||||
Issued on exercise of options | 133 | 35 | (17 | ) | |||||||||||||
Share issuance costs, inluding broker warrants | (345 | ) | 187 | ||||||||||||||
Stock based compensation | 380 | ||||||||||||||||
Net loss | (5,899 | ) | |||||||||||||||
Balance, September 30, 2009 | 27,193 | $ | 22,366 | $ | 8,431 | $ | 461 | $ | (25,521 | ) | |||||||
Issued on exercise of warrants | 970 | 2,008 | 60 | (213 | ) | ||||||||||||
Proceeds from private placement units | 4,678 | 12,295 | |||||||||||||||
Amount of private placement allocated to warrants | (1,424 | ) | 1,424 | ||||||||||||||
Issued on exercise of options | 917 | 755 | (61 | ) | |||||||||||||
Expiry of warrants | (60 | ) | |||||||||||||||
Share issuance | (974 | ) | 187 | ||||||||||||||
Stock based compensation | 402 | ||||||||||||||||
Net loss | (8,070 | ) | |||||||||||||||
Balance, September 30, 2010 | 33,758 | $ | 35,026 | $ | 8,832 | $ | 1,799 | $ | (33,591 | ) | |||||||
Issued on exercise of warrants | 107 | 193 | (60 | ) | |||||||||||||
Issued on exercise of options | 81 | 174 | (55 | ) | (125 | ) | |||||||||||
Expiry of warrants | 125 | ||||||||||||||||
Share issuance | (16 | ) | |||||||||||||||
Stock based compensation | 372 | ||||||||||||||||
Net loss | (6,807 | ) | |||||||||||||||
Balance, June 30, 2011 | 33,946 | $ | 35,377 | $ | 9,274 | $ | 1,614 | $ | (40,398 | ) | |||||||
F-4
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
Cash Flow Statement
(amounts in thousands of dollars)
| | From Inception to June 30, 2011 | |||||
|---|---|---|---|---|---|---|
Cash provided by (used in) | ||||||
Operations | ||||||
Net loss | $ | (40,398 | ) | |||
Items not affecting cash | ||||||
Amortization — patents and trademarks | 817 | |||||
— property and equipment | 2,618 | |||||
Patents written off | 97 | |||||
Stock-based compensation | 2,108 | |||||
Loss on sale of property and equipment | 225 | |||||
Interest accrual | (11 | ) | ||||
Changes in non-cash working capital items | ||||||
Amounts receivable | (623 | ) | ||||
Investment tax credit recoverable | 610 | |||||
Due from related party | 106 | |||||
Inventory | (1,142 | ) | ||||
Prepaids and deposits | (423 | ) | ||||
Accounts payable and accrued liabilities | 1,668 | |||||
| (34,348 | ) | |||||
Investing | ||||||
Purchase of property and equipment | (4,832 | ) | ||||
Additions to patents and trademarks | (1,651 | ) | ||||
Sale of property and equipment | 2 | |||||
Due from related party | (97 | ) | ||||
| (6,578 | ) | |||||
Financing | ||||||
Loans from related parties | 7,120 | |||||
Advances (repayment) of loan/notes payable | 3 | |||||
Proceeds from private placement and exercise of warrants and options, net of share issuance costs | 35,789 | |||||
Deferred Share Issuance Costs | (433 | ) | ||||
Cash acquired on reverse takeover | 607 | |||||
Share subscription proceeds received | 657 | |||||
| 43,743 | ||||||
Net change in cash and cash equivalents during the period and cash at end of period | $ | 2,817 | ||||
Supplemental disclosure | ||||||
Equipment reallocated from inventory and segregated for use by the Company | $ | 631 | ||||
Cash paid for interest | $ | 109 | ||||
Canadian GAAP permits the disclosure of a subtotal of the amount of funds provided by operations before changes in non-cash operating working capital items in the consolidated statements of cash flows. United States GAAP does not permit this subtotal to be included.
F-5
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
| | June 30, 2011 | September 30, 2010 | ||||||
|---|---|---|---|---|---|---|---|---|
Trade payables | $ | 685 | $ | 763 | ||||
Accruals | 777 | 200 | ||||||
Payroll Liabilities | 66 | 9 | ||||||
| $ | 1,528 | $ | 972 | |||||
The aggregate amortization expense related to patents and trademarks for the next five years as at June 30, 2011 is as follows (amounts in thousands of dollars):
2012 | 95 | ||||
2013 | 69 | ||||
2014 | 69 | ||||
2015 | 69 | ||||
2016 | 69 |
In June 2009, the FASB launched the FASB Accounting Standards Codification, or the Codification, as the single source of authoritative U.S. GAAP recognized by the FASB. The Codification reorganizes various U.S. GAAP pronouncements into accounting topics and displays them using a consistent structure. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard had no impact on the Company's financial statements.
In February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (ASC Topic 855), Amendments to Certain Recognition and Disclosure Requirements." This Standard update requires a SEC Filer to (1) evaluate subsequent events through the date that the financial statements are issued or available to be issued, (2) defines "SEC Filer" as an entity that is required to file or furnish its financial statements with either the SEC or, with respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section, (3) not be bound to disclosing the date through which subsequent events have been evaluated, (4) note the definition ofpublic entity is not longer defined nor necessary for Topic 855, (5) note the scope of the reissuance disclosure requirements is refined to include revised financial statements only. These Updates are effective for interim or annual periods ending after June 15, 2010. ASU No. 2010-09 has no effect on the Company's financial position, statements of operations, or cash flows at this time.
F-6
SQI Diagnostics Inc.
SUPPLEMENTAL NOTE REGARDING THE RECONCILIATION OF THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED JUNE 30, 2011 AND 2010 WITH U.S. GAAP (Continued)
(unaudited)
Dated September 1, 2011
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855-10, Subsequent Events (formerly, SFAS No. 165, Subsequent Events) is consistent with existing auditing standards in defining subsequent events as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued, but it also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The new guidance defines two types of subsequent events: "recognized subsequent events" and "non-recognized subsequent events." Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date and must be reflected in the Company's financial statements. Non-recognized subsequent events provide evidence about conditions that arose after the balance sheet date and are not reflected in the financial statements of a company. Certain non-recognized subsequent events may require disclosure to prevent the financial statements from being misleading. The new guidance was effective on a prospective basis for interim or annual periods ending after June 15, 2009. The Company adopted the provisions of ASC 855-10 as required.
F-7
