As filed with the Securities and Exchange
Commission on October 21, 2005 An Exhibit
List can be found on page 30.
Registration No. 333-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ADDISON-DAVIS DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2834 80-0103134
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
143 Triumfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
EDWARD W. WITHROW, III, PRESIDENT
143 Triumfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES OF COMMUNICATIONS TO:
DARRIN M. OCASIO, ESQ.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of Americas
New York, New York 10018
Telephone: (212) 930-9700
Telecopier: (212) 930-9725
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
======================================== =============== =================== ===================== =====================
Amount to be Proposed Proposed
Title of Each Class of Securities to Registered Maximum Offering Maximum Aggregate Amount of
be Registered (1) Price per Unit(2) Offering Price(1) Registration Fee
- ---------------------------------------- --------------- ------------------- --------------------- ---------------------
Common Stock, $0.001 par value 78,000,000(3) $ 0.018 $1,404,000 $165.25
- ---------------------------------------- --------------- ------------------- --------------------- ---------------------
Common Stock, $0.001 par value 1,500,000(4) $ 0.07 $105,000 $12.36
- ---------------------------------------- --------------- ------------------- --------------------- ---------------------
Common Stock, $0.001 par value 10,000,000(5) $ 0.018 $180,000 $21.19
- ---------------------------------------- --------------- ------------------- --------------------- ---------------------
TOTAL 89,500,000 $1,689,000 $198.8
======================================== =============== =================== ===================== =====================
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of convertible securities and the exercise of warrants by the
selling stockholders. We are also registering such additional shares of common
stock as may be issued as a result of stock-splits, stock dividends and similar
transactions pursuant to Rule 416. The number of shares of common stock
registered hereunder represents a good faith estimate by us of the number of
shares of common stock issuable upon conversion of the convertible notes,
exercise of the warrants related thereto and previously issued restricted stock
with piggy-back registration rights to various consultants for services
rendered.. For purposes of estimating the number of shares of common stock to be
included in this registration statement, we calculated 200% of the number of
shares of our common stock issuable upon conversion of the convertible
securities,100% of the stock underlying the warrant shares and 100% of the
previously issued restricted shares with piggy-back registration rights to
various consultants for service rendered.. Should the conversion ratio result in
our having insufficient shares, we will not rely upon Rule 416, but will file a
new registration statement to cover the resale of such additional shares should
that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on October 13, 2005.
(3) Includes shares underlying convertible notes.
(4) Includes shares underlying warrants.
(5) Includes restricted shares with piggy-back registration rights previously
issued in accordance with stock purchase agreements.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
PROSPECTUS MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES.
INFORMATION MAY HAVE CHANGED SINCE THAT DATE.
ADDISON-DAVIS DIAGNOSTICS, INC.
89,500,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 89,500,000
shares of our common stock, $0.001 par value. The selling shareholders are
offering:
o 78,000,000 shares of common stock underlying our Original Issue
Discount Secured Convertible Notes;
o 1,500,000 shares of common stock underlying warrants;
o 10,000,000 shares of restricted common stock with piggy-back
registration rights previously issued in accordance with stock
purchase agreements.
These securities are more fully described in the section of this prospectus
titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms described in the
section of this prospectus titled "Plan of Distribution". We will not receive
any of the proceeds from the sale of the shares by the selling shareholders.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading
symbol is "ADDI."
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is October __, 2005
ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
--------
Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 5
Description of Securities to be Registered 5
Selling Shareholders 6
Plan of Distribution 7
Use of Proceeds 7
Directors, Executive Officers, Promoters and Control Persons 8
Security Ownership of Certain Beneficial Owners and Management 9
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 9
Organization 11
Our Business 11
Description of Property 13
Legal Proceedings 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Financial Statements F-1 through F-42
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 30
Certain Relationship and Related Transactions 30
Market for Common Equity and Related Shareholder Matters 20
Executive Compensation 23
Experts 26
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS
OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE
PROSPECTUS.
ADDISON-DAVIS DIAGNOSTICS, INC.
We are currently the owner of a patent-pending and FDA 510(K) cleared urine
specimen rapid drug screening test for drugs-of-abuse called DrugStop, which we
have sold in limited quantities and are preparing to market through wider
distribution channels including over-the-counter sale. We are also
test-marketing a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal
occult quick-test for unseen blood in the stool to detect early signs which may
lead to colon cancer and other intestinal diseases.
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto, wherein the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med and Insta Med assigned all its right
title and interest in that Drug Test Cup, Patent Pending Application No.
09752712 together with any and all approvals issued by the Federal Drug
Administration ("FDA") for the Drug Test named "Drug Stop" FDA No. K 991465
Regulatory Class II approval for over-the-counter ("OTC") as well as any and all
510(K) number attached.
Management believes that we cannot afford the financial burden of ongoing
developmental costs associated with the Target System and its related analyzing
equipment, in addition to the extended period of time necessary to bring those
products to market and revenue production. Outright ownership of the Drug Stop
product results in the addition of a valuable asset that is currently revenue
producing, and adding licensed products that are immediately marketable without
additional cost is, in management's opinion, the direction which we should
pursue. We have recently entered into sales representative and distribution
agreements to sell Drug Stop, our self-regulating urine specimen quick-test for
drugs of abuse and EZ F.O.B.T., a fecal occult quick-test for unseen blood in
the stool to detect early signs which may lead to colon cancer and other
intestinal diseases. The distribution company is seasoned and established with
twenty five years experience in selling biomedical products.
Management is seeking to license other quick-test biomed products that do not
require significant development costs. Management recognizes that we must
generate some additional resources to fund overhead until the eventual
achievement of sufficient revenue leading to sustained profitable operations.
However, no assurance can be given that debt or equity financing will be
available to us on satisfactory terms. Our success is dependent upon numerous
items, including further product licensing and successful and effective sales
strategies and management believes that revenues generated by these products
will lead to future profitability.
HOW TO CONTACT US
We maintain our principal offices at 143 Triumfo Canyon Road, Suite 104 Westlake
Village, CA 91361 . Our telephone number at that address is (805)-494-7838 and
our facsimile number is 805-494-3213.
THE OFFERING
We are registering 89,500,000 shares of our common stock for sale by the
shareholders identified in the section of this prospectus titled "Selling
Shareholders". The shares have not yet been, but that may be, issued to
designated selling shareholders upon the conversion of our Secured Convertible
Original Issue Discount Notes, and/or the exercise of warrants. Information
regarding the notes and the warrants is included in the section of this
prospectus titled "Description of Securities to be Registered".
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH
THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR
SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto. As a result, the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med. In return, Insta Med assigned all its
right title and interest in the Drug Test named "Drug Stop Patent Pending
Application No. 09752712 together with any and all approvals issued by the
Federal Drug Administration ("FDA") for the Drug Test named "Drug Stop".
1
Consequently, Drug Stop is the only product that we are currently selling and
marketing.
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY, THEREFORE
YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
We have a very short history of operations, and we are in the early stages of
marketing and selling Drug Stop, currently our only product, which has generated
little revenue to date. Although we anticipate significant revenue, we are not
certain that Drug Stop or new products, if any, will generate significant or any
revenue at all. During the year ended June 30, 2005, we incurred a net loss of
$3,617,527 and had only $5,176 of revenues. Because we have a short operating
history, you will have no basis upon which to accurately forecast our future
operations, including sales, or to judge our ability to develop our business. If
you purchase our securities, you may lose your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS
REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR
OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR
TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our ability to develop our business depends upon our receipt of funds to
continue our operations while we introduce our Drug Stop product and new
products, if any, and they are accepted in the market. If this funding is not
received as needed, it is unlikely that we could continue our business, in which
case you would lose your entire investment.
During the fiscal year ended June 30, 2005, management successfully obtained
additional capital through sales and issuance of convertible notes from which we
received net proceeds of $1,300,000. However, we cannot assure you that the
proceeds received from the sale and issuance of convertible notes will provide
all the additional capital necessary for us to become profitable.
During the next 6 months, if we fail to earn revenues in an amount sufficient to
fund our operations, we will have to raise capital through an additional
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.
If we are unable to obtain additional financing if needed, we may be required to
curtail the manufacturing and marketing of our product and possibly cease our
operations.
Our independent public accounting firm included an explanatory paragraph in
their report on our financial statements set forth in this report stating that
because of our significant losses and our working capital deficit there is
substantial doubt that we can continue as a going concern.
We are subject to the risks and uncertainties inherent in new businesses. If we
fail to accurately forecast our capital needs or if our product does not earn
significant revenues our business could fail and you could lose your entire
investment.
The risks and uncertainties inherent in new businesses include the following:
o Our projected capital needs may be inaccurate, and we may not have
enough money to develop our business and bring our products to
market as we planned;
o We may experience unanticipated development or marketing expenses,
which may make it more difficult to develop our business and bring
our products to market; and
o Even if we are able to develop our products and bring them to
market, we may not earn enough revenues from the sales of our
products to cover the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if the product
we provide does not produce revenues as we project, we are not likely to ever
become profitable and we may be required to curtail some or all of our
operations. If that happened you could lose your entire investment.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND
COMMERCIALIZING OUR NEW PRODUCTS AND/OR OTHER PRODUCTS.
Our ability to successfully acquire or develop any additional products is
uncertain. Potential new products may require additional research, development,
testing, regulatory approval and additional investment prior to their
commercialization, which may not be successful. There can be no assurance that
we can develop commercially successful products.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. IF WE ARE REQUIRED TO PAY A
CLAIM, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED AND YOUR
INVESTMENT MAY DECLINE IN VALUE.
2
Liability might result from claims made by customers who purchase our products.
Although we have received a quote from our insurance broker for product
liability insurance, we presently do not carry such insurance since our sales to
date are insignificant. We can give no assurance that such insurance will be
available when we need it at a reasonable cost or that any insurance policy
would be sufficient to meet any liability arising as a result of a claim. The
obligation to pay any product liability claim could have a material adverse
effect on our business and financial condition.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR
INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret and other
contractual and technical measures to protect our proprietary rights in our
product. However, we cannot assure you that these provisions will be adequate to
protect our proprietary rights. In addition, the laws of certain foreign
countries do not protect intellectual property rights to the same extent as the
laws of the United States.
Although we believe that our intellectual property does not infringe upon the
proprietary rights of third parties, others may claim that we have infringed on
their products.
If we were to become involved in disputes regarding the use or ownership of
intellectual property rights, we could incur substantial costs in defending or
prosecuting any such action and the defense or prosecution of the action would
likely result in a diversion of management resources. In addition, in order to
settle such an action we could be required to acquire licenses from others or to
give licenses to others on terms that are not beneficial to us. Any dispute
relating to our intellectual property could have a material adverse effect on
our business.
OUR CURRENT PRODUCT IS REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET,
GOVERNMENT AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY
APPROVALS FOR NEW PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF
TIME AND MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE
REGULATORY APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS
COULD BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our new products, if any, may
be subject to regulation by the FDA and similar government regulatory bodies in
other countries.
As we develop or obtain new products, we will be required to determine what
regulatory requirements, if any, are required to market and sell our products in
the United States and worldwide. The process of obtaining regulatory approval
could take years and be very costly, if approval can be obtained at all. If we
failed to comply with such a requirement, we could be subjected to an FDA
enforcement action. Such an action could take the form of a warning letter, an
injunction to stop us from marketing the product at issue or a possible seizure
of our assets.
We intend to work diligently to assure compliance with all applicable
regulations that impact our business. We cannot assure you, however, that we
will be able to obtain regulatory approval for all of our products or that, in
the future, additional regulations will not be enacted which might adversely
impact our operations. In either case, our revenues and operating results could
be adversely effected and the value of your investment may decline.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES
COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO THE
SELLING STOCKHOLDER, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities is
essentially limitless.
The following is an example of the amount of shares of our common stock that is
issuable to the selling stockholder, upon conversion of our convertible notes,
based on market prices 25%, 50% and 75% below our market price on October 13,
2005 of $0.018.
Secured Convertible Original Issue Discount Notes
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 65% Issuable Stock*
- ------ ----- ------ -------- -----
25% $0.0135 $0.0087 103,448,275 169%
50% $0.0085 $0.0058 155,172,413 254%
75% $0.0045 $0.0029 310,344,827 509%
*Based on 60,933,455 shares outstanding as of October 12, 2005.
3
The issuance of shares upon conversion of the convertible notes and exercise of
warrants may result in substantial dilution to the interests of other
stockholders since the selling stockholder may ultimately convert and sell the
full amount issuable on conversion. Although the selling stockholder may not
convert its convertible note and/or exercise their warrants if such conversion
or exercise would cause them to own more than 4.99% of our outstanding common
stock, this restriction does not prevent the selling stockholder from converting
and/or exercising some of their holdings, selling our common stock issued in
such conversion and/or exercise, and then converting more of their holdings. In
this way, the selling stockholder could sell more than 4.99% of our outstanding
common stock while never holding more than this limit. There is no upper limit
on the number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock, including investors in this offering.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES
MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD
HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible notes are convertible into shares of our common stock at a
conversion price that is equal to the lesser of (i) $.07 or (ii) the average of
the lowest three (3) intra-day trading prices during the twenty (20) trading
days immediately prior to the conversion date discounted by thirty-five percent
(35%). The significant downward pressure on the price of the common stock as the
selling stockholder converts and sells material amounts of common stock could
encourage short sales by investors. This could place further downward pressure
on the price of the common stock. In addition, not only the sale of shares
issued upon conversion or exercise of notes, warrants and options, but also the
mere perception that these sales could occur, may lower the market price of the
common stock.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR SECURITIES
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to fund our
operations. We do not plan to pay any cash dividends in the foreseeable future.
We cannot guarantee that we will, at any time, generate sufficient surplus cash
that would be available for distribution as a dividend to the holders of our
Common Stock. You should not expect to receive cash dividends on our Common
Stock.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK WITHOUT
ASKING FOR SHAREHOLDER APPROVAL, WHICH COULD CAUSE YOUR INVESTMENT TO BE
DILUTED.
Our Articles of Incorporation currently authorize the Board of Directors to
issue up to 2,000,000,000 shares of Common Stock. The power of the Board of
Directors to issue shares of Common Stock or warrants or options to purchase
shares of Common Stock is generally not subject to shareholder approval.
Accordingly, any additional issuance of our Common Stock may have the effect of
further diluting your investment.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE
YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, those securities may have rights, preferences or privileges
senior to those of the holders of our Common Stock. The issuance of additional
Common Stock or securities convertible into Common Stock by our management will
also have the effect of further diluting the proportionate equity interest and
voting power of holders of our Common Stock.
OUR SECURITIES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO LIQUIDATE THEM IF YOU
NEED MONEY.
Our Common Stock trades sporadically on the Over-The-Counter Bulletin Board. It
is not likely that an active market for our Common Stock will develop or be
sustained in the foreseeable future.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT
TRADING IN OUR COMMON STOCK.
Our Common Stock is considered a "low-priced" security under rules promulgated
under the Securities Exchange Act of 1934. In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document which describes the risks associated with
such stocks, the broker-dealer's duties in selling the stock, the customer's
rights and remedies and certain market and other information.
Furthermore, the broker-dealer must make a suitability determination approving
the customer for low-priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the
customer. The effect of these restrictions will likely be a decrease in the
willingness of broker-dealers to make a market in our Common Stock, decreased
liquidity of our Common Stock and increased transaction costs for sales and
purchases of our Common Stock as compared to other securities.
4
FORWARD LOOKING STATEMENTS
The federal securities laws provide a safe harbor for certain forward-looking
statements. This safe harbor protects us from liability in a private action
arising under either the Securities Act of 1933 or the Securities Exchange Act
of 1934 for forward-looking statements that are identified as such and
accompanied by meaningful cautionary statements, or are immaterial.
This prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements about our plans, objectives, expectations,
assumptions, or future events. In some cases, you can identify forward-looking
statements by terminology such as "anticipate," "estimate," "plan," "project,"
"predict," "potential," "continue," "ongoing," "expect," "believe," "intend,"
"may," "will," "should," "could," or the negative of these terms or other
comparable terminology. These statements involve estimates, assumptions, known
and unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from any future results, performances, or
achievements expressed or implied by the forward-looking statements. Actual
future results and trends may differ materially from those made in or suggested
by any forward-looking statements due to a variety of factors, including for
example, our inability to obtain financing when and if we need it and other
factors, many of which may be outside our control. Consequently, you should not
place undue reliance on these forward-looking statements. We discuss many of
these and other risks and uncertainties in greater detail under the sections
titled, "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this prospectus.
The forward-looking statements speak only as of the date on which they are made
and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of our
common stock. We are authorized by our Articles of Incorporation, as amended, to
issue 5,000,000,000 shares of common stock, $0.001 par value. Our common stock
is traded on the over-the-counter bulletin board. On September 29, 2005, we
filed a Definitive Form 14c with the Securities and Exchange Commission and on
or abour October 10, 2005 an Information Statement was mailed to our registered
shareholders to amend our Articles of Incorporation to reduce the amount of our
authorized common stock from 5,000,000,000 shares to 2,000,000,000 shares
("Amendment"). We anticipate filing the Amendment with the State of Delaware on
or about October 29, 2005.
Holders of our common stock are entitled to one vote per share on all matters
subject to shareholder vote. If the Board of Directors were to declare a
dividend out of funds legally available therefore, all of the outstanding shares
of common stock would be entitled to receive such dividend. We have never
declared dividends and we do not intend to declare dividends in the foreseeable
future. If we were liquidated or dissolved, holders of shares of our common
stock would be entitled to share ratably in assets remaining after satisfaction
of our liabilities. Holders of our common stock do not have cumulative voting
rights.
SELLING SHAREHOLDERS
This prospectus relates to the offer and sale by the following selling
stockholders of the indicated number of shares, all of which are issuable
pursuant to warrants and/or convertible notes held by these selling
stockholders. The number of shares set forth in the table for the selling
stockholders represents an estimate of the number of shares of common stock to
be offered by the selling stockholders. The actual number of shares of common
stock issuable upon conversion of the notes and exercise of the related warrants
is indeterminate, is subject to adjustment and could be materially less or more
than such estimated number depending on factors which cannot be predicted by us
at this time including, among other factors, the future market price of the
common stock. The actual number of shares of common stock offered in this
prospectus, and included in the registration statement of which this prospectus
is a part, includes such additional number of shares of common stock as may be
issued or issuable upon conversion of the notes and exercise of the related
warrants by reason of any stock split, stock dividend or similar transaction
involving the common stock, in accordance with Rule 416 under the Securities Act
of 1933.
None of the following selling stockholders have held any position or office
within our company, nor has had any other material relationship with us in the
past three years, other than in connection with transactions pursuant to which
the selling stockholders acquired convertible notes and warrants.
None of the following selling stockholders are broker-dealers or affiliates of
broker-dealers.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
This prospectus covers the resale by selling shareholders of up to 89,500,000
shares of our common stock, $0.001 par value. The selling shareholders are
offering:
5
o 78,000,000 shares of common stock underlying our Original Issue
Discount Secured Convertible Notes;
o 1,500,000 shares of common stock underlying warrants;
o 10,000,000 shares of restricted common stock with piggy-back
registration rights previously issued in accordance with stock
purchase agreements.
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Convertible Notes Full Prospectus Before the Owned Before Offering Offering
Name and/or Warrants Conversion Offering Offering (2) (2)
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Alpha Capital
Aktiengesellschaft 42,400,000 (3) 69% 42,400,000(1) -- -- -- --
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Whalehaven Capital 21,200,000 (4) 35% 21,200,000(1) -- -- -- --
Fund Ltd.
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Ellis International 10,600,000 (5) 17% 10,600,000(1) -- -- -- --
Ltd.
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Osher Capital, Inc. 5,300,000 (6) 8.6% 5,300,000(1) -- -- -- --
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Profit Capital 2,500,000 (7) 4.1% 2,500,000 -- -- -- --
Management Ltd
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Edge Trading Inc. 2,500,000 (8) 4.1% 2,500,000 -- -- -- --
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Capital Group 2,500,000 (9) 4.1% 2,500,000 -- -- -- --
Communications
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
Liquid Assets 2,500,000 (10) 4.1% 2,500,000 -- -- -- --
- ---------------------- -------------------- ------------- -------------- ------------ --------------- ------------ --------------
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares, which the selling stockholder has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the convertible notes is subject to adjustment depending on, among
other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Includes 200% of the shares issuable upon conversion of the convertible
notes and 100% of the shares issuable upon exercise of warrants, based on
current market prices. Because the number of shares of common stock issuable
upon conversion of the convertible note is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of shares of
common stock that will be issued upon conversion will fluctuate daily and cannot
be determined at this time. However these selling stockholders have
contractually agreed to restrict their ability to convert or exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
(2) Assumes that all securities registered will be sold.
