UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number: 000-49972
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1579760
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Green House, Beechwood Business Park North,
Inverness, Scotland IV2 3BL
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
011 44-1463-667-347
--------------------------
(Issuer's telephone number)
WITH COPIES TO:
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference, LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700
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 [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [_] No [X]
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 June 16, 2006, the registrant
had 81,520,130 shares of common stock issued, 25,685,000 shares of common stock
held in escrow which are deemed as issued but not outstanding, and 55,835,130
shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
INDEX
Page
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. F-1- F-18
Item 2. Management's Discussion and Analysis or Plan of Operations. 3
Item 3. Controls and Procedures 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information 10
Item 6. Exhibits. 10
Signatures. 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
Page
----------
Unaudited Condensed Consolidated Balance Sheet as of April 30, 2006 F-2
Unaudited Condensed Consolidated Statements of Operations for the nine and three
months ended April 30, 2006 and 2005 and for the period
from March 26, 1997 (Inception) through April 30, 2006 F-3
Unaudited Condensed Consolidated Statements of Accumulated Other Comprehensive
Loss for the nine months ended April 30, 2006 and 2005 and for the period
from March 26, 1997 (Inception) through April 30, 2006 F-4
Unaudited Condensed Statement of Changes in Shareholders' Deficit for the nine months
ended April 30, 2006 F-5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended April 30, 2006 and 2005 and for the period
from March 26, 1997 (Inception) through April 30, 2006 F-6
Notes to the Unaudited Condensed Consolidated Financial Statements F-8
F-1
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
April 30, 2006
(Unaudited)
ASSETS
Current assets:
Cash $ 101,412
Accounts receivable 89,540
Prepaid expenses and other -
Deferred debt issue costs 83,982
-----------
Total current assets 274,934
Property and equipment, net (Note 3) 9,468
Intangible assets:
Patent costs 74,545
-----------
$ 358,947
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 673,382
Accrued liabilities 967,668
Notes payable, related party (net of discount) (Note 2) 1,762,399
Indebtedness to related party (Note 2) 19,617
-----------
Total current liabilities 3,423,066
Long term debt:
Secured convertible debenture (Note 8) 856,500
-----------
Total Liabilities 4,279,566
-----------
Shareholders' deficit:
Preferred stock, $.001 par value, 50,000,000 shares authorized (aggregate
liquidation preference $8 million) Series A Preferred stock, 34,343,662
shares issued and
outstanding (Note 4) 34,344
Common stock, $001 par value, 500,000,000 shares authorized
80,700,123 shares issued, 25,685,000 held in escrow, and
55,015,123 shares outstanding 80,700
Additional paid-in capital 7,627,703
Stock issued as security for convertible debenture (Note 8) (3,339,050)
Deficit accumulated during the development stage (7,798,862)
Accumulated other comprehensive loss, net of tax (525,454)
-----------
Total shareholders' deficit (3,920,619)
-----------
$ 358,947
===========
See accompanying notes to condensed consolidated financial statements.
F-2
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
March 26, 1997
Nine Months Ended Three Months Ended (Inception)
April 30, April 30, Through
------------------------------ --------------------------- April 30,
2006 2005 2006 2005 2006
------------- -------------- ------------- ------------ -------------
Net sales $ 1,077,451 $ 911,104 $ 311,019 $ 351,202 $ 3,378,128
------------- -------------- ------------- ------------ -------------
Operating expenses:
Cost of sales - 4,617 - 38 242,097
Research and development 901,416 823,329 314,746 300,000 3,800,298
Depreciation and amortization 24,075 15,771 7,889 6,228 161,505
General and administrative:
Stock based compensation:
Stock options expense 15,563 - 3,821 - 68,261
Consulting expense 255,000 567,560 - - 781,779
Non stock based general and administrative 434,091 1,090,735 139,299 394,247 6,280,305
------------- -------------- ------------- ------------ -------------
Total operating expenses 1,630,145 2,502,012 465,755 700,513 11,334,245
------------- -------------- ------------- ------------ -------------
Loss from operations (552,694) (1,590,908) (154,736) (349,311) (7,956,117)
Non operating income (expense):
UK government grants (Note 1) 94,458 - - - 289,354
Gain (loss) on foreign exchange 18,426 (17,000) 10,224 - (111,689)
Amortized debt issue costs (219,301) - (65,121) - (219,301)
Gain from debt extinguishment - - - - 662,610
Interest expense (233,177) (116,038) (96,429) (38,679) (463,719)
------------- -------------- ------------- ------------ -------------
Net loss before income taxes (892,288) (1,723,946) (306,062) (387,990) (7,798,862)
------------- -------------- ------------- ------------ -------------
Provision (benefit) for income taxes (Note 6) - - - - -
------------- -------------- ------------- ------------ -------------
Net loss $ (892,288) $ (1,723,946) $ (306,062) $ (387,990) $ (7,798,862)
============= ============== ============= ============ =============
Basic and diluted loss per share $ (0.0163) $ (0.0338) $ (0.0056) $ (0.0075)
============= ============== ============= ============
Weighted average common shares outstanding 54,638,212 50,991,236 55,015,123 51,627,332
============= ============== ============= ============
See accompanying notes to condensed consolidated financial statements.
F-3
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(Unaudited)
March 26, 1997
Nine Months Ended (Inception)
April 30, Through
------------------------------- January 31,
2006 2005 2006
-------------- -------------- --------------
Net loss $ (892,288) $ (1,723,946) $ (7,798,862)
-------------- -------------- --------------
Other comprehensive loss:
Foreign currency translation adjustment (155,962) (149,496) (525,454)
-------------- -------------- --------------
Net loss $ (1,048,250) $ (1,873,442) $ (8,324,316)
============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
F-4
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(Unaudited)
Preferred Stock Outstanding Common Stock
Series A Series B Shares Shares
Shares Par Value Shares Par Value Issued Outstanding
--------- --------- ---------- ----------- ---------- ------------
Balance July 31, 2005 33,042,484 33,043 863,844 864 54,261,301 54,261,301
Conversion of Preferred Stock into
Debentures -- -- (863,844) (864) -- --
(Note 4) (Unaudited)
Conversion of common stock into
preferred stock (Unaudited) 1,301,301 1,301 -- -- (1,301,178) (1,301,178)
Shares issued as security for
convertible debentures
(Note 8) (Unaudited) -- -- -- -- 25,685,000 --
Stock issued for services
(Unaudited) -- -- -- -- 1,583,000 1,583,000
Stock issued for interest
(Unaudited) -- -- -- -- 472,000 472,000
Foreign currency translation
adjustment (Unaudited) -- -- -- -- -- --
Net loss (Unaudited) -- -- -- -- -- --
---------- --------- ---------- ----------- ----------- ------------
Balance January 31, 2006
(Unaudited) 34,334,344 -- $ -- -- 80,700,123 55,015,123
========== ========= ========== =========== =========== ============
Less escrowed shares
(issued but not outstanding) -- -- -- -- -- --
Deficit
Accumulated Accumulated
Additional During Other
paid-in Development Comprehensive
Par Value capital Stage Loss Total
----------- ------------- ------------- --------------- ------------
Balance July 31, 2005 $ 54,261 $ 4,419,204 $ (6,906,574) $ (369,492) (2,768,694)
Conversion of Preferred Stock into
Debentures -- (555,636) -- -- (556,500)
(Note 4) (Unaudited)
Conversion of common stock into
preferred stock (Unaudited) (1,301) -- -- -- --
Shares issued as security for
convertible debentures
(Note 8) (Unaudited) 25,685 3,313,365 -- -- 3,339,050
Stock issued for services
(Unaudited) 1,583 389,882 -- -- 391,465
Stock issued for interest
(Unaudited) 472 60,888 -- -- 61,360
Foreign currency translation
adjustment (Unaudited) -- -- -- (155,962) (155,962)
Net loss (Unaudited) -- -- (892,288) -- (892,288)
----------- ------------- ------------- --------------- ------------
Balance January 31, 2006
(Unaudited) $ 80,700 $ 7,627,703 $ (7,798,862) $ (525,454) (581,569)
=========== ============= ============= =============== ============
Less escrowed shares
(issued but not outstanding) -- -- -- -- $ (3,339,050)
------------
$ (3,920,619)
============
See accompanying notes to condensed consolidated financial statements.
