U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
MARK ONE
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-25022
QT 5, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 80-0103134
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
5655 Lindero Canyon Road, Suite 120, Westlake Village, California 91362
(Address Of Principal Executive Offices) (Zip Code)
818-338-1500
(Issuer's Telephone Number, Including Area Code)
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 |_|
Transitional Small Business Disclosure Format: Yes |_| No |X|
The total number of shares of the registrant's Common Stock, par value $.001 per
share, outstanding on May 1, 2004 was 21,436,620 (reflected on a
post-reverse-split basis).
1
QT 5, INC.
INDEX TO FORM 10-QSB
Page
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2004 (Unaudited) 2
Consolidated Statements of Operations for the Three and
Nine Months Ended March 31, 2004 and 2003 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2004 and 2003 (Unaudited) 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 15
Item 3. Controls and Procedures 18
Part II--OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Change in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Securities Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QT 5, Inc.
Consolidated Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 178,538
Other receivable 3,306
Notes receivable, net of allowance of $139,500 --
Prepaid expenses 783
------------
Total current assets 182,627
------------
Property and equipment, net of accumulated depreciation
of $8,474 26,904
Deferred financing cost, net of accumulated amortization
of $512,840 72,470
License 358,684
Other assets 9,595
------------
Total assets $ 650,280
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 948,337
Accrued salaries 502,390
Lease liability 156,400
Accrued legal fees 222,258
Deferred rent expense 6,463
------------
Total current liabilities 1,835,848
Convertible debentures payable, net of unamortized
debt discount of $606,415 87,335
------------
Total liabilities 1,923,183
------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock; $0.001 par value; 300,000,000 shares
authorized; 164,534,060 shares issued and
outstanding 164,535
Additional paid-in capital 15,238,668
Prepaid consulting expense (17,361)
Accumulated deficit (16,658,745)
------------
Total stockholders' deficit (1,272,903)
------------
$ 650,280
============
See accompanying notes to unaudited consolidated financial statements.
3
QT 5, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 1,298 $ -- $ 191,702 $ --
Costs and expenses:
Cost of revenue 1,075 -- 109,437 --
General and administrative 891,266 3,372,580 4,307,326 4,082,616
Impairment loss 69,140 -- 756,788 --
------------ ------------ ------------ ------------
Loss from operations (960,183) (3,372,580) (4,981,849) (4,082,616)
Other expense:
Interest expense, net (121,494) (74,089) (1,463,200) (90,473)
Other -- -- (27,919) --
------------ ------------ ------------ ------------
Net loss $ (1,081,677) $ (3,446,669) $ (6,472,968) $ (4,173,089)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.01) $ (0.12) $ (0.09) $ (0.19)
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding 107,503,078 28,261,268 68,761,839 21,619,289
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
4
QT 5, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended March 31,
----------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(6,472,968) $(4,173,089)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,437 6,055
Amortization of debt discount, deferred
financing cost and non-cash interest expense 1,215,522 87,841
Amortization of prepaid compensation 420,836 --
Loss on issuance of shares for settlement
of accounts payable 27,919 --
Interest expense on issuance of shares for
settlement of note payable to a related party 202,500 --
Stocks and options issued for services 536,597 3,020,397
Reserve for uncollectibility of related party --
notes receivable 139,500
Write-off of accounts receivable, inventory,
intellectual property and accrued legal fees 730,131 --
Changes in operating assets and liabilities:
Accounts receivable 57,963 --
Inventories (205,476) --
Deferred costs 21,551 --
Prepaid expenses and other assets 77,058 (234)
Accounts payable and accrued expenses 677,480 196,684
Accrued salaries 248,890 --
Deferred revenue (86,184) --
Deferred rent expense (4,437) (301)
----------- -----------
Net cash used in operating activities (2,408,681) (862,647)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment -- (8,451)
Collection on notes receivable -- 60,000
----------- -----------
Net cash provided by investing activities -- 51,549
----------- -----------
Cash flows from financing activities:
Proceeds from sale of stock 150,000 --
Proceeds from exercise of options and warrants 133,333 29,500
Payments on notes payable to related parties (67,500) --
Payments on notes payable (215,000) --
Payments on installment financing (46,930) --
Proceeds from notes payable -- 385,000
Proceeds from convertible debentures, net of
issuance costs of $346,500 2,453,500 --
Proceeds from notes payable to related
parties 112,500 50,000
Capital contribution -- 300,000
----------- -----------
Net cash provided by financing activities 2,519,903 764,500
----------- -----------
Net increase (decrease) in cash and cash equivalents 111,222 (46,598)
Cash and cash equivalents, beginning of period 67,316 62,391
----------- -----------
Cash and cash equivalents, end of period $ 178,538 $ 15,793
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
QT 5, Inc.
Consolidated Statements of Cash Flows (continued)
For the Nine Months
Ended March 31,
---------------------------------
2004 2003
-------------- --------------
(Unaudited) (Unaudited)
Supplemental disclosure of cash flow information:
Installment financing payable and prepaid
insurance recorded for insurance premium
financed $ 431,908 $ --
============== ==============
Common stock issued as prepaid consulting
services $ 9,240 $ 700,513
============== ==============
Cancellation of financed insurance $ 375,444 $ --
============== ==============
Amortization of prepaid consulting expense $ 420,836 $ --
============== ==============
Debt discount recognized related to
convertible debentures $ 2,074,667 $ --
============== ==============
Common stock issued for settlement of
accounts payable $ 255,510 $ --
============== ==============
Common stock issued for settlement of
note payable to a related party $ 112,500 $ --
============== ==============
Common stock issued in connection with
deferred financing cost $ 16,000 $ --
============== ==============
Common stock issued in connection with conversion
of convertible debentures $ 2,306,250 $ --
============== ==============
Amortization of debt discount and deferred
financing costs against additional paid-in
capital in connection with conversion of
convertible debentures $ 965,571 $ --
============== ==============
Warrant issued in connection with deferred
financing cost $ 222,810 $ --
============== ==============
Common stock issued in connection with license
agreement $ 358,684 $ --
============== ==============
Furniture purchased under a note payable
to related party $ -- $ 17,500
Common stock issued as additional consideration
Pursuant to the terms of promissory note $ -- $ 106,407
============== ==============
Promissory notes receivable entered into as a
consideration for the assumption of lease
liability and other accounts payable $ -- $ 199,500
============== ==============
See accompanying notes to unaudited consolidated financial statements.
6
QT 5, Inc.
Notes to Unaudited Consolidated Financial Statements For the Three and Nine
Months Ended March 31, 2004 and 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND ORGANIZATION
QT 5, Inc. (the "Company") is currently the licensee of various quick test
devices and quantitative testing analyzers which it is preparing to bring to
market. In October 2003, the Company entered into a License Agreement of
Intellectual Property with VMM, LLC ("License Agreement"). Under the License
Agreement, the Company licensed the exclusive right, worldwide, to sell and
distribute, under its brand name, all of the licensor's products including, but
not limited to, specific point of care quick-test devices and quantitative
testing analyzers to the retail, professional and governmental healthcare
markets. These include an FDA cleared urine specimen drug screening test and a
disease testing target system platform to identify Rubella, Herpes, Roravirus,
Strep Group A, Infectious Mononucleosis, Myoglobin, CK-MB, Cardiac Troponin and
Pregnancy. In addition, the Company is preparing to submit an HIV 1&2 test phase
3 application for clearance by the FDA. Future plans include the submission of
tests for Hepatitis, Prostate PSA count, West Nile Virus and SARS to the FDA for
clearance. In consideration for the License Agreement, the Company released
3,260,760 previously issued shares of its common stock from escrow. The term of
the License Agreement is one year, although so long as the Company meets certain
proposed sales projections, the agreement will be extended for four additional
one-year terms. After this period, if neither party terminates the License
Agreement, it will be extended for an additional five-year term. The term of the
License Agreement will become effective four months after all required
regulatory clearances have been obtained for certain of the licensed products
and after the licensor has obtained a manufacturer to manufacture the products
in accordance with the terms of the License Agreement, which requires the
manufacturing to be at or below a certain price for the various products.
In February 2004, the Company entered into a Modification to License Agreement
of Intellectual Property ("Modification Agreement"), the significant
modifications of which were: (a) additional F.D.A. 510(k) cleared items which
the Company has the right to market and sell; (b) the first year of the term of
the License Agreement shall be set to commence six (6) months after (i) the
obtaining of an F.D.A. 510(k) clearance for the HIV 1 & 2 as well as all
statutory waiting periods in respect of the same shall have expired with no
restrictive conditions which may have a material adverse effect on marketing the
HIV 1&2 product ; and (ii) VMM has obtained a manufacturer to manufacture the
products consistent with agreed upon pricing; and (c) revised sales performance
goals and if such goals are not achieved, a right to extend the duration of the
License Agreement upon payment to licensor of $200,000 for each year, limited to
two one (1) year extensions until sales performance goals are achieved (see Note
5).
On April 7, 2002 the Company entered into an Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 (the "Agreement") relating to the
formulation of nicotine water-based products. This patent is referred to as the
"NICO Patent." The Agreement was effective upon the execution and delivery of
the assignment of patent. The assignment of patent was executed and delivered on
June 26, 2002. The Company's first water-based homeopathic nicotinum (nicotine)
product was NICOWater(TM), an odorless and tasteless water-based product that is
designed to relieve the self-diagnosed symptoms of tobacco cravings. In May
2003, the Company began shipping NICOWater(TM).
In May 2003, Mr. Marshall Anluaf Thompson, owner of the NICO Patent, alleged
that he was entitled to terminate the assignment of the NICO Patent based upon
the Company's failure to meet certain conditions required by the assignment
agreement, including performance conditions. The dispute was heard by a panel of
arbitrators who, on January 8, 2004, concluded that Mr. Thompson was entitled to
terminate the assignment agreement. Immediately following the decision, the
Company stopped marketing NICOWater(TM). Although the Company has acquired other
products, NICOWater(TM) was the only product sold.
7
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the management of the Company pursuant to the rules and regulations
of the Securities and Exchange Commission and in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly represent the financial position and
operating results for the respective periods. Certain information and footnote
disclosures normally present in the annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. It is
suggested that these unaudited condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 2003, included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission on
September 23, 2003. The results for the three and nine months ended March 31,
2004 are not necessarily indicative of the results to be expected for the full
year ending June 30, 2004.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of QT 5, Inc. and its wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. The Company incurred a net loss of $1,081,677 and $6,472,968
during the three and nine months ended March 31, 2004, respectively, only had
$1,298 and $191,702 of revenue during the three months and nine months ended
March 31, 2004, respectively, and had a cash balance of $178,538 at March 31,
2004. In addition, the Company had an accumulated deficit of $16,658,745 and
negative working capital of $1,653,221 and on January 8, 2004 lost its NICO
patent rights for its only revenue-generating product (see Note 6) since its
merger on January 9, 2003. The Company is now commencing the marketing of its
new disease and drug quick-test products as well as its first aid kits and
management recognizes that the Company must generate additional resources to
fund overhead and for the eventual achievement of revenue and sustained
profitable operations. The Company's success is dependent upon numerous items,
including the successful development of effective marketing strategies to
customers in a competitive market for its new products. The Company anticipates
that certain of its new product line may enter the market in second calendar
quarter of 2004 and management believes that revenues generated by this product
could lead to future profitability. Also, in November 2003, the Company
completed an accounts receivable financing facility with AeroFund Financial
which enables it to finance approved customer invoices to a maximum of
$1,500,000 at any given time. Although the Company is currently in default of
this financing agreement caused by the loss of its NICO patent and non-payment
by certain customers, the Company and AeroFund have agreed on terms to cure the
default, which included a partial $10,000 payment in March 2004 and anticipates
utilizing this financing, when and if required, in connection with future sales
of new product. Also, in February 2004 management successfully obtained
additional capital through a $1 million sale and issuance of 6% convertible
debentures with an original issuance discount of 20%, from which the Company
received gross proceeds of $800,000 in February and March 2004. However, no
assurance can be given that the accounts receivable financing facility will
remain available and the convertible debenture funding will generate sufficient
cash to satisfy the Company's need for additional capital or that other future
debt or equity financing will be available to the Company on satisfactory terms.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result from the outcome of these
uncertainties.
8
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the respective reporting period. Actual results could differ from those
estimates. Significant estimates made by management are, among others, the
realizability of deferred costs, license agreement, and long-lived assets,
collectibility of receivables, and the valuation allowance on deferred tax
assets.
CONCENTRATION OF CREDIT RISK
The financial instrument which potentially subjects the Company to concentration
of credit risk is cash. The Company maintains cash balances at certain high
quality financial institutions, and at times such balances may exceed the
Federal Deposit Insurance Corporation $100,000 insurance limit. As of March 31,
2004, there was an uninsured cash balance of $66,286.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used by an
entity are reviewed by the management of the Company for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. As of March 31, 2004, management of the Company has
written off the unamortized value of Intellectual Property Rights totaling
$44,854 (see Note 6) related to the NICO Patent which was lost on January 8,
2004.
INCREASE IN AUTHORIZED SHARES AND CHANGE IN PAR VALUE
On October 8, 2003, the Company filed a Definitive Form 14C with the Securities
and Exchange Commission stating that the Company's Board of Directors and
shareholders of record as of the close of business on September 22, 2003,
holding a majority of the total number of outstanding shares, have consented to
increase the number of shares of authorized common stock from 100,000,000 to
300,000,000. The par value of each such common stock shall be $0.001 per share.
The Company filed the Certificate of Amendment of Certificate of Incorporation
with the Secretary of the State of Delaware, in accordance with federal security
laws, on November 3, 2003, and these changes have been reflected in the
accompanying March 31, 2004 consolidated financial statements.
ONE-FOR-TEN REVERSE STOCK SPLIT
A Proxy Statement dated March 11, 2004 and accompanying Proxy card were
furnished to all the Company's stockholders of record on March 8, 2004 in
connection with the solicitation by the Company's Board of Directors of proxies
to be voted at a Special Meeting of Stockholders held on April 19, 2004 for the
purpose of effecting a one-for-ten reverse stock split of the Company's common
stock. A majority of the Company's stockholders approved a reverse stock split
pursuant to which each ten currently outstanding shares of common stock would be
automatically converted into one share of common stock The principal effects of
the reverse stock split is that the number of shares of common stock issued and
outstanding at April 26, 2004, the effective date of the reverse stock split,
was reduced from 171,509,060 to approximately 17,150,906. Accordingly, as a
result of the reverse stock split, at April 26, 2004 the Company had
approximately 282,849,094 authorized unissued shares. In addition, this reverse
stock split affects the exercise price, the number of shares related to all
outstanding warrants and the conversion price on all outstanding convertible
debentures. The Company will reflect the changes from the reverse stock split in
its June 30, 2004 consolidated financial statements. As a result, all references
to shares in this filing (unless otherwise designated) are reflected on a
pre-reverse-split basis. The reason for the reverse stock split is to increase
the per share stock price. The Company believes that if it is successful in
maintaining a higher stock price, the stock will generate greater interest among
professional investors and institutions. If the Company is successful in
generating interest among such entities, management anticipates that the
Company's common stock would have greater liquidity and a stronger investor
base. However, there is no assurance that the stock price will increase or that
professional investors and institutions will purchase the Company's stock and
give the stock greater liquidity and a stronger investor base.
9
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of its products to
customers. The Company was still in its initial stages of selling its initial
product, NICOWater(TM), to customers or distributors as of January 8, 2004.
Pursuant to Staff Accounting Bulletin No. 101, the Company was deferring its
sales and corresponding cost of sales to certain distributors as the payment
terms were contingent upon customer sell-through of product and therefore
collectibility of these receivables was not reasonably assured. As all sales
activity was terminated due to the loss of the Company's NICO Patent on January
8, 2004, the Company reversed all deferred sales of $269,100 against accounts
receivable and the corresponding cost of sales of $80,109 against inventory
during the nine months ended March 31, 2004. The Company also wrote off sales
and cost of sales of $58,459 and $31,802, respectively, to impairment loss in
the accompanying consolidated statements of operations for the nine months ended
March 31, 2004.
ADVERTISING
The Company expenses the cost of advertising when incurred as general and
administrative expense. Advertising expense was approximately $9,712 and $3,012
for the three months ended March 31, 2004 and 2003, respectively, and $498,571
and $127,143 for the nine months ended March 31, 2004 and 2003, respectively.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for stock-based
compensation to employees in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." The Company accounts
for non-employee stock-based compensation under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." At March 31, 2004, the Company has two stock-based employee
compensation plans, which are described more fully in Note 9. During the three
and nine months ended March 31, 2004 and 2003, no compensation expense was
recognized in the accompanying consolidated statements of operations for options
or warrants issued to employees pursuant to APB No. 25, as all options or
warrants granted in fiscal 2003 under those plans had exercise prices equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123, to
stock-based compensation:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss as reported $(1,081,677) $(3,446,669) $(6,472,968) $(4,173,089)
Deduct:
Total stock-based employee
compensation expense under
APB 25 -- -- -- --
Add:
Total stock-based employee
compensation under fair value
based method for all awards, net
of related tax effects -- -- (111,185) --
----------- ----------- ----------- -----------
Pro forma net loss $(1,081,677) $(3,446,669) $(6,584,153) $(4,173,089)
=========== =========== =========== ===========
Basic and diluted loss per share,
as reported $ (0.01) $ (0.12) $ (0.09) $ (0.19)
=========== =========== =========== ===========
Basic and diluted loss per share,
pro forma $ (0.01) $ (0.12) $ (0.09) $ (0.19)
=========== =========== =========== ===========
10
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities at each
period end based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.
LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. All potentially dilutive
shares, 96,676,200 and 0 as of March 31, 2004 and 2003, respectively, have been
excluded from dilutive loss per share, as their effect would be anti-dilutive
for the periods ended March 31, 2004 and 2003.
COMPREHENSIVE INCOME
Comprehensive income is not presented in the Company's condensed consolidated
financial statements since the Company did not have any items of comprehensive
income in any period presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
As the Company operates in one segment, the Company has not made segment
disclosures in the accompanying condensed consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. It is to be implemented
by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of SFAS No. 150 is not expected to have a material
impact on the Company's financial position, cash flows or results of operations.
NOTE 2 - ACCOUNTS RECEIVABLE AND INVENTORIES
Due to the Company's loss of the NICO Patent and the Company's subsequent
decision to stop marketing NICOWater(TM) (see Note 1), the Company's product
NICOWater(TM) could no longer be sold and the Company wrote off accounts
11
receivable from certain customers and its inventories of raw materials and
finished goods in the aggregate amount of $33,957 and $294,039, respectively, to
impairment loss which is reflected in the accompanying condensed statements of
operations for the nine months ended March 31, 2004.
On February 3, 2004, the Company received a letter of default and demand for
reimbursement in the sum of $26,870 from AeroFund Financial, with whom the
Company has an accounts receivable financing agreement. The default was caused
by non-payment of invoices to certain customers against which AeroFund had
advanced funds to the Company. The non-payment, in turn, was caused by the
Company's loss of the NICO Patent and the inability of that product to be sold.
In March 2004, the Company made a $10,000 cash payment and recorded an accrued
liability of $16,870 reflected in the accounts payable and accrued expenses in
accompanying consolidated balance sheet as of March 31, 2004. AeroFund assured
the Company that they would accept cash payment of the balance due or continue
to factor eligible receivables and offset the balance due them in lieu of
advances on the factored receivables. AeroFund also assured the Company that the
financing agreement would remain intact.
NOTE 3 - DUE FROM INSURANCE COMPANIES
The Company financed its product liability insurance premiums totaling $431,908
in August 2003. The principal amounts bore interest at 7.85% per annum and were
payable in equal monthly installments totaling $46,930 through May 1, 2004. The
related product liability policies were cancelled effective October 31, 2003, in
favor of one replacement policy at a substantially reduced annual premium. The
cancellation resulted in a return premium to the Company of $20,150 received in
March 2004 and an elimination of the financing payable and related prepaid
expense of $375,444. The replacement policy premium was collateralized by a
letter of credit, which required the Company to maintain a restricted cash
balance of $25,000, which is reflected in cash and cash equivalents in the
accompanying consolidated balance sheet as of March 31, 2004. This policy was
also cancelled in January 2004 as a result of the Company's loss of the NICO
Patent and the inability to sell NICOWater(TM). The Company recorded an accrued
expense of $25,000 in accounts payable and accrued expenses in the accompanying
consolidated balance sheet, which represents a final payment of the policy
cancellation fee that the Company expects to settle with the restricted cash
balance (see Note 13). The Company anticipates obtaining new product liability
insurance covering the sale of its new products when they are brought to market.
NOTE 4 - NOTES RECEIVABLE
On January 1, 2003, the Company entered into promissory notes receivable in the
total amount of $199,500 with two former stockholders of Moneyzone.com, Inc.
("Moneyzone"), an entity that the Company merged with and into in January 2003.
These notes accrue interest at a rate of 4% per annum and were payable on
January 1, 2004. The notes were entered into as consideration for a contingent
liability and assumed defense costs relating to Moneyzone's lease liability
resulting from abandoned office space (see Note 10) and other remaining accounts
payable of Moneyzone assumed in the merger. Pursuant to the terms of the notes,
the amount of the notes shall be automatically adjusted to the amount of actual
liability and defense costs incurred by the Company related to the litigation,
and shall also be reduced by any amounts of Moneyzone's outstanding accounts
payable which the Company does not actually pay within one year or which are
forgiven or negotiated to lower amount. These notes are secured by 399,000
shares of the Company's common stock owned by former stockholders. As the
collection of the notes is not reasonably assured, the Company reserved the
entire remaining amount of $139,500 of the notes receivable during the nine
months ended March 31, 2004. Thus, the remaining net balance of notes receivable
as of March 31, 2004 is zero.
NOTE 5 - LICENSE
In October 2003, the Company entered into a License Agreement of Intellectual
Property with VMM, LLC (see Note 1). In consideration for the License Agreement,
the Company released 3,260,760 previously issued shares of its common stock from
escrow valued at $358,684 (or $0.11 per share, which was the fair market value
of the stock on the date of the License Agreement). The term of the License
Agreement is one year, although so long as the Company meets certain proposed
sales projections, the License Agreement will be extended for four additional
one-year terms. After this period, if neither party terminates the License
Agreement, it will be extended for an additional five-year term. The term of the
License Agreement will become effective four months after all required
regulatory clearances have been obtained for certain of the licensed products
and after the licensor has obtained a manufacturer to manufacture the products
12
in accordance with the terms of the License Agreement. The Company will begin
the amortization of the License Agreement at the time the required regulatory
clearances are obtained and the License Agreement becomes effective. The Company
anticipates to amortize the License Agreement over the estimated useful life of
five years using a straight-line method.
In February 2004, the Company entered into a Modification to the License, the
significant modifications of which were: (a) additional F.D.A. 510(k) cleared
items which the Company has the right to market and sell; (b) the first year of
the term of the License Agreement shall be set to commence six (6) months after
(i) the obtaining of an F.D.A. 510(k) clearance for the HIV 1 & 2 as well as all
statutory waiting periods in respect of the same shall have expired with no
restrictive conditions which may have a material adverse effect on marketing the
HIV 1&2 product ; and (ii) VMM has obtained a manufacturer to manufacture the
Products consistent with agreed upon pricing; and (c) revised sales performance
goals and if such goals are not achieved, a right to extend the duration of the
License Agreement upon payment to Licensor of $200,000 for each year, limited to
two one (1) year extensions until sales performance goals are achieved.
NOTE 6 - PATENT AND ROYALTY FEE
On April 7, 2002, the Company entered into an Agreement relating to the
formulation of nicotine water-based products (see Note 1). The Agreement was
effective upon the execution and delivery of the assignment of patent. The
assignment of patent was executed and delivered on June 26, 2002. In
consideration thereof, the Company issued 133,000 shares of its common stock
valued at $50,000 (or $0.376 per share, which was management's estimate of the
fair market value of its common stock on the date the patent was assigned). The
cost of the patent had been amortized over the patent's remaining useful life of
17 years. In addition, the Company agreed to pay the original patent holder
royalties of $1.20 per case, quarterly, for every case sold (consisting of 24
bottles per case) of the Company's products which utilize the patent, for the
remaining life of the patent. In June 2002, the Company prepaid royalties
through the issuance of 399,000 shares of its common stock valued at $150,000
(or $0.376 per share, which was management's estimate of the fair market value
of its common stock on the date the shares were issued) in lieu of meeting the
minimum performance requirement of the first year. The Company's first
water-based homeopathic nicotinum (nicotine) product was NICOWater(TM), an
odorless and tasteless water-based product that is designed to relieve the
self-diagnosed symptoms of tobacco cravings, which the Company began shipping in
May 2003.
During the three and nine months ended March 31, 2004, the Company recorded $0
and $9,534 respectively, of royalty expense in the accompanying condensed
consolidated statements of operations. Due to the Company's loss of the NICO
Patent (see Note 1), the Company wrote off the unamortized portion of the
Intellectual Property Rights related to the NICO Patent of $44,854 and the
balance of prepaid royalties of $135,023 to impairment loss in the accompanying
condensed statements of operations for the nine months ended March 31, 2004.
NOTE 7 - NOTES PAYABLE
In June 2003, the Company entered into a Settlement Agreement and Mutual General
Releases with certain third party note holders and related parties, mutually
releasing all parties from any and all claims arising out of or related to
certain convertible promissory notes and bridge loan (the "Previous Notes"), and
executed and delivered new Secured Notes and Security Agreements (the "New
Notes") in the aggregate principal amount of $265,000. The New Notes superseded
the Previous Notes, bearing interest at the rate of 12% per annum with the
entire amount, including principal and accrued interest, due and payable on
December 1, 2003. The New Notes were secured by a pledge and first and second
priority security interest in all of the tangible and intangible assets of the
Company, and included certain non-financial covenants and events of default,
among other items, such as the Company's failure to ship in any calendar month
at least 10,000 cases of NICOWater(TM) and generate gross sales of at least
$280,000 from the sale of NICOWater(TM) in any month.
In August 2003, the Company prepaid the notes payable and notes payable to
related parties in the entire principal amounts of $215,000 and $50,000,
respectively, plus accrued interest of $5,760 for an aggregate amount of
$270,760 and has received full collateral releases from the noteholders.
13
NOTE 8 - CONVERTIBLE DEBENTURES
On August 22, 2003, the Company entered into a Securities Purchase Agreement
with certain investors pursuant to which the Company issued 6% convertible
debentures in the total principal amount of $2,000,000 (the "August 2003
Debentures"). The first payment of $1,000,000 in gross proceeds was provided at
the first closing, as defined. On October 15, 2003, the holders advanced
$200,000 of the remaining $1,000,000 in gross proceeds prior to the date they
were required to do so. In November 2003, the Company received the remaining
$800,000 in gross proceeds due at the second closing. The August 2003 Debentures
are payable on August 22, 2006. The interest of 6% per annum is payable
quarterly in cash or shares of the Company's common stock, at the option of the
Company, plus an additional interest of 15% per annum will accrue daily if all
accrued interest is not paid in full when due. The August 2003 Debentures are
convertible at the option of the holder into shares of the Company's common
stock at $0.075 with a forced conversion option by the Company if certain
closing prices are attained, as defined. The Company is required to register the
shares that might be issued under the agreement and is subject to liquidated
damages if agreed upon timetables are not met, as defined. The August 2003
Debentures also require that, in the event that the Company loses its patent
relating to NICOWater(TM), the conversion price shall thereafter equal the
lesser of (A) the Set Price and (B) 60% of the average of the 5 closing prices
for the 5 trading days immediately prior to the applicable conversion date. The
holders have agreed that such price will be fixed at $0.01 per share. The
Company has registered additional shares of common stock to cover such
additional conversion shares. As of March 31, 2004, a total of $1,950,000 of the
August 2003 Debentures was converted into 63,375,624 shares of the Company's
common stock.
In connection with the Securities Purchase Agreement, the Company also issued
warrants to purchase 13,333,333 shares of the Company's common stock at an
exercise price of $0.075 per share (see Note 9). On October 15, 2003, as a
consideration to receiving an early advance of $200,000, the Company reduced the
exercise price of the warrants to purchase 13,333,333 shares of the Company's
common stock and a warrant to purchase 200,000 shares of the Company's common
stock issued as part of the commission fee in connection with the August 2003
Debentures financing (see below) from $0.075 to $0.01. In addition, the Company
granted to the August 2003 Debentures purchasers a continuing security interest
in substantially all of the Company's assets and agreed to refrain from issuing
shares or granting options to the Company's employees, officers or directors in
excess of 50,000 shares per month for a period of 12 months, without the prior
written consent of the convertible debenture purchasers. So long as the Company
is in compliance with their obligations under the August 2003 Debentures, the
convertible debenture purchasers agreed to subordinate their security interests
to a factor lien as was required for the Company to factor its accounts
receivable.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the August 2003 Debentures, the Company has recorded a
debt discount of $1,274,667. The Company is amortizing the discount using the
effective interest method through August 2006. The Company is immediately
recording the corresponding unamortized debt discount related to beneficial
conversion feature as interest expense and related to detachable warrants as
additional paid-in capital when the related debenture is converted into the
Company's common stock.
On August 19, 2003, the Company also issued warrants to purchase 200,000 shares
of the Company's common stock as part of the commission fee in connection with
the August 2003 Debentures. The warrants had an exercise price of $0.075 per
share and expire in five years. On October 15, 2003 as a consideration to
receiving an early advance of $200,000, the Company reduced the exercise price
from $0.075 to $0.01. The Company recorded the value of the warrant of $220,114
(under the Black-Scholes pricing model) as an issuance cost, which is included
in the deferred financing cost in the accompanying consolidated condensed
balance sheet as of March 31, 2004. During the nine months ended March 31, 2004,
the Company incurred other issuance costs totaling $237,000 and an additional
$16,000 related to the issuance of the Company's common stock for finders fees
(see Note 9), which were all recorded as deferred financing cost in the
accompanying condensed consolidated balance sheet. The Company is amortizing the
deferred financing cost to interest expense using the straight-line method,
adjusted prospectively for the reduction in the warrant value as a result of the
exercise price reduction discussed above, through August 2006 and recording the
remaining unamortized portion to additional paid-in capital when the related
debenture is converted into the Company's common stock.
14
On February 13, 2004, the Company entered into a Securities Purchase Agreement
with certain investors pursuant to which the Company issued convertible
debentures with an original issue discount of 20% in the total principal amount
of $1,000,000 (the "February 2004 Debentures"). The funds were received in two
closings. The first closing, pursuant to which the Company received gross
proceeds of $350,000 in financing, took place on February 13, 2004 with an
additional $150,000 received on February 18, 2004. On March 12, 2004, the
Company received $300,000 in gross proceeds, representing the balance of the
total financing, pursuant to the registration statement registering the shares
in connection with the financing being declared effective. The February 2004
Debentures have a term of two years. At any time after the original issue date,
the February 2004 Debentures may be convertible into shares of the Company's
common stock at the option of the holder. The number of shares of common stock
issuable upon a conversion is determined by the quotient obtained by dividing
the outstanding principal amount of the February 2004 Debentures to be converted
by the Set Price. The Set Price is defined as $0.01. The Company has reserved
and registered 100,000,000 shares of its common stock to cover the conversion of
the February 2004 Debentures. As of March 31, 2004, a total of $356,250 of the
February 2004 Debentures was converted into 35,625,000 shares of the Company's
common stock.
In connection with the February 2004 Debentures, the Company also issued
warrants (the "February 2004 Debenture Warrants"). The February 2004 Debenture
Warrants were issued at the first closing and were immediately exercisable
following the first closing at an exercise price of $0.01 per share (see Note
9). The February 2004 Debenture Warrants expire five years from the date of
issuance. By exercising the February 2004 Debenture Warrants, each holder of the
February 2004 Debentures is entitled to purchase a number of shares of common
stock equal to one-half of the number of shares of common stock into which the
shareholder may convert the February 2004 Debentures. The Company has reserved
50,000,000 shares of our common stock, the number of shares that may be
purchased through the exercise of the February 2004 Debenture Warrants.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the February 2004 Debentures, the Company has recorded a
debt discount of $1,000,000. The Company is amortizing the discount using the
effective interest method through February 2006. The Company is immediately
recording the corresponding unamortized debt discount related to beneficial
conversion feature as interest expense and related to detachable warrants as
additional paid-in capital when the related debenture is converted into the
Company's common stock.
On February 13, 2004, the Company also issued warrants to purchase 100,000
shares of the Company's common stock as part of the commission fee in connection
with the February 2004 Debentures. The warrants have an exercise price of $0.01
per share and expire in five years. The Company recorded the value of the
warrant of $2,696 (under the Black-Scholes pricing model) as an issuance cost,
which is included in the deferred financing cost in the accompanying condensed
consolidated balance sheet During the three months ended March 31, 2004, the
Company incurred other issuance costs totaling $109,500 which were all recorded
as deferred financing cost in the accompanying condensed consolidated balance
sheet. The Company is amortizing the deferred financing cost to interest expense
using the straight-line method through February 2006 and recording the remaining
unamortized portion to additional paid-in capital when the related debenture is
converted into the Company's common stock.
During the three and nine months ended March 31, 2004, the Company recorded
interest expense related to the amortization of the debt discount and debt
issuance costs totaling $113,048 and $1,215,522, respectively. During the nine
months ended March 31, 2004, the Company recorded additional paid-in capital
related to the conversion of the debentures of $965,571. At March 31, 2004, the
Company has remaining unamortized debt issuance costs and debt discounts of
$72,470 and $606,415, respectively, associated with $693,750 of convertible
debentures not yet converted.
NOTE 9 - STOCKHOLDERS' DEFICIT
COMMON STOCK
In July 2003, the Company issued 1,000,000 shares of common stock for cash of
$150,000 and a warrant to purchase 1,000,000 shares of the Company's common
stock (see further discussion in the Warrants section below) to a third party.
