UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
MARK ONE
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-25022
ADDISON-DAVIS DIAGNOSTICS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 80-0103134
(State Or Other Jurisdiction Of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
143 Triunfo Canyon Road, Suite 104, Westlake Village, California 91362
(Address Of Principal Executive Offices) (Zip Code)
805-494-7838
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities and Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as the latest practicable date: The total number of shares of the
registrant's Common Stock, par value $.001 per share, outstanding on May 12,
2006 was 1,225,114.
Transitional Small Business Disclosure Format: Yes |_| No |X|
ADDISON-DAVIS DIAGNOSTICS, INC.
Index to Form 10-QSB
Page
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2006
(Unaudited) F-2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2006 and 2005 (Unaudited) F-3
Consolidated Statements of Operations for the Nine
Months Ended March 31, 2006 and 2005 (Unaudited) F-3
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2006 and 2005 (Unaudited) F-4
Notes to Consolidated Financial Statements F-6
Item 2. Management's Discussion and Analysis
or Plan of Operation 1
Item 3. Controls and Procedures 4
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings 4
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 4
Item 3. Defaults Upon Senior Securities 4
Item 4. Submission of Matters to a Vote of Securities Holders 4
Item 5. Other Information 4
Item 6. Exhibits 4
F-1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 2006
ASSETS
Current assets:
Cash $ 654
Accounts receivable 315
Other receivable 32,346
Notes receivable 74,000
Prepaid expenses 230,511
--------------
Total current assets 337,826
Property and equipment, net of accumulated
depreciation of $20,762 24,963
Deferred financing cost, net of accumulated
amortization of $714,751 101,168
Prepaid interest 100,000
Patent and FDA Clearance 358,684
Other assets 4,238
--------------
$ 926,879
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 799,726
Accrued interest 90,566
Lease liability 156,400
Notes payable 131,500
--------------
Total current liabilities 1,178,192
Convertible notes payable, net of unamortized debt
discount of $1,363,607 1,995,985
--------------
Total liabilities 3,174,177
--------------
Stockholders' deficit:
Common stock, $0.001 par value; 2,000,000,000
shares authorized; 154,497,648 shares issued and
outstanding 154,498
Additional paid-in capital 20,476,070
Accumulated deficit (22,877,866)
--------------
Total stockholders' deficit (2,247,298)
--------------
$ 926,879
==============
See accompanying notes to consolidated financial statements
F-2
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ -- $1,940 $1,977 $5,176
Costs and expenses:
Cost of sales -- 1,095 1,200 2,838
General and administrative 239,132 304,453 1,979,252 1,228,579
------------ ------------ ------------ ------------
Loss from operations 239,132 303,608 1,978,475 1,226,241
Other expense:
Interest expense - net (385,038) (374,423) (1,177,082) (1,259,792)
Other income - net 2,040 -- 375,182 34,273
------------ ------------ ------------ ------------
Total Other Income (Expense) (325,998) (324,423) (801,900) (1,225,519)
------------ ------------ ------------ ------------
Net loss before loss from $ (565,130) $ (678,031) $ (2,780,375) $ (2,451,760)
Discountinued operation ============ ============ ============ ============
Loss from discountinued
operation -- (324,676) -- (742,318)
------------ ------------ ------------ ------------
Net Loss $ (565,130) $ (1,002,707) $ (2,780,375) 3,194,078
============ ============ ============ ============
Basic and diluted net loss per
common share $ (0.00) $ (0.25) $ (0.02) $ (1.67)
============ ============ ============ ============
Basic and diluted weighted
average shares outstanding 75,376,201 4,040,537 43,441,773 1,907,144
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-3
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The For The
Nine Months Ended Nine Months Ended
March 31, 2006 March 31, 2005
----------------- -----------------
Cash flows from operating activities:
Net loss $(2,780,375) $(3,194,078)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,157 2,925
Amortization of debt discount and non-cash
(236,382) --
Common stock issued for services
Common stock issued for services 234,000
Changes in operating assets and
liabilities, net of acquired business:
Accounts receivable 29,173 (26,146)
Inventories, net 1,525 (42,899)
Deferred costs 21,787 14,219