F-5
IN VERITAS MEDICAL DIAGNOSTICS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
March 26, 1997
Nine Months Ended (Inception)
April 30, Through
--------------------------------- April 30,
2006 2005 2006
--------------- ---------------- --------------
Cash flows from operating activities:
Net loss $ (892,288) $ (1,723,946) $ (7,798,862)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 24,075 15,771 159,173
Imputed interest 26,046 96,995 170,428
Stock issued for interest expense 61,360 - 147,520
Stock issued for services 391,465 567,560 970,941
Gain (Loss) on debt forgiveness - - (662,610)
Changes in working capital items:
Receivables (62,280) 246,747 (115,719)
Prepaid expenses and other current assets 66,419 - 19,676
Deferred debt issue costs (84,092) - (84,092)
Accounts payable (28,958) (201,180) 683,751
Accrued expenses 411,233 - 961,915
Accounts payable (related party) 1,330 - (55,182)
Other (163,934) - (94,114)
--------------- ---------------- ---------------
Net cash used in operating activities. (249,624) (998,053) (5,697,175)
Cash flows from investing activities:
Acquisition of patents (11,620) - (72,359)
Capital expenditures (3,481) (50,800) (154,689)
--------------- ---------------- ---------------
Net cash used in investing activities (15,101) (50,800) (227,048)
Cash flows from financing activities:
Proceeds from bridge financing - 559,746 4,378,963
Repaymnent of advances from affiliates - - (728,426)
Advances from related parties - 58,201 83,050
Proceeds from issuance of preferred stock - 303,500 813,930
Discount on notes payable 50,913 - 195,295
Proceeds from debenture issue 300,000 300,000
Cash proceeds from debt issuance - 250,000 962,495
--------------- ---------------- ---------------
Net cash provided by financing activities 350,913 1,171,447 6,005,307
Effect of exchange rate on changes in cash 13,209 1,679 20,328
--------------- ---------------- ---------------
Net change in cash 99,397 124,273 101,412
Cash, beginning of year 2,015 46,191 -
--------------- ---------------- ---------------
Cash, end of period $ 101,412 $ 170,464 $ 101,412
=============== ================ ===============
Non-cash financing activities
Conversion of notes payable to common stock $ - $ - $ 700,000
Conversion of preferred stock into debentures 556,500 - 556,500
See accompanying notes to condensed consolidated financial statements.
F-6
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Organization and Basis of Presentation
Background
Effective July 31, 2004, Hall Effect Medical Products, Inc. ("HEMP"), a Delaware
corporation, merged with Sports Information Publishing Corp. ("SIPC"), which was
incorporated under the laws of Colorado on November 7, 2003. Subsequent to the
merger SIPC changed its name to In Vivo Medical Diagnostics, Inc. and later In
Veritas Medical Diagnostics, Inc. ("IVMD" "we" "us" or "our")
SIPC was originally incorporated for the purpose of engaging in the sports
industry. In 2002, SIPC filed a Form SB-2 registration statement with the
Securities and Exchange Commission relating to the registration of up to
1,000,000 previously issued shares of common stock at a price of $0.15 per
share. The SEC declared the offering effective in August 2003.
We are a development-stage enterprise located in Inverness, Scotland. We are
developing medical diagnostic products for personal and professional use.
Certain of our products under development are based on technology that utilizes
the Hall Effect, discovered more than a hundred years ago, for which we are
developing practical applications. Prior to the merger, we were funded by a
private UK company, Westek Limited, and Abacus Trust Company Limited was our
majority shareholder.
Shares of our common stock trade in the Over the Counter ("OTCBB") market.
Because of the nature of the OTCBB market there was only a limited trading
market for our stock during the periods presented. For similar reasons the
quoted price of our stock was inevitably subject to considerable short term
volatility. As a result, management has relied on the value of consideration
received when reporting non-monetary transactions in the accompanying financial
statements.
Principles of consolidation
Our consolidated financial statements include our accounts and the accounts of
our two wholly owned foreign subsidiaries; IVMD UK Limited ("IVMD") and Jopejo
Limited ("Jopejo"), both UK companies. The assets and liabilities of our foreign
subsidiaries have been translated from British pounds into US dollars at the
exchange rate in effect at the balance sheet date with the related translation
adjustments reported as a separate component of shareholders' deficit. Operating
statement accounts have been translated at the average exchange rate in effect
during the period presented. All significant intercompany transactions have been
eliminated.
Basis of presentation
Our research and development is conducted in Inverness, Scotland through our
subsidiaries: IVMD UK Limited and Jopejo Limited. Development-stage activities
consist of raising capital, obtaining financing, medical products research,
technical development and commercialization (being made market ready) and
administrative matters. We plan to continue to raise capital through stock sales
and debt issuances to fund our development. In addition, we obtain cash from UK
government grants that are designed to support employment and enterprise and
from commercial partners who contribute towards certain development projects. In
due course, we expect our primary revenue to consist of royalties received from
commercial partners in respect of the commercial exploitation of our products,
once developed and successfully taken to market.
Inherent in our development-stage enterprise are various risks and
uncertainties, including our limited operating history, historical operating
losses, dependence upon strategic alliances, and market acceptance of the Hall
Effect technology. We have completed the technical development of our product (a
Prothrombin measurement device) which is presently in the final stages of
commercialization, prior to being marketed by our commercial partners, who are
contracted to distribute the product, for which we will receive royalty income.
We anticipate royalty income from this product commencing towards the end of
calendar 2006. Our ability to generate revenues from royalties of future
products will be dependent upon our ability to enter into licenses, joint
ventures or distribution agreements with established businesses with existing
sales and marketing structures similar to the arrangement that is in place for
the Prothrombin device. Our future success will be dependent upon our ability to
develop and provide new medical devices that meet customers changing
requirements, including the effective use of the Hall Effect technology, to
continue to enhance our current products under development, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
F-7
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
In common with most development stage entities we have incurred losses
(principally represented by research and development expenditures) since
inception and we have an inevitable net capital deficit at April 30, 2006. We
also had substantial net current liabilities at April 30, 2006. These factors,
among others, raise substantial doubt about our ability to continue as a going
concern, in common with many development stage companies in our industry. As
explained above, in 2004, we merged with a public shell company. This merger
provides us with limited access to the capital markets via the OTCBB. During
fiscal years 2004 and 2005 and subsequently, we raised limited amounts of
capital by virtue of our OTCBB quote; we need to continue to raise capital
through public or private stock offerings to finance our development activities
and ultimately, to achieve profitability. However, there is no assurance that we
will be successful in our efforts to raise capital or to become a profitable
company.