15
In July 2003, the Company issued 270,430 shares of the Company's common stock
under the 2003 Plan, valued at $81,130 (or $0.30 per share, which is the fair
market value of the stock on the date of issuance), to a consultant for services
performed.
In August 2003, the Company issued 206,000 shares of the Company's common stock
under the 2003 Plan, valued at $48,320 (or $0.23 per share, which is the fair
market value of the stock on the dates of issuance), to two consultants for
services performed.
In August 2003, the Company issued 283,590 shares of the Company's common stock
under the 2003 Plan, valued at $79,405 (or $0.28 per share, which is the fair
market value of the stock on the date of issuance), for settlement of accounts
payable. The Company recorded a loss on settlement of accounts payable of
$19,142 in other expense in the accompanying condensed consolidated statements
of operations for the nine months ended March 31, 2004.
In August 2003, the Company issued 1,500,000 shares of its restricted common
stock to one of its shareholders in full payment of a non-interest bearing
demand promissory note of $112,500 dated July 25, 2003 (see Note 11). Based on
the estimated fair value of the stock issued, the Company recognized interest
expense of $202,500 in the accompanying consolidated statements of operations
during the six months ended December 31, 2003.
In August 2003, the Company issued 127,171 shares of its restricted common stock
to one of its shareholders valued at $26,706 (or $0.21 per share, which is the
weighted average fair market value on the dates the services were performed) for
consulting services performed.
In September 2003, the Company issued 670,773 shares of the Company's common
stock under the 2003 Plan, valued at $113,333 (or $0.17 per share, which is the
fair market value of the stock on the dates of issuance) for consulting services
rendered.
In September 2003, the Company issued 542,513 shares of the Company's common
stock under the 2003 Plan, valued at $70,527 (or $0.13 per share, which is the
fair market value of the stock on the date of issuance), for settlement of
accounts payable. The Company recorded a loss on settlement of accounts payable
of $1,357 in other expense in the accompanying condensed consolidated statement
of operations for the nine months ended March 31, 2004.
In September 2003, the Company committed to issue 100,000 shares of the
Company's common stock valued at $16,000 (or $0.16 per share) to a third party
for finders fees related to the August 2003 Debentures, which was recorded as
part of deferred financing costs (see Note 8). The Company issued the shares in
November 2003.
In November 2003, the Company issued 381,829 shares of the Company's common
stock under the 2003 Plan, valued at $32,948 (or $0.09 per share, which is the
fair market value of the stock on the date of issuance), for settlement of
accrued legal fees. The Company recorded a loss on settlement of accounts
payable of $6,761 in other expense in the consolidated statement of operations
in the nine months ended March 31, 2004.
Certain common stock purchase agreements with certain investors included a
provision in which, if for a period of six months from the purchase of shares,
the Company's common stock closing price for 5 consecutive trading days will be
below $0.15 per share, the Company will issue to the investors additional
shares, whereby the number of shares purchased and the additional shares,
multiplied by $0.10 would be equal to the aggregate purchase price paid. As of
December 31, 2003, the aggregate purchase price paid by these investors totaled
$310,000. For the five consecutive trading days ended October 3, 2003, the
Company's common stock closing price fell below $0.15 per share, requiring the
Company to issue the 1,033,334 shares of common stock to those investors, which
were issued in November 2003. Such shares represent the maximum number of shares
required to be issued by the Company under the provisions of these common stock
purchase agreements.
In November 2003, the Company issued 1,945,476 shares of the Company's common
stock under the 2003 Plan and 93,750 shares of the Company's restricted common
stock, valued at a total of $183,138 (or $0.09 per share, which is the fair
market value of the stock on the dates of issuance), to consultants for services
performed.
16
In November 2003, the Company issued 83,136 shares of the Company's restricted
common stock , valued at $6,651 ( or $0.08 per share, which is the fair market
value of the stock on the date of issuance), in satisfaction of an accounts
payable in the amount of $20,656. The Company recorded a gain on settlement of
accounts payable of $14,005 in other expense in its accompanying condensed
statement of operations.
In November 2003, the Company issued 9,883,333 shares of the Company's
previously registered common stock, pursuant to the conversion of $741,250 (or
$0.075 per share, which is the conversion rate pursuant to the terms of the
August 2003 Debentures) of the Company's August 2003 Debentures (see Note 8).
In November 2003, the Company issued 666,667 shares of the Company's previously
registered common stock for $6,667 in cash in connection with the exercise of
warrants which were issued in connection with the August 2003 Debentures (see
Note 8).
In December 2003, the Company issued 7,449,999 shares of the Company's
previously registered common stock, pursuant to the conversion of $558,750 (or
$0.075 per share which is the conversion rate pursuant to the terms of the
August 2003 Debentures) of the Company's August 2003 Debentures (see Note 8).
In December 2003, the Company issued 7,333,334 shares of the Company's
previously registered common stock for $73,333 in cash in connection with the
exercise of warrants which were issued in connection with the August 2003
Debentures (see Note 8).
In December 2003, the Company issued 663,408 shares of the Company's common
stock under the 2003 Plan and 760,322 shares of the Company's restricted common
stock, valued at a total of $113,898 (or $0.08 per share, which is the fair
market value of the stock on the date of issuance), for legal retainer and
settlement of accrued legal fees. The Company recorded a loss on settlement of
accounts payable of $14,664 in other expense in the consolidated statement of
operations in the nine months ended March 31, 2004.
In December 2003, the Company issued 596,818 shares of the Company's common
stock under the 2003 Plan and 100,000 shares of the Company's restricted common
stock, valued at a total of $51,609 (or $0.07 per share, which is the fair
market value of the stock on the dates of issuance), to consultants for services
performed.
In December 2003, the Company issued 20,000 shares of the Company's common stock
under the 2003 Plan, valued at $1,600 (or $0.08 per share, which is the fair
market value of the stock on the date of issuance), to an employee as additional
compensation.
In January 2004, the Company issued 1,000,000 shares of the Company's common
stock under the 2003 Plan, valued at $20,000 (or $0.02 per share, which is the
fair market value of the stock on the date of issuance) for consulting services
rendered.
In January 2004, the Company issued 3,333,334 shares of the Company's previously
registered common stock for $33,333 in cash in connection with the exercise of
warrants which were issued in connection with the August 2003 Debentures (see
Note 8).
In January 2004, the Company issued 4,595,588 shares of the Company's previously
registered common stock, pursuant to the conversion of $150,000 (or
approximately $0.03 per share which is the conversion rate pursuant to the terms
of the August 2003 Debentures) of the Company's August 2003 Debentures (see Note
8).
In February 2004, the Company issued 14,192,827 shares of the Company's
previously registered common stock and 13,700,000 of the Company's restricted
common stock, pursuant to the conversion of $203,417 and $137,250, respectively
(or approximately $0.01 per share which is the conversion rate pursuant to the
terms of the August 2003 Debentures), of the Company's August 2003 Debentures
(see Note 8).
In February 2004, the Company issued 2,000,000 shares of the Company's
previously registered common stock for $20,000 in cash in connection with the
exercise of warrants which were issued in connection with the August 2003
Debentures (see Note 8).
In March 2004, the Company issued 13,553,877 shares of the Company's previously
registered common stock, pursuant to the conversion of $159,333 (or
approximately $0.01 per share which is the conversion rate pursuant to the terms
of the August 2003 Debentures) of the Company's August 2003 Debentures (see Note
8).
17
In March 2004, the Company issued 35,625,000 shares of the Company's previously
registered common stock, pursuant to the conversion of $356,250 (or $0.01 per
share which is the conversion rate pursuant to the terms of the February 2004
Debenture) of the Company's February 2004 Debentures (see Note 8).
During the three and nine months ended March 31, 2004, the Company amortized
$20,833 and $420,836, respectively, of prepaid consulting expense which is being
amortized over the respective service periods.
STOCK OPTIONS
The Company has a stock option plan (the "2000 Plan"), as amended, that
authorized the issuance of options and shares to acquire up to 2,533,330
registered shares of common stock to officers, employees, directors and
consultants. On February 12, 2003, the Company increased the number of
registered shares reserved for issuance pursuant to the 2000 Plan amendment to
4,233,330 shares. The 2000 Plan allows for the issuance of either incentive
stock options (which can only be granted to employees) and non-qualified stock
options, pursuant to Section 422 of the Internal Revenue Code. Options vest at
the discretion of the Board of Directors as determined at the grant date, but no
longer than a ten-year term. Under the 2000 Plan, the exercise price shall not
be less than fair market value on the date of grant for the incentive stock
options, and not less than 50% of the fair market value on the date of grant for
non-qualified stock options. The number of options under the 2000 Plan available
for grant at March 31, 2004 was 2,055,830.
On April 21, 2003, the Company adopted an incentive equity stock plan (the "2003
Plan") that authorized the issuance of up to 10,000,000 shares of common stock
in the form of options, rights to purchase common stock and stock bonuses, of
which 5,000,000 shares were registered on April 25, 2003, 5,000,000 shares were
registered on June 25, 2003 and 10,000,000 shares were registered on January 22,
2004. The 2003 Plan allows for the issuance of incentive stock options (which
can only be granted to employees), non-qualified stock options, stock awards, or
stock bonuses pursuant to Section 422 of the Internal Revenue Code. Options vest
at the discretion of the Board of Directors as determined at the grant date, but
no longer than a ten-year term. Under the 2003 Plan, the exercise price shall
not be less than fair market value on the date of grant for the incentive stock
options, and not less than 85% of the fair market value on the date of grant for
non-qualified stock options. The number of options under the 2003 Plan available
for grant at March 31, 2004 was 9,271,330.
No options were issued or outstanding during the nine months ended March 31,
2004.
WARRANTS
From time to time, the Company issues warrants pursuant to various employment,
consulting and third party agreements.
During the nine months ended March 31, 2004, the Company:
(i) issued a warrant to purchase 1,000,000 shares of the Company's common stock
at $0.50 per share to a third party. The warrant expires in 5 years and vests
immediately. The common stock purchase warrant agreement also includes a right
by the Company to call any or all shares of the common stock issued under
warrant agreement from the warrant holder for (i) $2.00 per share for the first
500,000 shares and (ii) $3.00 per share for the remaining 500,000 shares through
July 9, 2004. This call right can by exercised by the Company only if the
Company's common stock has a closing price above the call price for 5
consecutive trading days prior to execution of the call right.
(ii) issued a warrant to purchase 750,000 restricted shares of the Company's
common stock at $0.24 per share (the fair market value of the stock on the date
of grant) to one of its officers in connection with his employment agreement and
recorded $0 of compensation expense under APB 25 as the warrant had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
18
(iii) issued, pursuant to the Securities and Purchase Agreement and in
connection with the August 2003 Debenture (see Note 8), warrants to purchase one
share of the Company's common stock for every two shares underlying the
debentures (or 13,333,333 shares of the Company's common stock as of March 31,
2004) at $0.075 per share, expiring in five years. The fair value of the
warrants was recorded as a debt discount (see Note 8). On October 15, 2003, as a
consideration to receiving an early advance of $200,000, the Company reduced the
exercise price of these warrants from $0.075 to $0.01 (see Note 8). As of March
31, 2004, all of these warrants have been exercised for total proceeds of
$133,333 (see Note 8).
(iv) issued a warrant to purchase 200,000 shares of the Company's common stock
as part of the commission fee in connection with the August 2003 Debenture (see
Note 8). The warrant had an exercise price of $0.075 per share and expires in
five years. On October 15, 2003 as a consideration to receiving an early advance
of $200,000, the Company reduced the exercise price of this warrant from $0.075
to $0.01. The Company recorded the revised warrant value of $220,114, using the
Black-Scholes option pricing model, as a debt issuance cost as of March 31, 2004
(see Note 8).
(v) issued, pursuant to the Securities and Purchase Agreement and in connection
with the February 2004 Debenture (see Note 8), warrants to purchase one share of
the Company's common stock for every two shares underlying the debentures (or
50,000,000 shares of the Company's common stock as of March 31, 2004) at $0.01
per share, expiring in five years. The fair value of the warrants was recorded
as a debt discount (see Note 8).
(vi) issued a warrant to purchase 100,000 shares of the Company's common stock
as part of the commission fee in connection with the February 2004 Debenture
(see Note 8). The warrant has an exercise price of $0.01 per share and expires
in five years. The Company recorded the warrant value of $2,696 ,using the
Black-Scholes option pricing model, as a debt issuance cost as of March 31, 2004
(see Note 8).
Certain common stock purchase warrant agreements issued prior to the nine months
ended March 31, 2004 with certain investors include a right by the Company to
call any or all shares of the common stock issued under warrant agreement from
the warrant holder for (i) $2.00 per share for the first 950,000 shares and (ii)
$3.00 per share for the remaining 950,000 shares through June 9, 2004. This call
right can by exercised by the Company only if the Company's common stock has a
closing price above the call price for 7 consecutive trading days prior to
execution of the call right.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
In August 2003, the Company entered into an employment agreement with one of its
officers. The agreement is for a five-year term through July 31, 2008 and
provides for a base salary of $250,000 per annum through October 1, 2003,
$300,000 per annum through October 1, 2004, and an increase of at least 10%
annually until the termination date. The agreement also provides for a sign-up
bonus of $75,000 payable over a seven month period, annual net profit bonus of
1.25% of the Company's net income, issuance of incentive stock options, and
warrant to purchase 750,000 shares of the Company's common stock at $0.24 per
share (fair market value of the stock on the date of grant). Additionally, the
agreement provides for a payment of $500,000 upon sale or merger of the Company,
and severance payment of one year of base salary.
LITIGATION
On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit
against the Company alleging that the Company breached a sublease with Fidelity.
Fidelity is seeking $156,400 in damages plus interest, costs and attorneys'
fees. The Company is in the process of defending this litigation and has
recorded a liability of $156,400 in the accompanying consolidated balance sheet.
On April 7, 2002 the Company entered into an Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 relating to the formulation of
19
nicotine water-based products. This patent is referred to as the "NICO Patent."
The agreement was effective upon the execution and delivery of the assignment of
patent. The assignment of patent was executed and delivered on June 26, 2002.
The Company's first water-based homeopathic nicotinum (nicotine) product was
NICOWater(TM), an odorless and tasteless water-based product that is designed to
relieve the self-diagnosed symptoms of tobacco cravings. In May 2003 the Company
began shipping NICOWater(TM). In May 2003 Mr. Marshall Anluaf Thompson, owner of
the NICO Patent, alleged that he was entitled to terminate the assignment of the
NICO Patent based upon the Company's failure to meet certain conditions required
by the assignment agreement, including performance conditions. The dispute was
heard by a panel of arbitrators who, on January 8, 2004, concluded that Mr.
Thompson was entitled to terminate the assignment agreement. Immediately
following the decision the Company stopped marketing NICOWater(TM). Although the
Company has acquired other products, NICOWater(TM) was the only product sold. On
February 17, 2004, the panel of arbitrators issued a final award for
reimbursement of the opposing party's attorneys fees in the amount of $222,258.
As a result, the Company accrued legal fees of $222,258, which are reflected in
impairment loss in the accompanying consolidated statement of operations for the
nine months ended March 31, 2004. The Company and the opposing parties are
currently negotiating a settlement.
In October 2003, two individuals filed a lawsuit against the Company in
connection with a consulting agreement and a common stock warrant purchase
agreement they allegedly entered into with the Company. Attorneys for the
Company responded disavowing the validity of referenced agreements. On February
27, 2004 a Stipulation For Voluntary Dismissal was filed in the Circuit Court of
Cook County, Illinois dismissing the plaintiffs'action without prejudice,
without costs and without attorney's fees.
On February 3, 2004, the Company received a letter of default and demand for
reimbursement in the sum of $26,870 from AeroFund Financial, with whom the
Company has an accounts receivable financing agreement. The default was caused
by non-payment of invoices to certain customers against which AeroFund had
advanced funds to the Company. The non-payment, in turn, was caused by the
Company's loss of the NICO Patent and the inability of that product to be sold.
In March 2004, the Company made a $10,000 cash payment and recorded an accrued
liability of $16,870 as of March 31, 2004 in the accounts payable and accrued
expenses in the accompanying consolidated balance sheet related to the
reimbursement. AeroFund assured the Company that they would accept cash payment
of the balance due or continue to factor eligible receivables and offset the
balance due them in lieu of advances on the factored receivables. AeroFund also
assured the Company that the financing agreement would remain intact.
The Company is, from time to time, involved in various legal and other
proceedings which arise in the ordinary course of operating its business. In the
opinion of management, the amount of ultimate liability, if any, with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company.
INDEMNITIES AND GUARANTEES
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. The Company indemnifies its directors, officers employees
and agents to the maximum extent permitted under the laws of the State of
Delaware. In connection with a certain facility lease, the Company has
indemnified its lessor for certain claims arising from the use of the
facilities. The duration of these indemnities and guarantees varies and, in
certain cases, is indefinite. The majority of these indemnities and guarantees
do not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. Historically, the Company has not been
obligated to make significant payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
consolidated balance sheet.
