As filed with the Securities and Exchange Commission on June 2, 2006
An Exhibit List can be found on page __.
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)
CHARLES MISEROY, CHIEF EXECUTIVE OFFICER
143 Triunfo 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 Offering Price(1) Registration Fee
- -------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 7,975,000(3) $ 0.09(2) $ 717,750 $ 76.80
- -------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 600,000(4) $ 0.07(2) $ 42,000 $ 4.49
- -------------------------------------- -------------- ------------------ ------------------- -----------------
TOTAL 8,575,000 $ 759,750 $ 81.29
====================================== ============== ================== =================== =================
(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 notes 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. 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 April 2006 convertible notes, 100% of the number of shares of
our common stock issuable upon conversion of the September 2005 convertible
notes and 100% of the stock underlying the warrant shares. 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 (i) the closing price as reported on the Over-The-Counter Bulletin Board
on June 1, 2006, which was $0.09; and (ii) $0.07, the exercise price of the
warrants.
(3) Includes 100% of the shares underlying our remaining, unconverted principal
amount $685,295 convertible notes issued pursuant to our September 2005
Subscription Agreement and 200% of the shares underlying our principal amount of
$360,000 convertible notes issued pursuant to our April 2006 Subscription
Agreement.
(4) Includes 100% of the shares underlying warrants issued to certain of the
selling stockholders pursuant to our April 2006 Subscription Agreement.
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.
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY MATERIAL
TECHNOLOGIES, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING
STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE
IS NOT PERMITTED.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JUNE 2, 2006
ADDISON-DAVIS DIAGNOSTICS, INC.
8,575,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 8,575,000
shares of our common stock, $0.001 par value. The selling shareholders are
offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount
Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common
stock are being registered for the remaining, unconverted $685,295 principal
amount of such notes issued in September 2005 and up to 4,500,000 shares of
common stock are being registered for the $360,000 principal amount of such
notes issued in April 2006. The Original Issue Discount Secured Convertible
Notes are convertible into shares of common stock at the lower of (i) $0.07 or
(ii) 65% of the average of the three lowest intra-day trading prices for our
common stock for the 20 trading days prior to, but not including, the conversion
date;
o 600,000 shares of common stock underlying warrants issued to certain of the
selling stockholders pursuant to our April 2006 Subscription Agreement. The
warrants are exercisable into common stock at price equal to $0.07.
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.
However, we will receive the sale price of any common stock we sell to the
selling stockholder upon exercise of the warrants in the amount up to $42,000.
We expect to use the proceeds received from the exercise of the warrants, if
any, for general working capital purposes.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading
symbol is "ADSD." The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on June 1, 2006, was $.09.
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 6.
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 June __, 2006
3
ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
--------
Prospectus Summary 5
Risk Factors 6
Description of Securities to be Registered 11
Selling Shareholders 11
Plan of Distribution 15
Use of Proceeds 16
Market for Common Equity and Related Shareholder Matters 16
Directors, Executive Officers, Promoters and Control Persons 18
Executive Compensation 19
Security Ownership of Certain Beneficial Owners and Management 20
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 21
Certain Relationship and Related Transactions 22
Organization 23
Our Business 23
Description of Property 25
Legal Proceedings 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Experts 31
Financial Statements F-1 through F-38
4
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 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. Outright ownership of our self-regulating urine
specimen quick-test for drugs of abuse Drug Stop product results in the addition
of a valuable asset that is currently revenue producing, in addition to adding
licensed products that are immediately marketable without additional cost is, in
management's opinion, the direction which we should pursue.
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 (OTC) 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 (OTC) 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 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 biomedical 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.
For the three months ended March 31, 2006 and 2005, we generated revenue in the
amount of $0 and $1,940, respectively, and a net loss of $565,130 and
$1,002,707, respectively. For the years ended June 30, 2005 and 2004, we
generated revenue in the amount of $5,176 and $192,109 respectively, and a net
loss of $3,617,527 and $7,161,005, respectively. As a result of our substantial
need for working capital and other factors, our auditors in their report dated
September 8, 2005, have expressed substantial doubt about our ability to
continue as going concern.
HOW TO CONTACT US
We maintain our principal offices at 143 Triunfo 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 8,575,000 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 Being Registered".
5
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
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. For the nine months ended March 31,
2006 and 2005, we incurred a net loss of $2,780,375 and $3,194,078,
respectively, and had only zero and $1,977 in revenues, respectively. 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 independent registered 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. 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 and for the nine month period ended
March 31, 2006, management successfully obtained additional capital through
sales and issuance of convertible notes from which we received net proceeds of
$1,300,000 and $960,000, respectively. 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.
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.
6
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.
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
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2006, we had 1,270,114 and shares of common stock issued and
outstanding, respectively, and convertible debentures outstanding that may be
converted into an estimated 5,725,000 shares of common stock at current market
prices, and outstanding warrants to purchase 600,000 shares of common stock. In
addition, the number of shares of common stock issuable upon conversion of the
outstanding convertible debentures may increase if the market price of our stock
declines. All of the shares, including all of the shares issuable upon
conversion of the debentures and upon exercise of our warrants, may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock.
7
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 stockholders, upon conversion
of our remaining, unconverted principal amount $685,295 convertible notes issued
pursuant to our September 2005 Subscription Agreement and our principal amount
$360,000 convertible notes issued pursuant to our April 2006 Subscription
Agreements, based on market prices 25%, 50% and 75% below our market price on
May 10, 2006 of $0.24.
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 35% Issuable Stock
------- ----------- -------------- ------------ --------------
25% $0.18 $0.117 8,934,145 87.5%
50% $0.12 $0.078 13,401,217 91.3%
75% $0.06 $0.039 26,802,435 95.4%
*Based on 1,270,114 shares outstanding as of May 10, 2006
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) $0.07 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.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
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 notes 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 and then converting the rest of their
holdings. In this way, the selling stockholder could sell more than this limit
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.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
The secured convertible notes in the principal amount of $360,000 issued under
our April 2006 Subscription Agreement and the remaining unconverted principal
amount of $685,295 issued under our September 2005 Subscription Agreement due
and payable two years from the date of issuance, unless sooner converted into
shares of our common stock. Any event of default such as our failure to repay
the principal when due, our failure to issue shares of common stock upon
conversion by the holder, our failure to timely file a registration statement or
have such registration statement declared effective, breach of any covenant,
representation or warranty in the Subscription Agreement or related convertible
note, the assignment or appointment of a receiver to control a substantial part
of our property or business, the filing of a money judgment, writ or similar
process against our company in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against our
company and the delisting of our common stock could require the early repayment
of the secured convertible notes, including a default interest rate of 15% on
the outstanding principal balance of the notes if the default is not cured with
the specified grace period. We anticipate that the full amount of the secured
convertible notes will be converted into shares of our common stock, in
accordance with the terms of the secured convertible notes. If we were required
to repay the secured convertible notes, we would be required to use our limited
working capital and raise additional funds. If we were unable to repay the notes
when required, the note holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.