(3) Represents shares of common stock underlying an aggregate of $480,000
principal amount convertible notes and 800,000 shares underlying warrants
exercisable at $0.07 per share. Alpha Capital AG is a private investment fund
that is owned by all its investors and managed by Mr. Konrad Ackermann, who may
be deemed the control person of the shares owned Alpha Capital.
(4) Represents shares of common stock underlying an aggregate of $240,000
principal amount convertible notes and 400,000 shares underlying warrants
exercisable at $0.07 per share. Whalehaven Capital Fund Limited is a private
investment fund that is owned by all of its investors and managed by Michael
Finkelstein and Bhavesh Singh. Evan Schemenauer, Arthur Jones and Jennifer Kelly
may be deemed control persons of the shares owned by such entity, with final
voting power and investment control over such shares.
(5) Represents shares of common stock underlying an aggregate of $120,000
principal amount convertible notes and 200,000 shares underlying warrants
exercisable at $0.07 per share. Mr. Wilhelm Ungar may be deemed the control
person of the securities.
(6) Represents shares of common stock underlying an aggregate of $60,000
principal amount convertible notes and 100,000 shares underlying warrants
exercisable at $0.07 per share. Mr. Yisroel Kluger has voting and dispositive
control over securities owned by Osher Capital, Inc.
(7) Represents restricted shares of common stock with piggy-back registration
rights issued in accordance with a stock purchase agreement. Scott McMyn may be
deemed the control person of the securities.
(8) Represents restricted shares of common stock with piggy-back registration
rights issued in accordance with a stock purchase agreement. William Reed may be
deemed the control person of the securities.
(9) Represents restricted shares of common stock with piggy-back registration
rights issued in accordance with a stock purchase agreement. Ryan Drutman may be
deemed the control person of the securities.
(10) Represents restricted shares of common stock with piggy-back registration
rights issued in accordance with a stock purchase agreement. Andrea Bruno may be
deemed the control person of the securities.
6
OUR SEPTEMBER 16, 2005 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES
SUBSCRIPTION AGREEMENT
On September 16, 2005, we entered into a Subscription Agreement with several
accredited institutional investors for the issuance of an aggregate of $900,000
principal amount Original Issue Discount Secured Convertible Notes (the
"Convertible Notes") and we received a gross amount of $750,000. The convertible
notes are due two years from the date of issuance. The convertible notes are
convertible at the option of the holders into shares of our common stock. The
conversion price is equal to the lesser of (i) $.07 or (ii) the average of the
lowest three (3) intra-day trading prices during the twenty (20) trading days
immediately prior to the conversion date discounted by thirty-five percent
(35%). In connection with the issuance of the convertible notes, the noteholders
shall receive warrants to purchase shares of our common stock. Furthermore we
entered into a Registration Rights Agreement in order to register the
above-referenced securities and are required to register 200% of our common
shares underlying the convertible notes and the warrants.
The secured convertible notes mature on two years from the date of issuance. The
convertible notes are convertible at any time at the option of the holder into
shares of our common stock, provided at no time may a holder of our convertible
notes and its affiliates own more than 4.9% of our outstanding common stock. The
conversion price of our common stock used in calculating the number of shares
issuable upon conversion of the convertible notes, is the lesser of:
o Sixty-five percent of the average of the lowest three intra-day
trading prices for our common stock during the twenty trading day
period ending one trading day prior to the date the conversion
notice is sent by the holder to the borrower; and
o a fixed conversion price of $0.07.
We are be obligated to pay a penalty of $2,000 per day to the investors if we
fail to deliver the shares of our common stock issuable upon a conversion of the
convertible notes within two business days following the receipt of the
investors' notice of conversion.
The number of shares of common stock issuable upon conversion of the convertible
notes is determined by dividing that portion of the principal of the convertible
notes to be converted by the conversion price. For example, assuming conversion
of $900,000 of convertible notes at a conversion price of $0.015 per share, the
number of shares issuable, ignoring the 4.9% limitation discussed above, upon
conversion would be:
$900,000/ $0.015 = 39,000,000 shares
The conversion price of the convertible notes are subject to equitable
adjustments if we distribute a stock dividend, subdivide or combine outstanding
shares of common stock into a greater or lesser number of shares, or take such
other actions as would otherwise result in dilution of the selling stockholders'
ownership. Also, the convertible notes fixed conversion price gets lowered in
the event we issue shares of our common stock or any rights, options, warrants
to purchase shares of our common stock at a price less than the market price of
our shares as quoted on the OTCBB. The fixed conversion price gets lowered upon
such issuance to the amount of the consideration per share received by us.
The convertible notes are secured by a security agreement and an intellectual
property security agreement under which we pledged substantially all of our
assets, including our goods, fixtures, equipment, inventory, contract rights,
receivables and intellectual property.
DESCRIPTION OF WARRANTS
The warrants purchased by the investors pursuant to the September 16, 2005
Subscription Agreement entitle the investors to purchase 1,500,000 shares of our
common stock at an exercise price equal to $0.07 per share.
The warrants expire five years from the date of issuance. The warrants are
subject to exercise price adjustments upon the occurrence of certain events
including stock dividends, stock splits, mergers, reclassifications of stock or
our recapitalization. The exercise price of the warrants is also subject to
reduction if we issue shares of our common stock on any rights, options or
warrants to purchase shares of our common stock at a price less than the market
price of our shares as quoted on the OTC Bulletin Board.
REGISTRATION RIGHTS
We are obligated to file a registration statement registering 200% of the shares
of our common stock issuable upon conversion of the promissory notes and 100% of
the shares of our common stock issuable upon exercise of the Class A warrants no
later than 35 days after the initial closing date and cause it to be effective
within 90 days after the initial closing date. If we do not meet the
aforementioned filing and effectiveness deadlines, we shall pay to each investor
an amount equal to 2% for each 30 days or part thereof, thereafter of the
purchase price of the notes remaining unconverted and purchase price of the
shares of our common stock issued upon conversion of the notes.
PLAN OF DISTRIBUTION
We are registering a total of 89,500,000 shares of our common stock that are
being offered by the selling shareholders. As used in this prospectus, "selling
shareholders" includes the pledgees, donees, transferees or others who may later
hold the selling shareholders' interests in the common stock. We will pay the
costs and fees of registering the common shares, but the selling shareholders
will pay any brokerage commissions, discounts or other expenses relating to the
sale of the common shares. We will not receive the proceeds from the sale of the
shares by the selling shareholders. However, some of the shares we are
registering will be issued upon the exercise of warrants held by the selling
shareholders. Although the selling shareholders are not required to exercise the
warrants, if they do so we will receive the proceeds from the exercise, unless
those warrants are exercised pursuant to the cashless exercise provisions
thereof.
7
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The shares being offered by the selling stockholders or their
respective pledgees, donees, transferees or other successors in interest, will
be sold from time to time in one or more transactions, which may involve block
transactions:
o on the Over-the-Counter Bulletin Board or on such other market on
which the common stock may from time to time be trading;
o in privately-negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination thereof.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling stockholders determine from time to
time.
The selling shareholders may also sell shares under Rule 144 or Regulation S
under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. The selling stockholders shall have the
sole and absolute discretion not to accept any purchase offer or make any sale
of shares if they deem the purchase price to be unsatisfactory at any particular
time. Broker-dealers may receive commissions or discounts from the selling
shareholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The selling
shareholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling shareholders may from time to time pledge or grant a security
interest in some or all of the shares or common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of
1933, as amended, amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus.
The selling shareholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, or the rules and regulations under such acts.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The selling
shareholders have informed us that none of them have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
We are required to pay all fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling
stockholders, or their transferees or assignees, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the selling stockholders or their respective pledgees,
donees, transferees or other successors in interest, may be required to make in
respect of such liabilities.
8
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered by
the selling shareholders. We will receive proceeds of $0.07 per share from the
exercise of warrants by the selling shareholders, unless those warrants are
exercised pursuant to the cashless exercise provisions thereof.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The name, age and a description of the positions held by our directors,
executive officers and key employees are as follows:
NAME AGE TITLE
- ---- --- -----
Edward W. Withrow III 41 Chief Executive Officer,
President, Acting Chief
Financial Officer and
Director
Fred De Luca 74 Director and Secretary
There are no family relationships among any of our directors or officers.
The size of our Board of Directors is currently fixed at two members. Members of
the Board serve until the next annual meeting of stockholders and until their
successors are elected and qualified. Officers are appointed by and serve at the
discretion of the Board.
None of our directors or executive officers has, during the past five years,
o had any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer, either
at the time of the bankruptcy or within two years prior to that
time,
o been convicted in a criminal proceeding and none of our directors or
executive officers is subject to a pending criminal proceeding,
o been subject to any order, judgment, or decree not subsequently
reversed, suspended or vacated of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities, futures, commodities or banking activities, or
o been found by a court of competent jurisdiction (in a civil action),
the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended,
or vacated.
Edward W. Withrow III, Chairman, Chief Executive Officer, President and Acting
Chief Financial Officer joined the Company in September 2004. In 1991 Mr.
Withrow began his fifteen year entrepreneurial career as co-founder and
principal in Box Office Partners, a foreign distribution and acquisition fund,
spearheading the capitalization of their Box Office Partners 1, 2 and 3 Funds.
He then became a principal in The Withrow Group in 1993, a Los Angeles based
company developing and packaging filmed entertainment and shortly thereafter in
1995, co-founded Family Store Entertainment, successfully producing educational
entertainment for young children distributed through major U.S. grocery chains.
In 1999, Mr. Withrow also co-founded Simplyfamily.com, an integrated vertical
commerce community and one of the largest independent family based communities
operating on the Internet. In 2002, Mr. Withrow then became the C.E.O. of Reward
Enterprises, Inc., an international telecommunications company specializing in
the emerging growth area of Voice over Internet Protocol (VoIP) Mr. Withrow
attended the University California Santa Barbara (UCSB).
Fred De Luca, Director and Secretary. On July 21, 2004, Fred De Luca, Secretary,
was appointed to the Board of Directors. Mr. De Luca practiced corporate law
over a twenty nine year period until retiring to serve as legal consultant and
board of directors member to various private and publicly traded companies. Mr.
De Luca earned his under graduate degree at University California Los Angeles
(UCLA) and his law degree at Southwestern University School of Law.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
9
The following table sets forth information as of October 12, 2005 as to each
person who is known to us to be the beneficial owner of more than 5% of our
outstanding Common Stock and as to the security and percentage ownership of each
of our executive officers and directors and all of our officers and directors as
a group. The term "executive officer" is defined as the Chief Executive Officer,
President and the Chief Financial Officer. Except where specifically noted, each
person listed in the table has sole voting and investment power with respect to
the shares listed. All shares in this table are reflected on a post-reverse
split basis.
- ----------------------------------------------------------------------------------------------
Number of Percentage
Shares Ownership
Title of Class of Beneficially
Security Name and Address(1) Owned
- ----------------------------------------------------------------------------------------------
Common Stock Edward W. Withrow III (1)(7)(8) 11,192,238(3) 18.4%
Common Stock Fred DeLuca(1)(6)(7) 3,202,267(4) 5.2%
Common Stock Norman Kunin(1)(6) 3,166,336(5) 5.2%
Common Stock Charles Miseroy(2)(9) 10,000,000 16.4%
All Officers and Directors (2 persons) 14,394,505 23.6%
- ----------------------------------------------------------------------------------------------
(1) The address for Mr. Withrow, Mr. DeLuca and Mr. Kunin is c/o Addison-Davis
Diagnostics, Inc., 143 Triunfo Canyon Road, Suite 104, Westlake Village,
California 91361.
(2) The address for Mr. Miseroy is 12318 Foxcroft Place, Granada Hills CA 91344
(3) Includes 3,325 shares issued to Warren Withrow, Mr. Withrow's brother and
5,000,000 shares deemed beneficially owned by Edward W. Withrow III by virtue of
his right to acquire them within 60 days of the date of this Annual Report that
would be required to be reported pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934. These shares represent warrants granted to Huntington
Chase LLC, a limited liability company in which Mr. Withrow is the sole member
and managing member.
(4) Includes 1,330 shares issued to SAGS-3 LLC, a limited liability company in
which Mr. De Luca is the sole member and managing member and 1,500,000 shares
deemed beneficially owned by Mr. DeLuca by virtue of his right to acquire them
within 60 days of the date of this Annual Report that would be required to be
reported pursuant to Rule 13d-3 of the Securities Exchange Act of 1934. The
1,500,000 shares represent warrants granted to Mr. DeLuca for consulting
services.
(5) Includes 1,500,000 shares deemed beneficially owned by Mr. Kunin by virtue
of his right to acquire them within 60 days of the date of this Annual Report
that would be required to be reported pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934. The 1,500,000 shares represent warrants granted to Mr.
Kunin for consulting services.
(6) 5% Shareholder.
(7) Director
(8) Executive Officer
(9) 10% Shareholder
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
As permitted by Section 102(b)(7) of the General Corporation Law of the State of
Delaware, Article Ninth of our Certificate of Incorporation includes a provision
that eliminates the personal liability of each of our directors for monetary
damages for breach of such director's fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to us or our
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) under Section
174 of the General Corporation Law; or (iv) for any transaction from which the
director derived an improper personal benefit. If the General Corporation Law is
amended to authorize the further elimination or limitation of the liability of
directors, then the liability of a director shall be limited to the fullest
extent allowed by the amendment. However, any repeal or modification of the
indemnity provided by the General Corporation Law shall not adversely affect any
limitation on the personal liability of our directors.
Our Certificate of Incorporation requires us, to the extent and in the manner
provided by the General Corporation Law, to indemnify any person against
expenses, (including attorneys' fees), judgments, fines and amounts paid in
settlement, that are actually and reasonably incurred in connection with any
threatened, pending or completed action, suit or proceeding to which such person
was or is a party or is threatened to be made a party by reason of the fact that
such person is or was one of our directors or officers.
Our Bylaws provide that we must, to the fullest extent permitted by Section 145
of the Delaware General Corporation Law, indemnify our directors and officers
for actions they took in good faith and in a manner reasonably believed to be
in, or not opposed to, our best interests. With respect to any criminal action
or proceeding, the officer or director must have had no reasonable cause to
believe that his conduct was unlawful. We are required by our Bylaws to advance,
prior to the final disposition of any proceeding, promptly following request
therefore, all expenses incurred by any officer or director in connection with
such proceeding. If the General Corporation Law is amended to provide narrower
rights to indemnification than are available under our Bylaws, such amendment
shall not apply to alleged actions or omissions that precede the effective date
of such amendment. Our Bylaws permit us to indemnify our employees and agents to
the fullest extent permitted by the General Corporation Law.
10
Section 145 of the General Corporation Law of the State of Delaware permits
indemnification of a corporation's agents (which includes officers and
directors) because he is a party (or he is threatened to be made a party) to any
action or proceeding by reason of the fact that the person is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense. Indemnification must be
authorized in the specific case upon a determination that indemnification is
proper because the person has met the applicable standard of conduct to require
indemnification. This provision of the General Corporation Law of the State of
Delaware is not exclusive of any other rights to which persons seeking
indemnification may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ORGANIZATION
CORPORATE HISTORY
Addison-Davis Diagnostics, Inc. (referred to in this prospectus as "we", "us",
or "our") was formed on April 4, 1989 under the name Chelsea Atwater, Inc. On
March 19, 1997 we changed our name to Cerx Entertainment Corporation, and on
March 23, 1998 we changed our name to Cerx Venture Corporation. Prior to 1999 we
had limited operations while we were seeking a business to acquire. On July 15,
1999, we effected a merger with EBonlineinc.com, Inc., a Delaware corporation,
and changed our name to MoneyZone.com, Inc. (referred to in this prospectus as
"MoneyZone"). On July 18, 2002, we announced that we had entered into a Merger
Agreement with QuickTest 5, Inc., a Delaware corporation.
Effective January 9, 2003, pursuant to the terms of the Merger and Plan of
Reorganization between MoneyZone.com, Inc. and QuickTest 5, Inc., Quicktest
merged with and into MoneyZone (the "Merger"), the separate corporate existence
of Quicktest ceased, and MoneyZone continued as the surviving entity and changed
its name to "QT 5, Inc." and its symbol on the Over The Counter Bulletin Board
to "QTFV". Prior to the Merger, our Board of Directors and the holders of a
majority of the outstanding shares of common stock authorized and approved by
written consent an amendment to our Certificate of Incorporation increasing the
total number of shares of our authorized common stock from 25,000,000 shares to
100,000,000 shares. Prior to the Merger but also effective on January 9, 2003,
we effectuated a 5 for 1 forward split of our outstanding shares of common
stock. On November 3, 2003 we effected an increase of the total number of shares
of our authorized common stock from 100,000,000 to 300,000,000 shares. In
July2004 we effected an increase of the total number of shares of our authorized
common stock from 300,000,000 to 5,000,000,000 shares. On April 26, 2004 we
effected a 1 for 10 reverse stock split of our outstanding shares of common
stock and on November 26, 2004 we effected a 1 for 150 reverse stock split of
our outstanding shares of common stock and changed our name to "Addison-Davis
Diagnostic, Inc."
All shares reported in this prospectus reflect the forward stock split and both
reverse stock splits unless otherwise noted. All shares reported in this
prospectus prior to May 2004 are reflected on a pre 1 for 150 reverse split
basis unless otherwise noted.
On February 7, 2003 we formed Nico International, Inc., a wholly owned
subsidiary.
On April 19, 2004 we formed Xact Aid, Inc., a wholly owned subsidiary.
On May 9, 2005, in connection with the spin-off of Xact Aid, Inc., the Company
distributed all 2,001,000 shares of its outstanding common stock that we owned
to our shareholders (along with a copy of the Xact Aid prospectus). Xact Aid,
Inc. filed a registration statement with the Securities and Exchange Commission,
which was declared effective on April 18, 2005, registering all 2,001,000 shares
of Xact Aid common stock owned by the Company. In addition, Xact Aid has filed
an application on Form 211 with the NASD to have the 2,001,000 shares traded on
the Over-The-Counter-Bulletin Board.
OUR BUSINESS
We are currently the owner of a patent-pending and FDA 510(K) cleared urine
specimen rapid drug screening test for drugs-of-abuse called DrugStop, which we
have sold in limited quantities and are preparing to market through wider
distribution channels including over-the-counter sale. We are also
test-marketing a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal
occult quick-test for unseen blood in the stool to detect early signs which may
lead to colon cancer and other intestinal diseases.
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto, wherein the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med and Insta Med assigned all its right
title and interest in that Drug Test Cup, Patent Pending Application No.
09752712 together with any and all approvals issued by the Federal Drug
Administration ("FDA") for the Drug Test named "Drug Stop" FDA No. K 991465
Regulatory Class II approval for over-the-counter ("OTC") as well as any and all
510(K) number attached.
Management believes that we cannot afford the financial burden of ongoing
developmental costs associated with the Target System and its related analyzing
equipment, in addition to the extended period of time necessary to bring those
products to market and revenue production. Outright ownership of the Drug Stop
product results in the addition of a valuable asset that is currently revenue
producing, and adding licensed products that are immediately marketable without
additional cost is, in management's opinion, the direction which we should
pursue. We have recently entered into sales representative and distribution
agreements to sell Drug Stop, our self-regulating urine specimen quick-test for
drugs of abuse and EZ F.O.B.T., a fecal occult quick-test for unseen blood in
the stool to detect early signs which may lead to colon cancer and other
intestinal diseases. The distribution company is seasoned and established with
twenty five years experience in selling biomedical products.
11
Management is seeking to license other quick-test biomed products that do not
require significant development costs. Management recognizes that we must
generate some additional resources to fund overhead until the eventual
achievement of sufficient revenue leading to sustained profitable operations.
However, no assurance can be given that debt or equity financing will be
available to us on satisfactory terms. Our success is dependent upon numerous
items, including further product licensing and successful and effective sales
strategies and management believes that revenues generated by these products
will lead to future profitability.
THE MARKET & STATUS OF LAUNCH OF PRODUCTS
There is a global market for rapid drug screening testing of individuals in
order to determine the presence of certain drugs of abuse. We believe that we
can capture a segment of that market with our urine specimen rapid drug
screening test prior to utilization of more extensive reference laboratory
tests. Test kits are currently used to screen for illegal drugs in the workplace
by government, correctional and law enforcement agencies, and are used outside
the employment environment by rehabilitation centers, clinics, physicians and
hospitals and by consumers. These provide an easy, private, inexpensive way for
consumers to undergo testing. We believe that these factors may encourage
high-risk individuals, or those who are simply "too busy" to make an appointment
with a physician, to use the home test kits.