NOTE 11 - RELATED PARTY TRANSACTIONS
During the nine months ended March 31, 2003, the Company recorded expense of
approximately $135,000 related to various related parties, including officers
and /or stockholders of the Company, for consulting and other administrative
services and expenses. No such expenses were incurred during the nine months
ended March 31, 2004, mainly because these related parties became employees of
the Company under employment agreements.
20
Also, during the nine months ended March 31, 2004, the Company issued 127,171
shares of its common stock to a stockholder for consulting services valued at
$26,706.
In July 2003, the Company entered into a non-interest bearing promissory note
for $112,500 with one of its shareholders, which was due on demand. In August
2003, the Company issued 1,500,000 shares of its restricted common stock to the
shareholder for a full payment of this promissory note. Based on the estimated
fair value of the stock issued, the Company recognized interest expense of
$202,500 during the nine months ended March 31, 2004 in the accompanying
condensed consolidated statement of operations.
In November 2002, the Company entered into a non-interest bearing note, due on
demand, for a purchase of certain office furniture from one of its officers for
$17,500. The Company repaid this note in full in August 2003.
NOTE 12 - BASIC AND DILUTED LOSS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations for the three and nine
months ended March 31, 2004 and 2003:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator for basic and diluted loss
per common share - net loss $(1,081,677) $ (3,446,669) $ (6,472,968) $ (4,173,089)
============ ============= ============= =============
Denominator for basic and diluted loss
per common share - weighted
average shares 107,503,078 28,261,268 68,761,839 21,619,289
============ ============= ============= =============
Basic and diluted loss per common
share $ (0.01) $ (0.12) $ (0.09) $ (0.19)
============ ============= ============= =============
NOTE 13 - SUBSEQUENT EVENTS
In April 2004, the Company issued 5,625,000 shares of the Company's previously
registered common stock, pursuant to a conversion of $56,250 (or $0.01 per share
which is the conversion rate pursuant to the terms of the February 2004
Debentures) of the Company's February 2004 Debentures (see Note 8).
In April 2004, the Company issued 1,350,000 shares of the Company's common stock
under the 2003 Plan , valued at $9,180 (or $0.0068 per share, which is the fair
market value of the stock on the dates of issuance) for consulting services
rendered.
In April 2004, the Company issued 714,285 (post-reverse-split basis, effective
April 26, 2004) shares of the Company's common stock under the 2003 Plan, valued
at $25,000 (or $0.035 per share, which is the fair market value of the stock on
the dates of issuance) for consulting services rendered.
In April 2004, the Company entered into an Agreement of Sale of Assets with
Xact Aid, Inc., a California corporation ("Seller") to acquire the Xact Aid line
of first aid products for minor injuries ("Xact Aid Products"). The assets
acquired were, including all goodwill appurtenant thereto, (a) inventory; (b)
confidential and proprietary information relating to the Xact Aid Products
("Know-How"); (c) words, symbols and logos identifying and distinguishing Xact
Aid Products ("Trademarks"); (d) registrations and application for Trademarks;
(e) Seller's domain names including source codes, user name and passwords; (f)
21
all designs and copyrights in connection with the Trademarks ("Designs"); and
(g) all records and materials relating to Seller's suppliers and customer list.
In addition, Seller agreed to not use or employ in any manner the names "Xact
Aid" or "Exact Aid" and shall change Seller's name so as not to conflict with
the foregoing restricted names. In full consideration for all the acquired
assets, the Company paid $5,000 in cash at the closing and a promissory note in
the amount of $30,702 payable in equal monthly installments of $5,000 until paid
in full, for a total purchase price of $35,702. Current Xact Aid Products
include wound-specific First Aid Packs for insect bites, minor burns, burns,
scrapes, cuts and sprains which provide materials to clean, treat, dress and
maintain a specific type of minor injury. On April 19, 2004 the Company formed
Xact Aid, Inc., a Nevada corporation and wholly owned subsidiary, for the
purpose of receiving an assignment of the assets acquired by the Company in the
Xact Aid transaction and operating the business of marketing and selling the
Xact Aid Products.
In April 2004, Essex Insurance Company ("Essex") agreed to accept $25,000 in
full payment of any and all premiums due from the Company on the product
liability policy cancelled by the Company in January 2004. Essex agreed to
release the $25,000 letter of credit provided by the Company in return for
receiving the proceeds from a $25,000 certificate of deposit provided by the
Company collateralizing the letter of credit (see Note 3). The Company
anticipates that this transaction will be completed during the month of May
2004.
In April 2004, the Company issued 3,571,429 (post-reverse-split basis, effective
April 26, 2004) shares of its restricted common stock to Timothy J. Owens, the
Company's Chief Executive Officer, in exchange for $100,000 of accrued
compensation due to him. The value of the shares was $125,000 (or $0.035 per
share, which is the fair market value of the stock on the date of issuance). The
Company will record a loss on settlement of accrued compensation of $25,000 in
other expense in accompanying consolidated statements of operations in the
quarter ending June 30, 2004.
In April 2004, the Company entered into a Shares for Debt Agreement with a third
party law firm ("Firm") whereby the Company agreed to issue, on or before May
12, 2004, $50,000 in shares of the Company's common stock, registered pursuant
to the Company's 2003 Plan, as complete settlement for the total outstanding
debt to the Firm. The number of shares shall be calculated by dividing $50,000
by 95% of the average closing price of the Company's common stock for the 10
trading days following the effective date of the Company's 1 for 10 reverse
stock split. The Company's failure to timely deliver these shares shall be
deemed a material breach of this agreement and this agreement shall in such
instance be voidable at the sole option of the Firm. The Company did not deliver
these shares on or before May 12, 2004, and is currently in negotiations to
extend or amend this agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited consolidated balance
sheet as of March 31, 2004, the unaudited consolidated statements of operations
for the three and nine months ended March 31, 2004, and the unaudited
consolidated statements of cash flows for the nine months ended March 31, 2004
and the related notes thereto.
The Company cautions readers that important facts and factors described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this document sometimes have affected, and in the
future could affect, the Company's actual results, and could cause the Company's
actual results during fiscal 2004 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
As reported in the Independent Auditors' Report on our June 30, 2003 financial
statements, the Company has incurred losses from operations that raised
substantial doubt about our ability to continue as a going concern.
22
GOING CONCERN
As a result of an arbitration decision concerning our right to retain patent
rights, on January 8, 2004 we lost the patent rights for our only
revenue-generating product (see Note 1 to Financial Statements). Although we are
now commencing the marketing and sales of our new specific point of care
quick-test products, and we have high expectations for our newly acquired Xact
Aid product line, management recognizes that we must generate additional
resources to fund overhead and for the eventual achievement of revenue and
sustained profitable operations. Our success is dependent upon numerous items,
including the successful development of effective marketing strategies to
customers in a competitive market for new products. We anticipate that certain
products in our new product line may enter the market in the second calender
quarter of 2004 and management believes that revenues generated by these
products will lead to future profitability. In November 2003 we completed an
accounts receivable financing facility with AeroFund Financial which enables us
to finance approved customer invoices to a maximum of $1,500,000 at any given
time. In February 2004 we received a Notice of Default of this financing
agreement caused by the loss of the NICOWater patent and non-payment by certain
Nico customers. On March 8,2004, we received a Default Resolution indicating
AeroFund's preparedness to resume factoring our accounts upon receipt of payment
in the amount of $26,870 and further that they would be willing to factor new
invoices and charge back the default balance out of new receivable proceeds. On
March 10, 2004 we paid AeroFund $10,000, reducing the amount in default to
$16,870. We anticipate utilizing this financing, when and if required, in
connection with future sales of new products. Also, in February 2004 management
successfully obtained additional capital through a $1 million sale and issuance
of convertible debentures, with an original issuance discount of 20% from which
the Company received initial gross proceeds of $500,000 in February 2004 and the
$300,000 balance of the gross proceeds in March 2004. However, no assurance can
be given that the accounts receivable financing facility will remain available
and the balance of the convertible debenture funding will generate sufficient
cash to satisfy our need for additional capital or that other debt or equity
financing will be available to us on satisfactory terms.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern. The accompanying condensed consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of these uncertainties.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant effect on our revenues, income/loss from
operations, and net income/net loss, as well as on the value of certain assets
on our balance sheet. We believe that there are several accounting policies that
are critical to an understanding of our historical and future performance as
these policies affect the reported amounts of revenues, expenses, and
significant estimates and judgments applied by management. While there are a
number of accounting policies, methods and estimates affecting our financial
statements, policies that are particularly significant are stock-based
compensation and revenue recognition. In addition, please refer to Note 1 to the
accompanying condensed consolidated financial statements for further discussion
of our significant accounting policies.
STOCK-BASED COMPENSATION
The Company accounts for non-employee stock-based compensation under Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based
Compensation." SFAS No. 123 defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25, as amended ("APB 25"), "Accounting for Stock Issued to
Employees." Under APB 25, compensation cost, if any, is recognized over the
respective vesting period based on the difference, on the date of grant, between
the fair value of the Company's common stock and the grant price. Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS No. 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
23
REVENUE RECOGNITION
We recognize revenue at the time of shipment of our products to customers.
During the nine-month period ended March 31, 2004 we were still in our initial
stages of selling NICOWater(TM), our only product to customers or distributors.
We ceased selling NICOWater on January 8, 2004, and have had no revenue for the
three-month period ended March 31, 2004.
Pursuant to Staff Accounting Bulletin No. 101, we deferred sales and the related
costs to certain distributors as the payment terms are contingent upon customer
sell-through of product, and therefore collectibility is not reasonably assured.
RESULTS OF OPERATIONS
On February 6, 2004 we entered into a Modification to License Agreement of
Intellectual Property ("Modification Agreement") which modified the License
Agreement of Intellectual Property ("License Agreement") which we entered into
in October 2003, the significant modifications of which were: (a) additional
F.D.A. 510(k) cleared items which the Company has the right to market and sell;
(b) the first year of the term of the License Agreement shall be set to commence
six (6) months after (i) the obtaining of an F.D.A. 510(k) clearance for the HIV
1 & 2 as well as all statutory waiting periods in respect of the same shall have
expired with no restrictive conditions which may have a material adverse effect
on marketing the HIV 1&2 product ; and (ii) VMM has obtained a manufacturer to
manufacture the Products consistent with agreed upon pricing; and (c) revised
sales performance goals and if such goals are not achieved, a right to extend
the duration of the License Agreement upon payment to Licensor of $200,000 for
each year, limited to two one (1) year extensions until sales performance goals
are achieved.
Through the License Agreement, we licensed the exclusive right, worldwide, to
sell and distribute under its brand name, all of the licensor's products
including, but not limited to, specific point of care quick-test devices and
quantitative testing analyzers to the retail, professional and governmental
healthcare markets. These include an FDA cleared urine specimen drug screening
test ("DRUGSTOP") and a disease testing target system platform ("Target System
Diagnostics") to identify Rubella, Herpes, Roravirus, Strep Group A, Infectious
Mononucleosis, Myoglobin, CK-MB, Cardiac Troponin and Pregnancy. In addition, we
are preparing to submit an HIV 1&2 test phase 3 application for clearance by the
FDA. Our future plans include submission of tests for Hepatitis, Prostate PSA
count, West Nile Virus and SARS to the FDA for clearance. The term of the
License Agreement is one year, although so long as we meet certain proposed
sales projections, the agreement will be extended for four additional one-year
terms. After this period, if neither party terminates the License Agreement, it
will be extended for an additional five-year term. The term of the License
Agreement will become effective four months after all required regulatory
clearances have been obtained for certain of the licensed products and after the
licensor has obtained a manufacturer to manufacture the products in accordance
with the terms of the License Agreement, which requires the manufacturing to be
at or below a certain price for the various products.
We ceased the sale of NICOWater(TM) effective January 8, 2004, the date upon
which a panel of arbitrators concluded that the owner of the Nico Patent was
entitled to terminate his assignment agreement with us. On April 7, 2002, we
entered into an Agreement for the Assignment of Patent Rights to U.S. Patent No.
6,268,386 relating to the formulation of nicotine water-based products. This
patent is referred to as the "NICO Patent." The agreement was effective upon the
execution and delivery of the assignment of patent. The assignment of patent was
executed and delivered on June 26, 2002. The Company's first water-based
homeopathic nicotinum (nicotine) product was NICOWater(TM), an odorless and
tasteless water-based product that is designed to relieve the self-diagnosed
symptoms of tobacco cravings. In May 2003 we began shipping NICOWater(TM). In
May 2003 Mr. Marshall Anluaf Thompson, owner of the NICO Patent, alleged that he
was entitled to terminate the assignment of the NICO Patent based upon our
failure to meet certain conditions required by the assignment agreement,
including performance conditions. The dispute was heard by a panel of
arbitrators who, on January 8, 2004, concluded that Mr. Thompson was entitled to
terminate the assignment agreement. Immediately following the decision we
stopped selling and marketing NICOWater(TM). Although we have acquired other
products, NICOWater(TM) was the only product sold. We previously reported that
during the quarter ended December 31, 2003,due to the indecision of the outcome
of the arbitration proceeding, sales were at a minimum. Based upon the
arbitration result on January 8, 2004 and the subsequent cessation of
NICOWater(TM) sales, we credited customers for unsalable merchandise and wrote
off certain accounts receivable, all of the NICOWater (TM) inventory,
unamortized patent rights and prepaid patent royalties, all of which have been
reflected in impairment loss in the accompanying condensed consolidated
statement of operations.
24
Although we anticipate revenue from the sale of new products, we will require
substantial additional financing for sales and marketing, general business
overhead, continuing research and development and obtaining regulatory approval
for and the commercialization of products. There can be no assurances that our
operations will be profitable or that we will be able to obtain sufficient
additional financings when they are needed, or that such financings will be
obtainable on terms satisfactory to us. Our products, to the extent they may be
deemed medical devices or biologics, are governed by the Federal Food, Drug and
Cosmetics Act and by the regulations of various state and foreign governmental
agencies. There can be no assurance that we will maintain or obtain the
appropriate regulatory approvals required to market our products.
During the three-months ended March 31, 2004, we had revenues of $1,298 and
incurred a net loss of $1,081,677 compared to $0 revenue and a net loss of
$3,446,669 during the three-months ended March 31, 2003. Cost of sales for the
three-month period ended March 31, 2004 was $1,075 compared to $0 during the
development stage three-month period ended March 31, 2003. General and
administrative expenses for the three-months ended March 31, 2004 were $891,266
compared to $3,372,580 for the three-months ended March 31, 2003. The decrease
in expenses of $2,481,314 for the current three-month period were due to a
decrease of consulting fees of $3,060,428, which were substantially consulting,
legal and professional fees associated with completing our merger, less
increases for the current period due to salaries of $318,312, professional fees
of $179,015 and other operating expenses of approximately $81,787. During the
three-months ended March 31, 2004 and 2003, we recorded interest expense of
$121,494 and $74,089, respectively, representing accrued interest and
amortization of a discount on convertible debentures.
During the nine months ended March 31, 2004, we had revenues of $191,702 and
incurred a net loss of $6,472,968 compared to $0 revenue and a net loss of
$4,173,089 during the nine months ended March 31, 2003. Additional shipments to
certain pharmacies in the amount of $269,100 during the current nine-month
period, not included as revenue and reflected as deferred revenue, have been
reversed against accounts receivable in our March 31, 2004 balance sheet. The
nine-month period ended March 31, 2003 was part of our development stage
activities.
Cost of sales for the nine-month period ended March 31, 2004 was $109,437
compared to $0 during the nine-month development stage period ended March 31,
2003. General and administrative expenses for the nine months ended March 31,
2004 were $4,307,326 compared to $4,082,616 for the nine months ended March 31,
2003. The increase in expenses of $224,710 for the current nine month period
were due substantially to a reduction in medical, marketing and other advisory
consulting fees of $ 2,304,898 and increases in legal and accounting fees of $
438,594, salaries, commissions and related taxes of $1,067,073, insurance of $
230,255, advertising of $375,541, freight, marketing and public relations of
$181,601, allowance for uncollectible notes receivable of $139,500 and other
operating expenses of approximately $ 97,044. During the nine months ended March
31, 2004 and 2003, we recorded interest expense of $1,463,200 and $90,473,
respectively, representing accrued interest and amortization of a discount on
convertible debentures. Also, during the nine months ended March 31, 2004 we
wrote wrote-off $33,957 of accounts receivable from certain customers, $294,039
of inventory, $44,854 of unamortized intellectual property, $135,023 of prepaid
royalties, $58,459 in sales, less $31,802 in cost of sales, and $222,258 of
accrued legal fees all in connection with the loss of our NICOWater(TM) patent
which occurred as a result of a binding arbitration decision rendered January 8,
2004.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements, particularly as they relate to the acquisition,
introduction and launch of our products and our continued testing and
improvement of our products, have been and will continue to be significant. Our
future cash requirements and the adequacy of available funds will depend on many
factors, including costs of acquiring new products, costs to bring new products
to market, the pace at which we are able to launch products we may acquire,
whether or not a market develops for any product we acquire and, if a market
develops, the pace at which it develops.
