Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
CardioGenics Inc. (“CardioGenics”)
was incorporated on November 20, 1997 in the Province of Ontario, Canada, and carries on the business of development and commercialization
of diagnostic test products to the In Vitro Diagnostics testing market. CardioGenics has several test products that are in various
stages of development.
CardioGenics’ business
is that of a development-stage company, with a limited history of operations and whose revenues, to date, have been primarily comprised
of grant revenue and Scientific Research Tax Credits from government agencies. There can be no assurance that the Company will
be successful in obtaining regulatory approval for the marketing of any of the existing or future products that the Company will
succeed in developing.
On October 27, 2009, the name
of the Company was changed from JAG Media Holdings, Inc. to CardioGenics Holdings, Inc.
In the opinion of management,
the unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the condensed interim consolidated financial position of CardioGenics Holdings Inc. and its subsidiaries
under generally accepted accounting principles in the United States (“US GAAP”) as of January 31, 2013, their results
of operations for the three months ended January 31 2013 and 2012, and the period from November 20, 1997 (date of inception) to
January 31, 2013, changes in deficiency for the three months ended January 31, 2013 and cash flows for the three months ended January
31 2013 and 2012, and the period from November 20, 1997 (date of inception) to January 31, 2013. CardioGenics Holdings Inc. and
its subsidiaries are referred to together herein as the “Company”. Pursuant to rules and regulations of the SEC, certain
information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or
omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent
fiscal year. Accordingly, these condensed interim consolidated financial statements should be read in conjunction with the consolidated
financial statements, notes to consolidated financial statements and the other information in the audited consolidated financial
statements of the Company as of October 31, 2012 and 2011 (the “Audited Financial Statements”) included in the Company’s
Form 10-K that was previously filed with the SEC on January 29, 2013 and from which the October 31, 2012 consolidated balance sheet
was derived.
The results of the Company’s
operations for the three months ended January 31, 2013 are not necessarily indicative of the results of operations to be expected
for the full year ending October 31, 2013.
The accompanying condensed interim
consolidated financial statements have been prepared using the accounting principles generally accepted in the United States of
America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business.
The Company has incurred operating
losses and has experienced negative cash flows from operations since inception. The Company has an accumulated deficit at January
31, 2013 of approximately $42.3 million. The Company has not yet established an ongoing source of revenues sufficient to cover
its operating costs and to allow it to continue as a going concern. The Company has funded its activities to date almost exclusively
from debt and equity financings. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern.
CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
The Company will continue to
require substantial funds to continue research and development, including preclinical studies and clinical trials of its products,
and to commence sales and marketing efforts, if the FDA and other regulatory approvals are obtained. In order to meet its operating
cash flow requirements Management’s plans include financing activities such as private placements of its common stock and
issuances of convertible debt instruments. Management is also actively pursuing industry collaboration activities including product
licensing and specific project financing.
While the Company believes it
will be successful in obtaining the necessary financing to fund its operations, meet revenue projections and manage costs, there
are no assurances that such additional funding will be achieved and that it will succeed in its future operations. The accompanying
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.
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3.
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Summary of Significant Accounting Policies
.
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Recent
Accounting Pronouncements
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In December 2011, the Financial Accounting Standards Board (“FASB”) issued
ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity
to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect
of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S.
GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective
for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required.
The Company will implement the provisions of ASU 2011-11 as of November 1, 2013.
In February 2013, the FASB
the issued guidance requiring disclosure of amounts reclassified out of accumulated other comprehensive income by component.
In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the
amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts
not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide
additional detail about those amounts. This guidance is effective prospectively for the Company for annual and interim
periods beginning January 1, 2013. The Company believes that the impact of this standard will not have a material impact on
its consolidated financial statements.
Derivative Instruments
The Company’s derivative liabilities
are related to embedded conversion features of the Notes Payable. For derivative instruments that are accounted for
as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting
date, with changes in fair value recognized in earnings each reporting period. The Company uses the Black-Scholes model to
value the derivative instruments at inception and subsequent valuation dates and the value is re-assessed at the end of
each reporting period, in accordance with Accounting Standards Codification (“ASC”) 815. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of
the derivative instrument could be required within twelve months of the balance sheet date.
CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
Based on the Company’s
evaluation, management has concluded that there are no significant tax positions requiring recognition in the condensed interim
consolidated financial statements.
The Company has incurred losses
in Canada since inception, which have generated net operating loss carryforwards for income tax purposes. The net operating loss
carryforwards arising from Canadian sources as of January 31, 2013 approximated $6,533,000 (2012 - $6,025,000) which will expire
from 2014 through 2032. All fiscal years as originally filed have been assessed. Claims relating to research and development credits
are open for review for the fiscal years ended October 2012, 2011, 2010, 2009, 2008 and 2007 and July 2009.