Note 8 to these Financial Statements sets out details of the status of certain
capital raisings that have taken place recently and the status of future
financings which are presently being negotiated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid securities with original maturities of three
months or less when acquired to be cash equivalents. There were no cash
equivalents at April 30, 2006.
Accounts Receivable
We consider all trade receivables to be fully collectible.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
Patent Costs
The legal, professional and registration costs involved in registering patents
which are important to our product development program are capitalized and
written off on a straight line basis over the lesser of the estimated commercial
life or legal life of the underlying patents, on a patent by patent basis. We
adopted this accounting policy for the first time in the balance sheet at July
31, 2005 since we previously judged that the costs were immaterial. Prior to
July 31, 2005, we expensed patent costs as incurred. Capitalized costs are
expensed if patents are not granted.
F-8
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate our
long-lived assets, including related intangibles, of identifiable business
activities for impairment when events or changes in circumstances indicate, in
management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether impairment has occurred is based on
management's estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. If impairment has
occurred, estimating the fair value for the assets and recording a provision for
loss if the carrying value is greater than fair value determine the amount of
the impairment recognized. For assets identified to be disposed of in the
future, the carrying value of these assets is compared to the estimated fair
value less the cost to sell to determine if impairment is required. Until the
assets are disposed of, an estimate of the fair value is re-determined when
related events or circumstances change.
When determining whether impairment of one of our long-lived assets has
occurred, we must estimate the undiscounted cash flows attributable to the asset
or asset group. Our estimate of cash flows is based on our assessment of the
outcome of future trading.
Any significant variance in any of the above assumptions or factors could
materially affect our cash flows, which could require us to record an impairment
of an asset.
No impairment charges were recognized during each of the nine month periods
ended April 30, 2006 and April 30, 2005.
Deferred Offering and Debt Issue Costs
Costs incurred in connection with proposed common stock offerings that straddle
the period end are deferred in the accompanying financial statements and are
offset against the proceeds from the offering or written off against earnings,
if the offering is unsuccessful, as appropriate, in future periods.
Costs incurred in arranging and raising debt are written off against income over
the expected life of the debt and shown on the balance sheet as "Deferred Debt
Issue Costs".
Income Taxes
We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Revenue Recognition
Our revenue has been generated through contribution to development projects from
commercial partners and from UK government grants. We recognize such revenue
based on the terms of the underlying agreement.
Financial Instruments and Concentration of Credit Risk
At April 30, 2006, the fair value of our financial instruments approximate their
carrying value based on their terms and interest rates. All of our trade
receivables were from one customer as of April 30, 2005.
F-9
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Stock based Compensation
We account for stock-based compensation arrangements in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro
forma net earnings (loss) disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. We have
elected to continue to apply the provisions of APB Opinion No. 25 (for employee
stock option accounting only) and provide the pro forma disclosure provisions of
SFAS No. 123.
Foreign Currency Translation
Our assets and liabilities, which have the British Pound as their functional
currency, are translated into United States Dollars at the foreign currency
exchange rate in effect at the applicable reporting date, and the statements of
operations are translated at the average rates in effect during the applicable
period. The resulting cumulative translation adjustment is recorded as a
separate component of Other Comprehensive Income.
Research and Development Costs
Research and development costs are expensed as incurred. During the year ended
July 31, 2005 we reexamined the method used to calculate the proportion of our
overheads that related to research and development and have refined the basis to
provide a more accurate reflection of those costs, this method was used in
estimating research and development expenditure in the nine month period ended
April 30, 2006. Naturally this involves estimates, but we believe that the
method which we have used fairly reflects the volume of research and development
activity of the Group. For comparative purposes, the Financial Statements
include comparative 2005 data for research and development which has been
calculated using the same methods of estimation as have been employed for the
2006 financial statements. This reclassification does not impact the overall
2005 financial statements.
Earnings (Loss) per Share
Basic net income or loss per share is computed by dividing the net income or
loss available to common shareholders (the numerator) for the period by the
weighted average number of common shares outstanding (the denominator) during
the period. The computation of diluted earnings is similar to basic earnings per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued.
At April 30, 2006, there was no variance between basic and diluted loss per
share as the securities in our capital structure are antidilutive.
Note 2: Related Party Transactions
As of April 30, 2006, $19,617 was due to related parties. There were no
significant financial transactions with related parties during the nine month
periods ended April 30, 2006 or 2005.
In July 2004, Westek agreed to release us from $2,030,298 of previously
accumulated advances in exchange for a noninterest-bearing promissory note
totalling $1,800,000. We reflected a capital contribution totalling $2,030,298
in our financial statements at that time. The promissory note is payable in full
by September 30, 2006. Under the terms of the note, we are obligated to make
repayments of the principle amount earlier that September 30, 2006 out of any
equity or equity type financings made before that date by applying an agreed
percentage of the aggregate net proceeds from any such equity or equity-type
financings. The agreed percentage is 56% of any net proceeds which exceed
$2,000,000 (up to $3,000,000) and 25% of all net proceeds in excess of
$3,000,000. As of April 30, 2006, we are indebted to Westek in the amount of
$1,762,399, net of discount of $37,601.
F-10
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 3: Property and Equipment
Major classes of property and equipment as of April 30, 2006 are listed below:
Furniture and fixtures..................................... $ 16,523
Office equipment........................................... 89,814
Plant and equipment........................................ 20,939
---------------
127,276
Less: accumulated depreciation............................. 117,808
---------------
$ 9,468
===============
Depreciation expense was $24,075 and $15,771 for the nine month periods ended
April 30, 2006 and 2005, respectively.
Note 4: Preferred Stock
We are authorized to issue 50,000,000 shares of preferred stock.
4% Convertible Preferred Stock
As of October 31, 2005, the Company had 34,343,662 shares of Series A 4% voting
redeemable convertible preferred stock outstanding. Such shares pay an annual
dividend of 4% and are convertible at any time at the option of the holder into
Common Stock at the rate of one share Common Stock for each outstanding share of
Series A Preferred Stock commencing October 30, 2005, provided the Common Stock
have traded at a price of $3.00 per share for at least 30 consecutive trading
days, and at any time after January 30, 2006. Holders of Series A Preferred
Stock have priority over all of the shares of In Veritas Medical Diagnostics,
Inc. on liquidation or sale at the rate of $.233 per share. Holders are entitled
to vote on all matters as to which Common Stock shareholders are entitled to
vote.
The aggregate of arrearages in cumulative preferred dividends on the Series A
Preferred Shares through April 30, 2006, are $27,192.
5% Convertible Preferred Stock
On April 15, 2005, we completed the sale of 863,845 units (the "Units"), each
Unit consisting of one share of Series B 5% Convertible Preferred Stock, one
warrant to purchase one share of the Company's common stock ("Stock Warrants"),
and one warrant to purchase an additional unit ("Unit Warrants"). Such shares
pay an annual dividend of 5% and are convertible at any time at the option of
the holder into Common Stock at the rate of one share of Common Stock for each
outstanding share of Series B Preferred Stock commencing April 15, 2005. The
Stock Warrants are exercisable from April 15, 2005 until April 15, 2008 at an
exercise price of $1.50 per share, subject to adjustment. The Unit Warrants are
exercisable for a period of 180 days from the effective date of the registration
statement at an exercise price of $0.65 per unit, subject to adjustment. All
preferential amounts to be paid to the holders of Series B Preferred Stock shall
be paid on a pari-passu basis with any preferential amounts to be paid to the
holders of our Series A Preferred Stock, and prior to the common stock.