Reference laboratories, correctional institutions, manufacturing facilities
vying to become drug-free workplaces ("Drug-free Workplaces"), public utilities
and governmental federal, state, county and city agencies are being targeted. We
will be targeting the $2.2 Billion substance abuse market with our Drug Stop
product. Our Drug Stop product has received a 510(K) FDA Clearance for the test
as well as FDA clearance for sale to the Over-The-Counter market. We plan to
take advantage of various State incentive programs for a "Drug Free Workplace."
The Government's Drug Free Workplace initiative's biggest incentive is to offer
Workers Compensation Insurance discounts to companies that have mandatory drug
testing. We believe these incentives will open corporations to implementing drug
testing programs.
Recent studies show that illicit drug use is as equally implicated as alcohol in
DUI arrests in the United States and 65-85% of the DUI problem in Europe. In
1997, in the U.S., 73% of all illegal drug users were employed and more than 14%
of American workers had a drug or alcohol abuse problem. Drugs and alcohol use
have been implicated in up to 50% of all emergency room trauma visits in the
United States. Police officers making traffic stops, emergency room doctors and
nurses, and employers sending workers out in trucks, trains and planes all need
a test to provide an immediate indication of performance "under-the-influence."
We have signed a strategic sales and marketing agreement with Ohio Surgical,
LLC. Ohio Surgical will be responsible for setting up and maintaining
institutional sales and distribution channels for Drug Stop. Ohio Surgical is an
Ohio-based company serving the healthcare community for 25 years. They
specialize in innovative, niche products and services that represent quality and
value not found elsewhere in the healthcare market. Ohio Surgical provides
diversified products from diagnostic to specialty infusion products. Bill
Hallagan, Ohio Surgical's VP of Marketing and Sales attended the American
Correctional Association's 135th Congress of Correction held August 6-11, 2005,
at the Baltimore Convention Center. This event allowed for an opportunity to
interact with other industry leaders and prospective clients who will be
exploring the latest in products and services available.
We have been awarded, through a public bid process, to exclusively supply
Miami-Dade County, FL our Drug Stop product for the Turner Guilford Knight
Correctional Center. The Turner Guilford Knight Correctional Center has 1,300
beds for male and female inmates of various levels of custody and has an active
drug testing program.
We are also planning a strategic Over-The-Counter sales initiative with the new
"Parents' Tool" Drug Test Program. We anticipate directing this program to
parents, with a specific focus on mothers, who are concerned about the well
being of their children. We are planning the program as a resource for parents
throughout the country and for us to be viewed as a partner in their fight
against drugs in their children's lives. To assist in the implementation of the
program, we have retained the services of a diverse and experienced team with
over 10 years of success in Internet Design, Programming, Marketing and Branding
to build our Parent Community Internet Portal. The Portal will be designed to
inform parents on drug related issues by serving as a resource for parents to
access local and n ational agencies. The portal will also enable parents to post
messages, blogs, share stories, and obtain expert advice on how to deal with the
issues of drug use among their children. We believe this portal will allow us to
make a major impact in addressing the problems and providing solutions to
parents dealing with kids and drugs. We plan to launch our proprietary "Parents'
Tool" program in the first quarter of 2006.
THE EFFECT OF GOVERNMENT REGULATION ON OUR BUSINESS
We believe that we are currently in compliance with applicable FDA regulations
and we intend to work diligently to assure compliance with current and future
regulations that impact our business. We cannot assure you, however, that future
regulations will not be enacted which might adversely impact our operations.
The Medical Device Amendments of 1976" (the "Medical Device Act"), a section of
the Federal Food, Drug & Cosmetic Act, establishes complex procedures for
compliance based upon FDA regulations that designate devices as Class I (general
controls, such as compliance with labeling and record-keeping requirements),
Class II (performance standards in addition to general controls) or Class III
(pre-market approval application before commercial marketing).
12
Our Drug Stop product is regulated by the FDA and, in the worldwide market,
government agencies like the FDA. We may be unsuccessful in obtaining regulatory
approvals for our future products, even though we may invest a significant
amount of time and money into seeking such approvals. Therefore, management
intends to focus on the sale of our Drug Stop product and be extremely selective
in moving forward with developing or acquiring future products until it has
thoroughly evaluated the viability of such product or products in the
marketplace. If our products do not receive the regulatory approvals we need to
sell them, our revenues and operating results could be adversely affected and
the value of your investment may decline.
Our Drug Stop product is a Class I and Class II product. This product has been
approved by the FDA for sale in the professional market and is approved for sale
over-the-counter.
LICENSES AND OTHER INTELLECTUAL PROPERTY
In April 2005, we entered into a Settlement and Release Agreement with Insta Med
Manufacturing, Inc. ("Insta Med") in settlement of certain disputes between us
and Insta Med concerning the license agreement dated October 17, 2003 and the
February 6, 2004 modification thereto, wherein the license agreement and
modification were rescinded and the rights to sell and market the Target System
reverted back to Insta Med and Insta Med assigned all its right title and
interest in that Drug Test Cup, Patent Pending Application No. 09752712 together
with any and all approvals issued by the Federal Drug Administration ("FDA") for
the Drug Test named "Drug Stop" FDA No. K 991465 Regulatory Class II approval
for over-the-counter ("OTC") as well as any and all 510(K) number attached.
In May 2005, in connection with the spin-off of Xact Aid, Inc., we ceased to
have an interest in any confidential and proprietary information relating to the
Xact Aid products or (Know-How), words, symbols and logos identifying and
distinguishing Xact Aid products (Trademarks), registrations and application for
Trademarks, domain names including source codes, user name and passwords, all
designs and copyrights in connection with the Trademarks.
COMPETITION
Our urine specimen rapid drug screening test is not unique in the marketplace.
There are a number of similar products that may offer similar results using
different specimens and methods.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Our manufacturing and distribution is outsourced to third parties. To our
knowledge, federal, state or local environmental laws do not effect our
operations and we have not spent any funds to comply with any such laws.
EMPLOYEES
As of September 10, 2005 we have 3 full-time employees.
DESCRIPTION OF PROPERTY
Our office facilities are located at 143 Triunfo Canyon Road, Suite 104,
Westlake Village, California 91361. We lease this 1,300 square foot facility at
market rates. Our current rent is $2,745.40 per month. The lease provides for a
rent increase at the rate of 4% for the second year of the term, which will
increase our rent to $2,855.22 per month for the period August 1, 2006 to July
31, 2007. The lease expires on July 31, 2007.. We believe that this space is
sufficient for our needs for the foreseeable future. Our former lessor sought
only possession of our prior premises and on or about July 15, 2005 we moved to
our new premises and vacated possession of the prior premises.
LEGAL PROCEEDINGS
On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit
against us alleging that we breached a sublease with Fidelity. Fidelity is
seeking $156,400 in damages plus interest, costs and attorneys' fees. We are in
the process of defending this litigation and have recorded a liability of
$156,400 in the accompanying audited consolidated balance sheet.
On June 10, 2004, Impact Displays Inc. filed a complaint against us demanding
payment of $146,830 representing the balance due on a $346,830 invoice, against
which we paid $200,000, for shelving to display our NICOWater(TM) product in
Rite Aid Pharmacy stores. In its answer to the complaint, we alleged that (1)
the goods sold were at the special request of third-parties (ie Rite Aid and
Impact Displays) and that either of those third parties still have possession of
the goods; (2) that the plaintiff overcharged for the goods; and (3) that
plaintiff, in violation of state and federal law, had a tying arrangement with
Rite Aid wherein only the shelving manufactured by plaintiff could be used for
the display of our product. Management believes that we will prevail and will
have no liability regarding this lawsuit.
13
On January 5, 2005, Steven H. Reder ("Reder"), a former officer and director of
the Company, filed a lawsuit against us alleging breach of his employment
agreement, wrongful discharge, libel and breach of promissory note. On June 15,
2004 we issued a note to Mr. Reder in the amount of $220,750, which reflected
the sums due to Mr. Reder for unpaid compensation due by us as of June 15, 2004
(see Note 9). The note bears interest at the rate of 6% per annum payable
monthly commencing June 15, 2004 and continuing until December 31, 2004, when
the entire principal and accrued interest shall be due and payable. The Company
has successfully demurred to a cause of action for libel, which has been omitted
from Reder's First Amended Complaint. We have made no payments to Mr. Reder on
this note. Management views this lawsuit as lacking in merit and is defending
the same vigorously. The Court has ordered the parties to participate in a
mediation and to return for a Post-Mediation Status conference on October 28,
2005.
On August 4, 2005, Bristol Investment Fund, Ltd. filed a summons with notice to
appear against us for breach of contract. The relief sought is liquidated and
compensatory damages. The Company has tendered the sum of $80,000 to Bristol
Investment Fund, Ltd in payment of the outstanding principal balance due on the
note in the amount of $60,086 plus accrued interest and penalties. The Company
has retained counsel to respond to the Summons. The Company anticipates
resolving the matter and does not consider this as having a material adverse
effect on the operations of the Company.
We are, from time to time, involved in various other legal and related
proceedings which arise in the ordinary course of operating our business. In the
opinion of management, the amount of ultimate liability, if any, with respect to
these other actions will not materially affect the consolidated financial
position or results of operations of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto. As a result, the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med and Insta Med assigned all its right
title and interest in that Drug Test Cup, Patent Pending Application No.
09752712 together with any and all approvals issued by the Federal Drug
Administration ("FDA") for the Drug Test named "Drug Stop" FDA No. K 991465
Regulatory Class II approval for over-the-counter ("OTC") as well as any and all
510(K) number attached.
Management believes that it is not in our best interest to assume the financial
burden of ongoing developmental costs associated with the Target System and its
related analyzing equipment, in addition to the extended period of time
necessary to bring those products to market and revenue production. Outright
ownership of the Drug Stop product results in the addition of a valuable asset
that is currently revenue producing, and adding licensed products that are
immediately marketable without additional cost is, in management's opinion, the
direction which we should pursue.
As the current owner of Drug Stop, a patent-pending and FDA 510(K) cleared
self-regulating urine specimen rapid drug screening test for drugs-of-abuse
which we have sold in limited quantities, we are preparing to market this
product through wider institutional distribution. channels. Drug Stop is one of
several drugs-of-abuse tests that is also cleared by the F.D.A. for
over-the-counter sale. We have focused on healthcare professionals, hospitals,
certain branches of the government, correctional institutions and the workplace
environment, and have recently entered into sales representative and
distribution agreements to sell Drug Stop with a seasoned and established
distribution company with twenty five years experience in selling biomedical
products. We are in the process of arranging an over-the-counter sales and
marketing program for our Drug Stop product which will include the participation
of highly visible organizations and product brokers and distributors in order to
gain entrance to major retail outlets. In addition, we are test-marketing a
licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal occult
quick-test for unseen blood in the stool to detect early signs which may lead to
colon cancer and other intestinal diseases.
Management is seeking to license other quick-test biomed products that do not
require significant development costs. Management recognizes that we must
continue to generate additional resources to fund overhead until the eventual
achievement of sufficient revenue leading to sustained profitable operations.
Our success is dependent upon numerous items, including further product
licensing and successful and effective sales strategies and management believes
that revenues generated by these products will lead to future profitability.
GENERAL OVERVIEW AND GOING CONCERN
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited balance sheet as of
June 30, 2005 and the audited statements of operations and cash flows for the
fiscal years ended June 30, 2005 and 2004, and the related notes thereto. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates based on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The important facts and factors described in this discussion and elsewhere in
this document sometimes have effected, and in the future could effect, our
actual results, and could cause our actual results to differ materially from
those expressed in any forward-looking statements made by us or on our behalf.
As reported in the Report of Independent Registered Public Accounting Firm on
our June 30, 2005 financial statements, we have incurred losses from operations
and we have not generated significant net sales revenue that raised substantial
doubt about our ability to continue as a going concern.
14
On May 9, 2005, in connection with the spin-off of Xact Aid, Inc., the Company
distributed all 2,001,000 shares of its outstanding common stock that we owned
to our shareholders (along with a copy of the Xact Aid prospectus). Xact Aid,
Inc. filed a registration statement with the Securities and Exchange Commission,
which was declared effective on April 18, 2005, registering all 2,001,000 shares
of Xact Aid common stock owned by the Company. In addition, Xact Aid has filed
an application on Form 211 with the NASD to have the 2,001,000 shares traded on
the Over-The-Counter-Bulletin Board.
Although we are now the current owner of Drug Stop, a patent-pending and FDA
510(K) cleared self-regulating urine specimen rapid drug screening test for
drugs-of-abuse, and are commencing the marketing and sales of Drug Stop,
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. Although we have commenced marketing our
Drug Stop product, we anticipate that it may not enter the market until the
first calendar quarter of 2006 and management believes that revenues generated
by this product will lead to future profitability.
Also, during the fiscal year ended June 30, 2005, management successfully
obtained additional capital through sales and issuance of callable convertible
notes from which we received gross proceeds of $1,300,000. However, no assurance
can be given that the convertible note 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 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.
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements, as defined in Regulation S-B Section
303.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant effect on our revenues, income or loss
from operations, and net income or 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, the following policies are considered critical. In addition, you
should refer to our accompanying audited balance sheet as of June 30, 2005 and
the audited statements of operations and cash flows for the fiscal years ended
June 30, 2005 and 2004, and the related notes thereto, for further discussion of
our accounting policies.
STOCK-BASED COMPENSATION.
We account 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 our 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. We have elected to account for our
stock-based compensation to employees under APB 25.
REVENUE RECOGNITION.
We recognize revenue at the time of shipment of our products to our customers.
RESULTS OF OPERATIONS
In May 2005, Xact Aid, Inc., formerly a wholly owned subsidiary whose operations
were consolidated with ours for accounting and financial statement purposes, was
spun off from our company. Consequently, the results of operations of Xact Aid,
Inc. are included in the financial statements herein as loss from discontinued
operations for the period from July 1, 2004 to the date of the spin-off (May 9.,
2005) and for the fiscal year ended June 30, 2004, totaling $800,301 and
$68,093, respectively.
15
During the fiscal year ended June 30, 2005, we had revenues of $5,176 from the
initial sales during the marketing phase of our Drug Stop product, as compared
to $192,109 during the fiscal year ended June 30, 2004. Revenues during the
fiscal year ended June 30, 2004 were earned from the sale of NICOWater(TM).
Sales of NICOWater(TM) ceased on January 8,2004 due to the loss of the NICO
patent. Cost of sales for the fiscal year ended June 30, 2005 was $2,838 as
compared to $109,437 for the fiscal year ended June 30, 2004. Other costs and
expenses for the fiscal year ended June 30, 2005 totaled $1,634,864 as compared
to $4,876,505 for the fiscal year ended June 30, 2004. The net decrease in
general and administrative expense for the fiscal year ended June 30, 2005 was
due primarily to a combination of the following:
(i) a decrease in selling and marketing expenses of approximately $909,539 due
primarily to the discontinuance of our NICOWater(TM) product;
(ii) a decrease in consulting fees totaling approximately $212,423, due
primarily to a decrease in issuance of the Company' stock for medical and
marketing consulting services in connection with the Company's loss of
NICOWater(TM);
(iii) a decrease in executive salaries of approximately $627,284 and other
salaries of approximately $117,866, in addition to a decrease in related payroll
tax expense of approximately $95,919, due to the installation of new management
and cost saving measures;
(iv) a decrease in legal and accounting fees totaling approximately $532,159, of
which approximately $373,377 were associated with non-recurring general
corporate legal fees and legal expense in connection with the NICOWater(TM)
arbitration;
(v) a decrease in insurance expense of approximately $278,150 due primarily to
the discontinuance of product liability insurance in connection with
NICOWater(TM); and
(vi) a decrease of approximately $388,302 attributable to net decreases in
various other expenses.
Other income for the fiscal years ended June 30, 2005 and June 30, 2004
consisted of forgiveness of debt and gain on settlement of accounts payable of
$107,976 and zero, respectively. Other expenses for the fiscal years ended June
30, 2005 and June 30, 2004 consisted of amortization of debt discount and
financing expense in the amount of $970,464 and $1,139,534, respectively,
interest in the amount of $322,212 and $262,110, respectively. Other expenses
were zero in the fiscal year ended June 30, 2005, however, in the fiscal year
ended June 30, 2004 other expenses included write-offs in connection with the
loss of NICOWater(TM) in the amount of $730,131, a write-off of notes receivable
in the amount of $139,500 and $27,919 of losses on settlements of accounts
payable.
As a result of the above, we incurred a net loss of $3,617,527 for the fiscal
year ended June 30, 2005 as compared to a net loss of $7,161,005 for the fiscal
year ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements, particularly as they relate to the marketing and sales
of Drug Stop and the introduction and launch of our new products, if any, could
continue to be significant. Our future cash requirements and the adequacy of
available funds will depend on many factors, including whether or not the market
accepts Drug Stop and, if there is market acceptance, the pace at which it
develops and the pace at which we are able to launch new products, if any, and
the pace at which the market for new products develops.
During the fiscal year ended June 30, 2005, management successfully obtained
additional capital through sales and issuance of convertible notes from which we
received net proceeds of $1,300,000, however, we cannot assure you that the
proceeds received from the sale and issuance of convertible notes will provide
all the additional capital necessary for us to become profitable. During the
next 12 months, if we fail to earn revenues in an amount sufficient to fund our
operations and we do not obtain the credit facility, we will have to raise
capital through an additional 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.
As of June 30, 2005, our current assets included $158,275 in cash, $29,488 in
accounts receivable and inventory valued at $1,525. Also included in current
assets is prepaid expenses of $428,794, $337,000 of which represents the
prepayment of corporate marketing expenses and $91,794 is prepaid interest in
connection with our convertible debt financing. As of June 30, 2005, non current
assets included $100,000 in prepaid interest and $122,955 of deferred financing
costs, both related to the callable convertible secured note financing. We have
also reflected $358,684 as the value of our patent and related FDA clearance for
our DrugStop product. Our current liabilities at June 30, 2005 included accounts
payable and accrued expenses of $1,013,265, a liability in the amount of
$156,400 for unpaid lease payments we assumed from Moneyzone, notes payable of
$334,250 and $207,049 in notes payable due to related parties.
We had a net loss of $3,617,527 for the fiscal year ended June 30, 2005 as
opposed to a net loss of $7,161,005 for the fiscal year ended June 30, 2004. The
decrease in the net loss is attributable to eliminating costs and expenses
associated with our NICOWater(TM) product and patent and cost efficiencies
resulting from installation of new management.
Net cash used in operating activities was $1,939,044 for the year ended June 30,
2005. The primary use of cash for the fiscal year ended June 30, 2005 was to
fund our net loss, offset by $1,034,805 for amortization of debt discount and
non-cash interest expense, $230,728 representing the fair market value of
options, warrants and common stock issued during the fiscal year for services
rendered. To conserve cash, we have historically paid some consultant and
employee salaries with our common stock. During the next 12 months, if we cannot
generate sufficient funds to operate our business from product sales, we may be
required to sell additional debt or equity securities or borrow funds from
related parties. We cannot be certain that we will be successful in obtaining
financing if we need it.
16
Net cash used in operating activities was $1,939,044 for the year ended June 30,
2005.
Cash flows from investing activities for the fiscal year ended June 30, 2005
consisted of the purchase of property and equipment for net cash provided by
investing activities of $238.
Cash flows used in investing activities for the fiscal year ended June 30, 2004
consisted of $5,000 for acquisition and $7,207 used in the purchase of property
and equipment for net cash used in investing activities of $12,207.
Net cash provided by financing activities for the fiscal year ended June 30,
2005 included proceeds from notes payable (net of prepaid interest of $16,500 in
the amount of $95,798, payments of notes payable to related parties in the
amount of $71,226, proceeds from the issuance of convertible debentures of
$1,531,261 (net of issuance costs and prepaid interest of $599,000) and proceeds
from the exercise of options and warrants in the amount of $230,728. Net cash
provided by financing activities for the fiscal year ended June 30, 2004
included proceeds from the sale of common stock in the amount of $150,000,
proceeds from notes payable to related parties in the amount of $112,500,
proceeds from the issuance of convertible debentures of $3,401,000 (net of
issuance costs of $599,000) and proceeds from the exercise of options in the
amount of $133,333. We also made payments on notes payable in the amount of
$339,430, resulting in net cash provided by financing activities for the fiscal
year ended June 30, 2005 in the amount of $3,457,403. . Since we are in the
early sales and marketing stages for DrugStop, our only product, its manufacture
and sale is an unproven business model that may not be successful and will
ultimately depend upon demand for the product. Although it is the opinion of
management that due to the growth of this product and potential new products,
our business will grow and prosper, at this time it is impossible for us to
predict the degree to which demand for our product will evolve or whether our
potential market-share will be large enough to provide any meaningful revenue or
profit for us.