As of January 31, 2013, the
Company had net operating loss carryforwards from US sources of approximately $40,763,000 available to reduce future Federal taxable
income which will expire from 2019 through 2032. Returns for the years 2008 through 2012 are yet to be filed.
For the three months ended January
31, 2013 and 2012, the Company’s effective tax rate differs from the statutory rate principally due to the net operating
losses for which no benefit was recorded.
During the three months ended
January 31, 2013, two shareholder/directors advanced $200,000 to the Company. The amount due to shareholders is due on demand and
carries interest at 10% per annum. No interest has been accrued to date.
On November 19, 2012, the Company
entered into an agreement (“Line”) with JMJ Financial (“Lender”) whereby the Company may borrow up to $350,000
from the Lender in increments of $50,000. The Line is subject to an original issue discount of $50,000. Advances under the Line
(“Notes”) have a maturity date of one year from the date of the advance. If the advance is repaid within three months
the advance is interest free. If not repaid within three months, the advance may not be repaid before maturity and carries interest
at 5%. The Lender has the right at any time to convert all or part of the outstanding principal and accrued interest (and any other
fees) into shares of fully paid and non-assessable shares of common stock of the Company at a price equal to the lesser of $0.23
and 60% of the lowest trade price in the 25 trading days previous to the conversion. Unless agreed in writing by the parties, at
no time will the Lender convert any amount owing under the Line into common stock that would result in the Lender owing more than
4.99% of the common stock outstanding.
A summary of the Notes at January 31, 2013 is as follows:
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January 31,
2013
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October 31,
2012
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Convertible Notes Payable, interest at 5% per annum to maturity at November 19, 2014
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$
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50,000
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$
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-
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Debt Discount - value attributable to conversion feature attached to notes, net of accumulated amortization of $0
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(50,000
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)
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-
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Total
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-
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-
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Less: Current portion
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-
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-
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Total Long-term portion
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$
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-
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$
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-
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CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
As described in further detail
in Note 7, “Derivative Liabilities”, the Company determines the fair value of the embedded derivatives and records
them as a discount to the Notes and as a derivative liability. Upon conversion of the Notes to Common Stock, any remaining unamortized
discount is charged to financing expense.
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7.
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Derivative Liabilities
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Convertible notes- embedded conversion features
The Notes meet the definition
of a hybrid instrument, as defined in ASC 815. The hybrid instrument is comprised of a i) a debt instrument, as the host contract
and ii) an option to convert the debentures into common stock of the Company, as an embedded derivative. The embedded derivatives
derive their value based on the underlying fair value of the Company’s common stock. The embedded derivatives are not clearly
and closely related to the underlying host debt instrument since the economic characteristics and risk associated with these derivatives
are based on the common stock fair value.
The Company determines the fair
value of the embedded derivatives and records them as a discount to the Notes and a derivative liability.
The
Company has recognized a derivative liability of $50,000 at January 31, 2013.
Accordingly, changes in the fair value of
the embedded derivative are immediately recognized in earnings and classified as a gain or loss on the embedded derivative financial
instrument in the accompanying statements of operations. There was no change in the fair value for the three months ended January
31, 2013.
The Company estimated the fair
value of the embedded derivatives using a Black Scholes model with the following assumptions: conversion price $0.12 per share
according to the agreements; risk free interest rate of 1.76%; expected life of 1 year; expected dividend of zero; a volatility
factor of 124%, as of as of January 31, 2013. The expected lives of the instruments are equal to the contractual term of the conversion
option. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free
interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related conversion option. The
dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.
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8.
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Fair Value Measurements
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As defined by the ASC, fair value measurements and disclosures establish a hierarchy that prioritizes fair value measurements
based on the type of inputs used for the various valuation techniques (market approach, income approach and cost approach). The
levels of hierarchy are described below:
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·
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Level 1: Observable inputs such as quoted
market prices in active markets for identical assets or liabilities.
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·
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Level 2: Inputs other than quoted market
prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets
or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.
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CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
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·
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Level 3: Unobservable inputs that reflect
the reporting entity’s own assumptions, as there is little, if any, related market activity.