8
IF AN EVENT OF DEFAULT OCCURS UNDER THE SUBSCRIPTION AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE
POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL
INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND
INTELLECTUAL PROPERTY.
In connection with the Subscription Agreements we entered into in September 2005
and April 2006, we executed Security Agreements in favor of the investors
granting them a second priority security interest in all of our goods,
inventory, contractual rights and general intangibles, receivables, documents,
instruments, chattel paper, and intellectual property. The Security Agreements
state that if an even of default occurs under the Subscription Agreement,
Secured Convertible Notes, Warrants or Security Agreements, the investors have
the right to take possession of the collateral, to operate our business using
the collateral, and have the right to assign, sell, lease or otherwise dispose
of and deliver all or any part of the collateral, at public or private sale or
otherwise to satisfy our obligations under these agreements.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
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 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.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT
TRADING IN OUR COMMON STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny
stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be
purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
9
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
10
DESCRIPTION OF SECURITIES BEING 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 2,000,000,000 shares of common stock, $0.001 par value. As of May 10,
2006, we had 1,270,114 shares of common stock issued and outstanding and
approximately 500 holders of our common stock.
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
8,575,000 shares of our common stock, $0.001 par value. The selling shareholders
are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount
Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common
stock are being registered for the remaining, unconverted $685,295 principal
amount of such notes issued in September 2005 and up to 4,500,000 shares or
common stock are being registered for the $360,000 principal amount of such
notes issued in April 2006; and
o 600,000 shares of common stock underlying warrants issued to certain of the
selling stockholders pursuant to our April 2006 Subscription Agreement.
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
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(1) Conversion Offering* Offering* (2) (2)
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Alpha Capital
Aktiengesellschaft 3,800,000 (3) 74.9% 3,800,000 63,379 4.99% -- --
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Whalehaven Capital 2,700,000 (4) 68.0% 2,700,000 63,379 4.99% -- --
Fund Ltd.
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Ellis International 1,175,000 (5) 48.1% 1,175,000 63,379 4.99% -- --
Ltd.
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Osher Capital, Inc. 900,000 (6) 41.5% 900,000 63,379 4.99% -- --
- -------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
* These columns represents the aggregate maximum number and percentage of shares
that the selling stockholder can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
11
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 100% of the remaining shares issuable upon conversion of the
$685,295 remaining balance of convertible notes issued pursuant to our September
2005 Subscription Agreement, 200% of the shares issuable upon conversion of the
$360,000 convertible notes issued pursuant to our April 2006 Subscription
Agreement and 100% of the shares issuable upon exercise of warrants issued
pursuant to our April 2006 Subscription Agreement, based on current market
prices. Under the terms of the convertible debentures, if the convertible notes
had actually been converted on May 10, 2006, the conversion price would have
been $.16. 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 (i) 2,100,000 shares of common stock underlying an aggregate of
$421,500 unconverted principal amount convertible notes issued to the selling
stockholder pursuant to our September 2005 Subscription Agreement, (ii)
1,500,000 shares of common stock underlying an aggregate of $120,000 principal
amount convertible notes issued to the selling stockholder pursuant to our April
2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants
exercisable at $0.07 per share issued to the selling stockholder pursuant to our
April 2006 Subscription Agreement. 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 (i) 1,000,000 shares of common stock underlying an aggregate of
$200,000 unconverted principal amount convertible notes issued to the selling
stockholder pursuant to our September 2005 Subscription Agreement, (ii)
1,500,000 shares of common stock underlying an aggregate of $120,000 principal
amount convertible notes issued to the selling stockholder pursuant to our April
2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants
exercisable at $0.07 per share issued to the selling stockholder pursuant to our
April 2006 Subscription Agreement. 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 (i) 325,000 shares of common stock underlying an aggregate of
$54,882 unconverted principal amount convertible notes issued to the selling
stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000
shares of common stock underlying an aggregate of $60,000 principal amount
convertible notes issued to the selling stockholder pursuant to our April 2006
Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable
at $0.07 per share issued to the selling stockholder pursuant to our April 2006
Subscription Agreement. Mr. Wilhelm Ungar may be deemed the control person of
the securities owned by such entity, with final voting power and investment
control over such shares.
(6) Represents (i) 50,000 shares of common stock underlying an aggregate of
$8,913 unconverted principal amount convertible notes issued to the selling
stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000
shares of common stock underlying an aggregate of $60,000 principal amount
convertible notes issued to the selling stockholder pursuant to our April 2006
Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable
at $0.07 per share issued to the selling stockholder pursuant to our April 2006
Subscription Agreement. Mr. Yisroel Kluger has voting and dispositive control
over securities owned by Osher Capital, Inc.
OUR APRIL 11, 2006 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES
SUBSCRIPTION AGREEMENT
On April 12, 2006, we entered into a Subscription Agreement with several
accredited and/or qualified institutional investors pursuant to which the
investors subscribed to purchase an aggregate principal amount of $360,000 in
secured convertible promissory notes for aggregate purchase price of $300,000
and 2 Class A common stock purchase warrants for each one dollar of the purchase
price of the secured convertible notes ($300,000).
Each investor shall have the right to convert the secured convertible notes
after the date of issuance at any time, until paid in full, at the election of
the investor into fully paid and nonassessable shares of our common stock. The
conversion price per share shall be the lower of (i) $0.07 or (ii) 65% of the
average of the three lowest intra-day trading prices for our common stock for
the 20 trading days prior to, but not including, the conversion date as reported
by Bloomberg, L.P. on any principal market or exchange where our common stock is
listed or traded. The conversion price is adjustable in the event of any stock
split or reverse stock split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion price of
the secured convertible notes will be adjusted in the event that we spin off or
otherwise divest ourselves of a material part of our business or operations or
dispose all or a portion of our assets. Our obligation to repay all principal,
and accrued and unpaid interest under the convertible notes is secured by all of
our assets pursuant to a certain Security Agreement dated as of April 12, 2006.
12
We issued an aggregate of 600,000 Class A common stock purchase warrants to the
investors, representing and 2 Class A common stock purchase warrants for each
one dollar of the purchase price of the secured convertible notes ($300,000).
The Class A warrants are exercisable until five years from the closing date at
an exercise price of $0.07 per share. The exercise price of the Class A warrants
will be adjusted in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the exercise price of the warrants will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering 200% of the shares
of our common stock issuable upon conversion of the secured promissory notes and
100% of the shares issuable upon exercise of the Class A warrants no later than
35 days after the closing date and cause it to be declared effective within 120
days after the closing date. If we do not meet the aforementioned filing and
effectiveness deadlines, we shall pay to each investor an amount equal to 2% of
the purchase price of the secured convertible notes remaining unconverted and
purchase price of the shares of our common stock issued upon conversion of the
notes for each 30 days or part thereof of the pendency of such non-registration
event.