While we had begun to earn revenues from the sale of NICOWater(TM), the revenues
we had generated through January 8, 2004, the date upon which we ceased selling
NICOWater(TM), were not sufficient to fund our operations and have ceased due to
25
the loss of the Nico Patent. We must, therefore, rely upon bringing to market
and selling our point of care quick test devices and quantitative testing
products. In February 2004, we obtained additional capital to roll-out our new
products by entering into a financing for the issuance of $1 million of
convertible debentures with an original issuance discount of 20% (the "February
2004 Debentures"). We received gross proceeds of $500,000 from this financing in
February 2004 and the balance of $300,000 gross proceeds in March 2004.
Notwithstanding receipt of the proceeds from the placement of our February 2004
Debentures, there is no assurance that we will not need additional capital to
become profitable. During the next 12 months, if we do not have sufficient
capital to fund our operations, we would have to seek capital through an
offering of our securities or from additional loans. We cannot guarantee that
financing will be available to us, on acceptable terms or at all. If we do not
earn revenues sufficient to support our business and we fail to obtain other
financing, either through an offering of our securities or by obtaining
additional loans, we may be unable to maintain our operations.
We had $178,538 in cash, of which $25,025 collateralizes a letter of credit
issued in favor of an insurance company, $3,306 in taxes receivable and $783 in
prepaid expenses at March 31, 2004. We have written off $135,023 of prepaid
royalties pertaining to NICOWater(TM) sales. An additional $17,361 of prepaid
expense, representing consulting services to be rendered in subsequent periods
pursuant to consulting agreements for which we issued shares of common stock, is
reflected as a reduction of stockholders' equity. Two promissory notes
receivable are reflected at $0 net of allowance for uncollectibility of
$139,500, representing consideration for the assumption of a lease liability. We
have written off deferred costs in the amount of $80,109 which represented the
cost of sales attributable to the $269,100 of product shipments that were
reflected as deferred revenue. Also, in connection with our August 2003 and
February 2004 Debentures, we have deferred financing costs of $72,470 net of
accumulated amortization of $512,840. Our license of intellectual property is
reflected at $358,684.
Current liabilities in the amount of $1,835,848 include accounts payable and
accrued expenses of $948,337,accrued salaries of $502,390, a lease liability of
$156,400 related to assumed pre-merger Moneyzone liabilities, deferred rent of
$6,463 and $222,258 of accrued legal fees in connection with the Nico Patent
arbitration award. Convertible debentures payable in the amount of $87,335 net
of unamortized debt discount of $606,415 related to our placement of convertible
debentures, represent a gross outstanding principal balance of $693,750. We have
written off deferred revenue in the amount of $269,100 which represented
shipments to certain pharmacies through January 8, 2004 (the date upon which
sales of NICOWater(TM) ceased) designated as consigned sales and not included as
revenue. We had negative working capital in the amount of $1,653,221 at March
31, 2004. In April 2004 we, in non-cash settlements of debt, (a) issued
3,571,429 (post-reverse-split basis, effective April 26, 2004) shares of our
restricted common stock to Timothy J. Owens, the Company's Chief Executive
Officer, in exchange for $100,000 of accrued compensation due to him. The value
of the shares were $125,000 (or $0.035 per share, which is the fair market value
of the stock on the date of issuance), and we will record a loss on settlement
of accrued compensation of $25,000 in other expense in accompanying consolidated
statements of operations in the quarter ending June 30, 2004; and (b) in April
2004, we issued 5,625,000 shares of our previously registered common stock,
pursuant to a conversion of $56,250 (or $0.01 per share which is the conversion
rate pursuant to the terms of the February 2004 Debentures) of our February 2004
Debentures.
During the nine months ended March 31, 2004, our net cash position increased by
$111,222 from a beginning balance of $67,316 as of June 30, 2003 to $178,538 as
of March 31, 2004. As of March 31, 2003, we had cash of $15,793. During the nine
and three months ended March 31, 2004, we had a loss from operations of
$6,472,968 and $1,081,677, respectively. Also, during the nine months ended
March 31, 2004, we had no cash flows from investing activities and net cash
flows provided by financing activities were $2,519,903. During this period, our
operating activities utilized net cash of $2,408,681.
Also during the nine months ended March 31, 2004, our trade accounts payable and
accrued expenses increased by $680,394, of which $502,390 represents accrued
salaries, due primarily to our transition from a development stage to an
operating company, and our notes payable decreased by $282,500, due to our
utilization of the August 2003 Debenture funding, as compared to an increase of
$239,784 and an increase of $433,934, respectively, during the same period in
2003.
The Company does not currently have any material commitments for capital
expenditures in the short term other than those expenditures incurred in the
ordinary course of business.
26
Since inception, our operating and investing activities have used all cash
generated from our financing activities. We anticipate continued revenues from
sales of our products, however, we will have an ongoing need to raise additional
capital to meet working capital requirements in order to fund the growth and
development of the business.
SIGNIFICANT EVENTS DURING THE CURRENT THREE-MONTH PERIOD
A. MODIFICATION TO LICENSE AGREEMENT
On February 6, 2004 we entered into a Modification to License Agreement of
Intellectual Property ("Modification Agreement") which modified the License
Agreement of Intellectual Property ("License Agreement") which we entered into
in October 2003, the significant modifications of which were: (a) additional
F.D.A. 510(k) cleared items which the Company has the right to market and sell;
(b) the first year of the term of the License Agreement shall be set to commence
six (6) months after (i) the obtaining of an F.D.A. 510(k) clearance for the HIV
1 & 2 as well as all statutory waiting periods in respect of the same shall have
expired with no restrictive conditions which may have a material adverse effect
on marketing the HIV 1&2 product ; and (ii) VMM has obtained a manufacturer to
manufacture the Products consistent with agreed upon pricing; and (c) revised
sales performance goals and if such goals are not achieved, a right to extend
the duration of the License Agreement upon payment to Licensor of $200,000 for
each year, limited to two one (1) year extensions until sales performance goals
are achieved.
Under the License Agreement we entered into in October 2003,we licensed the
exclusive right, worldwide, to sell and distribute, under its brand name, all of
the licensor's products including, but not limited to, specific point of care
quick-test devices and quantitative testing analyzers to the retail,
professional and governmental healthcare markets. These include an FDA cleared
urine specimen drug screening test ("DRUGSTOP") and a disease testing target
system platform ("Target System Diagnostics") to identify Rubella, Herpes,
Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin, CK-MB, Cardiac
Troponin and Pregnancy. In addition, we are preparing to submit an HIV 1&2 test
phase 3 application for clearance by the FDA. Our future plans include the
submission of tests for Hepatitis, Prostate PSA count, West Nile Virus and SARS
to the FDA for clearance. In consideration for the License Agreement, the
Company released 3,260,760 previously issued shares of its common stock from
escrow. The term of the License Agreement is one year, although so long as the
Company meets certain proposed sales projections, the agreement will be extended
for four additional one-year terms. After this period, if neither party
terminates the License Agreement, it will be extended for an additional
five-year term. The term of the License Agreement will become effective four
months after all required regulatory clearances have been obtained for certain
of the licensed products and after the licensor has obtained a manufacturer to
manufacture the products in accordance with the terms of the License Agreement,
which requires the manufacturing to be at or below a certain price for the
various products.
B. LOSS OF NICO PATENT
On January 8, 2004 a panel of arbitrators concluded that the owner of the Nico
Patent was entitled to terminate his assignment agreement with us. On April 7,
2002, we entered into an Agreement for the Assignment of Patent Rights to U.S.
Patent No. 6,268,386 relating to the formulation of nicotine water-based
products. This patent is referred to as the "NICO Patent." The agreement was
effective upon the execution and delivery of the assignment of patent. The
assignment of patent was executed and delivered on June 26, 2002. The Company's
first water-based homeopathic nicotinum (nicotine) product was NICOWater(TM), an
odorless and tasteless water-based product that is designed to relieve the
self-diagnosed symptoms of tobacco cravings. In May 2003 we began shipping
NICOWater(TM). In May 2003 Mr. Marshall Anluaf Thompson, owner of the NICO
Patent, alleged that he was entitled to terminate the assignment of the NICO
Patent based upon our failure to meet certain conditions required by the
assignment agreement, including performance conditions. The dispute was heard by
a panel of arbitrators who, on January 8, 2004, concluded that Mr. Thompson was
entitled to terminate the assignment agreement. Immediately following the
decision we stopped selling and marketing NICOWater(TM).
C. SALE OF CONVERTIBLE ORIGINAL ISSUE DISCOUNT DEBENTURES
In February 13, 2004, we entered into a Securities Purchase Agreement with
several accredited institutional investors for the issuance of an aggregate of
27
$1,000,000 principal amount convertible debentures with an original issue
discount of 20%. In February and March 2004, we closed on the aggregate
principal amount of $1,000,000 of convertible debentures and received gross
proceeds of $800,000. The debentures are due two years from the date of
issuance. The debentures are convertible at the option of the holders into our
shares of common stock at a fixed conversion price of $0.01 per share. In
connection with the Securities Purchase Agreement, we also issued warrants to
purchase 50,000,000 shares of our common stock at an exercise price of $0.01 per
share to these investors. The term of the warrants is five years. Furthermore we
entered into a Registration Rights Agreement in order to register the
above-referenced securities. We paid a finders fee of 9% and issued 100,000
warrants to such finder. These securities were issued pursuant to an exemption
from registration pursuant to Section 4 (2) of the Securities Act of 1933. On
February 24, 2004 we filed a Form SB-2 with the Securities and Exchange
Commission, which became effective on March 2, 2004, registering 150,100,000
shares underlying the convertible debenture shares, the convertible debenture
warrants and the finder's warrants
D. ONE-FOR-TEN REVERSE STOCK SPLIT
On April 19, 2004 a majority of the Company's stockholders of record on March 8,
2004 approved a one-for-ten reverse stock split pursuant to which each ten
currently outstanding shares of common stock would be automatically converted
into one share of common stock. The principal effects of the reverse stock split
will be that the number of shares of common stock issued and outstanding at
April 26, 2004, the effective date of the reverse stock split will be reduced
from 171,509,060 to approximately 17,150,906. Accordingly, as a result of the
reverse stock split, at April 26, 2004 the Company had approximately 282,849,094
authorized unissued shares. A Certificate of Amendment of Certificate of
Incorporation was filed with the Secretary of the State of Delaware on April 19,
2004. The Company has been assigned a new cusip number and symbol, 747268209 and
QTFI, respectively. The Company's reason for the reverse stock split is to
increase the per share stock price. The Company believes that if it is
successful in maintaining a higher stock price, the stock will generate greater
interest among professional investors and institutions. If the Company is
successful in generating interest among such entities, management anticipates
that the Company's common stock would have greater liquidity and a stronger
investor base. However, there is no assurance that the stock price will increase
or that professional investors and institutions will purchase the Company's
stock and give the stock greater liquidity and a stronger investor base.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
the Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the President and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Security and Exchange Commission's rules and
forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are based on our management's beliefs
as well as assumptions and information currently available to us. When used in
this report, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. These
statements are subject to risks, uncertainties and assumptions, including,
without limitation, the risks and uncertainties concerning our recent
reorganization, our present financial condition, the availability of additional
capital as and when required, general economic conditions and the risks and
uncertainties discussed in the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operation". Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
or projected. We caution you not to place undue reliance on any forward-looking
28
statements, all of which speak only as of the date of this report. You should
refer to and carefully review the information in future documents we file with
the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 8, 2004 a panel of arbitrators concluded that the owner of the Nico
Patent was entitled to terminate his assignment agreement with us. On April 7,
2002, we entered into an Agreement for the Assignment of Patent Rights to U.S.
Patent No. 6,268,386 relating to the formulation of nicotine water-based
products. This patent is referred to as the "NICO Patent." The agreement was
effective upon the execution and delivery of the assignment of patent. The
assignment of patent was executed and delivered on June 26, 2002. The Company's
first water-based homeopathic nicotinum (nicotine) product was NICOWater(TM), an
odorless and tasteless water-based product that is designed to relieve the
self-diagnosed symptoms of tobacco cravings. In May 2003 we began shipping
NICOWater(TM). In May 2003 Mr. Marshall Anluaf Thompson, owner of the NICO
Patent, alleged that he was entitled to terminate the assignment of the NICO
Patent based upon our failure to meet certain conditions required by the
assignment agreement, including performance conditions. The dispute was heard by
a panel of arbitrators who, on January 8, 2004, concluded that Mr. Thompson was
entitled to terminate the assignment agreement. Immediately following the
decision we stopped selling and marketing NICOWater(TM). On February 17, 2004,
the panel of arbitrators issued a FINAL AWARD for reimbursement of the opposing
party's attorneys fees in the amount of $222,258. The Company and the opposing
parties are currently negotiating a settlement.
In October 2003, two individuals filed a lawsuit against the Company in
connection with a consulting agreement and a common stock warrant purchase
agreement they allegedly entered into with the Company. Attorneys for the
Company responded disavowing the validity of referenced agreements. On February
27, 2004 a Stipulation For Voluntary Dismissal was filed in the Circuit Court of
Cook County, Illinois dismissing the plaintiffs'action without prejudice,
without costs and without attorney's fees.
On November 15, 2002, Fidelity Mortgage, Inc. filed a lawsuit against us in the
Supreme Court of the State of New York alleging that we breached a sublease (the
alleged breach occurred prior to the date of the merger with Quicktest 5, Inc.).
Fidelity is seeking $156,400 in damages plus interest, costs and attorneys'
fees. We are defending this litigation.
The Company is, from time to time, involved in various legal and other
proceedings which arise in the ordinary course of operating its business. In the
opinion of management, the amount of ultimate liability, if any, with respect to
these actions will not materially affect the consolidated financial position or
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In February 2004, the Company issued 13,700,000 of the Company's restricted
common stock, pursuant to the conversion of $137,250, (or approximately $0.01
per share which is the conversion rate pursuant to the terms of the August 2003
Debentures), of the Company's August 2003 Debentures.
In February 2004, the Company entered into a Securities Purchase Agreement with
certain investors pursuant to which the Company issued convertible debentures
with an original issue discount of 20% in the total principal amount of
$1,000,000 (the "February 2004 Debentures"). The February 2004 Debentures have a
term of two years. At any time after the original issue date, the February 2004
Debentures may be convertible into shares of the Company's common stock at the
option of the holder. The number of shares of common stock issuable upon a
conversion is determined by the quotient obtained by dividing the outstanding
principal amount of the February 2004 Debentures to be converted by the Set
Price. The Set Price is defined as $0.01. The Company has reserved and
registered 100,000,000 shares of its common stock to cover the conversion of the
February 2004 Debentures.
29
In February 2004, the Company issued, pursuant to the Securities and Purchase
Agreement and in connection with the February 2004 Debenture, warrants to
purchase one share of the Company's common stock for every two shares underlying
the debentures (or 50,000,000 shares of the Company's common stock as of March
31, 2004) at $0.01 per share, expiring in five years. The fair value of the
warrants was recorded as a debt discount.
In February 2004, the Company issued a warrant to purchase 100,000 shares of the
Company's common stock as part of the commission fee in connection with the
February 2004 Debenture. The warrant has an exercise price of $0.01 per share
and expires in five years. The Company recorded the warrant value of $2,696,
using the Black-Scholes option pricing model, as a debt issuance cost as of
March 31, 2004.
The above securities were issued pursuant to an exemption from registration
provided by Section 4 (2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 19, 2004 a majority of the Company's stockholders of record on March 8,
2004 approved a one-for-ten reverse stock split pursuant to which each ten
currently outstanding shares of common stock would be automatically converted
into one share of common stock. The principal effects of the reverse stock split
will be that the number of shares of common stock issued and outstanding at
April 26, 2004, the effective date of the reverse stock split will be reduced
from 171,509,060 to approximately 17,150,906. Accordingly, as a result of the
reverse stock split, at April 26, 2004 the Company had approximately 282,849,094
authorized unissued shares. A Certificate of Amendment of Certificate of
Incorporation was filed with the Secretary of the State of Delaware on April 19,
2004. The Company has been assigned a new cusip number and symbol, 747268209 and
QTFI, respectively.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.11 Certificate of Amendment to Certificate of Incorporation, dated as of
April 19, 2004
10.1 Modification To License Agreement of Intellectual Property
32. Certification Pursuant to Section 1350 of Title 18 of the United States Code
(b) Reports on Form 8-K
On January 8, 2004 the Company filed a Form 8-K relating to the
result of a decision by JAMS in the proceeding titled "In the matter of QT 5,
Inc. vs. Marshall Thompson and Platinum Products", announcing that the Company
will immediately cease marketing NICOWater(TM).
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QT 5, INC.