Customer deposits -- 5,398
Prepaid expenses (101,717) 1,402
Other assets 745 --
Legal fees (210,093)
Accounts payable and accrued expenses (122,973) 292,003
----------------- -----------------
Net cash used in operating activities (2,952,550) (3,157,269)
----------------- -----------------
Cash flows from investing activities:
Cash paid for acquisition (7,610) (1,000)
----------------- -----------------
Net cash (used in) provided by investing activities (7,610) (1,000)
----------------- -----------------
Cash flows from financing activities:
Change in common stock 146,146 1,926,029
Change in paid in capital 2,095,882 --
Change in Convertible debentures 776,656 990,324
Change in notes payable (202,750) 104,341
Change in notes to related parties (207,049) (170,275)
Change in notes receivable (106,346)
Change in security deposit -- 100
Proceeds from escrowed funds 300,000 --
----------------- -----------------
Net cash provided by financing activities 2,802,539 2,850,519
----------------- -----------------
F-4
ADDISON-DAVIS DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
For The For The
Nine Months Ended Nine Months Ended
March 31, 2006 March 31, 2005
----------------- -----------------
Net increase (decrease)in cash (157,621) (307,750)
Cash, beginning of year 158,275 310,520
----------------- -----------------
Cash, end of period 654 $2,770
================= =================
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ -- $524,381
================= =================
Income taxes $ -- $ --
================= =================
See accompanying notes to consolidated financial statements
F-5
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2006
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying March 31, 2006 financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at March 31, 2006 and
2005 and for all periods presented have been made. Certain information and
Footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's June 30, 2005 audited financial
statements. The results of operations for periods ended March 31, 2006 and
2005are not necessarily indicative of the operating results for the full years.
NOTE 2 - 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 $2,817,226 and $7,161,005, respectively, with
only $5,176 and $192,109 of revenue, respectively, during the years ended June
30, 2005 and 2004. Also, the Company incurred net losses of $565,130 and
$374,423, respectively, with only $0 and $1,940 of revenue, respectively, during
the three month periods ended March 31, 2006 and 2005 and net losses of
$2,780,375 and $3,194,078, respectively, with only $1,977 and $5,176 of revenue,
respectively, during the nine month periods ended March 31, 2006 and 2005. The
Company also had an accumulated deficit of $22,877,866 and negative working
capital of $840,366, with $654 in cash at March 31, 2006. 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. In November 2005, the Company
granted an exclusive worldwide License to brand develop, manage, provide sales
strategy, manufacture and to sell and distribute its Drug Stop product for
over-the-counter (OTC) sales, and as consideration the Company shall receive a
royalty equal to Seven and One Half Percent (7.5%) of the gross revenues derived
from sales of the Drug Stop product sold over-the-counter "OTC" in stores,
calling centers, Internet or other over-the-counter means. The Company has also
entered into sales representative and distribution agreements for institutional
sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies
nationwide.
Management believes that ownership, sales and marketing of the Drug Stop product
will have a significant effect on future profitability. During the three month
period ended December 31, 2005, management successfully obtained capital through
the sale and issuance of original issue discount convertible notes, from which
the Company received gross proceeds of approximately $210,000, and anticipates
an additional sale and issuance of original issue discount notes in the
approximate gross amount of $360,000 during the months of April 2006 and May
2006. 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.
NOTE 3 - DESCRIPTION OF BUSINESS
The Company operates through its parent company and one subsidiary:
1. Addison-Davis Diagnostics, Inc. (the parent Company)
2. Nico International,Inc.(inactive)
NOTE 4 - PREPAID INTEREST
The Company has prepaid interest of $330,511, primarily in connection with the
issuance of convertible debt in May 2004, August 2004, June 2005, September 2005
and December 2005. 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.