We claim an exemption from the registration requirements of the Act for the
private placement of these securities pursuant to Section 4(2) of the Act and/or
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the investors were accredited investors
and/or qualified institutional buyers, the investors had access to information
about us and their investment, the investors took the securities for investment
and not resale, and we took appropriate measures to restrict the transfer of the
securities.
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) $0.07 (or $12.25 post 1 for 175
reverse stock split effectuated on April 18, 2006) 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;
or
o a fixed conversion price of $0.07(or $12.25 post 1 for 175 reverse stock split
effectuated on April 18, 2006).
Since the issuance of our convertible notes to the investors of our September
2005 private placement, an aggregate of $685,295principal amount of such notes
remain unconverted. We are registering an aggregate of 8,575,000 shares of our
common stock underlying such unconverted notes in this prospectus.
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 (or $12.25 post 1 for
175 reverse stock split effectuated on April 18, 2006). 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
13
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.
Sample Conversion Calculation
The convertible notes in the principal amount of $360,000 issued under our April
2006 Subscription Agreement and in the remaining, unconverted principal amount
of $685,295 issued under our September 2005 Subscription Agreement are
convertible into the number of our shares of common stock equal to the lesser of
(i) $0.07 or (ii) 65% of the average of the three lowest intra-day trading
prices for our common stock for the 20 trading days prior to, but not including,
the conversion date. For example, assuming conversion of $1,045,295 of notes on
May 10, 2006, a conversion price of $0.16 per share, the number of shares
issuable upon conversion would be:
$1,045,295 /$.16 = 6,533,094
14
PLAN OF DISTRIBUTION
We are registering a total of 8,575,000shares 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.
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.
15
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.
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, or an aggregate of $42,000,
unless those warrants are exercised pursuant to the cashless exercise provisions
thereof.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock trades on the NASD OTC Bulletin Board. Since April 18, 2006 it
is currently trading under the symbol ADSD. From November 26, 2004 until April
18, 2006, it traded under the symbol ADDI. From April 26, 2004 until November
26, 2004, it traded under the symbol QTFI. From January 3, 2003 until April 26,
2004, it 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)
(1) Reflects post 10 for 1 reverse split.
(2) Reflects post 150 for 1 reverse split.
HOLDERS
There were approximately 500 holders of our Common Stock of record as of May 10,
2006.
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 (reflects post 1 to 175 reverse split that became
effective April 18, 2006).
16
- ----------------------------------------------------------------------------------------------------------
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 -- $ -- 1,464
- ----------------------------------------------------------------------------------------------------------
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 May 12, 2006 was 1,464
(reflects post 1 to 175 reverse split that became effective April 18, 2006).
17
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
Charles Miseroy 74 Chief Executive Officer,
President, Acting Chief
Financial Officer
Fred De Luca 75 Director and Secretary
Federico G. Cabo 61 Director
CHARLES MISEROY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHIEF FINANCIAL OFFICER.
Mr. Miseroy brings to our company nearly forty years of international financial
and executive expertise and experience. From 1986 to the present, Mr. Miseroy
has been a business and tax consultant to a variety of small to medium size
companies, including First Gargo Net Inc. in Los Angeles, California and from
2000 to the present, the Administrator for the Heard Family Trust in Pasadena,
California. From 1979 to 1985 he served as Chief Financial Officer and Executive
Vice President of N.I.D.C., (National Investment Development Corporation)
located in Los Angeles, California, a major syndication and multi-dwelling
residential development company. His background includes a six-year tenure with
Price Waterhouse & Co. in The Hague, Netherlands as a Chartered Accountant.
FEDERICO CABO, DIRECTOR. In 1970, Mr. Cabo began his series of entreprenureal
successes by founding Cabo Distributing Co., a beer, wine and spirits
distribution company, which through his leadership became the leader in sales of
Mexican beer brands which included Corona, Carta Blanca, Dos Equis, Bohemia,
Pacifico and others. He sold the company in 1998 when annual sales had reached
$20 million. He then transitioned from distribution to production and in
February 1998 co-founded American Craft Brewing Co. (Ambrew), where he served as
Director and was majority shareholder of this public company. In June 1998, he
also founded Fabrica de Tequilas Finos S.A., a tequila distilling company
located in Tequila, Jalisco, Mexico, selling premium tequila to a network of
wholesalers throughout the U.S., Canada and Europe. Mr. Cabo served as President
of this company from inception to the present date. In August 1998, he expanded
his activity in production and distribution by serving as Director and President
of Cerveceria Mexicana S.A. de C.V., the 3rd largest brewery in Mexico, which
was sold to Coors Brewing Co. in May 2000. From May 2000 to September 2004, Mr.
Cabo continued his service as president of Fabrica de Tequilas Finos S.A., a
tequila distributing company selling to a network of wholesalers throughout the
U.S., Canada and Europe. Mr. Cabo graduated as a Civil Engineer from the
Universidad Nacional Autonoma De Mexico (UNAM) in 1967, and was employed through
1969 as a Special Applications Engineer at ITT Barton, a liquid gas level and
gas flow instrumentation company.
FRED DE LUCA, SECRETARY AND DIRECTOR. 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.
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.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT.
18
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
certain officers and persons holding 10% or more of our common stock to file
reports regarding their ownership and regarding their acquisitions and
dispositions of the Registrant's common stock with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish our
company with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the registrant under Rule 16a-3(d) during fiscal 2005, and certain written
representations from executive officers and directors, we are unaware that any
required reports that have not been timely filed.
Code of Ethics
We have not adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. We have not adopted such a
code of ethics because all of management's efforts have been directed to
building the business of the company; at a later time, such a code of ethics may
be adopted by the board of directors.
Committees of the Board Of Directors
We presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our board of directors, stock plan
committee or any other committee of our board of directors.
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)
(1) - Resigned in September 2004
(2) - Terminated in September 2004
(3) - Resigned in June 2004
(4) - These salaries were accrued and unpaid for the period June 9 through June
30, 2003.
(5) - These bonuses were accrued pursuant to employment agreements dated June 9,
2003.
(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
(7) - Of this gross salary, $241,859 was paid in cash and $100,000 was paid in
common stock of the Company.
19
(8) - Of this gross salary, $239,538 was paid in cash and $108,000 was paid in
common stock.
(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, $25,000 was paid in cash and
the balance was accrued.