By: /s/ Steven Reder
-----------------------------------------
Date: May 14, 2004 Steven Reder, President
By: /s/ Norman A. Kunin
-----------------------------------------
Date: May 14, 2004 Norman A. Kunin, Chief Financial Officer
31
State of Delaware
Secretary of State
Division of Corporations
Delivered 03:55 PM 04/19/2004
FILED 03:55 PM 04/19/2004
SRV 040284456 - 3402033 FILE
CERTIFICATE OF AMENDMENT
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF QT 5, INC.
First: The Board of Directors and a majority of the stockholders of QT
5, Inc., a Delaware corporation (the "Corporation"), duly resolved and adopted a
proposed amendment of the Certificate of Incorporation of the Corporation,
declaring said amendment to be advisable. The resolution setting forth the
proposed amendment is as follows:
1. The certificate of incorporation of the Corporation is hereby amended by
inserting the following paragraph at the end of Article Fourth:
"Upon effectiveness of a one-for-ten reverse stock split of the Corporation's
Common Stock, all issued and outstanding shares, as of the effective date of the
reverse, shall be consolidated to the extent of the issued and outstanding
shares of Common Stock. All fractional shares shall be rounded up to the next
whole number of shares. The capital of the Corporation will not be reduced under
or by reason of any amendment herein certified."
Second: That the foregoing resolution was adopted pursuant to a joint
written consent of the Corporation's Board of Directors and majority of
stockholders, such consent of stockholders being in accordance with Section 228
of the General Corporation Law of the State of Delaware, and that the holders of
the necessary number of shares entitled to vote on this matter duly executed
such written consent.
Third: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
Fourth: That the capital of the Corporation shall not be reduced under
or by reason of said amendment.
Fifth: That this amendment shall be effective on April 22, 2004.
IN WITNESS WHEREOF, the undersigned Corporation has caused this
Certificate of Amendment of Certificate of Incorporation to be signed by a duly
authorized officer this 19th day of April 2004.
/s/ Steven Reder
--------------------
By: Steven Reder
Its: President
32
MODIFICATION TO LICENSE AGREEMENT OF INTELLECTUAL PROPERTY
THIS MODIFICATION SUPERSEDES AND REPLACES THAT CERTAIN AGREEMENT DATED
OCTOBER 17, 2003 BY AND BETWEEN THE PARTIES (THE "MODIFIED AGREEMENT")
THIS MODIFICATION TO LICENSE AGREEMENT OF INTELLECTUAL PROPERTY (THE
"AGREEMENT") entered into on the date as appears on the Signature Page of this
Agreement (the "Effective Date") is for the License of Intellectual Property, by
and between
THE PARTIES:
VMM, LLC a Limited Liability Company organized and existing under the
laws of the State of North Carolina (hereinafter referred to as the "LICENSOR";
and
QT 5, INC., a corporation organized and existing under the laws of the
State of Delaware (hereinafter referred to as the "LICENSEE").
RECITALS
WHEREAS, LICENSOR has developed and is the proprietary owner of certain
rights, titles and interest in and to technology and information which it owns,
or lawfully possesses for itself or holds valid licenses from others, which it
considers highly proprietary (the "CONFIDENTIAL INFORMATION") regarding certain
technology, and has developed and is the proprietary owner of certain patented
processes along with certain rights, titles and interests in and to the
technology and information which it owns, or lawfully possesses. The list of
Patents LICENSOR owns is attached as EXHIBIT A. the Patent Pending List is
attached as EXHIBIT B, the FDA 510K Numbers are attached as EXHIBIT C and the
Approved Platform Products is attached as EXHIBIT D.
WHEREAS, LICENSOR has obtained from the U.S. Food and Drug
Administration (the "FDA") Regulatory Clearance for a desktop Analyzer and
Target System Diagnostic System. The Target Diagnostic System has 510K Clearance
from the FDA for Rubella, Herpes, Rotavirus, Pregnancy, Inf. Moronic, Strep
Group A, Myoglobin, CK-MB, Cocaine and Card.Trop-1.
WHEREAS, LICENSOR is in the process of obtaining for HIV 1 & 2
utilizing the Target Diagnostic System Platform a FDA 510K Clearance, but said
clearance has not yet been obtained.
WHEREAS, LICENSOR has obtained from the FDA under the Trade Name and
Devise Name B "DrugStop" FDA No. K991465 - Regulatory Class II approval for
over-the-counter (OTC) sales to the general public. LICENSOR'S rights include
the right to utilize the patent process in it's manufacturing of a home
drug-screening test. LICENSOR provides, if necessary, a confirmation service at
an additional cost to the customer. The FDA approved the device that is a
preliminary screen to detect and identify the presence of drugs within the body
using a urine sample. The device is designed to detect the presence of COC
(Cocaine, Crack), THC (Marijuana, Pot, Cannabis), MOR (Opiates, Heroin,
Morphine), AMP (Amphetamine, Speed, Metamphetamine), PCP (Angel Dust).
33
WHEREAS, the parties to this Agreement acknowledge and agree that this
License shall include all applications of the Target System and Drug Stop
presently utilized or which may be developed in the future by either Party to
this Agreement.
WHEREAS, LICENSEE is a marketing company licensed to Brand Develop,
Manage and provide sales Strategy for all aspects of a full marketing program to
sell and distribute all of LICENSOR'S Intellectual Properties as set forth in
Exhibits A, B, C and D under LICENSOR'S and/or LICENSEE'S Brand Names and under
LICENSOR'S and/or LICENSEE'S trademark or any other Brand Names designated by
LICENSEE.
WHEREAS, LICENSEE desires to obtain the EXCLUSIVE rights from LICENSOR
to sell and distribute all Products under its own brand name or names including
all existing Brand names of LICENSOR.
WHEREAS, it is the intent of the LICENSEE to file with the FDA for
clearance to market and sell all the Products under LICENSOR'S and/or LICENSEE'S
Brand Name or Names. LICENSOR herein agrees to assist, provide documentation,
and join in any and all applications for approval required by the FDA.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and intending to be legally bound,
LICENSOR and LICENSEE hereby agree as follows:
DEFINITIONS
1.1 DEFINITIONS. Whenever used in this Agreement, the Recital above, or
any Exhibit or Schedule hereto, unless otherwise required by the subject matter
or the context, the following terms shall have the meanings respectively
ascribed to them:
"AFFILIATE" means, in respect to any Person, any other Person
that directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with such first Person.
"ANCILLARY AGREEMENTS": None at the present time.
"BEST KNOWLEDGE" means, in respect of a Person, that nothing
has come to the attention of that Person that gives such Person actual knowledge
of the existence or absence of any material information or fact bearing on the
matter.
"CLAIM" means a written notice asserting a breach of a
representation, warranty or covenant specified in the Agreement which shall
reasonably set forth, in light of the information then known to the party giving
such notice, a description of and an estimate (if then reasonable to make) of
the amount involved in such breach or for a claim for injunctive relief.
34
"CONFIDENTIAL INFORMATION" means any confidential or secret
information or data, whether or not reduced to writing, pertaining to the
license product, including scientific or technical knowledge, expertise, skill,
practice, proprietary rights, copyrights, patented or un-patented inventions,
formulas, trade secrets, manufacturing techniques and procedures, analytical
methodology, processes, and data and shall include any and all technology,
pending and existing intellectual property matters, including patenting, and
copyrighting of LICENSOR'S product lines, technologies and inventions, and
future plans and operations done in support of such future plans and operations.
Provided however, that in respect of the obligations of either party
hereunder, the term "Confidential Information" shall not include any information
that (i) is now or subsequently enters the public domain through means other
than direct or indirect disclosure by a party in violation of the terms of this
Agreement or (ii) is lawfully communicated to a party by a third party, free of
any confidentiality obligation, subsequent to the date hereof.
"COMMENCEMENT OF TERM OF AGREEMENT DATE" means the
commencement of the Term of this Agreement as set forth in paragraph 2.2 (b)
below.
"COMPLETION DATE" means the date upon which QT 5, Inc. shall
have received written notice to the effect that the FDA has issued to QT 5, Inc.
a Regulatory Clearance in the Field of Activity
"COMPETING PERSON" means any Person a substantial majority of
whose business is in the same or similar business of LICENSEE and who is a
direct competitor of LICENSEE or any of its Affiliates that is an Affiliate of
such Person
"CONTROL" means (i) when used in respect of any Person, the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through the
ownership of voting securities, by contract or otherwise, and (ii) when used in
respect of any security, the possession, directly or indirectly, of the power to
vote, or to direct the voting of, such security or the power to dispose of, or
to direct the disposition of, such security.
"CONTROLLING PERSON" means, in respect of any business
organization or other legal entity, a Person having control of such business,
organization or entity, and any second Person having Control of such first
Person, and so on in an ascending order up to and including the last Person
having Control of the next preceding Person who is not subject to the Control of
any other Person.
"ENHANCEMENTS" means any change, correction, modification,
improvement, enhancement, addition or revision to the Licensed Products.
35
"FDA CLEARANCE" means an application to the FDA for the sale
or other distribution of FDA 510K small device for professional use and/or OTC
for the Patent Target System process for the HIV I & II immuno assay HIV Phase
III, as well as all other FDA Clearances obtained by either LICENSOR or LICENSEE
pursuant to this Agreement.
"GOVERNMENTAL AUTHORITY" means any governmental body, agency
or official of any county or political subdivision of any country.
"INDEMNIFIED PARTY" means the Person who is entitled to
indemnification for, and to be held harmless in respect of, a claim, cause of
action or any other proceedings, as provided under the terms and subject to the
conditions of this Agreement.
"INDEMNIFYING PARTY" means the party hereto that is obligated
to indemnify and to hold harmless another Person in respect of a claim, cause of
action or any other proceeding, as provided under the terms and subject to the
conditions of this Agreement.
"INTELLECTUAL PROPERTY" means all intellectual and industrial
property and includes (i) inventions and patents for inventions, including
re-issue thereof and continuation and continuations in part, (ii) computer
programs, (iii) copyrights, (iv) designs and industrial designs, (v) trade
marks, and any word, symbol, icon, logo or other indicia or origin adopted or
used in connection with the license or service and (vi) trade secrets and
confidential information described in (d) above.
"INTELLECTUAL PROPERTY RIGHTS" means all intellectual and
industrial property and other proprietary rights in respect of Intellectual
Property, and includes all right to Intellectual Property.
"KNOW-HOW" means "The Confidential Information" and
proprietary information, including any patents, formula, pattern, compilation,
method, invention, technique or process, used in the creation of the Licensed
Product.
"LICENSED PRODUCT" means those certain patents and proprietary
rights of LICENSOR as described in EXHIBITS A, B, C AND D.
"LICENSOR" means VMM LLC, a Limited Liability Company
organized and existing under the laws of the State of North Carolina.
"LICENSEE" means QT 5, INC. a corporation organized and
existing under the laws of the State of Delaware.
"PERSON" means a human being, partnership, association, joint
venture, corporation, legal representative, trustee, trustee in bankruptcy,
receiver or any other legal entity whatsoever.
36
"REGULATORY CLEARANCE" means (a) (i) in the case of a
product, a clearance by the FDA and (ii) in the case of product clearance by the
FDA for the sale or other disposition of the patent target system for its
specific and intended use; or (b) in the event of any change in the regulatory
process, a clearance similar to the foregoing for the sale and distribution of
said product.
"RIGHT OF FIRST REFUSAL" means the right given to LICENSEE of
first refusal as set forth in paragraph 2.2 (c).
"TERM" means the term of this Agreement as set forth in
paragraph 2.2 (a) Term.
"THIRD PARTY CLAIM" means, in respect of the obligations of
an Indemnifying Party hereunder, a claim asserted against, imposed upon or
incurred by the Indemnified Party by any third party.
ADDITIONAL TERMS.2 ADDITIONAL TERMS.2 ADDITIONAL TERMS.2
ADDITIONAL TERMS.2 ADDITIONAL TERMS.2 ADDITIONAL TERMS.2 ADDITIONAL TERMS.2
ADDITIONAL TERMS.2 ADDITIONAL TERMS. The definitions in Section 1.1 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" and
shall be deemed to be followed by the phrase "without limitation." All
references to "party" and "parties" shall be deemed references to the parties to
this Agreement and to a party's successor in title unless the context shall
otherwise require. All references to Sections and Paragraphs shall be deemed
references to Sections and Paragraphs of this Agreement, unless the context
shall otherwise require. All references herein to Schedules and Exhibits shall
be deemed to be references to the Schedule(s) and Exhibit(s) attached to this
Agreement. The terms "this Agreement", "hereof", "hereunder", and similar
expressions refer to this Agreement as a whole and not to any particular Article
or Section or other portion hereof and include any agreement supplemental
hereto. The conjunction "or" shall be understood in its inclusive sense
(and/or).
HEADINGS .3 HEADINGS .3 HEADINGS .3 HEADINGS .3 HEADINGS .3
HEADINGS .3 HEADINGS .3 HEADINGS .3 HEADINGS . The division of this Agreement
into Articles and Sections and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation of this
Agreement.
ARTICLE 2
2.1 GRANTING OF LICENSE.
Subject to the terms and conditions of this Agreement, LICENSOR hereby
grants LICENSEE a right to utilize, sell, or resell all LICENSOR Products as
specified in EXHIBITS A, B, C AND D hereof under LICENSOR'S and/or LICENSEE'S
own Trade Names, Brand Names and Trademark WORLDWIDE. All products Licensed
herein that are specifically designated for professional and the general public
consumption (over the counter) are warranted by LICENSOR to meet any and all
37
government requirements and clearances for sale in the respective professional
and over-the-counter market.
2.2 TERM
(a) The Term of this Agreement shall be for one (1) year commencing as
of the Commencement of Term of Agreement Date (defined below). This Agreement
shall be extended for four (4) additional Terms of one (1) year each on
condition that LICENSEE achieves its Sales Projections after the Commencement
Date. The Sales Projections are attached to this Agreement as Exhibit "E"
("Sales Projections") and incorporated herein by reference and shall commence as
of the Commencement of Term of Agreement Date defined below. All of the
provisions of this Agreement shall continue in full force and effect during the
extension period and any subsequent extension periods.
This Agreement shall be automatically extended for an additional five (5) year
period so long as neither party causes a termination of this Agreement pursuant
to the terms hereof.
(b) COMMENCEMENT OF TERM OF AGREEMENT DATE: The Effective Date of
this Agreement is the date of its execution, however, the Commencement of the
Term of Agreement Date starts as set forth in this paragraph 2.2 (b) Both
Parties recognize that the Product for HIV 1 &2 utilizing the Target Diagnostic
System Platform has not received a FDA 510K Clearance. It is the intent of the
Parties that the First year of the Term of this Agreement shall be set to
commence six (6) months after (a) the obtaining of a FDA 510K Clearance for the
HIV 1 &2 as well as all statutory waiting periods in respect of the same shall
have expired and no such clearances shall contain any conditions, restrictions
or requirements which LICENSEE reasonably determines would either before or
after an effective time period and has a material adverse effect on LICESSEE in
marketing the HIV 1 & 2 Product contemplated by this Agreement, taken as a whole
and (b) LICENSOR has obtained a manufacturer to manufacturer said Products
[consistent with the Pricing of the Product] as set forth in Sales Projections
attached as Exhibit "E". Both Parties agree to use their best efforts to obtain
said FDA 510K Clearance for HIV 1 & 2 Target Diagnostic System and obtain the
best manufacturing price for the Product.
(c) PERFORMANCE OF SALES PROJECTIONS: In the event that LICENSEE
fails to perform the Sales Projections as set forth in Exhibit "E" after the
Commencement Date, LICENSEE shall have the right to extend the duration of this
Agreement, as set forth above, upon the payment to LICENSOR of $200,000, for
each year, limited to two One (1) year extensions for a total of Two (2) years
until said Sales Projections are achieved. In the event that any specific
product contained within this Agreement does not, after best efforts attempt by
the LICENSEE, meet acceptable levels of sales as reflected by the Sales
Projections attached herein (whether by obsolesce of design, by non competitive
manufacturing costs or FDA rejection of approvals ), LICENSEE may exclude that
product from it's Sales Projections without invalidating the exclusivity of the
rest of the product licenses granted herein.
38
LICENSOR grants to LICENSEE the right to sell and market any products
that have been cleared with a 510K FDA clearance and such sales shall be
included in achieving the Sales Projections.
(d) RIGHT OF FIRST REFUSAL: LICENSOR herein shall have the right to
sell, assign and transfer its Patent rights to any of the Patents listed in this
Agreement. In the event that LICENSOR receives an offer to purchase said Patent
rights and decides to sell said rights, LICENSOR shall first offer the right to
purchase to LICENSEE for the price and the terms of the intended sale. LICENSEE
shall have thirty (30) days from the date that LICENSOR delivers to LICENSEE a
copy of the offer in which to accept or reject. Failure by LICENSEE to notify
LICENSOR shall be construed as a refusal of LICENSEE to exercise its right of
first refusal and LICENSOR shall have the right to sell said Patents.