RECENT SIGNIFICANT EVENTS
A. SPIN OFF OF XACT AID, INC., A WHOLLY OWNED SUBSIDIARY
On May 9, 2005, in connection with the spin-off of Xact Aid, Inc., the Company
distributed all 2,001,000 shares of its outstanding common stock that we owned
to our shareholders (along with a copy of the Xact Aid prospectus). Xact Aid,
Inc. filed a registration statement with the Securities and Exchange Commission,
which was declared effective on April 18, 2005, registering all 2,001,000 shares
of Xact Aid common stock owned by the Company. In addition, Xact Aid has filed
an application on Form 211 with the NASD to have the 2,001,000 shares traded on
the Over-The-Counter-Bulletin Board.
B. SALE OF 10% CALLABLE SECURED CONVERTIBLE NOTES
On June 22, 2005, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of $800,000
principal amount 10% Callable Secured Convertible Notes and we received the
gross amount of $800,000. The 10% convertible notes are due two years from the
date of issuance. The 10% convertible notes are convertible at the option of the
holders into shares of our common stock. The conversion price is equal to the
lesser of (i) $.017 and (ii) the average of the lowest three (3) intra-day
trading prices during the twenty (20) trading days immediately prior to the
conversion date discounted by sixty percent (60%). In connection with the
issuance of the 10% convertible notes, the noteholders shall receive warrants to
purchase shares of our common stock. Furthermore we entered into a Registration
Rights Agreement in order to register the above-referenced securities and are
required to register 200% of our common shares underlying the 10% convertible
notes and the warrants.
C. ISSUANCE OF UNREGISTERED COMMON STOCK AS CONSIDERATION FOR SERVICES
On July 12, 2005 we issued a total of sixteen million two hundred (16,200,000)
shares of our restricted and unregistered common stock to five consultants as
consideration for services and three million eight hundred thousand (3,800,000)
shares of our restricted and unregistered common stock to Edward W. Withrow,
III, our Chief Executive Officer, in consideration of his terminating his
employment agreement and entering into a consulting agreement, the effect of
which includes, but is not limited to, reducing his annual base salary from
$198,000 to $96,000. Mr. Withrow will continue to serve as our Chief Executive
Officer.
D. AUGUST 2005 CONVERTIBLE DEBENTURE
In August 2005, the Company entered into a Securities Purchase Agreement with an
accredited institutional investor for the issuance of a $50,000 principal amount
6% convertible debenture with an original issue discount of 20%. The debenture
is due February 2006. The debenture is convertible at the option of the holder
into the Company's shares of common stock at a fixed conversion price of $0.01
per share and bears the same terms and conditions as the February 2004
Convertible Debentures. As of August 24, 2005, the entire $50,000 in principal
amount remains outstanding.
17
FINANCIAL STATEMENT INDEX
FINANCIAL STATEMENTS FOR Addison-Davis Diagnostics, Inc. (f/k/a QT 5, Inc.)
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of June 30, 2005 F-2
Consolidated Statements of Operations for the years ended June 30, 2005
and 2004 F-3
Consolidated Statements of Stockholder' Deficit for the years ended
June 30, 2005 and 2004 F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2005
and 2004 F-5
Notes to the Consolidated Financial Statements F-7
Notes to the Consolidated Financial Statements as of March 31, 2005
(unaudited) F-31
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[LOGO] ACI
ARMANDO C. IBARRA
Certified Public Accountants
A Professional Corporation
Armando C. Ibarra, C.P.A. Members of the California Society of
Certified Public Accountants
Armando Ibarra, Jr., C.P.A., JD Members of the American Institute of
Certified Public Accountants
Registered with the Public Company Oversight
Accounting Board
To the Board of Directors
Addison-Davis Diagnostics, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Addison-Davis
Diagnostics, Inc. as of June 30, 2005 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Addison-Davis
Diagnostics, Inc. as of June 30, 2004, were audited by other auditors whose
report dated August 19, 2004, expressed an unqualified opinion on those
statements. Their report included an explanatory paragraph regarding going
concern.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Addison-Davis Diagnostics,
Inc., as of June 30, 2005, and the results of their operations and its cash
flows for the year then ended in conformity with U.S. generally accepted
accounting principles.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's losses from operations raise substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
ARMANDO C. IBARRA, CPA
September 8, 2005
Chula Vista, Ca. 91910
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Addison-Davis Diagnostics, Inc. (formerly known as QT 5, Inc.)
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Addison-Davis Diagnostics, Inc.
(formerly known as QT 5, Inc.) (the "Company") for the year ended June 30, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Company for the year ended June 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. During the year ended June 30,
2004, the Company incurred a net loss of $7,161,005, with only $192,109 of
revenues. In addition, the Company lost its arbitration with the patent holder
of NICOWater(TM), and subsequently lost the rights to the patent and the related
right to sell the Company's only product that had been producing revenues for
the Company. These factors, among others, as discussed in Note 1 to the
consolidated financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Successful completion of the Company's
transition to the attainment of profitable operations is dependent upon its
obtaining adequate financing to fulfill its development activities and achieving
a level of sales adequate to support the Company's cost structure. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
CORBIN & COMPANY, LLP
Irvine, California
August 19, 2004
F-2
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, 2005
------------
Current assets:
Cash $ 158,275
Accounts receivable 29,488
Inventories 1,525
Escrow receivable 300,000
Prepaid expenses 128,794
------------
Total current assets 618,082
Property and equipment, net of accumulated depreciation of $17,943 19,705
Deferred financing cost, net of accumulated amortization of $636,855 122,955
Prepaid interest 100,000
Patent and FDA Clearance 358,684
Other assets 3,493
------------
$ 1,222,919
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 976,400
Accrued salaries 36,865
Lease liability 156,400
Notes payable 334,250
Notes payable to related parties 207,049
------------
Total current liabilities 1,710,964
Convertible notes payable, net of unamortized debt discount of $2,649,259 1,219,329
Total liabilities 2,930,293
------------
Stockholders' deficit:
Common stock, $0.001 par value; 5,000,000,000 shares authorized;
13,836,973 shares issued and outstanding 13,837
Additional paid-in capital 18,374,703
Accumulated deficit (20,095,914)
------------
Total stockholders' deficit (1,707,374)
------------
$ 1,222,919
============
See accompanying notes to consolidated financial statements
F-3
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended For The Year Ended
June 30, 2005 June 30, 2004
--------------- ---------------
Revenue $ 5,176 $ 192,109
Costs and expenses:
Cost of revenue (2,838) (109,437)
General and administrative (1,634,864) (4,876,505)
Loss on patent arbitration -- (730,131)
--------------- ---------------
Operating loss (1,632,526) (5,523,964)
Other income (expense):
Interest, net (1,292,676) (1,401,644)
Other, net 107,976 (167,304)
--------------- ---------------
Net loss before loss from discontinued operations (2,817,226) (7,092,912)
Loss from discontinued operations (800,301) (
68,093)
--------------- ---------------
Net loss $ (3,617,527) $ (7,161,005)
=============== ===============
Net loss available to common stockholders
per common share:
Basic and diluted:
Loss from continuing operations $ (0.51) $ (101.23)
Loss from discontinued operations (0.14) (0.97)
--------------- ---------------
Net loss $ (0.65) $ (102.20)
=============== ===============
Weighted average shares outstanding:
Basic and diluted 5,527,547 70,067
=============== ===============
See accompanying notes to consolidated financial statements
F-4
ADDISON-DAVIS DIAGNOSTICS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
Additional Pre-paid
Common Stock Paid-in Consulting Accumulated
Shares Amount Capital Expense Deficit
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 27,214 $ 27 $ 9,962,735 $ (428,957) $(10,185,776)
Issuance of shares from escrow for license -- -- 358,684 -- --
Issuance of common stock for services 24,060 24 646,001 -- --
Issuance of common stock on settlement
of notes payable 1,000 1 314,999 -- --
Issuance of common stock for cash 667 -- 150,000 -- --
Shares issued to employees for
services rendered and past due salaries 37,712 38 155,729 -- --
Issuance of common stock for conversion of
convertible promissory note 129,174 129 1,139,668 -- --
Issuance of common stock for settlement of
accounts payable 885 1 167,069 -- --
Shares issued in connection with
convertible note antidilution provision 688 1 (1) -- --
Issuance of common stock upon exercise
of warrants 8,889 9 133,324 -- --
Shares issued in connection with
convertible notes payable 67 -- 16,000 -- --
Estimated fair value of deferred financing costs,
beneficial conversion features
and warrants issued in connection with
convertible notes payable -- -- 3,214,150 -- --
Amortization of prior year prepaid
consulting expense -- -- -- 428,957 --
Net loss (7,161,005)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2004 230,356 230 16,258,358 -- (17,346,781)
Shares issued to employees for services
Rendered and past due salaries 697,667 698 167,882 -- --
Shares issued in connection with
Convertible notes payable 8,777,145 8,777 221,951 -- --
Issuance of common stock for services 4,065,138 4,065 256,293 -- --
Issuance of common stock on settlement
Of notes payable to a related party 66,667 67 7,131 -- --
Estimated fair value of deferred financing
Costs, beneficial conversion features
and Warrants issued in connection with
Convertible notes payable -- -- 1,531,261 -- --
Distribution of net assets of Xact Aid, Inc.
In spin-off -- -- (68,093) -- 868,394
Net loss -- -- -- -- (3,617,527)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 2005 13,836,973 13,837 18,374,703 -- (20,095,914)
============ ============ ============ ============ ============
Total
------------
Balance, June 30, 2003 $ (651,971)
Issuance of shares from escrow for license 358,684
Issuance of common stock for services 646,025
Issuance of common stock on settlement
of notes payable 315,000
Issuance of common stock for cash 150,000
Shares issued to employees for
services rendered and past due salaries 155,767
Issuance of common stock for conversion of
convertible promissory note 1,139,797
Issuance of common stock for settlement of
accounts payable 167,070
Shares issued in connection with
convertible note antidilution provision --
Issuance of common stock upon exercise
of warrants 133,333
Shares issued in connection with
convertible notes payable 16,000
Estimated fair value of deferred financing costs,
beneficial conversion features
and warrants issued in connection with
convertible notes payable 3,214,150
Amortization of prior year prepaid
consulting expense 428,957
Net loss (7,161,005)
------------
Balance, June 30, 2004 (1,088,193)
Shares issued to employees for services
Rendered and past due salaries 168,500
Shares issued in connection with
Convertible notes payable 230,728
Issuance of common stock for services 260,358
Issuance of common stock on settlement
Of notes payable to a related party 7,198
Estimated fair value of deferred financing
Costs, beneficial conversion features
and Warrants issued in connection with
Convertible notes payable 1,531,261
Distribution of net assets of Xact Aid, Inc.
In spin-off 800,301
Net loss (3,617,527)
------------
Balance, June 30, 2005 (1,707,374)
============
See accompanying notes to financial statements.
F-5
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended For The Year Ended
June 30, 2005 June 30, 2004
--------------- ---------------
Cash flows from operating activities:
Net loss $ (3,617,527) $ (7,161,005)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,480 11,194
Amortization of debt discount and non-cash interest
expense 745,883 1,139,532
Amortization of prepaid compensation -- 428,957
Loss on issuance of shares for settlement of accounts
payable -- 46,562
Issuance of shares for settlement of notes payable 7,198 202,500
Fair market value of options and warrants issued -- --
Gain on extinguishment of debt (108,403) --
Common stock and options issued for services 428,858 646,025
Provision for uncollectible related party note receivable -- 139,500
Loss on patent arbitration -- 507,873
Loss on discontinued operations 800,301
Changes in operating assets and liabilities, net of acquired
business:
Accounts receivable 27,816 61,269
Inventories, net 34,345 (205,644)
Deferred costs (20,094) 21,551
Prepaid expenses (193,018) (38,338)
Other assets 6,652 --
Accounts payable and accrued expenses (3,903) 1,095,116
Deferred revenue -- (86,184)
Deferred rent expense -- (10,900)
--------------- ---------------
Net cash used in operating activities (1,939,044) (3,201,992)
--------------- ---------------
Cash flows from investing activities:
Cash paid for acquisition -- (5,000)
Purchases of property and equipment 238 (7,207)
--------------- ---------------
Net cash (used in) provided by investing activities 238 (12,207)
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of stock -- 150,000
Proceeds from notes payable to related parties (71,226) 112,500
Payments on notes payable 95,798 (225,000)
Payments on notes payable to related parties -- (67,500)
Proceeds from convertible debentures, net of issuance
costs and prepaid interest of $599,000 in 2004 1,531,261 3,400,000
Proceeds from exercise of options and warrants 230,728 133,333
Payments on installment financing -- (46,930)
--------------- ---------------
Net cash provided by financing activities 1,786,561 3,457,403
--------------- ---------------
CONTINUED ...
F-6
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
For The Year Ended For The Year Ended
June 30, 2005 June 30, 2004
--------------- ---------------
Net increase in cash (152,245) 243,204
Cash, beginning of year 310,520 67,316
--------------- ---------------
Cash, end of year 158,275 $ 310,520
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ -- $ --
=============== ===============
Income taxes $ -- $ --
=============== ===============
Common stock issued for settlement of accounts
payable and accrued liabilities $ -- $ 276,275
=============== ===============
Shares issued upon settlement of note payable $ -- $ 112,500
=============== ===============
Stock issued from escrow for license $ -- $ 358,684
=============== ===============
Issuance of note payable for inventory $ -- $ 30,702
=============== ===============
Issuance of equity instruments in connection with
deferred finance costs $ -- $ 238,810
=============== ===============
Amortization of deferred financing costs and debt
discount against additional paid-in capital upon
conversion of notes payable $ -- $ 1,275,846
=============== ===============
Shares issued on conversion of notes payable $ -- $ 2,415,643
=============== ===============
Debt discount recognized related to convertible debentures $ -- $ 2,991,340
=============== ===============
Shares issued for anti-dilution provision $ -- $ 103
=============== ===============
Accrued expenses converted to note payable $ -- $ 496,025
=============== ===============
Distribution of Xact Aid, Inc. net assets in spin-off $ (800,301) $ --
=============== ===============
See accompanying notes to consolidated financial statements
F-7
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND ORGANIZATION
Addison-Davis Diagnostics, Inc. (formerly QT 5, Inc.) (the "Company") is
currently the owner of a patent-pending and FDA 510(K) cleared urine specimen
rapid drug screening test for drugs-of-abuse called DrugStop, which we have sold
in limited quantities and are preparing to market through wider distribution
channels. We are also test-marketing a licensed FDA 510(K) cleared product
called EZ F.O.B.T., a fecal occult quick-test for unseen blood in the stool to
detect early signs which may lead to colon cancer and other intestinal diseases.
On May 9, 2005, in connection with the spin-off of Xact Aid, Inc., formerly a
wholly-owned subsidiary of the Company, the Company distributed all 2,001,000
shares of its outstanding common stock that we owned to our shareholders (along
with a copy of the Xact Aid prospectus). Xact Aid, Inc. filed a registration
statement with the Securities and Exchange Commission, which was declared
effective on April 18, 2005, registering all 2,001,000 shares of Xact Aid common
stock owned by the Company. In addition, Xact Aid has filed an application on
Form 211 with the NASD to have the 2,001,000 shares traded on the
Over-The-Counter-Bulletin Board.
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto, wherein the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med and Insta Med assigned all its right
title and interest in that Drug Test Cup, Patent Pending Application No.
09752712 together with any and all approvals issued by the Federal Drug
Administration ("FDA") for the Drug Test named "Drug Stop" FDA No. K 991465
Regulatory Class II approval for over-the-counter ("OTC") as well as any and all
510(K) number attached.
In April 2004, the Company entered into an Agreement of Sale of Assets with Xact
Aid Investments, 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)
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. Xact Aid, Inc., a Nevada corporation, was spun off in May
2005.
In October 2003, the Company entered into a License Agreement of Intellectual
Property with VMM, LLC. In consideration for the License Agreement, the Company
released 2,174 previously issued shares of its common stock from escrow valued
at $358,684 (or $165.00 per share, which was the fair market value of the stock
on the date of the License Agreement). The term of the License Agreement was one
year, although so long as the Company met certain proposed sales projections,
the License Agreement would be extended for four additional one-year terms.
After this period, if neither party terminated the License Agreement, it would
be extended for an additional five-year term. The term of the License Agreement
would have become effective four months after all required regulatory clearances
had been obtained for certain of the licensed products and after the licensor
had obtained a manufacturer to manufacture the products in accordance with the
terms of the License Agreement.
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 had the right to market and sell; (b) the first year of
the term of the License Agreement was 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. On June
23, 2004, we received a Notice of Assignment and Assumption Agreement by and
between VMM and Insta Med , whereby VMM sold, assigned and transferred all its
right title and interest in the intellectual property described in the
Modification Agreement. The Company was to begin the amortization of the License
Agreement at the time the required regulatory clearances are obtained and the
License Agreement becomes effective. The Company anticipated to amortizing the
License Agreement over the estimated useful life of five years using a
straight-line method.
F-8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Addison-Davis Diagnostics, Inc. and its wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
GOING CONCERN
The accompanying 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 net losses of $3,617,527 and $7,161,005, respectively, with
only $5,176 and $192,109 of revenue, respectively, during the years ended June
30, 2005 and 2004. The Company also had an accumulated deficit of $20,095,914
and negative working capital of $1,092,882, with $158,275 in cash at June 30,
2005. Management recognizes that the Company must obtain additional funding for
the eventual achievement of sustained profitable operations. The Company's
success is dependent upon numerous items, including the successful development
of effective marketing strategies to customers of current and new products in a
competitive market coupled with faster service and a variety of options. In
April 2005, the Company rescinded its license to market the Target System
diagnostic products and was assigned all rights, title and interest in the
patent-pending Drug Stop product, together with all approvals issued by the
F.D.A. Management believes that ownership, sales and marketing of this product
will have a significant effect on future profitability. During the fiscal year
ended June 30, 2005, management successfully obtained capital through the sale
and issuance of convertible notes, from which the Company received gross
proceeds of approximately $1,300,000 (see Note 8). However, no assurance can be
given that the convertible debt financing will provide sufficient cash to
satisfy the Company's need for additional capital or that other 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 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.
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
realization of prepaid expenses and long-lived assets, collectibility of
receivables, provision for slow moving and obsolete inventories and the
valuation allowance on deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments as of June 30, 2005,
including cash, receivables, accounts payable and accrued expenses, and notes
payable, approximate their respective fair values due to their short maturities.
The fair value of notes payable to related parties is not determinable as these
transactions are with related parties. The fair value of convertible notes
payable is not determinable as similar instruments cannot be located.
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 June 30,
2005, there was approximately $58,419 of uninsured cash balances.
INVENTORIES
Inventories are stated at the lower of cost or estimated net realizable value
and consist of finished goods. Cost is determined under the average cost method.
Should customer orders be canceled or decline, the ultimate net realizable value
of such products could be less than the carrying value of such amounts. At June
30, 2005, management believes that inventories are carried at the lower of cost
or net realizable value.
PREPAID EXPENSES AND PREPAID INTEREST
As discussed in Note 7, the Company has prepaid interest of $173,294 in
connection with the issuance of convertible debt. The Company has recorded such
amount as prepaid expenses for the current portion and prepaid interest for the
long term portion and is amortizing such amounts to interest expense over the
life of the debt. The Company also has prepaid interest of $16,500 in connection
with an original issue discount note payable to Robert G. Pautsch in the total
principal amount of $66,500 dated December 31, 2004 and payable on demand.
F-9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from three to seven years. Repairs and maintenance are charged to
expense as incurred while significant improvements are capitalized. Upon
retirement or other disposition of property and equipment, the accounts are
relieved of the cost and the related accumulated depreciation, with any
resulting gain or loss included in the consolidated statements of operations.
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 June 30, 2005, management of the Company believes
that no impairment has been indicated. There can be no assurances, however, that
market conditions will not change or demand for the Company's products will
develop which could result in impairment of long-lived assets in the future.
INCREASE IN AUTHORIZED SHARES AND STOCK SPLIT
On April 26, 2004, a majority of the Company's stockholders approved a one for
ten reverse stock split and on July 26, 2004 approved an increase in the number
of authorized common stock shares to 5,000,000,000 shares. On November 26, 2004
a majority of the Company's stockholders approved a one for one hundred fifty
reverse stock split. In addition, the Company amended its articles of
incorporation to adjust the common stock par value to $0.001 per share. All
references in the consolidated financial statements and the accompanying notes
referring to common shares, share prices, per share amounts, and stock plans
have been adjusted to give retroactive effect to the reverse stock splits and
par value change.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of its products to
customers.
ADVERTISING
The Company expenses the cost of advertising when incurred as general and
administrative expense. Advertising expense was approximately $1,510 and
$378,985 for the years ended June 30, 2005 and 2004, respectively, and is
included in general and administrative expenses on the accompanying consolidated
statements of operations.