(10) - Employment commenced September 2004 - Resigned in November 2005
STOCK OPTIONS
The following tables set forth certain information concerning the granting and
exercising of stock options during the last completed fiscal year by the named
executive officers and the fiscal year-end value of unexercised options for the
named executive officers on an aggregated basis:
Number of
Securities % of Total
Underlying Options/SARs Granted
Options/SARs to Employees in
Name Granted (#) Fiscal Year Exercise Price ($/sh) Expiration Date
- -----------------------------------------------------------------------------------------------------
None
- -----------------------------------------------------------------------------------------------------
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
None.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 10, 2006 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.
20
- --------------------------------------------------------------------------------
Name and Address Percent
Title of Of Amount and Nature Of
Class Beneficial Owners (1) Of Beneficial Ownership* Class
- --------------------------------------------------------------------------------
Common Stock Edward W. Withrow III (2) 63,936 5.0%
and Warrants
- --------------------------------------------------------------------------------
Common Stock Fred De Luca (3)(4)(5) 58,299 4.6%
and Warrants Treasurer, Secretary and
Director
- --------------------------------------------------------------------------------
Common Stock Charles Miseroy (5) 97,143 7.6%
CEO, President, CFO
- --------------------------------------------------------------------------------
Common Stock Federico G. Cabo (4) 4 0.0%
Director
- --------------------------------------------------------------------------------
Common Stock All officers and directors 155,446 12.2%
As a group (three persons)
- --------------------------------------------------------------------------------
*The shares reflect the Company's post April 18, 2006 1 for 175 reverse stock
split.
(1) The address for Mr. Edward W.Withrow, III, Mr. DeLuca, and Mr. Cabo is c/o
Addison-Davis Diagnostics, Inc., 143 Triunfo Canyon Road, Suite 104, Westlake
Village, California 91361. The address for Mr. Miseroy is 12318 Foxcroft Place,
Granada Hills CA 91344
(2) Includes 28,571 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.
(3) Includes 8 shares issued to SAGS-3 LLC, a limited liability company in which
Mr. De Luca is the sole member and managing member and 8,571 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 8,571 shares
represent warrants granted to Mr. DeLuca for consulting services.
(4) Director
(5) Executive Officer
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.
21
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 9, 2005, in connection with the spin-off of Xact Aid, Inc., we
distributed all 2,001,000 shares of our 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 us. 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 the fiscal year ended June 30, 2005, we issued to the following parties an
aggregate of 2,588,888 shares of our Common Stock in connection with consulting
services and/or employment agreements having a total value of $140,000:
Name Description No. of Shares* $ Value
------------------------------------------------------------------------------------------------
Edward W. Withrow III Executive Officer/Director/5% Shareholder 13,651 $125,000
Fred De Luca Director/5% shareholder 571 $ 7,500
Norman A. Kunin 5% Shareholder 571 $ 7,500
* The shares reflect the Company's post April 18, 2006 1 for 175 reverse stock
split.
CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
On November 15, 2004, we terminated our business relationship with Corbin &
Company (the "Former Accountant") as our auditors. On November 16, 2004, we
engaged Armando C. Ibarra, CPA - APC (the "New Accountant"), as our independent
certified public accountant. Our decision to engaged the New Accountant was
approved by the board of directors, which serves the same functions as the Audit
Committee, on November 16, 2004.
The report of the Former Accountant on our financial statements for the two most
recent fiscal years, did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles for the two most recent fiscal years and all subsequent interim
periods, except that the Former Accountant's opinion in its report on our
financial statements expressed substantial doubt with respect to our ability to
continue as a going concern for the last two fiscal years.
During our two most recent fiscal years, there were no reportable events as the
term described in Item 304(a)(1)(v) of Regulation S-K.
During our two most recent fiscal years, there were no disagreements with the
Former Accountant on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of the Former Accountant would have caused it to
make reference to the subject matter of the disagreements in connection with its
reports on these financial statements for those periods.
We did not consult with the New Accountant regarding the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
and no written or oral advice was provided by the New Accountant that was a
factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issues.
22
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
July 2004, 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." In October 2005, we effected a decrease of the
total number of shares of our authorized common stock from 5,000,000,000 to
2,000,000,000 shares. On April 17, 2006, we effected a 1 for 175 reverse stock
split of our outstanding shares of common stock
All shares reported in this prospectus reflect the forward stock split and all
three reverse stock splits 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., we
distributed all 2,001,000 pre-split shares of its outstanding common stock that
we owned to our shareholders (along with a copy of the Xact Aid prospectus).
Xact Aid filed a registration statement with the Securities and Exchange
Commission, which was declared effective on April 18, 2005, registering all
2,001,000 pre-split shares of Xact Aid common stock owned by us. Xact Aid shares
are currently traded on the Over-The-Counter-Bulletin Boardunder the symbol
"XAID".
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 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-countermarket 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 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 biomedical 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.
23
THE MARKET & STATUS OF LAUNCH OF PRODUCTS
We believe that 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.
DRUG STOP is a self-regulating on-site drug testing product that utilizes a
rapid immunoassay for qualitative detection of drug metabolites found in urine.
The test is calibrated to the National Institute of Drug Abuse (NIDA) cutoff
levels for the detection of cocaine, amphetamines, marijuana (THC), morphine and
PCP. The subject urinates into the specimen cup which is immediately sealed once
the specimen is collected. Detection strips secured inside the specimen
collection cup eliminates any additional test processing before the result. The
test requires approximately 5 to 10 minutes to produce its result.
The security guard industry, correctional institutions, and manufacturing
facilities vying to become drug-free workplaces, and public utilities and
governmental federal, state, county and city agencies are being targeted. We
intend to target the 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.
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 sales. We anticipate the over-the-counter program to commence
in the third calendar 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, 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).
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. 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 for the Drug Test named
"Drug Stop" FDA No. K 991465 Regulatory Class II approval for over-the-counter
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.
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 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 DrugStop product
sold over-the-counter in stores, calling centers, internet or other
over-the-counter means during the term of the License.
24
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. Rapid drugtests are produced by competitive
companies including, but not limited to, BioTechNostiX, DAT Labs, Forefront
Diagnostics, Inc., Applied Biotech Inc., Syntron Bioresaerch, Inc. and
Pharmatech, Inc. and others.
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 May 10, 2006 we have 5 employees. We have never experienced a work
stoppage and believe our employee relations are very good.
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.
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, we are negotiating to settle the matter.
On January 5, 2005, Steven H. Reder ("Reder"), a former officer and director of
our 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. We had retained counsel to respond
to the Summons and on May 8, 2006 we settled the matter by agreeing to convert a
total of $70,086 of debt, including principal, interest and penalties, into
shares of our 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.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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 licensing the sale and distribution of
Drug Stop, where possible, 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 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
have recently 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
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, and
our unaudited consolidated balance sheet as of March 31, 2006 and the unaudited
consolidated statements of operations and cash flows for the three and nine
month period ended March 31, 2006 and 2005, 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.