2.3 PRIVATE LABEL RESELLER
LICENSOR acknowledges that it is a PRIVATE LABEL RESELLER (PLR) and
that LICENSEE shall purchase the products under this Agreement for resale in the
professional and over the counter (retail) market together with any and all
direct or indirect markets that LICENSEE shall develop as part of its marketing
program. The LICENSEE shall have the following rights:
(a) The right to utilize as a private label any and all label
approved by the FDA for LICENSOR with LICENSEE'S name, logo or any other label
thereafter selected by LICENSEE and approved by the FDA. In that connection,
LICENSOR shall provide LICENSEE with copies of all documents provided to the FDA
in which it obtained approval for any of the Licensed Products and join with
LICENSEE, if necessary, in any application for said approval for LICENSEE'S
label approval.
(b) Re-market to unaffiliated third party users in the
regular course of business, and/or;
(b) LICENSEE may include LICENSOR product(s) as part of
an integrated set of products sold direct (retail
outlets) or through third parties as a comprehensive
product service or consumer solution.
2.4 USE OF TRADEMARK
LICENSOR hereby grants LICENSEE the right to use and display LICENSOR'S
trademarks, service marks, and trademarks and trade names that are applicable to
LICENSOR Product(s) under this private labeling agreement. LICENSEE may use any
of LICENSOR'S Marks as part of its corporate, trade or other business name.
39
ARTICLE 3
3.1 PRODUCTS
LICENSOR'S Licensed Products are specified in EXHIBITS A, B, C, AND D
attached hereof.
40
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE LICENSOR
To induce the LICENSEE to acquire the License rights, the LICENSOR
hereby makes the following representations and warranties:
4.1 ORGANIZATION. STANDING AND QUALIFICATIONS . LICENSOR, VMM, LLC is a
Limited Liability company, duly organized, validly existing and in good standing
under the laws of the State of North Carolina. The LICENSOR has full power and
authority to carry on its business as it is now being conducted and to own the
property and assets it now owns. The Individual LICENSORS have full rights to
enter into this Agreement.
4.2 AUTHORIZATION . The LICENSOR that is a LLC has full power and
authority to execute and deliver this Agreement to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary action required by law, the LICENSOR'S Articles or
otherwise to be taken by the LICENSOR to authorize the execution and delivery of
this Agreement and the agreements specified herein or the consummation of the
transactions contemplated hereby and thereby.
4.3 BINDING AGREEMENTS. This Agreement constitutes the legal, valid and
binding obligations of the LICENSOR, enforceable in accordance with its terms.
4.4 NO VIOLATION. Neither the execution and delivery by the LICENSOR of
this Agreement nor the consummation by the LICENSOR of the transactions
contemplated hereby will (a) violate any provision of the Articles of VMM, LLC;
(b) conflict with or violate any statute, law, regulation, rule, order, judgment
or decree of any court or Governmental Authority binding upon or applicable to
the LICENSOR. The LICENSOR is not a party to, nor is it bound by, and the
LICENSOR Product Line are not subject to, any agreement or commitment that
prohibits the execution and delivery by the LICENSEE of this Agreement or the
consummation of the transactions contemplated hereby.
4.5 LITIGATION. No action, suit, inquiry, audit, or to the Best
Knowledge of the LICENSOR no proceeding or investigation, by or before any court
or governmental or other regulatory or administrative agency or commission is
currently pending or, to the Best Knowledge of the LICENSOR threatened, against,
involving or arising in connection with the LICENSOR'S Product Line or that
questions or challenges the validity of this Agreement or any action taken or to
be taken by the LICENSOR pursuant to this Agreement.
4.6 RIGHT TO LICENSE LICENSOR'S PRODUCT LINE. LICENSOR has the right to
license the intellectual property as described in Exhibits A, B, C, and D and
the right to manufacture Products utilizing said intellectual property rights
and patents.
41
4.7 INTELLECTUAL PROPERTY RIGHTS.
To the Best Knowledge of the LICENSOR, the License rights and
the use thereof will not infringe upon or violate any Patent and Intellectual
Property Right of any Third Person. Further, LICENSOR herein agrees that it
shall renew any and all patents required to insure the rights of both LICENSOR
and LICENSEE under this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE LICENSEE
To induce the LICENSOR to enter into this License Agreement with the LICENSEE,
the LICENSEE hereby represents and warrants to the LICENSOR as follows:
5.1 CORPORATE ORGANIZATION AND GOOD STANDING. The LICENSEE is a
Corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware.
5.2 AUTHORIZATION. The LICENSEE has full corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action required by law, the
LICENSEE'S Articles of Incorporation, or otherwise to be taken by the LICENSEE
to authorize the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby.
5.3 BINDING AGREEMENTS. This Agreement constitutes the legal,
valid and binding agreements of the LICENSEE enforceable in accordance with its
terms.
5.4 NO VIOLATION. Neither the execution and delivery by the LICENSEE of
this Agreement nor the consummation by the LICENSEE of the transactions
contemplated hereby, will (a) violate any provisions of the Articles of
Incorporation of the LICENSEE; (b) conflict with or violate any statute, law,
regulation, rule, order, judgment or decree of any court or Governmental
Authority binding upon or applicable to the LICENSEE or by which the property or
assets of the LICENSEE are bound or affected.
5.5 LITIGATION. No action, suit, inquiry, audit, or to the Best
Knowledge of the LICENSEE no proceeding or investigation, by or before any court
or governmental or other regulatory or administrative agency or commission is
currently pending or, to the Best Knowledge of the LICENSEE threatened, against,
involving or arising in connection with the LICENSEE entering into this
Agreement or that questions or challenges the validity of this Agreement or any
action taken or to be taken by the LICENSEE pursuant to this Agreement.
42
ARTICLE 6
COVENANTS OF THE PARTIES
6.1 COOPERATION.
(a) Each party shall cooperate reasonably with the other in
preparing and filing all notices, applications, reports and other instruments
and documents which are required by any statute, rule, regulation or order of
any Governmental Authority in connection with the transactions contemplated by
this Agreement, including the Private Label of the licensed Product with the
FDA.
(b) LICENSEE agrees not to use or exploit LICENSOR'S Product
Line in a manner that can be reasonably foreseen to bring it into disrepute or
materially diminish the value of exploiting such Product Line in connection with
the marketing, promotion, distribution, sale, licensing or use of the Products.
ARTICLE 7
CONFIDENTIAL INFORMATION
7.1 CONFIDENTIALITY OF INTELLECTUAL PROPERTY OF LICENSOR AND
CUSTOMER PROPRIETARY MARKETING DATA OF LICENSEE
It is expressly understood and agreed that all intellectual property
and data furnished to LICENSEE by LICENSOR or any information or data regarding
customers or data provided by LICENSEE to LICENSOR and such data as may be
provided by one to the other regarding and including that required for the
proper marketing, sale or re-sale of its products, all of which constitutes a
valuable intellectual proprietary property and trade secret(s) of LICENSOR or
LICENSEE, as the respective party providing such data has divulged. Providing
such material, under any circumstances, shall not constitute a grant of any
right of reproduction, manufacturing, distributing, resale, re-licensing (except
as later set forth) or ownership in any manner whatsoever. Both LICENSEE and
LICENSOR agree as follows:
(a) To observe complete confidentiality with regard to all aspects of
such data including, without limitation, agreeing not to disclose or otherwise
permit any other person or entity access to, in any manner, any such data in any
form whatsoever. Such disclosure or access shall only be permitted to an
employee of LICENSOR or LICENSEE as the case might be of the Marketing Plans,
Business Relationships, Automated Customer Service (CRM) Systems and any other
proprietary business or client information as permitted and on the terms and
conditions defined in this License Agreement;
(b) To ensure that both LICENSOR and LICENSEE and their respective
employees, agents, representatives, independent contractors, customers, sub
contractors or sub LICENSEE'S and business invitee's and guests are advised of
the confidential nature of such data and to insure by agreement or otherwise
that they are prohibited from copying or revealing, for any purpose whatsoever,
the contents of the data;
43
(c) LICENSEE shall not alter or remove any copyright or proprietary
rights notice of identification, which indicates LICENSOR'S ownership of the
Product. LICENSOR shall not alter or remove any proprietary rights, notice of
identification, which indicates LICENSEE'S confidential data, including customer
data:
(d) Each respective party agrees to notify the other promptly and in
writing of the circumstances surrounding any possession, use or knowledge of any
such data of which either LICENSOR or LICENSEE has knowledge by any person or
entity other than those authorized;
(e) Each respective party agrees to take any and all actions reasonably
necessary or desirable to ensure continued confidentiality and protection of all
such data and to prevent access to such data by any person or entity not
authorized by this section.
Should this Agreement terminate for any reason (including without
limitation, breach by LICENSEE of any of its obligations hereunder), the
confidentiality provisions of this Agreement shall survive the termination of
this Agreement and shall continue to be binding upon both LICENSOR and LICENSEE.
ARTICLE 8
PROTECTION OF THE LICENSOR'S RIGHTS
8.1 NOTICE OF INFRINGEMENT OR UNAUTHORIZED USE. LICENSEE shall promptly
inform LICENSOR in writing of any act of infringement, unauthorized use, piracy
or misappropriation of, or breach of any confidentiality agreement pertaining
to, or in any way affecting, the Licensed Property, or any Enhancements thereto,
that are discovered by LICENSEE or are otherwise brought to its attention. Each
party shall promptly inform the other party in writing of any notice of claim or
action, or any threatened claim or action, against either party by any third
Person arising out of in any way related to the Licensed Product.
8.2 INSTITUTION, PROSECUTION AND DEFENSE OF CLAIMS.
(a) (i) Promptly following the delivery to the LICENSOR of
notice from the LICENSEE of any act of any infringement, unauthorized use,
piracy or misappropriation of, or breach of any confidentiality agreement or
affecting the Licensed Property, or, in the case where such infringement,
unauthorized use, piracy misappropriation or breach is discovered by the
LICENSEE or is otherwise brought to its attention and the LICENSEE provides to
the LICENSOR written notice thereof, then promptly following the delivery of
such notice to the LICENSOR, the LICENSOR shall take such steps as shall be
necessary in order to protect the LICENSEE and the LICENSOR'S rights with
respect to the said Licensed Property, respectively, including, but not limited
to, instituting or authorizing others to institute any claim, suit or proceeding
at law or in equity arising out of or related to the infringement, unauthorized
use, piracy or misappropriation of, or breach of any confidentiality agreement
pertaining to, or in any way affecting the Licensed Property.
(ii) The institution, prosecution, maintenance and control of
any claim, suit or proceeding at law or in equity arising out of or related to,
or in any way affecting the Licensed Property shall be subject to the direction
44
and control of the LICENSOR, at its sole cost and expense, and any and all sums
that may be received, obtained, collected or recovered in any such claim, suit
or proceeding, whether by decree, judgment, settlement or otherwise, shall be
the sole and exclusive property of the LICENSOR.
(b) If requested by LICENSOR, LICENSEE shall join the LICENSOR as, a
party complainant in any such claim, suit or proceeding.
(c) LICENSOR shall defend, at its own expense, any claim that a
Third-Party shall institute effecting the Licensed Product granted to the
LICENSEE herein. LICENSEE shall cooperate fully in the defense of any such
claim, suit or proceeding against any party by a third Person, brought in
connection with, arising out of or related to the Licensed Property, and each
party shall execute such documents and take such actions as may be reasonably
requested by the other party and consistent with the rights and obligations of
the parties hereunder.
(d) LICENSOR shall indemnify LICENSEE for any costs, damages, or other
expenses suffered by LICENSEE in connection with any Third-Party claiming that
said Third-Party is the owner or has rights to the Licensed Product licensed to
LICENSEE.
(e) LICENSEE may, in its sole discretion, and with the consent of
LICENSOR, undertake to institute and prosecute any claim, suit or proceeding at
law or in equity arising out of or related to, or in any way affecting the
Licensed Property in which case it shall be subject to the direction and control
of the LICENSEE, at its sole cost and expense, and any and all sums that may be
received, obtained, collected or recovered in any such claim, suit or
proceeding, whether by decree, judgment, settlement or otherwise, shall be the
sole and exclusive property of the LICENSEE. If requested by LICENSEE, LICENSOR
shall join the LICENSEE as a party complainant in any such claim, suit or
proceeding
ARTICLE 9
INDEMNIFICATION
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS. Except as
otherwise expressly provided herein, all representations and warranties made by
any party in this Agreement shall survive from and after the date hereof and
shall continue in effect for a period of two (2) years from the date hereof, and
all covenants made by any party in this Agreement shall survive indefinitely
unless otherwise terminated by the parties. Any right of indemnification
pursuant to this Article 13 in respect of a claimed breach of any
representation, warranty or covenant shall expire at the date of expiration of
the representation, warranty or covenant claimed to be breached (the "Expiration
Date"), unless on or prior to the Expiration Date a Claim has been made against
the party from whom indemnification is sought. If a Claim is timely made, it may
continue to be asserted beyond the Expiration Date of the representation,
warranty or covenant to which such Claim relates.
9.2 INDEMNIFICATION.
(a) The LICENSOR hereby agrees to indemnify and hold harmless
LICENSEE from and against all Damages asserted against, imposed upon or incurred
45
by LICENSEE, directly or indirectly, by reason of or resulting from, any breach
or inaccuracy of any representation, warranty or covenant of the LICENSOR set
forth in this Agreement.
(b) The LICENSEE hereby agrees to indemnify and hold harmless
LICENSOR from and against all Damages asserted against, imposed upon or incurred
by LICENSOR, directly or indirectly, by reason of or resulting from any breach
or inaccuracy of any representation, warranty or covenant of the LICENSEE set
forth in this Agreement.
9.3 LIMITATION OF INDEMNIFICATION. LICENSOR herein shall be
obligated to indemnify LICENSEE for only such Third-Party Claims that are
established by a court judgment or order against LICENSEE involving and limited
to the Proprietary Patent(s) or any Enhancements thereto. The obligations and
liabilities of LICENSOR to indemnify LICENSEE shall be subject to the following
terms and conditions:
(a) LICENSOR shall indemnify and save LICENSEE harmless from
all liability for actual infringement of any Third-Party Patent(s) claimed by
said Third-Party to be the Patent(s) used and developed by LICENSOR. And,
LICENSOR shall indemnify and save LICENSEE harmless from and against all costs,
counsel fees, expenses and liabilities incurred in or about any claim of or
action for such infringement; provided however, that LICENSEE shall promptly
notify LICENSOR, in writing of said Third-Party Claim and transmit to LICENSOR
all papers served on LICENSEE in any suit involving such claim of infringement,
and provided further, that LICENSEE permits LICENSOR to have entire charge and
control of the defense of any such suit.
(b) LICENSEE shall provide LICENSOR with all records and
documents within the LICENSEE'S possession, custody, or control relating to any
Third-Party Claim. Nothing in this provision shall be deemed to constitute a
waiver of any attorney-client, work-product or joint defense privilege.
(c) LICENSOR'S indemnity obligation set forth in this Section
shall survive the termination or expiration of this Agreement with respect to
the Third-Party's Claim of rights to the Proprietary Patent(s) of LICENSOR which
occurs during the Term.
ARTICLE 10
TERMINATION
10.1 TERMINATION OF THIS AGREEMENT
If either party breaches a material provision of this Agreement and
fails to cure such violation within thirty (30) days after written notice of
said breach has been mailed by the other party, this Agreement shall terminate.
Upon termination, the terms and conditions herein will continue to apply to
LICENSOR Products owned by LICENSEE. If any outstanding debts are owing to
either party by the other, these amounts shall become due and payable
immediately.
46
(a) LICENSEE'S DEFAULT. If any of the following events occur,
LICENSEE shall be in default and LICENSOR shall have the right to immediately
terminate this Agreement upon written notice to LICENSEE.
If LICENSEE ceases to function as a going concern, makes an assignment
for the benefit of creditors, files a petition in bankruptcy, permits a petition
in bankruptcy to be filed against it, or admits in writing its inability to pay
its debts as they mature or if a receiver is appointed for a substantial part of
its assets;
LICENSEE ceases to carry on the business of a LICENSEE of LICENSOR'S
Products;
(b) LICENSOR'S DEFAULT. If any of the following events occur,
LICENSOR shall be in default and LICENSEE, at its option, shall have the right
to terminate this Agreement upon thirty (30) days written notice to LICENSOR.
LICENSOR ceases to function as a going concern, makes an assignment for
the benefit of creditors, files a petition in bankruptcy, permits a petition in
bankruptcy to be filed against it, or admits in writing its inability to pay its
debts as they mature or if a receiver is appointed for a substantial part of its
assets;
(c) OBLIGATIONS ON TERMINATION. Upon termination of this
Agreement for any reason whatsoever, LICENSEE and LICENSOR shall perform each
and all of the following obligations, all of which shall survive such
termination:
(i) LICENSEE shall discontinue the use of any LICENSOR trade or service
Marks.