F-6
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 5 - ONE TO 175 REVERSE STOCK SPLIT
On April 17, 2006, the Company effected a one to 175 reverse split of its common
stock. References to shares of the Company's common stock in these financial
statements and this Form 10-QSB are based on pre-split shares and do not reflect
the reverse split.
NOTE 6 - 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 as of March 31, 2006 and 2005, respectively, have been excluded from
dilutive loss per share, as their effect would be anti-dilutive.
NOTE 7 - PATENT PENDING AND F.D.A. CLEARANCES
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.
NOTE 8 - NOTES PAYABLE
On June 15, 2004, the Company executed 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, Reder filed a lawsuit against the Company alleging
breach of his employment agreement, wrongful discharge, libel and breach of
promissory note (see Note 9 - Litigation). As at December 31, 2005, legal
counsel for the Company advises that, based on events during the litigation
process, in their opinion the maximum payment to Reder with regard to this
action will not exceed $30,000. Accordingly, the financial statements as of
March 31, 2006 and for the nine month period ended March 31, 2006 reflect a
liability to Reder in the aggregate amount of $30,000 on the balance sheet and
other income in the amount of $291,116.31 on the statement of operations,
respectively.
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. As at March 31, 2006, the principal balance due on this note was
$66,500.
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. As at March 31, 2006, the principal
balance due on this note was $25,000.
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. As at March 31, 2006, the principal
balance due on this note was $25,000.
NOTE 9 - 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
F-7
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
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 September 30, 2005, a total of
$1,950,000 of the August 2003 Debentures were converted into 422,504 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 133 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.
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 September 30, 2005, a total of $572,066 of the
February 2004 Debentures was converted into 1,400,671 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
F-8
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
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 September 30, 2005, a
total of $128,196 of the May 2004 Callable Notes was converted into 6,500,337
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.
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.
F-9
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
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.
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.
F-10
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
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.
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 September 30, 2005, the entire $50,000 in
principal amount remains outstanding.
SEPTEMBER 2005 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES
On September 16, 2005, the Company 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 the Company 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 the Company's common
stock. Furthermore the Company entered into a Registration Rights Agreement in
order to register the above-referenced securities and are required to register
200% of the Company's common shares underlying the convertible notes and 100% of
the Company's common shares underlying 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 the Company's common stock, provided at no time may a holder of the
Company's convertible notes and its affiliates own more than 4.9% of the
Company's outstanding common stock. The conversion price of the Company's common
stock used in calculating the number of shares issuable upon conversion of the
convertible notes, is the lesser of: (i) Sixty-five percent of the average of
the lowest three intra-day trading prices for the Company's 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 $0.07.
The Company is obligated to pay a penalty of $2,000 per day to the investors if
the Company fails to deliver the shares of its common stock issuable upon a
conversion of the convertible notes within two business days following the
receipt of the investors' notice of conversion.
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 the Company's common stock, provided at no time may a holder of the
Company's convertible notes and its affiliates own more than 4.9% of the
Company's outstanding common stock. The conversion price of the Company's common
stock used in calculating the number of shares issuable upon conversion of the
convertible notes, is the lesser of: (i) Sixty-five percent of the average of
the lowest three intra-day trading prices for the Company's 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 $0.07.
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 the Company's common stock, provided at no time may a holder of the
Company's convertible notes and its affiliates own more than 4.9% of the
Company's outstanding common stock. The conversion price of the Company's common
stock used in calculating
F-11
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
The Company is obligated to pay a penalty of $2,000 per day to the investors if
the Company fails to deliver the shares of its common stock issuable upon a
conversion of the convertible notes within two business days following the
receipt of the investors' notice of conversion.