26
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. 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 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 fully enter the market until
the third 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. During the nine month
period ended March 31, 2006, management successfully obtained additional capital
through sales and issuance of original issue discount convertible notes from
which we received gross proceeds of $960,000. 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 and unaudited balance sheets as of June
30, 2005 and March 31, 2006, respectively, and the audited and unaudited
statements of operations and cash flows for the fiscal years ended June 30, 2005
and 2004 and the three and nine month periods ended March 31, 2006 and 2005,
respectively, 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 - NINE MONTHS ENDED MARCH 31, 2006 COMPARED WITH NINE
MONTHS ENDED MARCH 31, 2005
27
THE HISTORICAL FINANCIAL STATEMENTS INCLUDED IN THIS FILING (AUDITED FINANCIAL
STATEMENTS FOR THE YEARS ENDED JUNE 30, 2005 AND 2005 AND UNAUDITED FINANCIAL
STATEMENTS AS OF MARCH 31, 2006 AND 2005) HAVE NOT BEEN RECAST TO REFLECT THE 1
TO 175 REVERSE STOCK SPLIT EFFECTIVE APRIL 18, 2006, HOWEVER THE REVERSE STOCK
SPLIT WILL BE REFLECTED BEGINNING WITH THE FINANCIAL STATEMENTS AS OF JUNE 30,
2006.
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
$374,423 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.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED JUNE 30, 2005 COMPARED WITH FISCAL
YEAR ENDED JUNE 30, 2004
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.
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.
28
During the fiscal year ended June 30, 2005 and the three and nine month periods
ended March 31, 2006, management successfully obtained additional capital
through sales and issuance of convertible notes from which we received gross
proceeds of $1,300,000 and $960,000, respectively, 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 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 6 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.
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.
As at March31, 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.
29
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.
RECENT SIGNIFICANT EVENTS
A. 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 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.
B. ISSUANCES OF REGISTERED COMMON STOCK
30
During the month April 2006, the Company issued 169,433 shares of its common
stock in connection with the conversion of $60,567 of convertible note and
debenture.
During the month May 2006, the Company issued 110,103 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).
During the month May 2006, the Company issued 45,000 shares of its common stock
in connection with the conversion of $4,946 of convertible note and debenture.
C. 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.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
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.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Addison-Davis Diagnostics, Inc., filed
as part of the registration statement, and it does not contain all information
in the registration statement, as certain portions have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at 100 F Street N.E., Washington D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at 100 F Street
N.E., Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
31
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 - F-2
Consolidated Balance Sheet as of June 30, 2005 F-3
Consolidated Statements of Operations for the years ended
June 30, 2005 and 2004 F-4
Consolidated Statements of Stockholder' Deficit for the
years ended June 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2005 and 2004 F-6 - F-7
Notes to the Consolidated Financial Stateme F-8 - F-25
Consolidated Balance Sheet as of March 31, 2006 F-26
Consolidated Statements of Operations for the three and
nine months ended March 31, 2006 and 2005 F-27
Consolidated Statements of Cash Flows for the three
and nine months ended March 31, 2006 and 2005 F-28 - F-29
Notes to the Consolidated Financial Statements F-30 - F-38
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 For The Year
Ended Ended
June 30, June 30,
2005 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 Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 27,214 $ 27 $ 9,962,735 $ (428,957) $(10,185,776) $ (651,971)
Issuance of shares from
escrow for license -- -- 358,684 -- -- 358,684
Issuance of common stock
for services 24,060 24 646,001 -- -- 646,025
Issuance of common stock
on settlement of notes
payable 1,000 1 314,999 -- -- 315,000
Issuance of common stock
for cash 667 -- 150,000 -- -- 150,000
Shares issued to employees
for services rendered and
past due salaries 37,712 38 155,729 -- -- 155,767
Issuance of common stock
for conversion of
convertible promissory
note 129,174 129 1,139,668 -- -- 1,139,797
Issuance of common stock
for settlement of
accounts payable 885 1 167,069 -- -- 167,070
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 -- -- 133,333
Shares issued in connection
with convertible notes
payable 67 -- 16,000 -- -- 16,000
Estimated fair value of
deferred financing costs,
beneficial conversion
features and warrants
issued in connection with
convertible notes payable -- -- 3,214,150 -- -- 3,214,150
Amortization of prior year
prepaid consulting expense -- -- -- 428,957 -- 428,957
Net loss (7,161,005) (7,161,005)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2004 230,356 230 16,258,358 -- (17,346,781) (1,088,193)
Shares issued to employees
for services Rendered
and past due salaries 697,667 698 167,882 -- -- 168,500
Shares issued in connection
with Convertible notes
payable 8,777,145 8,777 221,951 -- -- 230,728
Issuance of common stock
for services 4,065,138 4,065 256,293 -- -- 260,358
Issuance of common stock
on settlement Of notes
payable to a related party 66,667 67 7,131 -- -- 7,198
Estimated fair value of
deferred financing Costs,
beneficial conversion
features and Warrants
issued in connection with
Convertible notes payable -- -- 1,531,261 -- -- 1,531,261
Distribution of net assets
of Xact Aid, Inc. In
spin-off -- -- (68,093) -- 868,394 800,301
Net loss -- -- -- -- (3,617,527) (3,617,527)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2005 13,836,973 13,837 18,374,703 -- (20,095,914) (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 3,401,000
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
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 159,983
Additional paid-in capital 20,470,585
Accumulated deficit (22,877,866)
--------------
Total stockholders' deficit (2,247,298)
--------------
$ 926,879
==============
See accompanying notes to consolidated financial statements
F-26
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 239,132 448,400 1,979,252 1,726,490
------------ ------------ ------------ ------------
Loss from operations 239,132 447,555 1,978,475 1,724,152
Other expense:
Interest expense - net (385,038) (557,504) (1,177,082) (1,506,557)
Other income - net 2,040 2,352 375,182 36,631
------------ ------------ ------------ ------------
Total Other Income (Expense) (325,998) (555,152) (801,900) (1,469,926)
------------ ------------ ------------ ------------
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-27
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
interest expense (236,382) --
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-28
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-29
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-30
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 willaccrue 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.
F-31
ADDISON-DAVIS DIAGNOSTICS, INC.
Notes to the Consolidated Financial Statements As of March 31, 2006 (continued)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-continued
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 Warrants.
F-32
ADDISON-DAVIS DIAGNOSTICS, INC.
Notes to the Consolidated Financial Statements As of March 31, 2006 (continued)
NOTE 9 - CONVERTIBLE DEBENTURES AND NOTES PAYABLE-continued
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-33
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-34
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 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.
F-35
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 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-36
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.
F-37
ADDISON-DAVIS DIAGNOSTICS, INC.
Notes to the Consolidated Financial Statements As of March 31, 2006 (continued)
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 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-38
ADDISON-DAVIS DIAGNOSTICS, INC.