F-11
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
As part the finance raising described in Note 8 to these Financial Statements,
in September, 2005 the Company entered into a Securities Purchase Agreement (the
"Accredited Investor Purchase Agreement") with the investors (the "Accredited
Investors") in its April 2005 financing pursuant to which the Accredited
Investors agreed to exchange the securities that they purchased for an aggregate
of $556,500 principal amount of Debentures. Specifically, the Accredited
Investors agreed to exchange an aggregate of 863,845 units (the "Units"), as
well as a warrant to purchase an additional Unit for an aggregate of $556,500
principal amount of Debentures. Each Unit consisted of one share of 5%
convertible preferred stock of the Company, $.001 par value per share, and one
warrant to purchase one share of the Company's common stock.
Note 5: Common Stock
We are authorized to issue 500,000,000 shares of common stock. Prior to the
merger discussed in Note 7, we valued the shares of common stock based on the
value of the services. After the merger, we valued the shares of common stock
based on the quoted market price of the stock. No units of common stock were
issued during the three month periods ended April 30, 2006. In the nine month
period ended April 30, 2006 we issued 1,583,000 units of common stock in
exchange for services; and we issued 472,000 units of common stock in exchange
for interest. In the nine month period ended April 30, 2005 we issued 60,096
units of common stock to the arrangers of bridge finance for services and
794,550 in exchange for services provided.
Note 6: Stock Options
Stock Options - Employees
During May 2004, the Company granted 9,659,000 common stock options to two
officers with an exercise price of $1.00 per share. The Company's common stock
had no traded market value on the date of grant. The market value of the stock
was determined to be $1.00 per share based on estimates made by the directors at
that time. 3,219,666 options vest on May 26, 2006, an additional 3,219,666
options vest on May 26, 2007, and the final 3,219,668 options vest on May 26,
2008. The intrinsic value of these options was $.-0- (i.e. the exercise or
strike price exceeds the market price).
The Company adopted and reserved 21,434,788 shares of Common Stock for issuance
under its 2005 Stock Incentive Plan. Under the plan, options may be granted
which are intended to qualify as Incentive Stock Options under Section 422 of
the Internal Revenue Code of 1986 or options which are not intended to qualify
as Incentive Stock Options under Section 422 of the Internal Revenue Code of
1986.
The 2005 Stock Incentive Plan and the right of participants to make purchases
thereunder are intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The 2005 Stock
Incentive Plan is not a qualified deferred compensation plan under Section
401(a) of the Internal Revenue Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
On June 1, 2005, the Company issued 400,000 options to its employees under the
plan, with an exercise price of $0.55 per share. The market price on June 1,
2005 was also $0.55 per share. These options were determined to have an
intrinsic value of $-0- (i.e. the exercise or strike price exceeds the market
value)
F-12
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
On January 1, 2006 the Company issued 365,000 options to its employees under the
plan, with an exercise price of $0.04 per share, which was the market price on
that day. These options were determined to have an intrinsic value of $ -0-.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 as if the Company had accounted for its granted stock options under the
fair value method of that Statement. The fair value for the options granted was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
For options issued in May 2004:
Risk-free interest rate.............................. 2.25
Dividend yield....................................... 0.00%
Volatility factor.................................... 0.00%
Weighted average expected life....................... 5.years
For options issued in June 2005:
Risk-free interest rate............................... 4.35%
Dividend yield........................................ 0.00%
Volatility factor..................................... 55.10%
Weighted average expected life........................ 5.years
For options issued in January 2006:
Risk-free interest rate............................... 4.25%
Dividend yield........................................ 0.00%
Volatility factor..................................... 50.00%
Weighted average expected life........................ 5.years
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. The pro forma net loss and pro
forma basic and diluted loss per common share using the assumptions noted above
for the nine month periods ended April 30, 2006 and 2005 is as follows:
F-13
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
For the 9 month period ended
April 30,
-----------------------------------
2006 2005
----------------- -----------------
Net loss, as reported............................. $ (892,288) $ (1,723,946)
================= =================
Pro forma net loss................................ $ (892,288) $ (1,723,946)
================= =================
Basic and diluted net loss per common
share, as reported............................. -0.016 -0.338
================= =================
Pro forma basic and diluted net loss
per common share............................... -0.016 -0.338
================= =================
Stock Options - Nonemployees
During the year ended July 31, 2005, the Company committed to grant to two
non-employees 250,000 options to purchase its Common Stock. The options carry an
exercise price of $0.55 per share. 100,000 options vested July 1, 2005, 50,000
options vest May 16, 2006, and 100,000 options vest July 1, 2006. The options
were granted on June 1, 2005. No options have yet been exercised.
The Company's common stock's traded market value on the date of grant was $0.55.
The weighted average exercise price and fair value of these warrants on the date
of issue were $0.55 and $0.29, respectively.
The fair value for the warrants granted during the year ended July 31, 2005 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Risk-free interest rate....................... 4.35%
Dividend yield................................ 0.00%
Volatility factor............................. 55.10%
Weighted average expected life................ 5 years
On January 1, 2006 the Company committed to grant to two non-employees options
to purchase 350,000 units of its Common Stock at an exercise price equal to then
market price of $0.04. These options vest on January 1, 2007.
The Company's common stock's traded market value on the date of grant was $0.04.
The weighted average exercise price and fair value of these warrants on the date
of issue were $0.04 and $0.019, respectively.
The fair value of the warrants issued on January 31, 2006 was estimated, at the
date of the grant, using the Black-Scholes option pricing model with the
following assumptions:
Risk-free interest rate...................... 4.25%
Dividend yield............................... 0.00%
Volatility factor............................ 50.00%
Weighted average expected life............... 5 years
F-14
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Stock Warrants
During the year ended July 31, 2005, the Company committed to grant to its
financial representative, Westor Capital Group, Inc., warrants to purchase
61,769 shares of the Company's common stock. The warrants carry an exercise
price of $1.50 per share, vest on the date of grant and expire on April 15,
2008. The warrants were granted on April 11, 2005. No warrants have yet been
exercised.
The Company's common stock's traded market value on the date of grant was $1.01.
The weighted average exercise price and weighted average fair value of these
warrants at the date of their grant were $1.50 and $0.29, respectively.
The fair value for the warrants granted during the year ended July 31, 2005 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Risk-free interest rate........................... 4.35%
Dividend yield.................................... 0.00%
Volatility factor................................. 55.10%
Weighted average expected life.................... 3.years
As explained in Note 8, on September 9, the Company issued to Montgomery Equity
Partners Ltd three-year warrants to purchase 350,000 shares of Common Stock at
$0.001 per share. These warrants were granted as part of the arrangement fee for
the issuance of the Secured Convertible Debenture described in Note 8. The
Company's common stock's traded market value on the date that the negotiation of
this transaction was completed (August 25) of grant was $0.13. The weighted
average exercise price and fair value of these warrants at the date of their
grant were $0.001 and $0.076, respectively.