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 June 30, 2005, the Company has two stock-based employee
compensation plans, which are described more fully in Note 9. During the years
ended June 30, 2005 and 2004, no compensation expense was recognized in the
accompanying consolidated statements of operations for options issued to
employees pursuant to APB 25, as all options granted in fiscal 2005 and 2004
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:
F-10
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Year Ended June 30,
----------------------------------
2005 2004
--------------- ---------------
Net loss as reported $ (3,617,527) $ (7,161,005)
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 -- (110,000)
--------------- ---------------
Pro forma net loss $ (3,617,527) $ (7,271,005)
=============== ===============
Basic and diluted loss per share - as reported $ (0.65) $ (102.20)
=============== ===============
Basic and diluted loss per share - pro forma $ (0.65) $ (103.77)
=============== ===============
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, 6,082,380 and 2,631 as of June 30, 2005 and 2004, respectively, have
been excluded from dilutive loss per share, as their effect would be
anti-dilutive for fiscal 2005 and 2004.
COMPREHENSIVE INCOME
Comprehensive income is not presented in the Company's 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 consolidated financial statements.
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
In May 2005, Xact Aid, Inc., formerly a wholly owned subsidiary whose operations
were consolidated with ours for accounting and financial statement purposes, was
spun off from our company. Consequently, the results of operations of Xact Aid,
Inc. are included in the financial statements herein for the period from July 1,
2004 to the date of the spin-off (May 9, 2005) and for the fiscal year ended
June 30, 2004, totaling $800,301 and $68,093, respectively, as discontinued
operations., For the periods presented, Xact Aid, Inc. had no revenues. The
spin-off of Xact Aid, Inc. to the Company's shareholders was recorded as a
dividend at the net book value of the net liabilities distributed, totaling
$800,301.
F-11
RECLASSIFICATIONS
Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 123R, "Share-Based Payment." The new rule requires
that the compensation cost relating to share-based payment transactions be
recognized in the financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. This statement
precludes the recognition of compensation expense under APB Opinion No. 25's
intrinsic value method. Public entities will be required to apply Statement 123R
in the first interim or annual reporting period that begins after June 15, 2005.
The Company has not yet assessed the impact of SFAS No. 123R on its financial
statements.
NOTE 3 - 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 amounts. These notes are secured by 266 shares
of the Company's common stock owned by former stockholders. As the collection of
the notes is not reasonably assured, the Company wrote off the entire remaining
amount of $139,500 of the notes receivable during the fiscal year ended June 30,
2004 to other expense.
NOTE 3 - ESCROW RECEIVABLE
On June 22, 2005, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of $800,000
principal amount 10% Callable Secured Convertible Notes and we received the
gross amount of $800,000 ("June 2005 Convertible Notes"). In connection with the
June 2005 Convertible Notes transaction, $337,000 was held in Escrow; $300,000
to fund a corporate marketing program for the Company and $37,000 to fund a
contingent premium for key man life insurance with the Company as beneficiary.
In June 2005, $300,000 was disbursed from the Escrow for corporate marketing and
is reflected as prepaid expenses in the audited financial statements included
herein. $37,000 remains in the Escrow.
NOTE 4 - PATENT PENDING AND F.D.A. CLEARANCES
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 2,174 previously issued shares of its common stock from
escrow valued at $358,684 (or $165.00 per share, which was the fair market value
of the stock on the date of the License Agreement). The term of the License
Agreement was one year, although so long as the Company met certain proposed
sales projections, the License Agreement would be extended for four additional
one-year terms. After this period, if neither party terminated the License
Agreement, it would be extended for an additional five-year term. The term of
the License Agreement would become effective four months after all required
regulatory clearances had 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. The Company would begin
amortizing the License Agreement at the time the required regulatory clearances
were obtained and the License Agreement became effective. The Company
anticipated amortizing 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 had 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 had 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 were achieved. On June
23, 2004, we received a Notice of Assignment and Assumption Agreement by and
between our Licensor, VMM, LLC ("VMM") and Insta Med Manufacturing, Inc.
("InstaMed"), whereby VMM sold, assigned and transferred all its right title and
interest in the intellectual property described in the Modification Agreement.
In April 2005, the Company entered into a Settlement and Release Agreement with
Insta Med Manufacturing, Inc. ("Insta Med") in settlement of certain disputes
between the Company and Insta Med concerning the license agreement dated October
17, 2003 and the February 6, 2004 modification thereto, wherein the license
agreement and modification were rescinded and the rights to sell and market the
Target System reverted back to Insta Med and Insta Med assigned all its right
title and interest in that Drug Test Cup, Patent Pending Application No.
09752712 together with any and all approvals issued by the Federal Drug
Administration ("FDA") for the Drug Test named "Drug Stop" FDA No. K 991465
Regulatory Class II approval for over-the-counter ("OTC") as well as any and all
510(K) number attached. The Company has reflected a value of $358,684 to the
Drug Stop product right, title and interest, together with F.D.A. approvals, the
same value originally recorded for the License.
F-12
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2005:
Furniture and fixtures $ 17,341
Computer equipment and software 20,307
Less: accumulated depreciation (17,943)
------------
$ 19,705
============
Depreciation expense approximated $8,480 and $8,500 for the years ended June 30,
2005 and 2004, respectively.
NOTE 6 - NOTES PAYABLE
In April 2004, the Company entered into an Agreement of Sale of Assets with Xact
Aid Investments, Inc. In full consideration for all the acquired assets, the
Company paid $5,000 in cash at the closing and a non-interest bearing 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. The balance of the
note was $20,702 at June 30, 2004 and $15,700 on November 15, 2004. The Company
allocated all of the purchase price to inventories. On November 15, 2004, as
part of the spin-off of the Company's former wholly owned subsidiary, Xact Aid,
Inc. ("Xact Aid"), the Company sold the Xact Aid line of first aid products for
minor injuries to Xact Aid,Inc. In full consideration for all assets, Xact Aid,
Inc. agreed to (i) repay funds advanced by the Company for Xact Aid operating
expenses from inception to September 30, 2004, which were repaid in November
2004 and December 2004 in the aggregate amount of $191,682; (ii) assume a
promissory note issued to Xact Aid Investments in the amount of approximately
$15,700 and (iii) issue 2,000,000 shares of its common stock to the Company.
On June 15, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "Owens Note") in the amount of $107,198 payable to
Timothy J. Owens ("Owens"), the former Chief Executive Officer of the Company.
The Owens Note was executed for payment of accrued and unpaid compensation. The
Owens Note bears interest at the rate of 6% per annum and is payable interest
only commencing July 15, 2004 and continuing until December 31, 2004, when the
principal and any accrued interest shall be due and payable. To secure the
performance of its obligation pursuant to the Owens Note, the Company has
granted a security interest in the Company's equipment, accounts receivable,
inventory and fixed assets. During the fiscal year ended June 30, 2005, Owens
converted the entire principal balance plus all unpaid accrued interest on the
Owens Note to 686,667 shares of restricted common stock of the Company.
On June 15, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "Reder Note") in the amount of $220,750 payable to
Steven H. Reder ("Reder"), the former President of the Company. The Reder Note
was executed for payment of accrued and unpaid compensation. The Reder Note
bears interest at the rate of 6% per annum and is payable interest only
commencing July 15, 2004 and continuing until December 31, 2004, when the
principal and any accrued interest shall be due and payable. To secure the
performance of its obligation pursuant to the Reder Note, the Company has
granted a security interest in the Company's equipment, accounts receivables,
inventory and fixed assets. On January 5, 2005 filed a lawsuit against the
Company alleging breach of his employment agreement, wrongful discharge, libel
and breach of promissory note (see Note 9 - Litigation).
On December 31, 2004, the Company executed and delivered an Original Issue
Discount Promissory Note in the total principal amount of $66,500 payable to
Robert G. Pautsch. The principal balance and all accrued interest is payable on
demand.
On February 3, 2005, the Company executed and delivered a Promissory Note in the
amount of $25,000 payable to Robert G. Pautsch. The principal balance and all
accrued interest is payable on demand.
On March 3, 2005, the Company executed and delivered a Promissory Note in the
amount of $25,000 payable to Robert G. Pautsch. The principal balance and all
accrued interest is payable on demand.
NOTE 7 - NOTES PAYABLE TO RELATED PARTIES
On April 30, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "De Luca Note") in the amount of $68,000 payable to
Fred De Luca ("De Luca"), a consultant to and director/secretary of the Company.
The De Luca Note was executed for payment of accrued and unpaid consulting fees
due to De Luca. The De Luca Note bears interest at the rate of 6% per annum and
is payable interest only each month commencing June 1, 2004 and continuing until
December 31, 2004, when the principal and any accrued interest shall be due and
payable. To secure the performance of its obligation pursuant to the De Luca
Note, the Company has pledged One Thousand (1,000) shares of common stock of
Xact Aid, Inc. held by the Company. On October 15, 2004, Xact Aid assumed the
$68,000 promissory note payable by the Company and secured by the assets of the
Company in order to facilitate Xact Aid's anticipated spin-off from the Company.
F-13
On June 10, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "Kunin Note") in the amount of $100,077 payable to
Norman A. Kunin ("Kunin"), a consultant to and former Chief Financial Officer of
the Company. The Kunin Note was executed for payment of accrued and unpaid
compensation and expenses accumulated prior to the date that Kunin terminated
employment with the Company. The Kunin Note bears interest at the rate of 6% per
annum with principal and interest payable through December 31, 2004 in
accordance with that certain Separation Agreement and General Release between
the Company and Kunin dated June 10, 2004. To secure the performance of its
obligation pursuant to the Kunin Note, the Company has granted a security
interest in the Company's equipment, accounts receivable, inventory and fixed
assets. . During the fiscal year ended June 30, 2005 the Company paid $38,092 to
Kunin, which reduced the outstanding principal balance of the note to $61,985.
On June 30, 2005, Kunin forgave the remaining principal balance and all accrued
interest on the Kunin Note. The forgiveness was recorded as other income -
forgiveness of debt on the consolidated operating statement.
On January 25, 2005, the Company executed and delivered a Promissory Note in the
amount of $25,000 payable to the Esther M De Luca Family Trust. The note bears
interest at the rate of 8% per annum and is payable on demand.
On February 24, 2005, the Company executed and delivered a Promissory Note in
the amount of $15,000 payable to the Esther M De Luca Family Trust. The note
bears interest at the rate of 8% per annum and is payable on demand.
NOTE 8 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE
AUGUST 2003 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 $112.50 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 or (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 the set price will be fixed at $15.00 per share. The
Company has registered additional shares of common stock to cover such
additional conversion shares. As of June 30, 2005, a total of $1,950,000 of the
August 2003 Debentures was converted into 42,250 shares of the Company's common
stock.
In connection with the Securities Purchase Agreement, the Company also issued
warrants to purchase 8,889 shares of the Company's common stock at an exercise
price of $112.50 per share. 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 8,889 shares of the Company's common stock and a warrant to
purchase 1,333 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 $112.50 to $15.00. 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 33 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 133 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 $112.50 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 $112.50
to $15.00. The Company recorded the value of the warrant at $220,114 (under the
Black-Scholes pricing model) as an issuance cost, which is included as a
deferred financing cost in the accompanying consolidated balance sheet as of
June 30, 2004. During the fiscal year ended June 30, 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 costs in the accompanying 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.
F-14
FEBRUARY 2004 CONVERTIBLE DEBENTURES
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 $15.00. The Company has reserved
and registered 66,667 shares of its common stock to cover the conversion of the
February 2004 Debentures. As of June 30, 2005, a total of $572,066 of the
February 2004 Debentures was converted into 2,059,365 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 $15.00 per share. 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 33,333 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 67 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 $15.00 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 fiscal year ended June 30, 2004, the
Company incurred other issuance costs totaling $109,500 which were all recorded
as deferred financing costs in the accompanying consolidated balance sheet. The
Company is amortizing the deferred financing costs 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.
MAY 2004 10% CALLABLE CONVERTIBLE NOTES
On May 28, 2004, the Company entered into a Securities Purchase Agreement with
several accredited institutional investors for the issuance of an aggregate of
$1,000,000 principal amount 10% Callable Secured Convertible Notes ("May 2004
Callable Notes") . The Company received the first tranche in the gross amount of
$400,000 in May 2004 and balance of two additional tranches in the aggregate
gross amount of $600,000 in June 2004. The Company has received net proceeds
from the May 2004 Callable Notes of $800,000. The remaining $200,000 has been
retained by the accredited investors for interest payments due through maturity.
The Company has included such amounts as prepaid expenses in the accompanying
consolidated balance sheet and is amortizing such amounts to interest expense
over the life of the notes. The 10% convertible notes are due two years from the
date of issuance. The 10% convertible notes are convertible at the option of the
holders into shares of the Company's common stock. The conversion price is equal
to the lesser of (i) $12.00 or (ii) the average of the lowest three (3)
intra-day trading prices during the twenty (20) trading days immediately prior
to the conversion date discounted by forty percent (40%).
In the event the Company breaches one or more of its covenants, representations
or warranties, the Company may be obligated to pay liquidated damages as defined
in the agreements. The May 2004 Callable Notes are callable by the Borrower by
making a cash payment ranging from 130% to 150% of the amounts borrowed plus
accrued interest, as defined. The May 2004 Callable Notes are collateralized by
substantially all of the Company's assets.
The Company has initially registered 1,111,111 shares of its common stock to
cover the conversion of the May 2004 Callable Notes. As of June 30, 2005, a
total of $128,196 of the May 2004 Callable Notes was converted into 6,500,145
shares of the Company's common stock.
In connection with the May 2004 Callable Notes, the Company also issued warrants
to purchase 20,000 shares of the Company's common stock at an exercise price of
$5.25 per share that expire five years from the date of issuance. The Company
has registered 40,000 shares of its common stock to cover these warrants.
F-15
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the May 2004 Callable Notes, the Company has recorded a
debt discount of $716,673. The Company is amortizing the discount using the
effective interest method, adjusted prospectively for any reduction in the
warrant value as a result in the exercise price reduction through May and June
of 2006. The Company is immediately recording the corresponding unamortized debt
discount related to the beneficial conversion feature as interest expense and
related to the detachable warrants as additional paid-in capital when the
related note is converted into the Company's common stock.
During the fiscal year ended June 30, 2004, the Company incurred issuance costs
of $52,500 which were recorded as deferred financing costs in the accompanying
consolidated balance sheet. The Company is amortizing the deferred financing
cost to interest expense using the straight-line method 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.
During the fiscal year ended June 30, 2005, the Company recorded interest
expense related to the amortization of the debt discount and debt issuance costs
totaling $970,464. During the fiscal year ended June 30, 2005, the Company
recorded additional paid-in capital related to the conversion of the debentures
of $1,531,261. At June 30, 2005, the Company has remaining unamortized debt
issuance costs and debt discounts of $122,955 and $1,219,329, respectively,
associated with convertible debentures not yet converted.
AUGUST 2004 10% CALLABLE CONVERTIBLE NOTES
On August 12, 2004, the Company entered into a Securities Purchase Agreement
with several accredited institutional investors for the issuance of an aggregate
of $500,000 principal amount 10% Callable Secured Convertible Notes ("August
2004 Callable Notes") . The 10% convertible notes are due two years from the
date of issuance. The 10% convertible notes are convertible at the option of the
holders into shares of the Company's common stock. The conversion price is equal
to the lesser of (i) $0.84 and (ii) the average of the lowest three (3)
intra-day trading prices during the twenty (20) trading days immediately prior
to the conversion date discounted by fifty percent (50%).
In the event the Company breaches one or more of its covenants, representations
or warranties, the Company may be obligated to pay liquidated damages as defined
in the agreements. The August 2004 Callable Notes are callable by the Borrower
by making a cash payment ranging from 130% to 150% of the amounts borrowed plus
accrued interest, as defined. The August 2004 Callable Notes are collateralized
by substantially all of the Company's assets.
The Company has registered approximately 3,333,333 shares of its common stock to
cover the conversion of the August 2004 Callable Notes.
In connection with the August 2004 Callable Notes, the Company also issued
warrants to purchase 10,000 shares of the Company's common stock at an exercise
price of $0.84 per share that expire five years from the date of issuance. The
Company has reserved and registered 20,000 shares of its common stock to cover
these warrants.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the August 2004 Callable Notes, the Company has provided a
debt discount of $500,000. 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 the beneficial
conversion feature as interest expense and related to the detachable warrants as
additional paid-in capital when the related note is converted into the Company's
common stock.
The Company incurred cash issuance costs of $120,000 which were recorded as
deferred financing costs. The Company is amortizing the deferred financing costs
to interest expense using the straight-line method, 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.
JUNE 2005 10% CALLABLE CONVERTIBLE NOTES
On June 22, 2005, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of $800,000
principal amount 10% Callable Secured Convertible Notes and we received the
gross amount of $800,000. The 10% convertible notes are due two years from the
date of issuance. The 10% convertible notes are convertible at the option of the
holders into shares of our common stock. The conversion price is equal to the
lesser of (i) $.017 and (ii) the average of the lowest three (3) intra-day
trading prices during the twenty (20) trading days immediately prior to the
conversion date discounted by sixty percent (60%). In connection with the
issuance of the 10% convertible notes, the noteholders shall receive warrants to
purchase shares of our common stock. Furthermore we entered into a Registration
Rights Agreement in order to register the above-referenced securities and are
required to register 200% of our common shares underlying the 10% convertible
notes and the warrants.
Under the terms of the securities purchase agreements, in the event the Company
breaches one or more of its covenants or representations or warranties, the
Company may be obligated to pay to the investors liquidated damages equal to
three percent (3%) of the outstanding notes per month, prorated for partial
months, in cash or unregistered shares of common stock (issued at a price equal
to the conversion price of the notes determined as of the time of payment), at
the option of the investors, for such time that the breach remains uncured.
The secured convertible notes bear interest at 10% per annum and mature on two
years from the date of issuance. The 10% notes are convertible at any time at
the option of the holder into shares of our common stock, provided at no time
may a holder of our 10% notes and its affiliates own more than 4.9% of our
outstanding common stock. The conversion price of our common stock used in
calculating the number of shares issuable upon conversion of the 10% convertible
notes, is the lesser of (i) Sixty percent of the average of the lowest three
intra-day trading prices for our common stock during the twenty trading day
period ending one trading day prior to the date the conversion notice is sent by
the holder to the borrower; and (ii) a fixed conversion price of $0.017.
F-16
We are be obligated to pay a penalty of $2,000 per day to the investors if we
fail to deliver the shares of our common stock issuable upon a conversion of the
convertible notes within two business days following the receipt of the
investors' notice of conversion.
The number of shares of common stock issuable upon conversion of the convertible
notes is determined by dividing that portion of the principal of the convertible
notes to be converted by the conversion price.
The convertible notes are secured by a security agreement and an intellectual
property security agreement under which we pledged substantially all of our
assets, including our goods, fixtures, equipment, inventory, contract rights,
receivables and intellectual property.
The warrants purchased by the investors pursuant to the June 22, 2005 securities
purchase agreement entitle the investors to purchase 47,058,824 shares of our
common stock at an exercise price equal to $0.0170 per share.
The warrants expire five years from the date of issuance. The warrants are
subject to exercise price adjustments upon the occurrence of certain events
including stock dividends, stock splits, mergers, reclassifications of stock or
our recapitalization. The exercise price of the warrants is also subject to
reduction if we issue shares of our common stock on any rights, options or
warrants to purchase shares of our common stock at a price less than the market
price of our shares as quoted on the OTC Bulletin Board.
NOTE 9 - STOCKHOLDERS' DEFICIT
COMMON STOCK
During the fiscal year ended June 30, 2004, the Company:
(i) issued 24,060 shares for services under the 2003 Plan, valued at $719,298,
(or an average price of $30.00 per share, which were recorded at the fair value
on the dates of issuance), of which $646,025 was recorded as general and
administrative expense in the accompanying consolidated statements of operations
based on the related services provided. The remaining balance of $73,273 will be
recorded during fiscal 2005 as the services are provided;
(ii) issued 129,174 shares of the Company's previously registered common stock,
pursuant to the conversion of $2,415,643 of convertible notes payable. In
connection with the conversions, the Company has recorded the unamortized
deferred financing costs, beneficial conversion features and warrant value to
additional paid-in capital upon conversion, which totaled $1,275,846 for fiscal
2004;
(iii) issued 1,000 shares of its restricted common stock, valued at $315,000
(based on the fair value on the date of grant) to one of its shareholders in
full payment of a non-interest bearing demand promissory note of $112,500 dated
July 25, 2003. 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;
(iv) issued 885 shares of the Company's common stock under the 2003 Plan, valued
at $167,070 (or an average price of $189.00 per share, which is the fair market
value of the stock on the date of issuances), for settlement of accounts
payable. The Company recorded a loss on settlement of accounts payable of
$46,562 in other expense in the accompanying consolidated statement of
operations;
(v) sold 667 shares of restricted common stock for $225.00 per share for which
the Company received cash proceeds of $150,000;
(vi) issued 688 shares of common stock related to an anti-dilution provision to
certain investors. Such shares represent the maximum number of shares required
to be issued by the Company under the provisions of the related agreements;
(vii) issued 67 shares valued at $16,000 as finders fees, which has been
recorded as deferred financing costs (see Note 9);
(viii) issued 8,889 shares for cash proceeds of $133,333 upon the exercise of
warrants;
(ix) issued 37,712 shares of common stock valued at $155,767 to former employees
for services rendered;
(x) issued 2,174 shares of common stock out of escrow valued at $358,684 for a
license (see Note 4); and
(xi) amortized all prepaid consulting expenses of $428,957 as the related
service periods were completed.