PROSPECTUS
8,575,000 Shares of Common Stock
June ___, 2006
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.
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.
II-1
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 $ 81.29
Legal Fees $ 30,000.00
Accounting Fees* $ 1,000.00
------------------------------------------------
Total* $ 31,081.29
* Estimated
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 (
Reflects the Company's April 18, 2006 1 to 175 reverse stock split):
On January 9, 2003, the registrant consummated a reverse merger with
MoneyZone.com, Inc., wherein the registrant issued to stockholders of Quicktest
5, Inc. 95 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 3 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 1 share 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 $75,126 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 8 shares of common stock at a
price of $39,375 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
7 shares of common stock for a weighted average exercise price of $152,250 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 $89,375 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
$89,375 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 7 shares of its common stock at a price
of $26,250 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 4 shares of its common stock for cash of
$150,000 and a warrant to purchase 4 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 $131,250 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 6 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 nil 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
$55,125 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 nil 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 $21,000 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.
II-2
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 $19,687.50 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 51 shares of the registrant's
common stock at an exercise price of $19,687.50 per share to these investors.
The warrant exercise price was reduced to $2,625 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 10 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 $19,687.50 per share, which was reduced to
$2,625 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 3shares of the
registrant's common stock at $63,000 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.
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 10 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
4 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 9 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 nil shares of its common stock to Donald
Cramer in exchange for services rendered and to be rendered valued at $21,000
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 nil 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 $21,000 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 3 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 $18,375 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
$39,375 per share, we will issue to the investors additional shares, whereby the
number of shares purchased and the additional shares, multiplied by $39,375
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 $39,375 per share for the 5 consecutive
trading days ended October 3, 2003, requiring the us to issue an additional 4
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 nil shares of the Company's restricted
common stock , valued at $6,651 ( or $21,000 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 nil shares of the Company's restricted
common stock , valued at $7,500 ( or $21,000 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.
II-3
In December 2003, the Company issued 3 shares of the Company's restricted common
stock, valued at $60,826 ( or $21,000 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 nil shares of the Company's restricted
common stock, valued at $9,000 (or $23,625 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 190
shares of our common stock at an exercise price of $26,250 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.
In April 2004, the Company issued 136 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 $918.75 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 114 shares
of our common stock ("Convertible Note Warrants") at $918.75 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 19 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 $787.50 per share. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In June 2004, we issued 38 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 $656.25 per share. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In June 2004, we issued 79 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 $367.50 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 19,048 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 57 shares of the Company's common stock at an exercise
price of $147 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.
II-4
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 6,643 shares
of its common stock in connection with the conversion of $129,641 of convertible
debenture debt, including 1,143 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 905 and
3,810 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 76 shares of the Company's common stock for
services rendered, valued at $11,400 (or $150.50 per share, which is the fair
market value of the stock on the date of issuance).
In August 2004 the Company issued a warrant to purchase 38 restricted shares of
the Company's common stock at $787.50 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 5,714 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 1,143 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 762 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 238 shares of its common stock in connection
with the conversion of $625 of convertible note and debenture debt
In December 2004 the Company issued 9,520 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 3,886 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 2,286 shares of its common stock to
consultants for services rendered valued at $18,800 (or $8.23 per share, which
is the fair market value of the stock on the date of issuance).
In February 2005 the Company issued 2,914 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 1,013 shares of its common stock to a
consultant for services valued at $9,750 (or $9.63 per share, which is the fair
market value of the stock on the date of issuance) and 7,937 shares of its
common stock to an executive officer in payment of a bonus pursuant to an
employment agreement valued at $50,000 (or $6.30 per share, which is the fair
market value of the stock on the date of issuance.
In March 2005 the Company issued 3,886 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 $5.78 per share, which is the fair market value of
the stock on the date of issuance).
On May 26, 2005, the Company issued 2,286 shares of the Company's common stock
for services rendered, valued at $6,800 (or $2.98 per share, which is the fair
market value of the stock on the date of issuance).
On June 2, 2005, the Company issued 1,429 shares of the Company's common stock
for services rendered, valued at $4,500 (or $3.15 per share, which is the fair
market value of the stock on the date of issuance).
II-5
On July 12, 2005, the Company issued an aggregate of 92,571 shares of its common
stock to five consultants for services valued at $324,000 (or $3.50 per share,
which is the fair market value of the stock on the date of issuance) and 21,714
shares of its common stock to an executive officer in payment of a bonus
pursuant to a consulting agreement valued at $76,000 (or $3.50 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 $1.75
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 28,571 restricted
shares of the Company's common stock at $10.50 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 8,571 restricted
shares of the Company's common stock at $10.50 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;
On August 12, 2005, the Company issued warrants to purchase 8,571 restricted
shares of the Company's common stock at $10.50 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 4,286 restricted
shares of the Company's common stock at $10.50 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 1,429 restricted
shares of the Company's common stock at $10.50 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 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) 12
..25 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 8,571 warrants to purchase shares of our
common stock at a purchase price of $12.25 per share.
On October 10, 2005 the Company issued 57,143 restricted shares of its common
stock to four separate purchasers in connection with stock purchase agreements
valued at $100,000 in the aggregate (or $1.75 per share, which is the fair
market value of the stock on the date of issuance).
On November 23, 2005, we issued 160,000 restricted shares of our Common Stock to
an employee, two consultants and an executive officer for services provided to
us. The fair market value of this Common Stock was $280,000 in the aggregate (or
$1.75 per share, which is the fair market value of the stock on the date of
issuance). On December 23, 2005, we entered into a Subscription Agreement
pursuant to which we issued an aggregate of $264,000 principal amount Original
Issue Discount Secured Convertible Notes (the "December 2005 Convertible Notes")
and we received a gross amount of $220,000. 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) $12.25 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 2,629 warrants to purchase shares of our common stock at a
purchase price of $12.25 per share. On January 10, 2006, the Subscription
Agreement was amended (the "Amendment") wherein an additional Original Issue
Discount Note was issued in the amount of $12,000 (the "Additional Convertible
Note"). The terms and conditions of the December 2005 Convertible Notes shall
apply to the Additional Convertible Note. In addition, the Amendment accelerated
the funding of an aggregate of $60,000 of the Third Closing Purchase Price of
the December 2005 Convertible Notes.
On December 28, 2005, we issued 28,571 restricted shares of our Common Stock to
a consultant for services provided to us. The fair market value of this Common
Stock was $24,000 in the aggregate (or $0.84 per share, which is the fair market
value of the stock on the date of issuance).
On April 12, 2006, we entered into a Subscription Agreement with several
accredited and/or qualified institutional investors pursuant to which the
investors subscribed to purchase an aggregate principal amount of $360,000 in
secured convertible promissory notes for aggregate purchase price of $300,000
and 2 Class A common stock purchase warrants for each one dollar of the purchase
price of the secured convertible notes ($300,000).