The fair value for these warrants was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate............................ 4.18%
Dividend yield..................................... 0.00%
Volatility factor.................................. 88.40%
Weighted average expected life..................... 3.years
The following schedule summarizes the changes in the Company's outstanding stock
awards:
F-15
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Options Outstanding Weighted Average
------------------------------------------ Exercise Price
Number of Exercise Price Per Share
Shares Per Share
--------------------- ------------------
Balance at July 31, 2005 10,370,769 $ 0.55 to $ 1.50 $ 0.94
Awards granted.................... 350,000 $ 0.001 $ 0.001
Awards granted.................... 715,000 $ 04 $ 0.04
Awards exercised.................. - $ -
Awards cancelled/expired.......... - $ -
--------------------- -----------------
Balance at April 30, 2006............ 11,435,769 $ 0.001.to.$ 1.50 $ 0.85
===================== =================
Note 7: Income Taxes
A reconciliation of U.K. statutory income tax rate to the effective rate follows
for the nine month periods ended April 30, 2005 and 2006:
Nine Month Period ended
April 30,
-------------------------------------
2006 2005
----------------- -----------------
U.K. statutory federal rate............................. 30.00% 30.00%
Net operating loss for which no tax
benefit is currently available.................. -30.00% -30.00%
----------------- -----------------
0.00% 0.00%
================= =================
At April 30, 2006, deferred U. K. income taxes were $-0-. U.K. pretax losses
were approximately $400,000 and $300,000, respectively, for the nine month
periods ended April 30, 2005 and 2006.
At April 30, 2006 and April 30, 2005, we had net operating tax losses available
for carryfoward and offset against future taxable profits arising in the UK of
approximately $5.0 million and $4.5 million respectively.
Note 7: Acquisitions
July 22, 2004
On July 22, 2004, Jopejo Limited and IVMD UK, Inc. and HEMP entered into a share
purchase agreement whereby HEMP purchased 100 percent of the issued and
outstanding preferred and ordinary shares of both Jopejo Limited and IVMD UK
Limited (formerly Hall Effect Technologies Limited) for 8,000,000 shares of
convertible Series A preferred stock, $0.001 par value. HEMP also agreed to
become a co-obligor of approximately $1.8 million in debt obligations to Westek.
As part of the acquisition, HEMP issued 3,000,000 shares of common stock to HEMP
TL, an employee benefit plan valued at $3,000 by the Board of Directors and an
addition 6,000,000 shares of common stock to certain individuals for services
valued at $6,000 by the Board of Directors.
As a result of these transactions, Jopejo limited and IVMD UK, Inc. became
wholly owned subsidiaries of HEMP.
F-16
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
July 30, 2004
On July 30, 2004, HEMP exchanged 100 percent of its outstanding shares of common
stock for 38,397,164 shares of the common stock and 100 percent of its
outstanding shares of preferred stock for 34,363,662 shares of preferred stock
of SIPC. This acquisition has been treated as a recapitalization of HEMP, a
Delaware corporation, with SIPC the legal surviving entity. Since SIPC has,
prior to the recapitalization, minimal assets (consisting primarily of cash and
trade payables) and no operations, the recapitalization has been accounted for
as the sale of 10,550,000 shares of HEMP common stock for the net assets of
SIPC. Costs of the transaction have been charged to the period.
Note 8: Secured Convertible Debenture and Related Financings
On September 7, 2005, the Company entered into a Standby Equity Distribution
Agreement (the "Distribution Agreement") with Cornell Capital Partners LP
("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000
of Common Stock over a period of up to 24 months after the signing of the
Distribution Agreement. Under the Distribution Agreement, the Company may sell
to Cornell up to $500,000 in shares of its common stock (the "Common Stock")
once every five trading days at a price of 97% of the lowest closing bid price
(as reported by Bloomberg L.P.), of the Common Stock on the principal market
where the Common Stock is traded for the five consecutive trading days following
a notice by the Company to Cornell of its intention to sell shares. The Company
will also pay a 5% commitment fee upon each sale of shares under the
Distribution Agreement. Cornell has agreed not to short any of the shares of
Common Stock. In addition as part of the commitment fee arrangements the Company
issued 472,000 shares of the Company's Common Stock to Cornell.
Also on September 7, 2005, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Montgomery Equity Partners Ltd.
("Montgomery"), an affiliated fund of Cornell, providing for the sale by the
Company to Montgomery of its 18% secured convertible debentures in the aggregate
principal amount of $750,000 (the "Debentures") of which $300,000 was funded on
September 7, 2005; $200,000 was to be funded two business days prior to the
Company's completion of its audited financial statements for the fiscal year
ended July 31, 2005, and; $250,000 was to be funded within five business days of
the date the Registration Statement is declared effective by the SEC. Under the
Purchase Agreement, the Company also issued to Montgomery three-year warrants
(the "Warrants") to purchase 350,000 shares of Common Stock at $0.001 per share.
In addition to the foregoing, the Company entered into a Securities Purchase
Agreement (the "Accredited Investor Purchase Agreement") with the investors (the
"Accredited Investors") in its April 2005 financing (which is described in
Footnote 4 to these Financial Statements) pursuant to which the Accredited
Investors agreed to exchange the securities that they purchased in such
financing for an aggregate of $556,500 principal amount of Debentures.
Specifically, the Accredited Investors agreed to exchange an aggregate of
863,845 units (the "Units"), as well as a warrant to purchase an additional Unit
for an aggregate of $556,500 principal amount of Debentures. Each Unit consisted
of one share of 5% convertible preferred stock of the Company, $.001 par value
per share, and one warrant to purchase one share of the Company's common stock.
The Debentures mature on the first anniversary of the date of issuance and bear
interest at the annual rate of 18% in cash. The Company is required to make
monthly interest payments commencing on October 7, 2005, and to make monthly
principal payments commencing on March 7, 2006.
Holders may convert, at any time, the principal amount outstanding under the
Debentures into shares of Common Stock, at a conversion price per share equal to
$0.144, subject to adjustment, which approximated to the market price of the
Company's common stock on the date that the negotiation of the transaction was
completed (which was August 25). Upon three-business day advance written notice,
the Company may redeem the Debentures, in whole or in part. The redemption
amount will be calculated at 112% of the Debentures' face value.
F-17
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
As further security for its obligations under the above mentioned facilities,
the Company has deposited into escrow 25,685,000 shares of common stock, these
shares are deemed issued but not outstanding.
Subsequent to the completion of the Standby Equity Distribution Agreement and
the sale of the 18% secured convertible debentures pursuant to the Securities
Purchase Agreement in September 2005, the Company prepared and filed a
registration statement on Form SB-2 (File No. 333-128321) with the Securities
and Exchange Commission for the purpose of registering the securities underlying
such financing transactions. In connection therewith, the Company has received
comments from the Commission indicating that, in the Commission's view, based
upon the structure of the transactions, the Company may not register the
securities sold in the financing transactions. On March 6, 2006, we withdrew the
registration statement on Form SB-2 (File No. 333-128321) by filing a Form R-W
with the Commission. As a result, the Company has not been able to draw down any
further amounts under the Debenture and is in discussions with the various
potential investors regarding raising alternative financing. No assurance can be
given as to when, or if, these possible alternative financings will be
completed. In the meanwhile, because of the failure to complete the entire
financing transaction envisaged in the September 2005 financing, the Company has
been unable to pay interest and principal payments on the debentures drawn down
under this financing.
Note 9: Defaults Upon Senior Securities
As explained above, the Company has been unable to pay interest and principal
repayments when due under the terms of its September, 2005 financing (also
describe above). As of April 30, 2006, the arrears of due but unpaid interest
was $63,750 and the arrears of unpaid but due principal were $173,600.