The conversion price of the convertible notes are subject to equitable
adjustments if the Company distributes 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 the Company issues shares of its common stock or any
rights, options, warrants to purchase shares of its common stock at a price less
than the market price of its 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 the Company. The convertible notes are secured by a security
agreement and an intellectual property security agreement under which the
Company pledged substantially all of its assets, including its goods, fixtures,
equipment, inventory, contract rights, receivables and intellectual property.
The warrants purchased by the investors pursuant to the September 2005
Subscription Agreement entitle the investors to purchase 1,500,000 shares of the
Company's 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
the Company's recapitalization. The exercise price of the warrants is also
subject to reduction if the Company issues shares of its common stock or 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.
DECEMBER 2005 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES
On December 23, 2005, the Company entered into a Subscription Agreement with
several accredited institutional investors for the issuance of an aggregate of
$252,000 principal amount Original Issue Discount Secured Convertible Notes (the
"Convertible Notes") and the Company received a gross amount of $132,000, with
the balance due in two tranches due $60,000 on January 15, 2006 and $60,000 due
February 15, 2006. 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 the Company's 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 the Company's common stock. Furthermore the Company entered into a
Registration Rights Agreement in order to register the above-referenced
securities.
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 the Company's common stock, provided at no time may a holder of the
Company's convertible notes and its affiliates own more than 4.9% of the
Company's outstanding common stock. The conversion price of the Company's common
stock used in calculating the number of shares issuable upon conversion of the
convertible notes, is the lesser of (i) Sixty-five percent of the average of the
lowest three intra-day trading prices for the Company's 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 $0.07.
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 $252,000 of convertible notes on January 10, 2006, a conversion price of
$0.004 per share, the number of shares issuable, ignoring the 4.9% limitation
discussed above, upon conversion would be: $252,000/ $0.004 = 63,000,000 shares
The conversion price of the convertible notes are subject to equitable
adjustments if the Company distributes 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 the Company issues shares of the Company's common stock or
any rights, options, warrants to purchase shares of the Company's common stock
at a price less than the market price of the Company's 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 the Company.
The convertible notes are secured by a security agreement and an intellectual
property security agreement under which the Company pledged substantially all of
its assets, including goods, fixtures, equipment, inventory, contract rights,
receivables and intellectual property.
DESCRIPTION OF WARRANTS
The warrants purchased by the investors pursuant to the December 23, 2005
Subscription Agreement entitle the investors to purchase 420,000 shares of our
common stock at an exercise price equal to $0.07 per share.
F-12
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-CONTINUED
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
the Company's recapitalization. The exercise price of the warrants is also
subject to reduction if the Company issues shares of our common stock on any
rights, options or warrants to purchase shares of the Company's common stock at
a price less than the market price of the Company's shares as quoted on the OTC
Bulletin Board.
REGISTRATION RIGHTS
If the Company at any time propose to register any of its securities under the
1933 Act for sale to the public, the Company is obligated to include 100% of the
shares of its common stock issuable upon conversion of the promissory notes and
100% of the shares of its common stock issuable upon exercise of the Class A
warrants in such registration statement.
NOTE 10 - STOCKHOLDERS' DEFICIT
COMMON STOCK
During the three month period ended March 31, 2006, the Company:
issued 53,193,244 shares of its common stock in connection with the conversion
of $157,385 of convertible note and debenture debt;
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LITIGATION
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 an illegal tying
arrangement with Rite Aid wherein only the shelving manufactured by plaintiff
could be used for the display of our product. In an effort to deter the cost of
further legal action, the Company is negotiating to settle the matter.
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. Mr. Reder
claims that 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. We have 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. This matter is set for
trial in September 2006.
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 outstanding principal balance due on the note is
$60,086 plus accrued interest and penalties. The Company has retained counsel to
respond to the Summons and effective May 8, 2006 the Company has settled the
matter with a Stipulation of Settlement and Limited Mutual Release (see Note
12).
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.