Each investor shall have the right to convert the secured convertible notes
after the date of issuance at any time, until paid in full, at the election of
the investor into fully paid and nonassessable shares of our common stock. The
conversion price per share shall be the lower of (i) $0.07 or (ii) 65% of the
average of the three lowest intra-day trading prices for our common stock for
the 20 trading days prior to, but not including, the conversion date as reported
by Bloomberg, L.P. on any principal market or exchange where our common stock is
listed or traded. The conversion price is adjustable in the event of any stock
split or reverse stock split, stock dividend, reclassification of common stock,
recapitalization, merger or consolidation. In addition, the conversion price of
the secured convertible notes will be adjusted in the event that we spin off or
otherwise divest ourselves of a material part of our business or operations or
dispose all or a portion of our assets. Our obligation to repay all principal,
and accrued and unpaid interest under the convertible notes is secured by all of
our assets pursuant to a certain Security Agreement dated as of April 12, 2006.
We issued an aggregate of 600,000 Class A common stock purchase warrants to the
investors, representing and 2 Class A common stock purchase warrants for each
one dollar of the purchase price of the secured convertible notes ($300,000).
The Class A warrants are exercisable until five years from the closing date at
an exercise price of $0.07 per share. The exercise price of the Class A warrants
will be adjusted in the event of any stock split or reverse stock split, stock
dividend, reclassification of common stock, recapitalization, merger or
consolidation. In addition, the exercise price of the warrants will be adjusted
in the event that we spin off or otherwise divest ourselves of a material part
of our business or operations or dispose all or a portion of our assets.
*Unless otherwise specified above, we claim an exemption from the registration
requirements of the Act for the private placement of above securities pursuant
to Section 4(2) of the Act and/or Regulation D promulgated thereunder since,
among other things, the transaction did not involve a public offering, the
investors were accredited investors and/or qualified institutional buyers, the
investors had access to information about us and their investment, the investors
took the securities for investment and not resale, and we took appropriate
measures to restrict the transfer of the securities.
II-7
ITEM 27. EXHIBITS.
a. The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
2.1 Agreement and Plan of Merger, dated as of June 28, 1999, by and among the
registrant, EBonlineinc.com, Inc., and John D. Brasher, Jr., incorporated by
reference to our Current Report on Form 8-K (File No. 000-25022), dated as of
July 15, 1999.
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of June 28,
1999, by and among the registrant, EBonlineinc.com, Inc., and John D. Brasher,
Jr., incorporated by reference to our Current Report on Form 8-K (File No.
000-25022), dated as of July 15, 1999.
2.3 Letter Agreement between MoneyZone.com and Global Capital Partners Inc.
dated as of March 7, 2001, incorporated by reference to our Current Report on
Form 8-K (File No. 000-25022), dated as of March 7, 2001.
2.4 Agreement and Plan of Merger, dated as of July 15, 2002, by and among the
registrant and QuickTest 5, Inc., incorporated by reference to Exhibit 10.2 of
our Schedule 14C (File No. 000-25022), filed with the Commission on December 11,
2002 (the "Schedule 14C").
2.5 Certificate of Merger, dated as of January 9, 2003, between the registrant
and Quicktest 5, Inc., incorporated by reference to Exhibit 10.1 of the Schedule
14C.
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.
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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.
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.
4.1 Form of Registration Rights Agreement, dated as of October 1, 1999, by and
among EBonlineinc.com, and each of the investors listed on Exhibit A thereto,
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022), dated as of March 30, 2000.
4.2 Convertible Debenture Purchase and Exchange Agreement dated as of September
15, 2000, incorporated by reference to our Current Report on Form 8-K (File No.
000-25022), dated as of September 15, 2000.
4.3 6% Convertible and Exchangeable Debenture, incorporated by reference to our
Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000.
4.4 Common Stock Purchase Warrant, incorporated by reference to our Current
Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000.
4.5 Registration Rights Agreement, incorporated by reference to our Current
Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000.
4.6 Registration Rights Agreement by and among registrant and NDMS Investments,
L.P. and NDMS Investments, L.P. assignees incorporated by reference to our
Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
4.7 $150,000 Promissory Note dated September 30, 2002, between the registrant
and NDMS Investments, L.P. incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
4.8 Amendment No. 1 to $150,000 Promissory Note dated February 28, 2003
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022) dated as of April 15, 2003.
4.9 Registration Rights Agreement dated September 30, 2002, between the
registrant and NDMS Investments, L.P. incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
5.1 Opinion of Sichenzia Ross Friedman Ference LLP (filed herewith).
10.1 Office Building Lease dated March 15, 2002 between the registrant and
Village Green Officer Park incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.2 Agreement for the Assignment of Patent Rights, dated April 7, 2002, by and
between the registrant and Marshall Anlauf Thompson, incorporated by reference
to Exhibit 99.1 of the registrant's Form 8-K as filed with the Commission on
January 24, 2003.
10.3 2000 Stock Option Plan, incorporated by reference to Exhibit 10.1 of the
registrant's Form S-8 (File No. 333-92236) filed with the Commission on July 11,
2002 (the "Form S-8").
10.4 Amendment No. 1 to the 2000 Stock Option Plan, incorporated by reference to
Exhibit 10.2 of the Form S-8.
10.5 Amendment No. 2 to the 2000 Stock Option Plan, incorporated by reference to
Exhibit 10.3 of the registrant's Form S-8 (File No. 333-103208) filed with the
Commission on February 14, 2003.
10.6 Issuance Agreement dated September 30, 2002, by and between the registrant
and NDMS Investments, L.P. incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.7 Issuance Agreement, dated December 31, 2002, by and between the registrant
and NDMS Investments, L.P. incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.8 2003 Incentive Equity Stock Plan, incorporated by reference to Exhibit 10.1
of the registrant's Form S-8 (File No. 333-104740) filed with the Commission on
April 25, 2003.
10.9 Employment Agreement dated June 9, 2003 between the registrant and Timothy
J. Owens, incorporated by reference to our Transition Report on Form 10-KSB
(File No. 000-25022) dated as of September 23, 2003.
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10.10 Employment Agreement dated June 9, 2003 between the registrant and Steven
H. Reder, incorporated by reference to our Transition Report on Form 10-KSB
(File No. 000-25022) dated as of September 23, 2003.
10.11 Employment Agreement dated August 4, 2003 between the registrant and
Norman Kunin, incorporated by reference to our Transition Report on Form 10-KSB
(File No. 000-25022) dated as of September 23, 2003.
10.12 Common Stock Purchase Warrant dated June 9, 2003 issued to Timothy J.
Owens, incorporated by reference to our Transition Report on Form 10-KSB (File
No. 000-25022) dated as of September 23, 2003.