F-18
In Veritas Medical Diagnostics, Inc.
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 11: Subsequent Events
Royalty Participation Agreement
On May 5, 2006, In Veritas Medical Diagnostics, Inc. ("In Veritas" or the
"Company") completed the sale of a percentage of future royalties pursuant to a
Royalty Participation Agreement (the "Agreement") with The Rubin Family
Irrevocable Stock Trust (the "Investor").
The royalties to be paid pursuant to the Agreement are derived from a license
agreement with Inverness Medical Innovations, Inc. (the "IMI Agreement")
pursuant to which the Company will receive royalties from the sale of a
Prothrombin blood clotting measuring device (the "IMI Royalties).
Pursuant to the Agreement, the Company received a sum of $250,000 in exchange
for 5.56% of the future IMI Royalties received by the Company, subject to the
terms and conditions set forth in the Agreement (the "Royalty Payments"). The
Royalty Payments shall be paid to the Investor within 15 days of the end of the
month in which the Company receives future IMI Royalties. The Company shall have
the option to terminate the Agreement at any time, without penalty, by making a
lump sum payment to the Investor equal to 300% of the funds received from the
Investor pursuant to the Agreement, less an amount equal to the difference
between (x) the Royalty Payments made to and received by the Investor and (y)
$250,000.
Resignation of an Officer
Effective May 9, 2006, Brian Cameron resigned as a member of the Board of
Directors and as Chief Operating Officer of In Veritas Medical Diagnostics, Inc.
There was no disagreement between Mr. Cameron and the Company which led to his
resignation. Under the terms of his contract Mr. Cameron was entitled to receive
the sum of (pound)75,000 ($137,000) which is being paid to him over a six month
period. This payment is being treated as a post period end event, since the
effective date of his resignation was subsequent to the date of the financial
statements, and the entire termination payment will be expensed in the quarter
ended July 30, 2007.
F-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
LIQUIDITY AND CAPITAL RESOURCES
Forward-Looking Statements
The information in this quarterly report contains forward-looking statements
within the meaning of the Private Securities litigation Reform Act of 1995. This
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than these statements of
historical fact made in this report are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with the
financial statements of In Veritas Medical Diagnostics, Inc., included herewith.
This discussion should not be construed to imply that the results discussed
herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future.
Such discussion represents only the best present assessment of our management.
Overview
In Veritas Medical Diagnostics, Inc. (formerly In Vivo Medical Diagnostics, Inc.
and Sports Information and Publishing Corp.) and its subsidiaries (the "Company"
or "the Group") is a development-stage enterprise that is engaged in the
development of lateral applications of novel measurement techniques in medical
devices with `near-patient' (i.e. point of care) testing applications. We are
developing medical diagnostic products for personal and professional use.
Several of the products for which we are developing practical applications are
based on technology that utilizes the Hall Effect, a physical phenomenon that
measures the electrical activity as it relates to magnetic fields, which was
discovered more than a hundred years ago. We are also developing products that
utilize novel signal processing for the late-term pregnancy market.
3
Our business model entails (i) researching and developing product applications
and (ii) the design, engineering and testing of the final product prior to
market launch, usually in partnership with a marketing partner that has a track
record in marketing and distribution, prior to market launch. Revenue streams
include consulting and development fees during the development and
commercialization stages of the product lifecycle, also supported by UK
government grants (which represent the dual sources of income from inception to
today) followed, in future, by royalty income receivable out of the sales
revenues generated on the sale of the final product by our commercial partner,
which we anticipate will become the most substantial revenue source as the Group
becomes established.
The Company was originally incorporated under the laws of Colorado on March 1,
2001 under the name Sports Information Publishing Corp. for the purpose of
engaging in sports prognostication. In July 2004, the Company entered into Share
Exchange Agreement pursuant to which the Company acquired all of the issued and
outstanding shares of Hall Effect Medical Products, Inc. ("HEMP"), a Delaware
corporation, from the security holders of HEMP.
We currently have two operating subsidiaries, IVMD(UK) Ltd. ("IVMD") and Jopejo
Ltd. ("Jopejo"), both of which are incorporated under the laws of England and
Wales and based in Inverness, Scotland. IVMD(UK) has a platform of patents from
which to exploit unique commercial applications. Jopejo is a biotech research
company utilizing similar development techniques. The fundamental premise is in
the transfer of measurement technology, the principles of which are known and
established in the world of physical science, into medical devices with global
near-patient applications. This is done through the creation of novel, patented
methods and apparatus for which IVMD is the sole owner of the intellectual
property.
Products and Services
We currently have applied for eleven patents (see list below) from granted to
pending, covering the generic application of our products and technology. We are
currently working on a number of additional patents for submission during 2006.
We have allowed two additional patents to lapse because we believe that they are
no longer core to our business and have no commercial value for us. We have
engineered prototypes on three distinct products:
o a prothrombin device for measuring the clotting or coagulation time of blood
in patients at risk of heart disease and stroke - a critical measurement for a
condition affecting millions worldwide
o a suite of products for fetal heart monitoring and predicting the onset of
labor several weeks in advance of the commencement of labor pains
o a low cost, sensitive immunoassay system that can be applied to any type of
marker eg cardiac disease, HIV and Drugs of Abuse
o a device to establish proof of principle, and a prototype to demonstrate a low
cost and non-harmful alternative to conventional X-ray imaging
We have also established the concept and are developing proof of principle for
other low-cost and safe magnetic detection systems for additional applications,
including:
o a minimally-invasive, rapid and accurate system for detection of compounds
within blood
o a non-invasive glucose monitoring system for diabetics which can be merely
clipped to a patient's ear lobe (or other area with blood rich tissue) and,
without taking blood from the patient, will measure levels of glucose in the
blood;
o a rapid, non-invasive monitoring device for osteoporosis
o a surgical instrument positioning system.
Several product applications are at advanced stages of market readiness and the
first product to use our technology, a Prothrombin measurement device, was
launched into the market in the second quarter of our 2006 fiscal year and is
expected to begin generating a royalty revenue stream for the Company. However,
the amount and timing of any projected royalties is dependent upon the
performance of our marketing partner, Inverness Medical Innovations, and there
can be no assurances that any royalties will materialize.
Results of Operations
Three Months Ended April 30, 2006 compared to Three Months April 30, 2005
Revenues
During the three months ended April 30, 2006, we had sales of $311,019. During
the three months ended April 30, 2005, we had sales of $351,202. Our revenues
consisted primarily of income received under development contracts with
commercial partners.
4
Depreciation Expenses
Depreciation expenses for the three months ended April 30, 2006 increased to
$7,889 from $6,228 for the three months ended April 30, 2005.
General & Administrative Expenses
General and administrative expenses for the three months ended April 30, 2006
decreased from $394,247 for the three months ended April 30, 2005 to $139,299.
This decrease reflects efforts to reduce general and administrative expenses,
combined with substantial transaction costs incurred in 2005.
Research & Development Expenditure
Research and development activity remains strong with no significant change
between periods. During the three months ended April 30, 2006, we spent $314,746
on research and development compared to $300,000 during the three month period
ended April 30, 2005.
Net Income (Loss)
Net loss for the three months ended April 30, 2006 was $306,062 as compared to a
net loss of $387,990 for the three months ended April 30, 2005. The difference
is caused mainly by (i) one time legal and other professional costs associated
with finance raising activities during the second and third quarters of our 2005
fiscal year and (ii) a general tightening of the company's overhead costs ,
offset by slightly lower revenues and larger interest and debt arrangement cost
in 2006.