NOTE 12 - SUBSEQUENT EVENTS
THE APRIL 2006 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES
On April 11, 2006, the Company entered into a Subscription Agreement with
several accredited institutional investors for the issuance of an aggregate of
$360,000 principal amount Original Issue Discount Secured Convertible Notes (the
"Convertible Notes") and the Company received a gross amount of $200,000 in
April 2006 and $100,000 in May 2006. The convertible notes are due two years
from the date of
F-13
ADDISON-DAVIS DIAGNOSTICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 (CONTINUED)
NOTE 12 - SUBSEQUENT EVENTS-CONTINUED
issuance. The 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) $.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 the Company's common stock. Furthermore the Company entered into a
Registration Rights Agreement in order to register the above-referenced
securities. 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 the Company's common stock, provided at no time may a
holder of the Company's convertible notes and its affiliates own more than 4.9%
of the Company's outstanding common stock. The conversion price of the Company's
common stock used in calculating the number of shares issuable upon conversion
of the convertible notes, is the lesser of (i) Sixty-five percent of the average
of the lowest three intra-day trading prices for the Company's 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 $0.07.
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 $360,000 of convertible notes on April 15, 2006, at a conversion price of
$0.002 per share, the number of shares issuable, ignoring the 4.9% limitation
discussed above, upon conversion would be: $360,000/ $0.002 = 72,000,000 shares
The conversion price of the convertible notes are subject to equitable
adjustments if the Company distributes 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 the Company issues shares of the Company's common stock or
any rights, options, warrants to purchase shares of the Company's common stock
at a price less than the market price of the Company's 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 the Company.
The convertible notes are secured by a security agreement and an intellectual
property security agreement under which the Company pledged substantially all of
its assets, including goods, fixtures, equipment, inventory, contract rights,
receivables and intellectual property.
DESCRIPTION OF WARRANTS
The warrants purchased by the investors pursuant to the April 11, 2006
Subscription Agreement entitle the investors to purchase 600,000 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 the Company's
recapitalization. The exercise price of the warrants is also subject to
reduction if the Company issues shares of our common stock on any rights,
options or warrants to purchase shares of the Company's common stock at a price
less than the market price of the Company's shares as quoted on the OTC Bulletin
Board.
REGISTRATION RIGHTS
If the Company at any time propose to register any of its securities under the
1933 Act for sale to the public, the Company is obligated to include 100% of the
shares of its common stock issuable upon conversion of the promissory notes and
100% of the shares of its common stock issuable upon exercise of the Class A
warrants in such registration statement.
ISSUANCES OF REGISTERED COMMON STOCK SUBSEQUENT TO MARCH 31, 2006
During the month April 2006, the Company issued 10,978,233 and 169,433 of its
pre-1 to 175 and post-1 to 175 reverse split shares of its common stock,
respectively, in connection with the conversion of $60,567 of convertible note
and debenture.
During the month April 2006, the Company issued 110,103 post-1 to 175 reverse
split shares of its common stock to four non-employees in connection with
services rendered to the Company. The common stock was valued, in the aggregate,
at approximately $30,829 (based on the fair value on the date of the issuances).
SETTLEMENT OF BRISTOL INVESTMENT FUND, LTD. MATTER
On August 4, 2005, Bristol Investment Fund, Ltd. filed a summons with notice to
appear against us for breach of contract. The relief sought was liquidated and
compensatory damages. The outstanding principal balance due on the note is
$60,086 plus accrued interest and penalties. The Company had retained counsel to
respond to the Summons and on May 8, 2006 the Company settled the matter by
agreeing to convert a total of $70,086 of debt, including principal, interest
and penalties, into shares of the Company's common stock at the rate of $10,000
per week at the conversion price pursuant to the terms of the original note.