10.13 Common Stock Purchase Warrant dated June 9, 2003 issued to Steven Reder,
incorporated by reference to our Transition Report on Form 10-KSB (File No.
000-25022) dated as of September 23, 2003.
10.14 Common Stock Purchase Warrant dated August 4, 2003 issued to Norman A.
Kunin, incorporated by reference to our Transition Report on Form 10-KSB (File
No. 000-25022) dated as of September 23, 2003.
10.15 Securities Purchase Agreement dated August 19, 2003 between the registrant
and various purchasers of the registrant's convertible debentures, incorporated
by reference to our Transition Report on Form 10-KSB (File No. 000-25022) dated
as of September 23, 2003.
10.16 Registration Rights Agreement dated August 19, 2003 between the registrant
and various purchasers of the registrant's convertible debentures, incorporated
by reference to our Transition Report on Form 10-KSB (File No. 000-25022) dated
as of September 23, 2003.
10.17 Warrant dated August 19, 2003 between the registrant and various
purchasers of the registrant's convertible debentures, incorporated by reference
to our Transition Report on Form 10-KSB (File No. 000-25022) dated as of
September 23, 2003.
10.18 6% convertible debenture entered into by the registrant and various
purchasers on September 22, 2003, incorporated by reference to our Transition
Report on Form 10-KSB (File No. 000-25022) dated as of September 23, 2003.
10.19 6% Convertible Debenture entered into by the registrant and various
holders on February 12, 2004, incorporated by reference to our Quarterly Report
on Form 10-QSB (File No. 000-25022) filed on February 17, 2004.
10.20 Securities Purchase Agreement for 10% Convertible Debentures entered into
by the registrant and various holders on May 28, 2004, incorporated by reference
to our registration statement on Form SB-2 dated as of June 11, 2004.
10.21 Registration Rights for 10% Convertible Debentures entered into by the
registrant and various holders on May 28, 2004 incorporated by reference to our
registration statement on Form SB-2 dated as of June 11, 2004.
10.22 Warrants for 10% Convertible Debentures entered into by the registrant and
various holders on May 28, 2004 incorporated by reference to our registration
statement on Form SB-2 dated as of June 11, 2004.
10.23 Intellectual property security agreement dated as of May 28, 2004
incorporated by reference to our registration statement on Form SB-2 dated as of
June 11, 2004.
10.24 Security Agreement dated as of May 28, 2004 incorporated by reference to
our registration statement on Form SB-2 dated as of June 11, 2004.
10.25 Callable Secured Convertible Note, incorporated by reference to our
registration statement on Form SB-2 dated as of July 21, 2005.
10.26 Guaranty and Pledge Agreement, incorporated by reference to our
registration statement on Form SB-2 dated as of July 21, 2005.
10.27 Security Purchase Agreement dated in June 2005, incorporated by reference
to our registration statement on Form SB-2 dated as of July 21, 2005.
10.28 Security Agreement dated in June 2005, incorporated by reference to our
registration statement on Form SB-2 dated as of July 21, 2005.
10.29 Stock Purchase Warrant - AJW Qualify Partners,LLC, incorporated by
reference to our registration statement on Form SB-2 dated as of July 21, 2005.
10.30 Stock Purchase Warrant - AJW Partners,LLC, incorporated by reference to
our registration statement on Form SB-2 dated as of July 21, 2005..
10.31 Stock Purchase Warrant - New Millenium Capital Partners II, LLC,
incorporated by reference to our registration statement on Form SB-2 dated as of
July 21, 2005.
10.32 Stock Purchase Warrant - AJW Offshore, Ltd, incorporated by reference to
our registration statement on Form SB-2 dated as of July 21, 2005.
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10.33 Registration Rights Agreement dated in June 2005, incorporated by
reference to our registration statement on Form SB-2 dated as of July 21, 2005.
10.34 Callable Secured Convertible Note - AJW Qualified Partners, LLC,
incorporated by reference to our registration statement on Form SB-2 dated as of
July 21, 2005.
10.35 Callable Secured Convertible Note - AJW Partners, LLC, incorporated by
reference to our registration statement on Form SB-2 dated as of July 21, 2005.
10.36 Callable Secured Convertible Note - New Millenium Capital Partners II,
LLC, incorporated by reference to our registration statement on Form SB-2 dated
as of July 21, 2005.
10.37 Callable Secured Convertible Note - AJW Offshore, Ltd., incorporated by
reference to our registration statement on Form SB-2 dated as of July 21, 2005.
10.38 Subscription Agreement dated December 23, 2005 by and between the Company
and the investors named on the signature pages thereto, incorporated by
reference to our registration statement on Form SB-2 dated as of February 13,
2006.
10.39 Form of Class A Common Stock Purchase Warrant dated December 23, 2005,
incorporated by reference to our registration statement on Form SB-2 dated as of
February 13, 2006.
10.40 Security Agreement, incorporated by reference to our registration
statement on Form SB-2 dated as of February 13, 2006.
10.41 Collateral Agent Agreement, incorporated by reference to our registration
statement on Form SB-2 dated as of February 13, 2006.
10.42 Form of Secured Convertible Note dated December 23, 2005, incorporated by
reference to our registration statement on Form SB-2 dated as of February 13,
2006.
10.43 Amendment to December 23, 2005 Transaction Documents Agreement,
incorporated by reference to our registration statement on Form SB-2 dated as of
February 13, 2006.
10.44 Subscription Agreement, dated as of April 12, 2006, by and among
Addison-Davis Diagnostics, Inc. and the investors named on the signature pages
thereto, incorporated by reference to our current report on Form 8-K dated April
18, 2006.
10.45 Form of Secured Convertible Note of Addison-Davis Diagnostics, Inc.,
incorporated by reference to our current report on Form 8-K dated April 18,
2006.
10.46 Form of Class A Common Stock Purchase Warrant of Addison-Davis
Diagnostics, Inc., incorporated by reference to our current report on Form 8-K
dated April 18, 2006.
10.47 Security Agreement dated as of April 12, 2006 by and among Addison-Davis
Diagnostics, Inc. and the investors named on the signature pages thereto,
incorporated by reference to our current report on Form 8-K dated April 18,
2006.
23.1 Consent of Corbin & Company LLC (filed herewith).
23.2 Consent of Armando C. Ibarra C.P.A. P.C. (filed herewith).
II-11
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities 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 Securities 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.
Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
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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 2nd of
June 2006.
Addison-Davis Diagnostics, Inc., a Delaware corporation
By: /s/ Charles Miseroy
------------------------------------------
Charles Miseroy, 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.
SIGNATURE TITLE DATE
- ---------------------------- ----------------------------- ---------------
By: /s/ Fred De Luca
-----------------------
Fred De Luca Secretary and Director June 2, 2006
By: /s/ Federico G. Cabo
-----------------------
Federico G. Cabo Director June 2, 2006
II-13