During the fiscal year ended June 30, 2005, the Company:
(i) issued 6,479,563 shares of the Company's previously registered common stock,
pursuant to the conversion of $110,529 of convertible notes payable. In
connection with the conversions, the Company has recorded the unamortized
deferred financing costs, beneficial conversion features and warrant value to
additional paid-in capital upon conversion, which totaled $104,049 for fiscal
2005;
F-17
(ii) issued 2,290,216 shares of the Company's previously registered common
stock, pursuant to the conversion of $120,199 of convertible notes payable. In
connection with the conversions, the Company has recorded the unamortized
deferred financing costs, beneficial conversion features and warrant value to
additional paid-in capital upon conversion, which totaled $117,901 for fiscal
2005;
(iii) issued 650,000 shares of the Company's common stock for consulting
services valued at $11,300 (or an average $0.02 per share, which was the
estimated fair market value of the common stock on the date the shares were
issued);
(iv) issued 66,667 shares the Company's common stock as a reduction of accrued
salary payable valued at $7,198 to a former executive (or $0.12 per share, which
was the estimated fair market value of the common stock on the date the shares
were issued);
(v) issued 13,333 shares of the Company's common stock under the 2003 Plan,
valued at $11,400 (or a price of $0.86 per share, which is the fair market value
of the stock on the date of issuances), for services;
(vi) issued 400,000 shares of the Company's common stock under the 2003 Plan,
valued at $18,800 (or a price of $0.05 per share, which is the fair market value
of the stock on the date of issuances), for services;
(vii) issued 100,,000 shares of the Company's common stock under the 2003 Plan,
valued at $3,300 (or a price of $0.03 per share, which is the fair market value
of the stock on the date of issuances), for services;
(viii) issued 452,250 shares of the Company's common stock as a reduction of
accounts payable in the amount of $27,225 (or an average $0.06 per share, which
was the estimated fair market value of the common stock on the date the shares
were issued);
(ix) issued 158,334 shares of the Company's common stock as additional
compensation valued at $63,333 and a reduction of accrued salary payable valued
at $95,000 to a former executive (or $1.05 per share, which was the estimated
fair market value of the common stock on the date the shares were issued);
(x) issued 600,000 shares of the Company's common stock as a reduction of
accrued salary payable valued at $72,802 to a former executive (or $0.12 per
share, which was the estimated fair market value of the common stock on the date
the shares were issued);
(xi) issued 1,000,000 shares of the Company's restricted common stock to an
executive in connection with his initial employment. The Company recorded salary
expense of $75,000 (or $0.12 per share, which was the fair market value of its
common stock on the date the shares were issued.
STOCK OPTIONS
The Company has a stock option plan (the "2000 Plan"), as amended, that
authorized 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.
On April 21, 2003, the Company adopted an incentive equity stock plan (the "2003
Plan") that 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 both plans available
for grant at June 30, 2005 was 256,137.
The Company has no options granted during the years ended June 30, 2004 and June
30, 2005 and has no options outstanding as of June 30, 2005.
The Black-Scholes option valuation method was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
WARRANTS
From time to time, the Company issues warrants pursuant to various employment,
consulting and third party agreements.
During the fiscal year ended June 30, 2004, the Company:
(i) issued a warrant to purchase 667 shares of the Company's common stock at
$750.00 per share to a third party. The warrant expires in 5 years and vests
immediately. The common stock purchase warrant agreement also included 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) $3,000.00 per share for the
first 333 shares and (ii) $4,500.00 per share for the remaining 334, which right
expired on July 9, 2004.
F-18
(ii) issued a warrant to purchase 500 restricted shares of the Company's common
stock at $360.00 per share (the fair market value of the stock on the date of
grant) to one of its former 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.
(iii) issued, pursuant to the Securities and Purchase Agreement and in
connection with the August 2003 Debenture (see Note 8), warrants to purchase
8,889 shares of the Company's common stock at $112.50 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
$112.50 to $15.00 (see Note 8). As of June 30, 2005, all of these warrants have
been exercised for total proceeds of $133,333.
(iv) issued a warrant to purchase 133 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 $112.50 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 $112.50
to $15.00. The Company recorded the revised warrant value of $220,114, using the
Black-Scholes option pricing model, as a debt issuance cost (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 33,333
shares of the Company's common stock at $15.00 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 67 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 $15.00 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 (see Note 8).
(vii) issued, pursuant to the Securities and Purchase Agreement and in
connection with the May 2004 Callable Notes (see Note 8), warrants to purchase
20,000 shares of the Company's common stock at $5.25 per share. The warrants
expire five years from the date of issuance and are subject to exercise price
adjustments upon the occurrence of certain events, including stock dividends,
stock splits, mergers, reclassifications of stock or the Company's
recapitalization. The exercise price of the warrants is also subject to
reduction if the Company issues shares of its common stock on any rights,
options or warrants to purchase shares of its common stock at a price less than
the market price of its shares as quoted on the OTC Bulletin Board. The Company
recorded the warrant value of $50,006, using the Black Scholes option pricing
model, as a debt discount (see Note 8).
(viii) issued a warrant to purchase 6,667 restricted shares of the Company's
common stock at $4.50 per share (in excess of the fair market value of the stock
on the date of grant) to one of its former executive officers in connection with
a consulting agreement for the period from June 2004 through June 2007. The
warrants vest over the term of the agreement, have a total value of $15,000
(based on the Black Scholes option pricing model) and expire in June 2009. The
related consulting expense for fiscal 2004 was insignificant.
Certain common stock purchase warrant agreements with certain investors included
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) $3,000.00 per share for
the first 633 shares and (ii) $4,500.00 per share for the remaining 634 shares,
which right expired on June 9, 2004.
During the fiscal year ended June 30, 2005, the Company:
(i) issued a warrant to purchase 6,667 restricted shares of the Company's common
stock at $4.50 per share (in excess of the fair market value of the stock on the
date of grant) to one of its officers in connection with a consulting agreement
for the period from June 2004 through June 2007. The warrants vest over the term
of the agreement, have a total value of $15,000 (based on the Black Scholes
option pricing model) and expired in June 2009. The related consulting expense
for fiscal 2005 was insignificant.
(ii) issued, pursuant to the Securities and Purchase Agreement and in connection
with the August 2004 Callable Notes (see Note 8), warrants to purchase 10,000
shares of the Company's common stock at $0.84 per share. The warrants expire
five years from the date of issuance and are subject to exercise price
adjustments upon the occurrence of certain events, including stock dividends,
stock splits, mergers, reclassifications of stock or the Company's
recapitalization. The exercise price of the warrants is also subject to
reduction if the Company issues shares of its common stock on any rights,
options or warrants to purchase shares of its common stock at a price less than
the market price of its shares as quoted on the OTC Bulletin Board. The Company
recorded the warrant value of $50,006 using the Black Scholes option pricing
model, as a debt discount (see Note 8).
(iii) issued, pursuant to the Securities and Purchase Agreement and in
connection with the June 2005 Callable Notes (see Note 8), warrants to purchase
6,000,000 shares of the Company's common stock at $0.025 per share. The warrants
expire five years from the date of issuance and are subject to exercise price
adjustments upon the occurrence of certain events, including stock dividends,
stock splits, mergers, reclassifications of stock or the Company's
recapitalization. The exercise price of the warrants is also subject to
reduction if the Company issues shares of its common stock on any rights,
options or warrants to purchase shares of its common stock at a price less than
the market price of its shares as quoted on the OTC Bulletin Board. The Company
recorded the warrant value of $118,685 using the Black Scholes option pricing
model, as a debt discount (see Note 8).
F-19
The following represents a summary of the warrants outstanding for the years
ended June 30, 2005 and 2004:
| Weighted Average
Exercise Price
Number of Warrants Per Share
--------------- ---------------
Outstanding at June 30, 2003 4,347 $ 430.50
Granted 70,256 16.50
Exercised (8,889) (1.50)
Forfeited/Cancelled (1,747) (249.00)
--------------- ---------------
Outstanding at June 30, 2004 63,967 40.50
Granted 8,315,995 0.40
Exercised (2,297,582) (.05)
Forfeited/Cancelled -- (1.66)
--------------- ---------------
Outstanding at June 30, 2005 6,082,380 $ 0.53
=============== ===============
Exercisable at June 30, 2005 6,082,380 $ 0.53
=============== ===============
The following summarizes information about warrants outstanding at June 30, 2005
Warrants Outstanding Warrants Exercisable
------------------------------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ------------------- --------------- ---------------- --------------- ------------- -----------
$0.025-$0.84 6,010,000 4.9 $ 0.03 6,010,000 $ 0.03
$4.50-$15.00 67,273 3.8 $ 9.94 67,273 $ 9.94
$112.50-$1,125.00 5,107 3.0 $ 466.77 5,107 $ 466.77
------------ ---------- ----------- -----------
6,082,380 $ 0.53 6,082,380 $ 0.53
============ ========== =========== ===========
F-20
The fair value of each warrant granted during the year ended June 30, 2004 to
consultants is estimated using the Black-Scholes option pricing model on the
date of grant using the following assumptions: (i) no dividend yield, (ii)
average volatility of 227 percent (iii) weighted average risk free interest rate
of approximately 2.00 percent, and (iv) average expected life of 1 year.
The fair value of warrants granted during the year ended June 30, 2005 to
consultants and employees totaling 6,667 warrants is zero ( the share price
being in excess of the fair market value of the stock on the date of grant) and
were valued in accordance with SFAS 123.
F-21
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company vacated its office facility at 5655 Lindero Canyon Road in July
2005. The Company leased that facility ("Prior Lease") under an operating lease
agreement expiring June 30, 2009. Under the lease, the Company pays $5,950 per
month through June 30, 2005, $6,110 per month through June 30, 2006, $6,271 per
month through June 30, 2007, $6,432 per month through June 30, 2008 and $6,593
per month through June 30, 2009. The total amount of rent paid during the year
ended June 30, 2005 and 2004 was $72,230 and $100,548, respectively.
The Prior Lease lessor sought only possession of the Prior Lease premises and on
or about July 15, 2005 the Company moved to its new premises and vacated
possession of the Prior Lease premises. The Company's contingent lease
obligation under the Prior Lease would have been $304,872.
The Company entered into a new operating lease agreement at its current facility
at 143 Triunfo Canyon Road on July 1, 2005 expiring June 30, 2007 ("Current
Lease"). Under the Current Lease, the Company pays $2,745 per month through June
30, 2006 and $2,855 per month through June 30, 2007.
The future minimum annual lease payments under the Current Lease at June 30,
2005 are as follows:
Years Ending
June 30,
- -----------------------------
2006 $ 32,940
2007 34,260
--------------
$ 67,200
==============
EMPLOYMENT AGREEMENT
Effective September 24, 2004, the Company entered into an employment agreement
with Edward W. Withrow III, employing Mr. Withrow as Chief Executive Officer.
The agreement expires on October 1, 2007 and provides for a base annual salary
in the amount of $198,000, with annual increases not to exceed 10% as determined
by the Board of Directors. The agreement provides for a signing bonus of $75,000
payable in cash in four quarterly payments commencing January 1, 2005, and the
issuance of 1,000,000 shares of the Company's common stock, which had a fair
market value on the date of issuance of $75,000. The agreement also provides for
a performance cash bonus based upon meeting certain sales goals and per-share
common stock prices for the Company. At the discretion of the Board of
Directors, Mr. Withrow could be entitled to Incentive Stock Options pursuant to
the Company's qualified Incentive Stock Option Plan.
On July 8, 2005, the employment agreement entered into between the Company and
Edward W. Withrow III on September 24, 2004 was terminated upon mutual consent
of both parties. On July 9, 2005 the Company entered into a consulting agreement
with Huntington Chase LLC, a limited liability company in which Mr. Withrow is
the sole member and the managing member ("Consultant"), to retain the exclusive
services of Mr. Withrow as Chief Executive Officer, President and Acting Chief
Financial Officer of the Company (the "Executive Consulting Agreement"). The
Executive Consulting Agreement, effective July 8, 2005, expires on October 1,
2007 and provides for a base annual fee in the amount of $96,000 and the
issuance, within ten days following the date of effectiveness, of 3,800,000
restricted shares of the Company's common stock, which had a fair market value
on the date of issuance of $76,000. The agreement also provides for a
performance cash bonus based upon meeting certain sales goals and per-share
common stock prices for the Company. At the discretion of the Board of
Directors, Consultant could be entitled to Incentive Stock Options pursuant to
the Company's qualified Incentive Stock Option Plan.
(see Note 13-Subsequent Events)
LITIGATION
On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit
against the Company alleging that the Company breached a sublease with Fidelity.
The alledged breach occurred prior to the January 2003 Merger with Moneyzone
(see Item 1. - Corporate History). 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
audited consolidated balance sheet. There has been no activity or actions filed
by the plaintiff since the Merger with Moneyzone.
F-22
On June 10, 2004, Impact Displays Inc. filed a complaint against us demanding
payment of $146,830 representing the balance due on a $346,830 invoice, against
which we paid $200,000, for shelving to display our NICOWater(TM) product in
Rite Aid Pharmacy stores. In its answer to the complaint, we alleged that (1)
the goods sold were at the special request of third-parties (ie Rite Aid and
Impact Displays) and that either of those third parties still have possession of
the goods; (2) that the plaintiff overcharged for the goods; and (3) that
plaintiff, in violation of state and federal law, had a tying arrangement with
Rite Aid wherein only the shelving manufactured by plaintiff could be used for
the display of our product. Management believes that we will prevail and will
have no liability regarding this lawsuit.
On January 5, 2005, Steven H. Reder ("Reder"), a former officer and director of
the Company, filed a lawsuit against us alleging breach of his employment
agreement, wrongful discharge, libel and breach of promissory note. On June 15,
2004 we issued a note to Mr. Reder in the amount of $220,750, which reflected
the sums due to Mr. Reder for unpaid compensation due by us as of June 15, 2004
(see Note 9). The note bears interest at the rate of 6% per annum payable
monthly commencing June 15, 2004 and continuing until December 31, 2004, when
the entire principal and accrued interest shall be due and payable. The Company
has successfully demurred to a cause of action for libel, which has been omitted
from Reder's First Amended Complaint. We have made no payments to Mr. Reder on
this note. Management views this lawsuit as lacking in merit and is defending
the same vigorously. The Court has ordered the parties to participate in a
mediation and to return for a Post-Mediation Status conference on October 28,
2005.
On August 4, 2005, Bristol Investment Fund, Ltd. filed a summons with notice to
appear against us for breach of contract. The relief sought is liquidated and
compensatory damages. The Company has tendered the sum of $80,000 to Bristol
Investment Fund, Ltd in payment of the outstanding principal balance due on the
note in the amount of $60,086 plus accrued interest and penalties. The Company
has retained counsel to respond to the Summons. The Company anticipates
resolving the matter and does not consider this as having a material adverse
effect on the operations of the Company.
We are, from time to time, involved in various other legal and related
proceedings which arise in the ordinary course of operating our business. In the
opinion of management, the amount of ultimate liability, if any, with respect to
these other actions will not materially affect the consolidated financial
position or results of operations of the Company.
LOSS ON PATENT ARBITRATION
On April 7, 2002, the Company entered into an agreement relating to the
formulation of nicotine water-based products. 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 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). Due to the Company's loss of the NICO Patent and the Company's
subsequent decision to stop marketing NICOWater(TM), the Company's product
NICOWater(TM) could no longer be sold and the Company incurred the following
costs in connection with the patent arbitration, which are reflected as loss on
patent arbitration in the accompanying consolidated statement of operations for
the year ended June 30, 2004:
Write-off of accounts receivable $ 33,957
Write-off of inventories 294,039
Write-off of prepaid royalties 135,023
Litigation costs 222,258
Write-off of patent 44,854
--------
$730,131
========
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. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. 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.
F-23
NOTE 11 - RELATED PARTY TRANSACTIONS
On April 30, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "De Luca Note") in the amount of $68,000 payable to
Fred De Luca ("De Luca"), a consultant to and director/secretary of the Company.
The De Luca Note was executed for payment of accrued and unpaid consulting fees
due to De Luca. The De Luca Note bears interest at the rate of 6% per annum and
is payable interest only each month commencing June 1, 2004 and continuing until
December 31, 2004, when the principal and any accrued interest shall be due and
payable. To secure the performance of its obligation pursuant to the De Luca
Note, the Company has pledged One Thousand (1,000) shares of common stock of
Xact Aid, Inc. held by the Company. On October 15, 2004, Xact Aid assumed the
$68,000 promissory note payable by the Company and secured by the assets of the
Company in order to facilitate Xact Aid's anticipated spin-off from the Company.
On June 10, 2004, the Company executed and delivered a Promissory Note Secured
By Security Agreement (the "Kunin Note") in the amount of $100,077 payable to
Norman A. Kunin ("Kunin"), a consultant to and former Chief Financial Officer of
the Company. The Kunin Note was executed for payment of accrued and unpaid
compensation and expenses accumulated prior to the date that Kunin left the
employ of the Company. The Kunin Note bears interest at the rate of 6% per annum
with principal and interest payable through December 2004 in accordance with
that certain Separation Agreement and General Release between the Company and
Kunin dated June 10, 2004. To secure the performance of its obligation pursuant
to the Kunin Note, the Company has granted a security interest in the Company's
equipment, accounts receivable, inventory and fixed assets. During the fiscal
year ended June 30, 2005 the Company paid $38,092 to Kunin, which reduced the
outstanding principal balance of the note to $61,985. On June 30, 2005, Kunin
forgave the remaining principal balance and all accrued interest on the Kunin
Note.
Interest expense on the related party notes payable was insignificant for the
year ended June 30, 2005.
See Note 9 for a description of all equity instruments issued to employees and
other related parties.
NOTE 12 - INCOME TAXES
No current provision for federal income taxes is required for the year ended
June 30, 2005 and 2004, since the Company incurred net operating losses through
June 30, 2005.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax asset at June 30, 2005 are presented below:
Deferred tax asset:
Net operating loss carryforward $ 6,787,987
Equity compensation 175,013
Reserves and accruals 37,000
-----------
7,000,000
Less valuation allowance (7,000,000)
-----------
Net deferred tax asset $ --
===========
The valuation allowance increased by $660,000and $2,552,000 during the years
ended June 30, 2005 and 2004, respectively.
The provision for income taxes for the years ended June 30, 2005 and 2004
differs from the amount computed by applying the U.S. Federal income tax rate of
34% to income before income taxes primarily as a result of state income taxes
and changes in the valuation allowance.
As of June 30, 2005, the Company had net operating loss carryforwards of
approximately $20,000,000 available to offset future taxable federal and state
income. The federal and state carryforward amounts expire in varying amounts
through 2025 and 2012, respectively.
F-24
NOTE 13 - 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 years ended June
30, 2005 and 2004:
2005 2004
--------------- ---------------
Numerator for basic and diluted loss per
common share - net loss before loss from
discontinued operations $ (2,817,226) $ (7,092,212)
Loss from discontinued operations (800,301) ( 68,093)
--------------- ---------------
Net loss $ (3,617,527) $ (7,161,005)
=============== ===============
Denominator for basic and diluted loss per
common share - weighted average shares 5,527,547 70,067
=============== ===============
Per share - basic and diluted:
Loss per common share before loss from discontinued operations $ (0.51) $ (101.23)
Loss from discontinued operations (0.14) (0.97)
--------------- ---------------
Net loss $ (0.65) $ (102.20)
=============== ===============
NOTE 14 - SUBSEQUENT EVENTS (UNAUDITED)
AUGUST 2005 CONVERTIBLE DEBENTURE
In July 2005, the Company's Board of Directors and the holders of a majority of
the outstanding shares of Common Stock authorized and approved by written
consent an amendment to the Company's Certificate of Incorporation decreasing
the authorized amount of common stock from 5,000,000,000 shares to 2,000,000,000
shares. Form PRE 14c was filed with the Securities and Exchange Commission on
August 26, 2005. The Company intends to mail copies of the Information Statement
to its shareholders upon the approval of the Securities and Exchange Commission
and, after the prescribed waiting period, file the Amendment to its Certificate
of Incorporation with the State of Delaware
In August 2005, the Company entered into a Securities Purchase Agreement with an
accredited institutional investor for the issuance of a $50,000 principal amount
6% convertible debenture with an original issue discount of 20%. The debenture
is due February 2006. The debenture is convertible at the option of the holder
into the Company's shares of common stock at a fixed conversion price of $0.01
per share and bears the same terms and conditions as the February 2004
Convertible Debentures. As of August 24, 2005, the entire $50,000 in principal
amount remains outstanding.