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are based on our management's beliefs
as well as assumptions and information currently available to us. When used in
this report, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. These
statements are subject to risks, uncertainties and assumptions, including,
without limitation, the risks and uncertainties concerning our recent
reorganization, our present financial condition, the availability of additional
capital as and when required, general economic conditions and the risks and
uncertainties discussed in the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operation". Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
or projected. We caution you not to place undue reliance on any forward-looking
statements, all of which speak only as of the date of this report. You should
refer to and carefully review the information in future documents we file with
the Securities and Exchange Commission.
GENERAL OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited consolidated balance
sheet as of March 31, 2006, and the unaudited consolidated statements of
operations and cash flows for the three months and nine months ended March 31,
2006and 2005, and the related notes thereto.
The Company cautions readers that important facts and factors described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this document sometimes have affected, and in the
future could affect, the Company's actual results, and could cause the Company's
actual results during fiscal 2006 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
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 Drug Stop, which we
have sold in limited quantities and are preparing to market through wider
distribution channels including the grant of a license for over-the-counter sale
upon which we will receive a royalty for each unit sold. We had also
test-marketed 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, however based upon
unfavorable results of test-marketing from our distributor we have ceased the
marketing effort of EZ F.O.B.T.
We also believe that it is in our company's and our shareholder's best interests
to license the Drug Stop product for sale and distribution to the
over-the-counter market because we cannot afford the financial burden of ongoing
costs associated with the branding, manufacture, marketing, sale and
distribution of such product to the over-the-counter market, which we believe
could be a major market.
Therefore, in November 2005, we granted an exclusive worldwide License of
Intellectual Property ("License") to brand develop, manage, provide sales
strategy, manufacture and to sell and distribute our Drug Stop drug-test product
for over-the -counter (OTC) sales. The License shall remain in full force and
effect for a period of 5 years and shall automatically be extended for an
additional 5 year period so long as neither party causes a termination of the
License pursuant to its terms. As consideration for granting the License, we
shall receive a royalty equal to 7.5% of the gross revenues derived from sales
of the Drug Stop product sold over-the-counter in stores, calling centers,
Internet or other over-the-counter means during the term of the License.
In order to contain overhead and eliminate certain distribution costs, we have
entered into sales representative and distribution agreements for institutional
sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies
nationwide.
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.
As reported in the Notes To Consolidated Financial Statements As of March 31,
2006, the Company has incurred losses from operations that raised doubt about
our ability to continue as a going concern.
GOING CONCERN
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.
1
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 on our March 31, 2006 financial statements, we have incurred losses
from operations and we have not generated significant net sales revenue.
Although during the three month period ended March 31, 2006, management
successfully arranged additional capital through sales and issuance of original
issue discount convertible notes from which we will receive gross proceeds of
$300,000 in April and May of 2006 (see Note 12 in Notes to the Consolidated
Financial Statements as at March 31, 2006), 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. As reported in the Report of Independent
Registered Public Accounting Firm on our June 30, 2005 audited 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. No assurance can be given that our 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. The accompanying condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of these uncertainties.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant effect on our revenues, income/loss from
operations, and net income/net loss, as well as on the value of certain assets
on our balance sheet. We believe that there are several accounting policies that
are critical to an understanding of our historical and future performance as
these policies affect the reported amounts of revenues, expenses, and
significant estimates and judgments applied by management. While there are a
number of accounting policies, methods and estimates affecting our financial
statements, policies that are particularly significant are stock-based
compensation and revenue recognition. In addition, please refer to Note 1 to the
accompanying condensed consolidated financial statements for further discussion
of our significant accounting policies.
STOCK-BASED COMPENSATION. The Company accounts for non-employee stock-based
compensation under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting For Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25, as amended ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, compensation cost, if
any, is recognized over the respective vesting period based on the difference,
on the date of grant, between the fair value of the Company's common stock and
the grant price. Entities electing to remain with the accounting method of APB
25 must make pro forma disclosures of net income and earnings per share, as if
the fair value method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation to employees
under APB 25.