Nine Months Ended April 30, 2006 compared to Nine Months Ended April 30, 2005
Revenues
During the nine months ended April 30, 2006 we had sales of $1,077,451. During
the nine months ended April 30, 2005, we had sales of $911,104. This increase
represents a generally higher level of billable development activity in the
current period compared to the same period in the previous year. Our revenues
consisted primarily of income received under development contracts with
commercial partners.
Depreciation Expenses
Depreciation expenses for the nine months ended April 30, 2006 increased to
$24,075 from $15,771 for the nine months ended April 30, 2005.
General & Administrative Expenses
General and administrative expenses for the nine months ended April 30, 2006
decreased from $1,090,735 for the nine months ended April 30, 2005 to $434,091.
This change reflects efforts to reduce to general and administrative expenses,
combined with substantial transaction costs incurred during the nine month
period ended April 30, 2005 in connection with financing activities.
Research & Development Expenditure
Research and development activity remains strong with no significant change
between periods. During the nine months ended April 30, 2006 we spent $901,416
on research and development compared to $823,329 in the nine month period ended
April 30, 2005.
Net Income (Loss)
Net loss for the nine months ended April 30, 2006 was $892,288 as compared to a
net loss of $1,723,946 for the nine months ended April 30, 2005. This decrease
is caused mainly by (i) legal and other professional costs associated with
finance raising activities during the second and third quarters of our 2005
fiscal year, (ii) a general tightening of the company's overhead costs during
2006 and (iii) increased revenues in 2006 over 2005.
Liquidity and Capital Resources
We have limited assets and limited revenues. At April 30, 2006, we had an
accumulated deficit from inception of $7,798,862. As a result, our auditors, in
their report on our financial statement for the fiscal year ended July 31, 2005,
have expressed substantial doubt about our ability to continue as a going
concern.
5
The Company's primary needs for liquidity and capital resources are for the
funding of salaries, administrative expenses and research and development
activities. At April 30, 2006, the Group had a cash balance of $101,412 and
current liabilities of $3,423,066. The Company's cash balances at April 30, 2006
are not sufficient to support operations for the next twelve months and it will
therefore be necessary for the Company to continue to seek additional financing
in the form of equity and debt, further grants from the UK government and income
from development contracts with new and existing commercial partners. As
explained in Note 8 to the Unaudited Condensed Consolidated Financial Statements
(set out in Item 1 above) and further explained in the section below entitled
"Recent Financings", the Company has been active, and continues to be active, is
seeking to secure new sources of financing.
Critical Accounting Policies
Principles of consolidation
Our consolidated financial statements include our accounts and the accounts of
our two wholly owned foreign subsidiaries; IVMD UK Limited ("IVMD") and Jopejo
Limited ("Jopejo"), both UK companies. The assets and liabilities of our foreign
subsidiaries have been translated from British pounds into US dollars at the
exchange rate in effect at April 30, 2006 with the related translation
adjustments reported as a separate component of shareholders' deficit. Operating
statement accounts have been translated at the average exchange rate in effect
during the period presented. All significant intercompany transactions have been
eliminated.
Basis of presentation
Our research and development is conducted in Inverness, Scotland through our
subsidiaries: IVMD UK Limited and Jopejo Limited. Development-stage activities
consist of raising capital, obtaining financing, medical products research and
development and administrative matters. We plan to continue to raise capital
through stock sales and debt issuances to fund our development. In addition, we
expect to obtain additional capital from UK government grants that are designed
to support employment and enterprise and from commercial partners who contribute
towards certain development projects. In the future, we expect our primary
revenue to consist of royalties received from commercial partners in connection
with the commercial exploitation of our products. However, there can be no
assurance that our products will be introduced to, or accepted by, the
commercial marketplace.
Inherent in our development-stage enterprise are various risks and
uncertainties, including our limited operating history, historical operating
losses, dependence upon strategic alliances, and market acceptance of our
patented core technologies. Our ability to generate revenues from royalties will
be dependent upon our ability to enter into licenses, joint ventures or
distribution agreements with established businesses with existing sales and
marketing structures. Our future success will be dependent upon our ability to
develop and provide new medical devices that meet the changing needs of the
marketplace, including the effective use of our patented core technologies, to
continue to enhance our current products under development, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
We have incurred losses (principally represented by research and development
expenditures) since inception and we have a net capital deficit at April 30,
2006 of $3,920,619. We also had substantial net current liabilities at April 30,
2006. These factors, among others, raise substantial doubt about our ability to
continue as a going concern, in common with many development stage companies in
our industry. As explained above, in 2004, we merged with a publicly traded
shell company. As a result, we obtained limited access to the capital markets
via a listing on the Nasdaq Over the Counter Bulletin Board (OTCBB). We have
raised limited amounts of capital by virtue of our OTCBB listing. However, we
need to continue to raise capital through public or private stock offerings in
order to finance our development activities and ultimately, to achieve
profitability. However, there is no assurance that we will be successful in our
efforts to raise capital or to become a profitable company. As explained above,
while there can be no assurance, we currently expect that by the last quarter of
calendar 2006 ongoing royalty income will start to flow from our first product
to enter the market.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Research & Development Expenditure
Research & Development expenditure is written off as it is incurred.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104
"Revenue Recognition in Financial Statements" (SAB 104). Arrangements with
multiple elements are accounted for in accordance with Emerging Issues Task
Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF
00-21. We consider this methodology to be the most appropriate for our business
model and current revenue streams.
Currently our only revenue streams relate to research and development contracts
under which we enter into collaborative agreements with medical technology
companies where the other party generally receives exclusive marketing and
distribution rights for certain products for set time periods and set geographic
areas. The terms of the collaborative agreements typically include funding of
certain research and development efforts and royalties on product sales.
6
Revenue from research funding is recognized when the services are performed and
is typically based on the fully burdened cost of a researcher working on a
collaboration plus reimbursement of other costs incurred
Currently we receive revenue mainly from contracts which we enter into with
commercial partners who work with us to develop new products which employ our
core technology. This revenue is generally in the form of contribution towards
development costs that we incur and is accounted for in accordance with the
underlying contracts. In the future we anticipate the nature of our principle
revenues changing from contribution towards development expenditure to royalty
income from developed products, this change will not take place until products
that are currently in development have been completed and are taken to market.
Whilst there can be no assurance we currently expect our first royalty income to
commence in the last quarter of 2006.
Recent Financings
Royalty Participation Agreement
On May 5, 2006, In Veritas Medical Diagnostics, Inc. ("In Veritas" or the
"Company") completed the sale of a percentage of future royalties pursuant to a
Royalty Participation Agreement (the "Agreement") with The Rubin Family
Irrevocable Stock Trust (the "Investor").
The royalties to be paid pursuant to the Agreement are derived from a license
agreement with Inverness Medical Innovations, Inc. (the "IMI Agreement")
pursuant to which the Company will receive royalties from the sale of a
Prothrombin blood clotting measuring device (the "IMI Royalties).
Pursuant to the Agreement, the Company received a sum of $250,000 in exchange
for 5.56% of the future IMI Royalties received by the Company, subject to the
terms and conditions set forth in the Agreement (the "Royalty Payments"). The
Royalty Payments shall be paid to the Investor within 15 days of the end of the
month in which the Company receives future IMI Royalties.