SEPTEMBER 2005 ORIGINAL ISSUE DISCOUNT CONVERTIBLE DEBENTURE
In September 2005, the Company entered into a Subscription Agreement with
several accredited institutional investors pursuant to which the Company issued
a convertible debenture with an original issue discount of 20% in the total
principal amount of $750,000 (the "September 2005 Convertible Debenture"). Gross
proceeds of $750,000 were received at the closing on September 15, 2005, of
which $150,000 was retained in an escrow account pending disbursement for
corporate marketing expenses. The September 2005 Convertible Debenture has a
term of two years. At any time after the original issue date, the September 2005
Convertible Debenture 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 equal to the lessor of (i) $0.07, or (ii) 65% of the
average of the three lowest intra-day trading prices of the Company's common
stock as reported by Bloomberg L.P. for the twenty trading days preceding a
conversion date. The Company has reserved and will register approximately
55,384,614 shares of its common stock to cover the conversion of the September
2005 Convertible Debenture.
In connection with the September 2005 Convertible Debenture, the Company also
issued warrants (the " September 2005 Convertible Debenture Warrants"). The
September 2005 Convertible Debenture Warrants will be issued at each closing
date and are immediately exercisable following the date of the closing at an
exercise price equal to the lessor of (i) $0.07, or (ii) 65% of the average of
the three lowest intra-day trading prices of the Company's common stock as
reported by Bloomberg L.P. for the twenty trading days preceding a conversion
date. The September 2005 Convertible Debenture Warrants expire five years from
the date of issuance. Two September 2005 Convertible Debenture Warrants will be
issued for each One Dollar of September 2005 Convertible Debenture principal
amount. The Company has reserved and will register 1,800,000 shares of its
common stock, the number of shares that may be purchased through the exercise of
the September 2005 Convertible Debenture Warrants.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the September 2005 Convertible Debenture, the Company will
record a debt discount which the Company will amortize using the effective
interest method through September 2007. 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.
In September 2005, the Company also issued 500,000 restricted shares of the
Company's common stock as a due diligence fee in connection with the September
2005 Convertible Debenture. The Company is amortizing the deferred financing
costs to interest expense using the straight-line method through September 2007
and recording the remaining unamortized portion to additional paid-in capital
when the related debenture is converted into the Company's common stock.
F-25
COMMON STOCK AND WARRANTS
Subsequent to fiscal year ended June 30, 2005, the Company;
issued 12,476,482 shares of its previously registered common stock in connection
with the conversion of $174,552 of convertible debenture and convertible note
debt;
issued 3,800,000 shares of its restricted common ctock to its Chief Executive
Officer in connection with an employment agreement. The common stock was valued
at approximately $76,000 (based on the fair value on the date of grant) and was
recorded by the Company as executive compensation;
issued 1,600,000 shares of its restricted common stock to its Secretary and
Director in connection with a consulting agreement. The common stock was valued
at approximately $32,000 (based on the fair value on the date of grant) and was
recorded by the Company as consulting expense;
issued 10,000,000 shares of its restricted common stock to a consultant and
related party in connection with a consulting agreement. The common stock was
valued, in the aggregate, at approximately $200,000 (based on the fair value on
the date of the grants) and was recorded by the Company as consulting expense;
issued 1,300,000 shares of its restricted common stock to a consultant and
related party in connection with a consulting agreement. The common stock was
valued, in the aggregate, at approximately $26,000 (based on the fair value on
the date of the grants) and was recorded by the Company as consulting expense;
issued 3,300,000 shares of its restricted common stock to two consultants in
connection with their consulting agreements. The common stock was valued, in the
aggregate, at approximately $66,000 (based on the fair value on the date of the
grants) and was recorded by the Company as consulting expens;
issued warrants to purchase 5,000,000 restricted shares of the Company's common
stock at $0.06 per share (in excess of the fair market value of the stock on the
date of grant) to a consultant of the Company in connection with a consulting
agreement to provide chief executive officer services, and will value such
warrant in accordance with SFAS 123 (see Note 13-Subsequent Events-Executive
Consulting Agreement);
issued warrants to purchase 1,500,000 restricted shares of the Company's common
stock at $0.06 per share (in excess of the fair market value of the stock on the
date of grant) to a consultant and one of the directors of the Company in
connection with a consulting agreement, and will value such warrant in
accordance with SFAS 123;
issued warrants to purchase 1,500,000 restricted shares of the Company's common
stock at $0.06 per share (in excess of the fair market value of the stock on the
date of grant) to a consultant and related party in connection with a consulting
agreement, and will value such warrant in accordance with SFAS 123;
issued warrants to purchase 750,000 restricted shares of the Company's common
stock at $0.06 per share (in excess of the fair market value of the stock on the
date of grant) to two consultants in connection with consulting agreements, and
will value such warrant in accordance with SFAS 123.
issued warrants to purchase 250,000 restricted shares of the Company's common
stock at $0.06 per share (in excess of the fair market value of the stock on the
date of grant) to an employee, and will value such warrant in accordance with
SFAS 123.
19
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock trades on the NASD OTC Bulletin Board. Since November 26, 2004
it has traded under the symbol ADDI. From April 26, 2004 until November 26, 2004
it has traded under the symbol QTFI. From January 3, 2003 until April 26, 2004 ,
it has traded under the symbol QTFV. Prior to January 9, 2003, our Common Stock
traded on the NASD OTC Bulletin Board under the symbol MOZN.
The table below sets forth the range of high and low bid quotes of our Common
Stock for each quarter for the last two fiscal years as reported by Yahoo
Finance. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions. The following prices reflect both the 1 for 10 reverse
stock split that was effected on April 26, 2004 and the 1 for 150 reverse stock
split that was effected on November 26, 2004, respectively, as footnoted below.
PERIOD HIGH LOW
-------------- -------- --------
Fiscal Year Ended June 30, 2004 First Quarter $0.39 $0.16
Second Quarter $0.15 $0.04
Third Quarter $0.07 $0.01
Fourth Quarter $0.06 $0.01(1)
Fiscal Year Ended June 30, 2005 First Quarter $1.35 $0.06(1)
Second Quarter $0.10 $0.02(2)
Third Quarter $0.07 $0.02(2)
Fourth Quarter $0.08 $0.01(2)
Fiscal Year Ended June 30, 2006 First Quarter $0.093 $0.017
(1) Reflects Post 10 for 1 reverse split.
(2) Reflects Post 150 for 1 reverse split.
HOLDERS
There were approximately 400 holders of our Common Stock of record as of June
30, 2005.
DIVIDENDS
We have never declared or paid cash dividends on our common stock, and our
present policy is not to pay cash dividends on our common stock. Any payment of
cash dividends in the future will be wholly dependent upon our earnings,
financial condition, capital requirements and other factors deemed relevant by
our board of directors. It is not likely that cash dividends will be paid in the
foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS
Set forth in the table below is information regarding awards made through
compensation plans or arrangements through June 30, 2005, the most recently
completed fiscal year.
20
- ------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column 2)
- ------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security Holders N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by Security
Holders -- $ -- 256,137
- ------------------------------------------------------------------------------------------------------------
Our 2000 Stock Option Plan (the "2000 Plan"), as amended, authorizes the
issuance of options and common stock to officers, employees, directors and
consultants. The common stock reserved for issuance pursuant to the 2000 Plan
has been registered on an S-8 Registration Statement. The 2000 Plan allows for
the issuance of either incentive stock options (which, pursuant to Section 422
of the Internal Revenue Code, can only be granted to employees) or non-qualified
stock options. The 2000 Plan is administered by a committee of two or more
members of the Board of Directors or, if no committee is appointed, then by the
Board of Directors. The committee, or the Board of Directors if there is no
committee, determines the type of option granted, the exercise price, the option
term, which may be no more than ten years, terms and conditions of
exercisability and methods of exercise. Options must vest within ten-years.
Under the 2000 Plan, the exercise price may not be less than fair market value
on the date of grant for incentive stock options, and not less than 50% of the
fair market value on the date of grant for non-qualified stock options. The 2000
Plan also allows for the granting of Stock Appreciation Rights in conjunction
with all or part of any stock option granted. No Stock Appreciation Rights have
been granted.
On April 21, 2003 our Board of Directors adopted the 2003 Incentive Equity Stock
Plan (the "2003 Plan"). The 2003 Plan authorizes the issuance of options, right
to purchase common stock and stock bonuses to officers, employees, directors and
consultants. The 2003 Plan is administered by a committee of two or more members
of the Board of Directors or, if no committee is appointed, then by the Board of
Directors. 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. The committee, or the Board of Directors if there is
no committee, determines the type of option granted, the exercise price, the
option term, which may be no more than ten years, terms and conditions of
exercisability and methods of exercise. Options must vest within ten-years.
Under the 2003 Plan, the exercise price may 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 both plans available for grant at June 30, 2005 was
256,137.
WHERE YOU CAN FIND FURTHER INFORMATION ABOUT US
We are subject to the informational requirements of the Securities Exchange Act
of 1934 and must file reports, proxy statements and other information with the
Securities and Exchange Commission. The reports, information statements and
other information we file with the Commission can be inspected and copied at the
Commission at the Public Reference Room, 450 Fifth Street, N.W. Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy, and information statements
and other information regarding registrants, like us, which file electronically
with the Commission.
This prospectus constitutes a part of a registration statement on Form SB-2
filed by us with the Commission under the Securities Act of 1933. As permitted
by the rules and regulations of the Commission, this prospectus omits certain
information that is contained in the registration statement. We refer you to the
registration statement and related exhibits for further information with respect
to us and the securities offered. Statements contained in the prospectus
concerning the content of any documents filed as an exhibit to the registration
statement (or otherwise filed with the Commission) are not necessarily complete.
In each instance you may refer to the copy of the filed document. Each statement
is qualified in its entirety by such reference.
No person is authorized to give you any information or make any representation
other than those contained or incorporated by reference in this prospectus. Any
such information or representation must not be relied upon as having been
authorized. Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in our affairs since the date of the prospectus.
21
EXECUTIVE COMPENSATION
REMUNERATION OF DIRECTORS AND OFFICERS
The following tables and discussion set forth information with respect to all
compensation, including incentive stock option plan and non-plan compensation
awarded to, earned by or paid to the CEO, President and CFO for all services
rendered in all capacities to us for each of its last three completed fiscal
years.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------------------------------------------
Value of
Other Restricted All Other
Annual Stock Securities LTIP Compen-
Name and Principal Year Salary Bonus Compensation Awards Underlying Payout sation
Position Granted by Options/SARs ($) ($)
Board of
Directors
($)
Timothy J. Owens 2005 88,970 66,250 -- -- --
- -
Chief Executive 2004 347,538(7) -- -- -- -- -- --
Officer (1) 2003 16,750(4) 100,000(5)(7) 177,500(6) -- 853 -- --
Steven Reder 2005 70,715
President(2) 2004 347,538(8) -- -- -- -- -- --
2003 16,750(4) 100,000(8)(5) 177,500(6) -- 853 -- --
Norman A. Kunin, 2004 251,538(9) 75,000(9) -- -- 500 -- --
Chief Financial
Officer (3)
Edward W. Withrow III 2005 144,685 -- -- 125,000 --
Chief Executive
Officer, President,
Acting Chief Financial
Officer(10)
Note 1 - Resigned in September 2004
Note 2 - Terminated in September 2004
Note 3 - Resigned in June 2004
Note 4 - These salaries were accrued and unpaid for the period June 9 through
June 30, 2003.
Note 5 - These bonuses were accrued pursuant to employment agreements dated June
9, 2003.
Note 6 - Represent total amounts due to these executive officers pursuant to
consulting agreements that pre-dated their employment. Cash payments made to
Timothy J. Owens for 2003 were $162,500. Cash payments made to Steven Reder for
2003 were $162,500
Note 7 - Of this gross salary, $241,859 was paid in cash and $100,000 was paid
in common stock of the Company.
Note 8 - Of this gross salary, $239,538 was paid in cash and $108,000 was paid
in common stock.
Note 9 - Of this gross salary, $198,961 was paid in cash and $20,000 was paid in
common stock of the Company; of the $75,000 bonus, $25,000 was paid in cash and
the balance was accrued.
Note 10 - Employment commenced September 2004
STOCK OPTIONS
The following tables set forth certain information concerning the granting and
exercising of stock options during the last completed fiscal year by the named
executive officers and the fiscal year-end value of unexercised options for the
named executive officers on an aggregated basis:
Number of
Securities % of Total
Underlying Options/SARs Granted
Options/SARs to Employees in
Name Granted (#) Fiscal Year Exercise Price ($/sh) Expiration Date
- ---------------------------------------------------------------------------------------------------------------
None
- ---------------------------------------------------------------------------------------------------------------
22
Aggregated Option/SAR Exercises in Last Fiscal Year And FY-End Option/SAR
Values(1)
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(2)
Shares Acquired Value Realized(1) Unexercisable/ Unexercisable/
Name on Exercise (#) ($) Exercisable Exercisable
- ----------------------------------------------------------------------------------------------------------------
Edward W. Withrow III -0- -0- 0/0 $0/$0
Timothy J. Owens -0- -0- 0/853 $0/$0
Steven Reder -0- -0- 0/853 $0/$0
Norman A. Kunin -0- -0- 0/500 $0/$0
- ----------------------------------------------------------------------------------------------------------------
(1) Value realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market value of
the common stock on the date the options are exercised. (2) The value of
unexercised options is determined by calculating the difference between the fair
market value of the securities underlying the options at fiscal year end and the
exercise price of the options.
DIRECTOR COMPENSATION
There is no standard or individual compensation package for any of the
directors.
EMPLOYMENT CONTRACTS
Effective September 27, 2004, the Company entered into an employment agreement
with Edward W. Withrow III, employing Mr. Withrow as Chief Executive Officer.
The agreement expires on October 1, 2007 and provides for a base annual salary
in the amount of $198,000, with annual increases not to exceed 10% as determined
by the Board of Directors. The agreement provides for a signing bonus of $75,000
payable in cash in four quarterly payments commencing January 1, 2005, and the
issuance of 1,000,000 shares of the Company's common stock, which had a fair
market value on the date of issuance of $75,000. The agreement also provides for
a performance cash bonus based upon meeting certain sales goals and per-share
common stock prices for the Company. At the discretion of the Board of
Directors, Mr. Withrow could be entitled to Incentive Stock Options pursuant to
the Company's qualified Incentive Stock Option Plan.
On July 8, 2005, the employment agreement entered into between the Company and
Edward W. Withrow III on September 24, 2004 (see Note 9-Employment Agreement)
was terminated upon mutual consent of both parties. On July 9, 2005 the Company
entered into a consulting agreement with Huntington Chase LLC, a limited
liability company in which Mr. Withrow is the sole member and the managing
member ("Consultant"), to retain the exclusive services of Mr. Withrow as Chief
Executive Officer, President and Acting Chief Financial Officer of the Company
(the "Executive Consulting Agreement"). The Executive Consulting Agreement,
effective July 8, 2005, expires on October 1, 2007 and provides for a base
annual fee in the amount of $96,000 and the issuance, within ten days following
the date of effectiveness, of 3,800,000 restricted shares of the Company's
common stock, which had a fair market value on the date of issuance of $76,000.
The agreement also provides for a performance cash bonus based upon meeting
certain sales goals and per-share common stock prices for the Company. At the
discretion of the Board of Directors, Consultant could be entitled to Incentive
Stock Options pursuant to the Company's qualified Incentive Stock Option Plan.
(see Notes To Financial Statements - Note 13 - Subsequent Events)
EXPERTS
Armando C. Ibarra, CPA audited our financial statements at June 30, 2005, as set
forth in their report which includes an emphasis paragraph relating to our
ability to continue as a going concern. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on the report of Armando C. Ibarra, CPA given on their authority as
experts in accounting and auditing.
Corbin & Company, LLP audited our financial statements for the year ended June
30, 2004, as set forth in their report which includes an emphasis paragraph
relating to our ability to continue as a going concern. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on the report of Corbin & Company, LLP given on their
authority as experts in accounting and auditing.
Sichenzia Ross Friedman Ference LLP has given us an opinion relating to the due
issuance of the common stock being registered.
23
ADDISON-DAVIS DIAGNOSTICS, INC.
PROSPECTUS
89,500,000 Shares of Common Stock
October __, 2005
No person is authorized to give any information or to make any representation
other than those contained in this prospectus, and if made such information or
representation must not be relied upon as having been given or authorized. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the securities offered by this prospectus or an
offer to sell or a solicitation of an offer to buy the securities in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any
implication that there has been no changes in the affairs of Addison-Davis
Diagnostics, Inc. since the date of this prospectus. However, in the event of a
material change, this prospectus will be amended or supplemented accordingly.
24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the General Corporation Law of the State of
Delaware, Article Ninth of the registrant's Certificate of Incorporation
includes a provision that eliminates the personal liability of each of its
directors for monetary damages for breach of such director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the registrant or its stockholders; (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law; (iii) under Section 174 of the General Corporation Law; or (iv) for any
transaction from which the director derived an improper personal benefit. If the
General Corporation Law is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director shall
be limited to the fullest extent allowed by the amendment. However, any repeal
or modification of the indemnity provided by the General Corporation Law shall
not adversely affect any limitation on the personal liability of the
registrant's directors.
The registrant's Certificate of Incorporation requires it, to the extent and in
the manner provided by the General Corporation Law, to indemnify any person
against expenses, (including attorneys' fees), judgments, fines and amounts paid
in settlement, that are actually and reasonably incurred in connection with any
threatened, pending or completed action, suit or proceeding to which such person
was or is a party or is threatened to be made a party by reason of the fact that
such person is or was one of the registrant's directors or officers.
The registrant's Bylaws provide that it must, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, indemnify its directors and
officers for actions they took in good faith and in a manner reasonably believed
to be in, or not opposed to, the registrant's best interests. With respect to
any criminal action or proceeding, the officer or director must have had no
reasonable cause to believe that his conduct was unlawful. The registrant is
required by its Bylaws to advance, prior to the final disposition of any
proceeding, promptly following request therefore, all expenses incurred by any
officer or director in connection with such proceeding. If the General
Corporation Law is amended to provide narrower rights to indemnification than
are available under the registrant's Bylaws, such amendment shall not apply to
alleged actions or omissions that precede the effective date of such amendment.
The registrant's Bylaws permit it to indemnify its employees and agents to the
fullest extent permitted by the General Corporation Law.
Section 145 of the General Corporation Law of the State of Delaware permits
indemnification of a corporation's agents (which includes officers and
directors) because he is a party (or he is threatened to be made a party) to any
action or proceeding by reason of the fact that the person is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense. Indemnification must be
authorized in the specific case upon a determination that indemnification is
proper because the person has met the applicable standard of conduct to require
indemnification. This provision of the General Corporation Law of the State of
Delaware is not exclusive of any other rights to which persons seeking
indemnification may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by the
registrant, are as follows:
SEC Filing Fee $ 198.80
Legal Fees $ 15,000.00
Accounting Fees* $ 1,500.00
- -------------------------------------------------
Total* $ 16,798.00
* Estimated
25
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years the registrant sold securities that were not
registered under the Securities Act of 1933. The transactions are as follows:
On January 9, 2003, the registrant consummated a reverse merger with
MoneyZone.com, Inc., wherein the registrant issued to stockholders of Quicktest
5, Inc. 16,667 shares of common stock in exchange for all the issued and
outstanding shares of Quicktest 5, Inc. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In April, May and June 2003 the registrant issued 460 shares of its common stock
to various consultants for services provided to the registrant. These
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In April and June 2003 the registrant committed to issue 200 shares of its
common stock to employees in connection with their initial employment. The
weighted average fair market value of this common stock was $75,126 or $375 per
share. These transactions were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933. These shares were issued in November 2003.