REVENUE RECOGNITION. We recognize revenue at the time of shipment of our
products to customers. We are still in our initial stages of selling our new
product line to customers or distributors
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2006 AND
2005
During the three months ended March 31, 2006, our revenues were $0 and we
incurred a net loss of $565,130, compared to revenue of $1,940 and a net loss of
$678,031 during the three months ended March 31, 2005. Cost of sales for the
three-month period ended March 31, 2006 and 2005 were $0 and $1,095,
respectively. General and administrative expenses for the three months ended
March 31, 2006 were $239,131, compared to $304,453, for the three months ended
March 31, 2005. The decrease in expenses of $65,322 for the current three month
period were due substantially to a decrease in salaries of approximately 82,459,
a decrease in rent expense of approximately $8,986, a decrease in consulting
fees of approximately $3,822, offset by an increase in insurance expense of
approximately $3,824, an increase in various other expenses of approximately
$4,437 and decrease in reimbursed office expenses of approximately 21,684.
During the three months ended March 31, 2006 and 2005, we recorded interest
expense of $385,038 and $374,423, respectively, representing primarily accrued
interest and amortization of a discount on convertible debentures and notes.
Also, during the three-month periods ended March 31, 2006 and 2005 we had other
income of $70,448, representing primarily write down of certain indebtedness,
and $0, respectively.
During the nine months ended March 31, 2006, our revenues were $1,977 and we
incurred a net loss of $2,780,376, compared to revenue of $5,176 and a net loss
of $2,451,835 during the nine months ended March 31, 2005. Cost of sales for the
nine-month period ended March 31, 2006 and 2005 were $1,200 and $2,838,
respectively. General and administrative expenses for the nine months ended
March 31, 2006 were $1,979,252, compared to $1,228,579, for the nine months
ended March 31, 2005. The increase in expenses of $750,673 for the current nine
month period were due substantially to the issuance of restricted shares of our
common stock in lieu of cash for various employee compensation and advisory
consulting services in the aggregate approximate value of $658,091, and
increases of approximately $436,197 in marketing expense, investor relations
services, increase in various other operating expenses of approximately $24,384,
offset by decreases in salaries of approximately $405,083, decrease in rent
expense of approximately $26,374, decrease in professional fees of approximately
$46,218 and a decrease in reimbursed office expenses of approximately $109,776.
During the nine month period ended March 31, 2006, we issued 46,000,000 and
7,000,000 shares of common stock for various advisory consulting services
pursuant to agreements and executive compensation, respectively. On the date of
issuance the fair market value of the common stock was $704,000. During the nine
months ended March 31, 2006 and 2005, we recorded interest expense of $1,177,082
and $1,259,792, respectively, representing primarily accrued interest and
amortization of a discount on convertible debentures and notes. Also, during the
nine-month period ended March 31, 2006 we had other income of $375,182
representing primarily writedown of certain indebtedness.
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We have made changes in our management team and are focused on (i) selling and
marketing our Drug Stop product to the institutional market; (ii) selling and
marketing our Drug Stop product to Federal agencies; (iii) giving support to our
Licensee in efforts to sell and market Drug Stop in the over-the-counter market;
and (iv) taking the appropriate steps to contain our general business overhead.
Although we believe that we are making progress, our revenues are nil. We will
require additional funding for sales and marketing, general business overhead
and the continuing research and development of additional products. There can be
no assurance that our operations will be profitable or that we will be able to
obtain financing when we need it or, if we obtain financing, that such financing
will have terms satisfactory to us. Our Drug Stop product is governed by the
Federal Food, Drug and Cosmetics Act and by the regulations of various state and
foreign governmental agencies. There can be no assurance that we will maintain
or obtain the appropriate regulatory approvals required to market this and
future products.
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.