The Company shall have the option to terminate the Agreement at any time,
without penalty, by making a lump sum payment to the Investor equal to 300% of
the funds received from the Investor pursuant to the Agreement, less an amount
equal to the difference between (x) the Royalty Payments made to and received by
the Investor and (y) $250,000.
September 2005 Financing
Standby Equity Distribution Agreement
On September 7, 2005, the Company entered into a Standby Equity Distribution
Agreement (the "Distribution Agreement") with Cornell Capital Partners LP
("Cornell") providing for the sale and issuance to Cornell of up to $10,000,000
of Common Stock over a period of up to 24 months after the signing of the
Distribution Agreement. Under the Distribution Agreement, the Company may sell
to Cornell up to $500,000 in shares of its common stock (the "Common Stock")
once every five trading days at a price of 97% of the lowest closing bid price
(as reported by Bloomberg L.P.), of the Common Stock on the principal market
where the Common Stock is traded for the five consecutive trading days following
a notice by the Company to Cornell of its intention to sell shares. The Company
will also pay a 5% commitment fee upon each sale of shares under the
Distribution Agreement. Cornell has agreed not to short any of the shares of
Common Stock. In addition as part of the commitment fee arrangements the Company
is to issue 472,000 shares of the Company's Common Stock to Cornell.
18% Secured Convertible Debentures
Also on September 7, 2005, the Company entered into a Securities Purchase
Agreement (the "Purchase Agreement") with Montgomery Equity Partners Ltd.
("Montgomery"), an affiliated fund of Cornell, providing for the sale by the
Company to Montgomery of its 18% secured convertible debentures in the aggregate
principal amount of $750,000 (the "Debentures") of which $300,000 was funded on
September 7, 2005; $200,000 shall be funded two business days prior to the
Company's completion of its audited financial statements for the fiscal year
ended July 31, 2005, and; $250,000 shall be funded within five business days of
the date the Registration Statement is declared effective by the SEC. Under the
Purchase Agreement, the Company also issued to Montgomery three-year warrants
(the "Warrants") to purchase 350,000 shares of Common Stock at $0.001 per share.
In addition to the foregoing, the Company entered into a Securities Purchase
Agreement (the "Accredited Investor Purchase Agreement") with the investors (the
"Accredited Investors") in its April 2005 financing (described below) pursuant
to which the Accredited Investors agreed to exchange the securities that they
purchased in such financing for an aggregate of $556,500 principal amount of
Debentures. Specifically, the Accredited Investors agreed to exchange an
aggregate of 863,845 units (the "Units"), as well as a warrant to purchase an
additional Unit for an aggregate of $556,500 principal amount of Debentures.
Each Unit consisted of one share of 5% convertible preferred stock of the
Company, $.001 par value per share, and one warrant to purchase one share of the
Company's common stock.
7
The Debentures mature on the first anniversary of the date of issuance and bear
interest at the annual rate of 18% in cash. The Company is required to make
monthly interest payments commencing on October 7, 2005, and to make monthly
principal payments commencing on March 7, 2006.
Holders may convert, at any time, the principal amount outstanding under the
Debentures into shares of Common Stock, at a conversion price per share equal to
$0.144, subject to adjustment. Upon three-business day advance written notice,
the Company may redeem the Debentures, in whole or in part. The redemption
amount will be calculated at 112% of the Debentures' face value.
As further security for its obligations under the Purchase Agreement and the
Accredited Investor Purchase Agreement, the Company has deposited into escrow
25,685,000 shares (the "Escrow Shares") of common stock. The Escrow Shares
shares are deemed issued but not outstanding.
Current Status of September 2005 Financing
Subsequent to the completion of the Standby Equity Distribution Agreement and
the sale of the 18% secured convertible debentures pursuant to the Securities
Purchase Agreement in September 2005, the Company prepared and filed a
registration statement on Form SB-2 (File No. 333-128321) with the Securities
and Exchange Commission for the purpose of registering the securities underlying
such financing transactions. In connection therewith, the Company has received
comments from the Commission indicating that, in the Commission's view, based
upon the structure of the transactions, the Company may not register the
securities sold in the financing transactions. On March 6, 2006, we withdrew the
registration statement on Form SB-2 (File No. 333-128321) by filing a Form R-W
with the Commission. As a result, the Company has not been able to draw down any
further amounts under the Debenture and is in discussions with the various
potential investors regarding raising alternative financing. No assurance can be
given as to when, or if, these possible alternative financings will be
completed. In the meanwhile, because of the failure to complete the entire
financing transaction contemplated in the September 2005 financing, the Company
has been unable to pay interest and principal payments on the debentures drawn
down under this financing.
April 2005 Financing
On April 15, 2005, we completed the sale of 863,845 units (the "Units"), each
Unit consisting of one share of 5% convertible preferred stock of the Company,
$.001 par value per share (the "Preferred Stock"), and one warrant to purchase
one share of the Company's common stock (the "Warrants"), to accredited
investors pursuant for an aggregate purchase price of approximately $561,500.
The aggregate purchase price consisted of the sale of $401,500 of Units for cash
and the sale of $160,000 of Units for the forgiveness of debt. In addition, each
purchaser of a Unit received a warrant to purchase an additional Unit (the "Unit
Warrants"). The aforementioned securities were sold in reliance upon the
exemption afforded by the provisions of Regulation D, as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as of January 31, 2006 or as
of the date of this report.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based
Payment (SFAS 123R) establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as
originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." This Statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. The Company is
required to adopt SFAS 123R effective August 1, 2006. The standard provides for
a prospective application. Under this method, the Company will begin recognizing
compensation cost for equity based compensation for all new or modified grants
after the date of adoption. In addition, the Company will recognize the unvested
portion of the grant date fair value of awards issued prior to the adoption
based on the fair values previously calculated for disclosure purposes.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument this is within its scope
as a liability. Many of those instruments were previously classified as equity.
SFAS No. 150 is effective for financial instruments entered into after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. For nonpublic entities, mandatorily
redeemable financial instruments are subject to SFAS No. 150 for the first
period beginning after December 15, 2003. Adoption of SFAS No. 150 will require
us to report any cumulative redeemable preferred stock and any cumulative Class
C redeemable preferred stock outstanding at the time of adoption as a liability.
8
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As explained under "Recent Financings" above, the Company has been unable to pay
interest and principal repayments when due under the terms of its September,
2005 financing (also described above). As of April 30, 2006 the arrears of due
but unpaid interest was $63,750 and principal repayment arrears amounted to
$173,600.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
Effective May 9, 2006, Brian Cameron resigned as a member of the Board of
Directors and as Chief Operating Officer of In Veritas Medical Diagnostics, Inc.
There was no disagreement between Mr. Cameron and the Company which led to his
resignation.
ITEM 6. EXHIBITS
EXHIBITS
10.1 Royalty Participation Agreement (as incorporated by reference to Form
8-K filed with the Securities & Exchange Commission on May 11, 2006).
31.1 Certification by John Fuller, President and Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Martin Thorp, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by John Fuller, President and Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Martin Thorp, Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 7. SIGNATURES
10
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IN VERITAS MEDICAL DIAGNOSTICS, INC.
June 19, 2006
By: /s/ John Fuller
----------------------------
John Fuller
Chief Executive Officer
/s/ Martin E. Thorp
----------------------------
Martin E. Thorp
Chief Financial Officer
11