(ii) LICENSEE will promptly refer to LICENSOR the details of any verbal
or written inquiries LICENSEE may receive regarding any of LICENSOR'S
Products, and, in the case of written inquiries, will provide copies
thereof to LICENSOR;
(iii) LICENSEE shall do all other things as LICENSOR may reasonably
request for the purpose of terminating LICENSEE'S business and
contractual arrangements with LICENSOR and effecting an orderly
transition of sales and/or service from LICENSEE to LICENSOR.
ARTICLE 11
CONSIDERATION
11.1 CONSIDERATION FOR EXCLUSIVE LICENSE.
Upon the execution of the Modified Agreement, LICENSEE issued
to LICENSOR Two Million Two Hundred Sixty Thousand Six Hundred (2,260,600)
restricted shares of LICENSEE'S ( Common Stock in addition to One Million One
Hundred Sixty (1,000,160) restricted shares of LICENSEE'S Common Stock
previously issued to Victor Parker. Therefore, the total stock consideration is
Three Million Two Hundred Sixty Thousand Seven Hundred Sixty (3,260,760) shares
47
(the "Shares"). Said Shares represent the consideration paid by LICENSEE to
LICENSOR for the exclusive rights granted under this Agreement
REMOVAL OF LEGEND LICENSEE shall remove any legend on the Shares within
ten (10) days of the qualifying date for removal of such legends in compliance
with Securities and Exchange Commission requirements.
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 NOTICES
(a) All notices, request, demands and other communications
which are required or may be given pursuant to the terms of this Agreement shall
be in writing and shall be deemed delivered (i) on the date of delivery when
delivered by hand; (ii) on the date of transmission when sent by facsimile
transmission during normal business hours with telephone confirmation of
receipt; (iii) on the next business day after transmission when sent by
facsimile transmission after normal business hours; (iv) two (2) days after
dispatch when sent by a reputable courier service that maintains records of
receipt or (v) five (5) days after dispatch when sent by registered mail,
postage prepaid, return=receipt requested; provided that, in any such case, such
communication is addressed provided in the immediately following paragraph (b).
(b) All notices, request, demands and other communications,
which are required or may be given pursuant to the terms of this Agreement shall
be addressed as follows:
(i) If to LICENSOR.
VMM, LLC
2929 Vail Avenue
City of Commerce
California 90040.
Telephone: (323) 721 8552
Facsimile: (323) 721 8554
(ii) If to LICENSEE.
QT 5, INC.
Lindero Canyon Road
Suite 120
Westlake Village, CA 91362
Telephone: 818 338 1510
Facsimile: 818 338 1551
Or to such other address as any party shall have designated by notice in the
foregoing manner to the other parties.
48
12.2 COMPLIANCE WITH LAWS. In connection with the License granted
herein and the consummation of the transactions contemplated hereby and the
performance by a party of its obligations hereunder, each of the LICENSOR and
the LICENSEE shall comply with all applicable laws, requirements, rules,
regulations and standards of Governmental Authorities of any pertinent
jurisdiction so that neither of the parties shall be subject to any fines or
penalties; or violate any laws or regulations affecting the lease, license and
sale of the Products contemplated herein.
12.3 AUTHORITY TO CONTRACT AND PERFORM. Both LICENSOR and LICENSEE
represents that they each respectively have full right and authority to enter
into this Agreement and to perform its obligations and that it has not made and
will not make any contract or commitment contrary to the terms of this
Agreement.
12.4 ETHICS AND COMPLIANCE WITH LAW. Both LICENSOR and LICENSEE
covenant each with the other, that they will maintain the highest ethical
business standards and avoid and refrain from being involved in any activities
which may in any manner disparage the LICENSOR'S or LICENSEE'S Products.
Furthermore in the conduct of its business, both LICENSOR and LICENSEE will
comply with all applicable Federal, State and local laws, rules and regulations.
12.5 CHOICE OF LAW. The validity, construction and performance of the
Agreement shall be interpreted, construed and enforces according to the laws of
the State of California.
12.6 [INTENTIONALLY OMITTED]
12.7 ENTIRE AGREEMENT. This Agreement (together with the Schedules and
the Exhibits expressly identified in this Agreement) constitutes the entire
agreement of the parties with respect to the subject matter hereof and thereof,
and supersedes all prior agreements and understandings of the parties, oral and
written, in respect of such subject matter.
12.8 BINDING EFFECT. This Agreement binds and insures the benefit of
the parties hereto, their respective heirs, representatives, successors or
assigns.
12.9 PARAGRAPH HEADINGS. The paragraph headings in this Agreement are
for convenience only, and they have no substantive or interpretive effect.
12.10 WAIVER. Neither modification of this Agreement nor any waiver of
any term or condition hereof shall be effective unless it is in writing and
signed by the parties hereto. If either party fails to meet the requirements of
any term of this Agreement or waives any breach hereunder, that failure or
waiver will neither prevent a subsequent enforcement of such term nor be deemed
a waiver of any subsequent breach.
12.11 PARTIAL INVALIDITY. In the event of the determination that any
terms, covenant or condition of this Agreement is of no force or effect, the
remaining terms, conditions or covenants contained herein shall not be affected
thereby, and the obligations of the parties hereto with respect to the
49
performance of the remaining terms, covenants and conditions shall continue in
full force and effect.
12.12 ASSIGNMENT. Either Party may assign this Agreement.
12.13 INDEMNITY. LICENSOR and LICENSEE agree to each hold the other
free and harmless from any and all claims, damages and expenses of any kind or
nature whatsoever: (1) arising from acts of the other; or (2) as a direct or
indirect consequence of termination of this Agreement in accordance with its
terms. LICENSOR agrees to hold LICENSEE free and harmless from any and all
claims, damages, and expenses of any kind or nature including attorneys fees and
costs arising out of any claim of patent or other infringements by a third party
as it relates to the use by LICENSEE of product(s) supplied to LICENSEE by
LICENSOR. Further, LICENSEE is relying on the representations of LICENSOR that
it has the approval from the FDA for over-the-counter sales to the general
public. In that regard, LICENSOR agrees to hold LICENSEE free and harmless from
any and all claims, damages, and expenses of any kind or nature including
attorney fees and cost arising out of any claim from the FDA or any other
governmental agency regarding the sale of the product to the public. This
indemnification shall be void and of no force or effect if LICENSEE fails to
obey or comply with any reasonable instruction or limitation imposed by LICENSOR
or the FDA. This section shall inure to the benefit of anyone who buys
product(s) from LICENSEE that was supplied by LICENSOR.
12.14 EXECUTION IN COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
12.15 RELATIONSHIP OF THE PARTIES. LICENSEE is an independent
contractor and private labeler. Nothing in this Agreement will be deemed or
construed to create an agency, partnership, joint venture or employment
relationship between LICENSOR and LICENSEE. LICENSEE will, under no
circumstances, represent itself directly or by implication, as LICENSOR'S agent
or employee, nor will LICENSEE purport or attempt to bind LICENSOR to any
liability or obligation whatsoever. Nothing contained herein will impose any
liability on LICENSOR in connection with the operation of LICENSEE'S business,
or for any expenditure, obligation or liability incurred by LICENSEE in
performing or preparing to perform, any of its obligations under this Agreement.
The credit risk with respect to sales by LICENSEE to its customers will be borne
by LICENSEE, and the collectibles of any amount due LICENSEE will in no respect
eliminate, reduce or otherwise affect an obligation of LICENSEE to LICENSOR.
12.16 AMENDMENT. This Agreement may only be modified, supplemented
or amended by a written instrument executed by the parties to it.
12.17 CONDITIONS PRECEDENT. Each and every provision of this Agreement
shall be contingent and become effective only upon the execution and delivery of
the Intellectual Property hereinabove described.
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12.18 SCHEDULES. EXHIBITS AND OTHER AGREEMENTS.
(a) The Schedules, Exhibits and other agreements specifically
referred to in, and delivered pursuant to, this Agreement are an integral part
of it. Any disclosure that is made in any of the Schedules delivered pursuant to
this Agreement shall be deemed responsive to any other applicable disclosure
obligation hereunder.
(b) The following are the Exhibits and Schedules annexed hereto
and incorporated by reference and deemed to be part hereof:
(i) Exhibits:
Exhibit A - List of Patents of Licensor
Exhibit B - Patent Pending List
Exhibit C - FDA 510K Numbers
Exhibit D - Approved Platform Products
Exhibit E - Sales Projections
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SIGNATURE PAGE
IN WITNESS WHEREOF, LICENSOR and LICENSEE have executed this Agreement
this ________ day of February 2004.
LICENSOR LICENSEE
VMM, LLC QT 5. INC.
5655 LINDERO CANYON RD. # 120
WESTLAKE VILLAGE, CALIFORNIA, 91362
BY BY:
------------------------------ -------------------------------
Victor Parker Timothy J. Owens
Its: Managing Member Its: CEO
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EXHIBIT A
TARGET SYSTEM AND DRUG TEST CUP PATENT NUMBERS
PATENTS ISSUED TARGET SYSTEM
- ------- ------ -------------
1. NO 4,748,042 5/31/88 Target Ringing & Spotting Machine (method
and Apparatus for imprinting membrane with
pattern of antibody)
2. NO 4,797,260 1/10/89 Target Cassette (Antibody testing system)
3. NO 5,036,569 8/6/61 Target Filter/Funnel Assembly Machine
(Apparatus for automatically assembling
filter into funnel).
4. NO 5,137,691 8/11/92 Target Cassette with Removable Air Gap
(Antibody testing system with removable air
gap)
5. NO 5,334,538 8/2/94 Gold Sol Immunoassay System and Device (A
system for one step immunoassay testing).
53
EXHIBIT B
PATENT PENDING
Application Number 20020085953 Drug Test Kit
54
EXHIBIT C
FDA 510(k) NUMBERS
(SEE ATTACHED FDA-CENTER FOR DEVICES AND RADIOLOGICAL HEALTH 510(k) PREMARKET
NOTIFICATION DATABASE REPORTS)
DEVICE NAME 510(k) NUMBER
----------- -------------
DRUGSTOP(TM) K991465
DRUG CHECK K980153
RUBELLA-CUBE(TM) K892051
CMV-CUBE(TM) K884842
ROTACUBE (ROTAVIRUS) K884017
BLUE DOT TM TEST FOR PREGNANCY K882588
FIRST SIGN (PREGNANCY, HCG) K973208
V-TREND TARGET IM TEST (INFECTIOUS MONONUCLEOSIS) K890041
TARGET STREP A (STREPTOCOCCUS SPP.) K880460
DRUG CHECK (COCAINE AND COCAINE METABOLITES) K980153
TARGET COCAINE METABOLITE-R K910122
TARGET COCAINE METABOLITE-V K910123
TARGET MYOGLOBIN TEST K963680
TARGET TM CK-MB K890295
TARGET CARDIAC TROPONIN I TEST K972094
TARGET HCG. ENZYME IMMUNOASSAY REGENTS K862247
TARGET ASO TEST K910073
TARGET(TM)-HOG K914303
TARGET(TM)CANNABINOIDS-V TEST K910892
TARGET(TM)CANNABINOIDS-R TEST K910893
TARGET AMPHETAMINE/METHAMPHETAMINE-V (VISUAL METH) K910738
TARGET AMPHETAMINE/METHAMPHETAMINE-R (READER METH) K910739
TARGET(TM)HOG ONE STEP K903937
V-TREND TARGET RF TEST K904105
TARGET(TM)QUANTITATIVE HCG K890131
V-TREND TARGET CRP TEST K892231
TARGET OPIATES-R K890978
TARGET OPIATES-V K890979
V-TREND TARGET CRP TEST K890423
TARGET READER K885254
EXHIBIT D
APPROVED PLATFORM PRODUCTS
HCG- Human chorionic gonadotropin (Pregnancy Test) Rapid enzyme immunoassay test
for qualitative detection of HCG in urine, serum and plasma. HCG is a hormone
produced by the developing placenta. Serum and urine levels of HCG climb
rapidly, starting as soon as the week following implantation, reaching peak
levels near the end of the first trimester. One-step technology offers superior
speed and simplicity without sacrificing sensitive and specific results.
STREP A Detects group A streptococci, the cause of upper respiratory infections
and pharyngitis. Identification is essential for the selection of appropriate
antibiotic therapy to avoid complications such as acute glomerulonephritis or
rheumatic fever. The test detects group A strep antigen directly from extracted
throat swabs or swabs from culture plates for test confirmation.
CK-MB Creatine Kinase (CK) Muscle (M) Brain (B) Rapid immunoassay for the
quantitative detection of CK-MB. CK-MB measurements in serum can provide useful
information to help confirm or exclude that myocardial infraction has occurred.
The amount of CK-MB released can also assess the infract size. CK_MB is found
predominantly in the myocardial tissue. Detectable increases in CK-MB levels
from non-cardiac sources are rare.
MYOGLOBIN Rapid enzyme immunoassay test for the quantitative detection of
Myoglobin in serum and plasmas an aid in the rapid diagnosis of acute myocardial
infarction.
TROPONIN I Rapid enzyme immunoassay test for the quantitative determination of
cardiac troponin I in serum and plasma as an aid in the rapid diagnosis of
myocardial in fraction. Troponin is a thin filament associated complex of the
myocyte. Troponin I is a protein with a high specificity for cardiac injury.
RUBELLA Rapid enzyme immunoassay test for qualitative detection of rubella virus
specific IgG antibody. Rubella is a highly contagious yet generally mild disease
in most people. However, it has great significance in women infected with
rubella, the virus may infect the placenta, multiply and induce serious damage
to the fetus, including low birth weight, cardio vascular detects, mental
retardation and bone defects. Therefore, all women of child bearing age, as
well, as school age children and healthcare personnel should be screened for
immunity to rubella.
CMV Rapid enzyme immunoassay for qualitative detection of antibody to
Cytomegalovirus in serum and plasma. Cytomegalovirus (CMV) is human viral
pathogen belonging to the herpes family. Infection in humans is wide spread and
usually results in asymptomatic disease. However, severe symptomatic infections
a very significant risk in infants and immunocomprised patients.
ROTAVIRUS Rapid enzyme immunoassay test for qualitative detection of human
rotavirus particles and antigens in human fecal specimens. Rotavirus is a major
cause of gastroenteritis in infants, young children and the elderly. During the
winter months a portion of gastroenterics in children is due to rotavirus
infection. The disease manifests with the symptoms of vomiting diarrhea, and
fever. Rapid and accurate diagnosis is important to avoid inappropriate
antibiotic therapy, provide proper treatment early and to prevent spread of
nosocmial infection.
MONO Qualitative and quantitative detection of heterophile antibodies associated
with infectious mononucleosis. IM is an acute disease caused by the Epstein Barr
virus. Heterophile antibodies are the primary antibodies, which appear in the
patient's serum, usually 1 to3 weeks after the onset of symptoms Common symptoms
include fatigue, pharyngitis, fever, lymphadenopatherapy and splenomegaly.
CRP C-reactive protein is an acute phase protection. The test is a solid phase
gold immunoassay for the detection of CRP. Quantitative CRP measurements have
been found to provide reliable early indication of postoperative inflammatory
complications if monitored on a daily basis. CRP is also predictive of clinical
cardiovascular disease.
READER The Reader is designed to interpret selected membrane enzyme
immunoassays. The instrument is designed for laboratory, emergency room or field
use and requires only a few minutes to learn to operate. The reader permits more
precise, accurate readings of test results than visual interpretation.
EXHIBIT E
SALES PROJECTIONS
YEAR YEAR YEAR YEAR YEAR
1 2 3 4 5
------------------------------------------------------------
DEVICES
Qualitative
HIV 1 and 2
Total No. of Units 115,000 132,250 152,088 174,901 201,136
Five Additional Devices No of Units 52,500 60,375 69,431 79,846 91,823
Rubella
CMV (Herpes)
Rotavirus
Streptococci Group A
Infectious Mononucleosis (Heterophile)
Quantitative
Cardiac System
Myoglobin No. of Units 68,500 78,775 90,591 104,180 119,807
CK - MB No. of Units 68,500 78,775 90,591 104,180 119,807
Cardiac Troponin - 1 No. of Units 68,500 78,775 90,591 104,180 119,807
One additional new test No. of Units - 16,700 19,205 22,086 25,399
per 6 months
Multiple Mobile Assay Analyzer
No. of Units
685 788 906 1,042 1,198
- -------------------------------------------------------------------------------------------------------------------------
TOTAL UNITS - DEVICES 426,185 506,813 582,835 670,260 770,799
- -------------------------------------------------------------------------------------------------------------------------
DRUG TESTS
Drug Cup
Total No. of Units 105,000 120,750 138,863 159,692 183,646
- -------------------------------------------------------------------------------------------------------------------------
TOTAL UNITS - DRUG TESTS 105,000 120,750 138,863 159,692 183,646
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
UNITS - GRAND TOTAL 531,185 627,563 721,697 829,952 954,444
- -------------------------------------------------------------------------------------------------------------------------
NOTE: YEAR 1 COMMENCES 6 MONTHS AFTER OBTAINING FDA 510K CLEARANCE FOR THE HIV 1
& 2 INCLUDING ALL CONDITIONS DESCRIBED IN ARTICLE 2.2 (b) OF THIS AGREEMENT.