Although during the three month period ended March 31, 2006, management
successfully arranged additional capital through sales and issuance of original
issue discount convertible notes from which we will receive gross proceeds of
$300,000 in April and May of 2006 (see Note 12 in Notes to the Consolidated
Financial Statements as at March 31, 2006), we cannot assure you that the
proceeds anticipated 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.
As at March 31, 2006, current assets included $654 in cash, $315 in accounts
receivable, $32,346 in other receivables, $230,511 in prepaid expenses primarily
in connection with our convertible note financings and $74,000 in notes
receivable.
Also reflected are net property and equipment of $24,963 and other assets
including net deferred financing costs of $101,168, patent and FDA clearance of
$358,684, prepaid interest of $100,000 and sundry of $4,238.
Current liabilities in the amount of $1,178,192 include accounts payable and
accrued expenses of $890,292. Also included are a lease liability of $156,400
related to pre-merger Moneyzone assumed liabilities and notes payable of
$131,500. Convertible debentures and notes payable in the amount of $1,995,9856
are net of unamortized debt discount of $1,363,607 relating to our convertible
debentures and notes. We had negative working capital in the amount of $840,366
at March 31, 2006.
During the nine months ended March 31, 2006, our net cash position decreased by
$157,621 from a beginning balance of $158,275 as of June 30, 2005. During the
nine months ended March 31, 2006, we had a loss from operations of $2,780,375.
During the nine months ended March 31, 2006 we had $7,610 cash flows used in
investing activities and net cash flows provided by financing activities were
$2,802,539. Also during this period, our operating activities utilized net cash
of $2,952,550.
During the nine months ended March 31, 2006, our trade accounts payable and
accrued expenses decreased by $86,108 from a beginning balance of $976,400 as of
June 30, 2005 and our notes payable decreased by $404,799 from a beginning
balance of $409,799 as of June 30, 2005 due to our utilization of convertible
debenture financing funds and a write down of certain liabilities
The Company does not currently have any material commitments for capital
expenditures in the short term other than those expenditures incurred in the
ordinary course of business.
Since inception, our operating and investing activities have used all cash
generated from our financing activities. We anticipate continued revenues from
sales of our products, however, we will have an ongoing need to raise additional
capital to meet working capital requirements in order to fund the growth and
development of the business.
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ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, we conducted an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
(b) Changes in internal controls. There was no change in our internal controls
or in other factors that could affect these controls during our last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 an illegal tying
arrangement with Rite Aid wherein only the shelving manufactured by plaintiff
could be used for the display of our product. In an effort to deter the cost of
further legal action, the Company is negotiating to settle the matter.
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. Mr. Reder
claims that 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. We have 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. This matter is set for
trial in September 2006.
On August 4, 2005, Bristol Investment Fund, Ltd. filed a summons with notice to
appear against us for breach of contract. The relief sought was liquidated and
compensatory damages. The outstanding principal balance due on the note is
$60,086 plus accrued interest and penalties. The Company had retained counsel to
respond to the Summons and on May 8, 2006 the Company settled the matter by
agreeing to convert a total of $70,086 of debt, including principal, interest
and penalties, into shares of the Company's common stock at the rate of $10,000
per week at the conversion price pursuant to the terms of the original note.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 23, 2005 a majority of the stockholders of the Company authorized an
amendment to the Company's certificate of incorporation to effect a one for 175
reverse split of its common stock. On April 19, 2006, we filed the amendment to
our articles of incorporation with the Secretary of State of Nevada. On April
17, 2006, the Company effectuated the reverse stock split.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification by Chief Executive Officer and Chief Financial
Officerpursuant to Sarbanes Oxley Section 302
32.1 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S. C. Section 1350
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADDISON-DAVIS DIAGNOSTICS, INC.
By: /s/ Charles Miseroy
----------------------------------------------
Date: May 15, 2006 Charles Miseroy, President and Chief Executive
Officer (Principal Executive Officer) and Chief
Financial Officer (Principal Accounting and
Financial Officer)
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