During the month of June 2003 the registrant sold 1,467 shares of common stock
at a price of $225 per share (which was the weighted average price paid by the
investors for the stock issuance) in five separate sales transactions to
accredited investors. The sales included, in the aggregate, warrants to purchase
1,267 shares of common stock for a weighted average exercise price of $870 per
share. The warrants have a term of five years. The registrant received aggregate
net cash proceeds of $331,000 in these offerings. These transactions were exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933. These purchase agreements included a provision in which, if for a
period of six months from the date of purchase, the closing price of the
registrant's common stock falls below $225 per share for a period of five
consecutive trading days, the registrant must issue to these investors
additional shares. The registrant's common stock closing price fell below $225
per share for five consecutive trading days ended October 3, 2003. Therefore,
the registrant is required to issue an additional 689 shares of common stock to
these investors. These shares were issued in November 2003. This issuance is
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
On June 23, 2003 the registrant issued 1,147 shares of its common stock at a
price of $150 per share for total proceeds of $172,000 to SBI-USA LLC pursuant
to the terms of a convertible promissory note. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In July 2003, the registrant issued 667 shares of its common stock for cash of
$150,000 and a warrant to purchase 667 shares of the registrant's common stock
to William J. Ritger, an accredited individual. The warrant term is five years
and the exercise price is $750 per share. These securities were issued pursuant
to an exemption from registration provided by Section 4 (2) of the Securities
Act of 1933.
In August 2003, the registrant issued 1,000 shares of its common stock to SBI
USA LLC, one of its shareholders in full payment of a non-interest bearing
demand promissory note of $112,500 dated July 25, 2003. These securities were
issued pursuant to an exemption from registration provided by Section 4 (2) of
the Securities Act of 1933.
In August 2003, the registrant issued 85 shares of its common stock to SBI USA
LLC, one of its shareholders in exchange for services rendered. The value of the
services received was determined by the Board of Directors to be $26,706 (or
$315 per share), which was the weighted average fair market value on the dates
the services were performed. These securities were issued pursuant to an
exemption from registration provided by Section 4 (2) of the Securities Act of
1933.
In August 2003, the registrant committed to issue 67 shares of its common stock
to Shai Stern for services rendered in connection with the convertible debenture
financing. The value of the common stock was determined by the Board of
Directors to be $120 per share. These shares were issued in November 2003
pursuant to an exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
In August 2003, the registrant entered into a Securities Purchase Agreement with
certain accredited institutional investors pursuant to which the registrant
issued 6% convertible debentures in the total principal amount of $2,000,000.
The debentures are due to be paid on August 22, 2006. The debentures are
convertible at the option of the holders into shares of the registrant's common
stock at $112.50 with a forced conversion option by the Company if certain
closing prices are attained. In connection with the Securities Purchase
Agreement, we also issued warrants to purchase 8,889 shares of the registrant's
common stock at an exercise price of $112.50 per share to these investors. The
warrant exercise price was reduced to $15 in October 2003. The term of the
warrants is five years. These securities were issued pursuant to an exemption
from registration provided by Section 4(2)of the Securities Act of 1933.
In August 2003, the registrant also issued a warrant to HPC Capital Management
to purchase 1,778 shares of the registrant's common stock as part of the
commission fee paid in connection with the placement of the convertible
debentures. The warrant had an exercise price of $112.50 per share, which was
reduced to $15.00 per share in October 2003, and expires in five years. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
In August 2003, the registrant issued a warrant to purchase 500 shares of the
registrant's common stock at $360.00 per share (the fair market value of the
stock on the date of grant) to Norman A. Kunin, the registrant's Chief Financial
Officer in connection with his employment agreement. The term of the warrant is
five years. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
26
As part of the negotiations to purchase a non-controlling interest in a bottling
facility in Mexico from OCIF-OBAC-SA de CV, the registrant authorized and issued
to escrow 1,773 shares of its common stock until a definitive agreement could be
reached. At present, a definitive agreement has not been reached. The shares
were issued and held in escrow subject to a cancellation fee equal to 15% of the
shares of the escrowed common stock, unless a definitive agreement was reached.
No definitive agreement was reached, therefore the registrant terminated
negotiations and transferred 266 shares of its common stock to OCIF-OBAC-SA de
CV. The balance of the common stock was returned to the treasury. The registrant
also entered into a license agreement of intellectual property with the
developers and patent holders of certain rapid test medical devises for an
exclusive right to market these devices, at the registrant's option. At present
667 shares of the registrant's common stock have been authorized, issued and
released from escrow as a partial payment for the right to market. As an
additional payment, the registrant has also issued 1,507 shares of the
registrant's common stock. The common stock that has been transferred to
OCIF-OBAC-SA de CV and to the developers and patent holders of the rapid test
medical devices were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In November 2003, the registrant issued 63 shares of its common stock to Donald
Cramer in exchange for services rendered and to be rendered valued at $120.00
per share (the fair market value of the stock on the date of issue). These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
In November 2003, the registrant issued 55 shares of its common stock to Asset &
Equity Corporation in payment of accounts payable in the amount of $8,729. The
shares were valued at $120.00 per share (the fair market value of the stock on
the date of issue). These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
In November 2003, the registrant issued 507 shares of its common stock to Erick
E. Richardson in exchange for services rendered. The value of the common stock
was determined by the Board of Directors to be $105.00 per share. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
Certain common stock purchase agreements with certain investors include a
provision in which, if for a period of six-months from the purchase of shares
our common stock closing price for 5 consecutive trading days falls below
$225.00 per share, we will issue to the investors additional shares, whereby the
number of shares purchased and the additional shares, multiplied by $150.00
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. Our
common stock closing price fell below $225.00 per share for the 5 consecutive
trading days ended October 3, 2003, requiring the us to issue an additional 689
shares of common stock to those certain investors. Such shares were issued in
November 2003 and are exempt from registration pursuant to Section 4 (2) of the
Securities Act of 1933.
In November 2003, the Company issued 55 shares of the Company's restricted
common stock , valued at $6,651 ( or $120.00 per share, which is the fair market
value of the stock on the date of issuance), in satisfaction of an account
payable in the amount of $20,656. The Company recorded a gain on settlement of
accounts payable of $14,005 in general and administrative expense in its
accompanying condensed statement of operations. These securities were issued
pursuant to an exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
In November 2003, the Company issued 63 shares of the Company's restricted
common stock , valued at $7,500 ( or $120.00 per share, which is the fair market
value of the stock on the date of issuance), to a consultant for services
performed. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
In December 2003, the Company issued 507 shares of the Company's restricted
common stock, valued at $60,826 ( or $120.00 per share, which is the fair market
value of the stock on the date of issuance), for legal services performed. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
In December 2003, the Company issued 67 shares of the Company's restricted
common stock, valued at $9,000 (or $135.00 per share, which is the fair market
value of the stock on the date of issuance), to a consultant for services
performed. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
In February 2004, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of
$1,000,000 principal amount 6% convertible debentures with an original issue
discount of 20%. As of June 2, 2004, we closed on an aggregate principal amount
of $1,000,000 of convertible debentures and received gross proceeds of $800,000.
The debentures are convertible at the option of the holders into our shares of
common stock at a fixed conversion price of $15 per share. In connection with
the Securities Purchase Agreement, we also issued warrants to purchase 33,333
shares of our common stock at an exercise price of $150.00 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 67 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.
27
In April 2004, the Company issued 23,809 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 $5.25 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. These securities were issued
pursuant to an exemption from registration pursuant to Section 4 (2) of the
Securities Act of 1933.
In May 2004, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of
$1,000,000 principal amount 10% Callable Secured Convertible Notes ("10%
Convertible Notes). We received the first tranch in the gross amount of $400,000
and are to receive the balance in two additional tranches, the first in the
gross amount of $300,000 upon the filing of a this registration statement and
the final tranch in the gross amount of $300,000 upon the effective date of this
registration statement. The 10% Convertible Notes are due two years from the
date of issuance. The 10% Convertible Notes are convertible at the option of the
holders into shares of our common stock. The conversion price is equal to the
lesser of (i) $12 and (ii) the average of the lowest three (3) intra-day trading
prices during the twenty (20) trading days immediately prior to the conversion
date discounted by forty percent (40%). In connection with the issuance of the
10% Convertible Notes, the noteholders received warrants to purchase 20,000
shares of our common stock ("Convertible Note Warrants") at $5.25 per share.
Furthermore we entered into a Registration Rights Agreement in order to register
the above-referenced securities and are required to register 200% of our common
shares underlying the 10% Convertible Notes and the Note Warrants. These
securities were issued pursuant to an exemption from registration pursuant to
Section 4 (2) of the Securities Act of 1933.
In May 2004, we issued 3,333 shares of our Common Stock to a consultant for
services provided to us. The fair market value of this Common Stock was $15,000
or $4.50 per share. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In June 2004, we issued 6,666 shares of our Common Stock to a consultant for
services provided to us. The fair market value of this Common Stock was $25,000
or $3.75 per share. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In June 2004, we issued 13,889 shares of our Common Stock to our Chief Financial
Officer in payment of $20,000 of accrued compensation. The fair market value of
this Common Stock was $29,167 or $2.10 per share. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
On August 12, 2004, the Company entered into a Securities Purchase Agreement
with several accredited institutional investors the issuance of an aggregate of
$500,000 principal amount 10% Callable Secured Convertible Notes ("August 2004
Callable Notes") . The 10% convertible notes are due two years from the date of
issuance. The 10% convertible notes are convertible at the option of the holders
into shares of the Company's common stock. The conversion price is equal to the
lesser of (i) $0.84 and (ii) the average of the lowest three (3) intra-day
trading prices during the twenty (20) trading days immediately prior to the
conversion date discounted by fifty percent (50%).
In the event the Company breaches one or more of its covenants, representations
or warranties, the Company may be obligated to pay liquidated damages as defined
in the agreements. The August 2004 Callable Notes are callable by the Borrower
by making a cash payment ranging from 130% to 150% of the amounts borrowed plus
accrued interest, as defined. The August 2004 Callable Notes are collateralized
by substantially all of the Company's assets.
The Company has registered approximately 3,333,333 shares of its common stock to
cover the conversion of the August 2004 Callable Notes.
In connection with the August 2004 Callable Notes, the Company also issued
warrants to purchase 10,000 shares of the Company's common stock at an exercise
price of $0.84 per share that expire five years from the date of issuance. The
Company has reserved and registered 20,000 shares of its common stock to cover
these warrants.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the August 2004 Callable Notes, the Company has provided a
debt discount of $500,000. 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 the beneficial
conversion feature as interest expense and related to the detachable warrants as
additional paid-in capital when the related note is converted into the Company's
common stock.
In the months of July, August and September 2004 the Company issued 1,162,584
shares of its common stock in connection with the conversion of $129,641 of
convertible debenture debt, including 200,000 shares that were issued in
consideration of the Company's not having the required amount of authorized
shares to satisfy the notice of conversion in a timely manner.
In the months of July, August and September 2004 the Company issued 158,333 and
666,667 shares of its Common Stock to its former Chief Executive Officer in
payment of $100,000 of accrued compensation and $50,000 related to the
conversion of notes payable, respectively. The common stock was valued at
$166,250 and $50,000 (based on the fair value on the date of grant) for the
issuance related to the accrued compensation and the conversion of notes
payable, respectively. The Company will record a loss on settlement of accrued
compensation of $66,250 in other expense in the statement of operations for the
quarter ending September 30, 2004.
In August 2004 the Company issued 13,333 shares of the Company's common stock
for services rendered, valued at $11,400 (or $0.86 per share, which is the fair
market value of the stock on the date of issuance).
28
In August 2004 the Company issued a warrant to purchase 6,667 restricted shares
of the Company's common stock at $4.50 per share (in excess of the fair market
value of the stock on the date of grant) to a consultant and director of the
Company in connection with a consulting agreement and will value such warrant in
accordance with SFAS 123.
In September 2004 the Company issued 1,000,000 shares of its Common Stock to its
Chief Executive Officer in connection with an employment agreement. The common
stock was valued at approximately $75,000 (based on the fair value on the date
of grant) and was expensed during the three month period ended September 30,
2004.
In September 2004 the Company issued 200,000 shares of its Common Stock, 100,000
to its former Chief Financial Officer and 100,000 to a current board of director
in connection with consulting services rendered. The common stock was valued at
approximately $30,000 (based on the fair value on the date of grant).
In October 2004 the Company issued 133,333 shares of its common stock in
connection with the conversion of $2,575 of convertible note and debenture debt.
In November 2004 the Company issued 41,667 shares of its common stock in
connection with the conversion of $625 of convertible note and debenture debt
In December 2004 the Company issued 1,666,036 shares of its common stock in
connection with the conversion of $28,146 of convertible note and debenture debt
In January 2005 the Company issued 680,000 shares of its previously registered
common stock in connection with the conversion of $10,200 of convertible note
and debenture debt.
In January 2005 the Company issued 400,000 shares of its common stock to
consultants for services rendered valued at $18,800 (or $0.047 per share, which
is the fair market value of the stock on the date of issuance).
In February 2005 the Company issued 510,000 shares of its previously registered
common stock in connection with the conversion of $8,160 of convertible note and
debenture debt
In February 2005 the Company issued 177,250 shares of its common stock to a
consultant for services valued at $9,750 (or $0.055 per share, which is the fair
market value of the stock on the date of issuance) and 1,388,888 shares of its
common stock to an executive officer in payment of a bonus pursuant to an
employment agreement valued at $50,000 (or $0.036 per share, which is the fair
market value of the stock on the date of issuance.
In March 2005 the Company issued 680,000 shares of its previously registered
common stock in connection with the conversion of $12,903 of convertible note
and debenture debt and 175,000 shares of its common stock to consultants for
services valued at $5,775 (or $0.033 per share, which is the fair market value
of the stock on the date of issuance).
On May 26, 2005, the Company issued 400,000 shares of the Company's common stock
for services rendered, valued at $6,800 (or $0.017 per share, which is the fair
market value of the stock on the date of issuance).
On June 2, 2005, the Company issued 250,000 shares of the Company's common stock
for services rendered, valued at $4,500 (or $0.018 per share, which is the fair
market value of the stock on the date of issuance).
On July 12, 2005, the Company issued an aggregate of 16,200,000 shares of its
common stock to five consultants for services valued at $324,000 (or $0.02 per
share, which is the fair market value of the stock on the date of issuance) and
3,800,000 shares of its common stock to an executive officer in payment of a
bonus pursuant to a consulting agreement valued at $76,000 (or $0.02 per share,
which is the fair market value of the stock on the date of issuance).
In August 2005, the Company entered into a Securities Purchase Agreement with an
accredited institutional investor for the issuance of a $50,000 principal amount
6% convertible debenture with an original issue discount of 20%. The debenture
is due February 2006. The debenture is convertible at the option of the holder
into the Company's shares of common stock at a fixed conversion price of $0.01
per share and bears the same terms and conditions as the February 2004
Convertible Debentures. As of August 24, 2005, the entire $50,000 in principal
amount remains outstanding.
On August 12, 2005, the Company issued warrants to purchase 5,000,000 restricted
shares of the Company's common stock at $0.06 per share (in excess of the fair
market value of the stock on the date of grant) to a consultant of the Company
in connection with a consulting agreement to provide chief executive officer
services, and will value such warrant in accordance with SFAS 123 (see Note
13-Subsequent Events-Executive Consulting Agreement);
On August 12, 2005, the Company issued warrants to purchase 1,500,000 restricted
shares of the Company's common stock at $0.06 per share (in excess of the fair
market value of the stock on the date of grant) to a consultant and one of the
directors of the Company in connection with a consulting agreement, and will
value such warrant in accordance with SFAS 123;
29
On August 12, 2005, the Company issued warrants to purchase 1,500,000 restricted
shares of the Company's common stock at $0.06 per share (in excess of the fair
market value of the stock on the date of grant) to a consultant and related
party in connection with a consulting agreement, and will value such warrant in
accordance with SFAS 123;
On August 12, 2005, the Company issued warrants to purchase 750,000 restricted
shares of the Company's common stock at $0.06 per share (in excess of the fair
market value of the stock on the date of grant) to two consultants in connection
with consulting agreements, and will value such warrant in accordance with SFAS
123.
On August 12, 2005, the Company issued warrants to purchase 250,000 restricted
shares of the Company's common stock at $0.06 per share (in excess of the fair
market value of the stock on the date of grant) to an employee, and will value
such warrant in accordance with SFAS 123.
On October 10, 2005 the Company issued 10,000,000 restricted shares of its
common stock to four separate purchasers in connection with stock purchase
agreements valued at $100,000 in the aggregate (or $0.01 per share).
On September 16, 2005, we entered into a Subscription Agreement pursuant to
which we issued an aggregate of $900,000 principal amount Original Issue
Discount Secured Convertible Notes (the "Convertible Notes") and we received a
gross amount of $750,000. The convertible notes are convertible at the option of
the holders into shares of our common stock. The conversion price is equal to
the lesser of (i) $.07 or (ii) the average of the lowest three (3) intra-day
trading prices during the twenty (20) trading days immediately prior to the
conversion date discounted by thirty-five percent (35%). In connection with the
issuance of the convertible notes, we also issued an aggregate of 1,500,000
warrants to purchase shares of our common stock at a purchase price of $0.07 per
share.
ITEM 27. EXHIBITS.
a. The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
3.1 Certificate of Incorporation, dated as of April 4, 1989,
incorporated by reference to Registration Statement on Form 10-SB
(File No. 0-25022), dated as of October 27, 1994.
3.2 Certificate of Amendment to Certificate of Incorporation, dated as
of November 8, 1990, incorporated by reference to Registration
Statement on Form 10-SB (File No. 0-25022), dated as of October 27,
1994.
3.3 Certificate of Amendment to Certificate of Incorporation, dated as
of October 26, 1994, incorporated by reference to Registration
Statement on Form 10-SB (File No. 0-25022), dated as of October 27,
1994.
3.4 Certificate of Increase in Number of Authorized Shares of Common
Stock, dated as of July 8, 1996, amending the Certificate of
Incorporation, incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022), dated as of March 30, 2000.
3.5 Certificate of Amendment to Certificate of Incorporation, dated as
of March 12, 1997, incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022), dated as of March 30, 2000.
3.6 Certificate of Amendment to Certificate of Incorporation, dated as
of March 20, 1998, incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022), dated as of April 14, 1998.
3.7 Certificate of Amendment to Certificate of Incorporation, dated as
of March 31, 1998, incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022), dated as of April 14, 1998.
3.8 Certificate of Amendment to Certificate of Incorporation, dated as
of July 8, 1999, incorporated by reference to our Annual Report on
Form 10- KSB (File No. 000-25022), dated as of March 30, 2000.
3.9 Certificate of Amendment to Certificate of Incorporation, dated as
of July 22, 1999, incorporated by reference to our Annual Report on
Form 10- KSB (File No. 000-25022), dated as of March 30, 2000.
30
3.10 Certificate of Amendment to Certificate of Incorporation, dated as
of December 17, 1999, incorporated by reference to our Annual Report
on Form 10-KSB (File No. 000-25022), dated as of March 30, 2000.
3.11 By-Laws of MoneyZone.com, Inc., incorporated by reference to
Registration Statement on Form 10-SB (File No. 0-25022), dated as of
October 27, 1994.
5.1 Opinion of Counsel
10.1 Subscription Agreement dated September 16, 2005
10.2 Form of Class A Common Stock Purchase Warrant
10.3 Security Agreement
10.4 Collateral Agent Agreement
10.5 Form of Secured Convertible Note
10.6 Stock Purchase Agreement between the Company and Liquid Assets dated
October 12, 2005
10.7 Stock Purchase Agreement between the Company and Profit Capital
Management dated October 12, 2005
10.8 Stock Purchase Agreement between the Company and Capital Group
Communications dated October 12, 2005
10.9 Stock Purchase Agreement between the Company and Edge Trading, Inc.
dated October 12, 2005
16.1 Letter on change in certifying accountant, incorporated by reference
to the Current Report on Form 8-K (File No. 000-25022) dated
February 12, 2003.
21.1 Subsidiaries of the registrant, incorporated by reference to our
Annual Report on Form 10-KSB (File No. 000-25022) dated as of
September 19, 2003.
23.1 Consent of Corbin & Company LLC, dated October 17, 2005 filed
herewith.
23.2 Consent of Armando C. Ibarra C.P.A. P.C., dated October 17, 2005
filed herewith.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement;
(iii) To include any additional or changed material information on the plan of
distribution.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
31
4. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
32
SIGNATURES
Pursuant to the requirements of the 1933 Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Los Angeles, State of California on the 21st
of October 2005.
Addison-Davis Diagnostics, Inc.
a Delaware corporation
By: /s/ Edward W. Withrow III
-----------------------------------------------
Edward W. Withrow III, Chief Executive Officer
(Principal Executive Officer and Principal
Financial and Accounting Officer)
Pursuant to the requirements of the 1933 Securities Act, this Form SB-2
Registration Statement has been signed by the following persons in the
capacities with Addison-Davis Diagnostics, Inc. and on the dates indicated.
Dated: October 21, 2005
/s/ Edward W. Withrow III
- -------------------------------------------
Edward W. Withrow III, Chief Executive
Officer, President, Chief Financial Officer
and Director
33