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The following table summarizes the financial liabilities
measured at fair value on a recurring basis as of January 31, 2013, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value:
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Quoted
Prices in
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Total
Increase (Reduction)
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Active
Markets for
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Significant
Other
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Significant
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in
Fair Value
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Balance Sheet
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Identical
Assets or
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Observable
Inputs
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Unobservable
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January
31, 2013
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Recorded
at
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Location
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Liabilities
(Level 1)
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(Level
2)
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Inputs
(Level 3)
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Total
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January
31, 2013
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Liabilities:
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Derivative
liability - on Notes Payable
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$
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-
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$
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-
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$
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50,000
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$
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50,000
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$
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-
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The table below sets forth a summary
of changes in the fair value of the Company’s Level 3 financial liability, or derivative liabilities related to the senior
secured convertible notes and warrants, for the period ended January 31, 2013.
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Balance at beginning of year
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$
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-
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Additions to derivative instruments
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50,000
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Change in fair value of derivative liabilities
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-
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Balance at end of period
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$
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50,000
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9.
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Stock-Based Compensation
|
Stock-based employee compensation
related to stock options for the three months ended January 31, 2013 and 2012 amounted to $-0-.
The following is a summary of
the common stock options granted, forfeited or expired and exercised under the plan:
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Weighted
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Average
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Exercise
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Options
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Price
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Outstanding – October 31, 2011
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30,000
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$
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0.90
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Granted
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▬
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▬
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Forfeited/Expired
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▬
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▬
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Exercised
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▬
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▬
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Outstanding – October 31, 2012
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30,000
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$
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0.90
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Granted
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▬
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▬
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Forfeited/Expired
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▬
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▬
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Exercised
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▬
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▬
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Outstanding – January 31, 2013
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30,000
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$
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0.90
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CardioGenics Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
Options typically vest immediately
at the date of grant. As such, the Company does not have any unvested options or unrecognized compensation expense at January 31,
2013.
Outstanding warrants are as follows:
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January 31,
2013
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October 31,
2012
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Issued to consultant August 1, 2009, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.90 per common share up to and including July 31, 2017
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287,085
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287,085
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Issued to Flow Capital Advisors Inc. on settlement of lawsuit in August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.30 per common share up to and including August 23, 2016
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250,000
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250,000
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Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including August 23, 2016
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250,000
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250,000
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|
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016
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500,000
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500,000
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Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $1.00 per common share up to and including August 23, 2016
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500,000
|
|
|
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500,000
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|
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016
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500,000
|
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500,000
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|
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.10 per common share up to and including March 20, 2013
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1,500,000
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|
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1,500,000
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|
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.34 per common share up to and including March 20, 2013
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1,500,000
|
|
|
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1,500,000
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|
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including March 20, 2013
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1,000,000
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1,000,000
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Total Warrants outstanding
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6,287,085
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6,287,085
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CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
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10.
|
Issuance of Common Stock
|
On January 17, 2013, the Company’s Articles of
Incorporation were amended to increase the total number of common and preferred shares authorized for issuance from 65,000,000
shares to 150,000,000 shares and 5,000,000 shares to 50,000,000, respectively, par value $0.00001 per share.
During the three months ended January 31, 2013, the
Company issued no common shares.
The following table sets forth
the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS):
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|
Three Months Ended
January 31,
|
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|
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2013
|
|
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2012
|
|
|
|
|
|
|
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Weighted-average shares - basic
|
|
|
56,676,166
|
|
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55,626,166
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Effect of dilutive securities
|
|
|
▬
|
|
|
|
▬
|
|
|
Weighted-average shares - diluted
|
|
|
56,676,166
|
|
|
|
55,626,166
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Basic earnings per share “EPS”
and diluted EPS for the three months ended January 31, 2013 and 2012 have been computed by dividing the net loss available to common
stockholders for each respective period by the weighted-average shares outstanding during that period. All outstanding options,
warrants and shares to be issued upon the exercise of the outstanding options and warrants representing 6,317,085 and 9,834,969
incremental shares respectively have been excluded from the three months ended January 31, 2013 and 2012 computation of diluted
EPS as they are antidilutive given the net losses generated.
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13.
|
Commitments and Contingencies
|
Lawsuits
On April 22, 2009, the Company
was served with a statement of claim from a former employee claiming compensation for wrongful dismissal and ancillary causes of
action including payment of monies in realization of his investment in the Company, with an aggregate claim of $514,000. The Company
considers all the claims to be without any merit, has already delivered a statement of defense and intends to vigorously defend
the action. If the matter eventually proceeds to trial, the Company does not expect to be found liable on any ground or for any
cause of action.
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14.
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
For the Three Months Ended
|
|
|
|
|
January 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,364
|
|
|
$
|
2,200
|
|
|
Income taxes
|
|
$
|
▬
|
|
|
$
|
▬
|
|
CardioGenics
Holdings Inc.
(A Development
Stage Company)
Notes to Condensed Consolidated
Financial Statements (unaudited)
January 31, 2013 and 2012
In February 2013, the shareholders
loans were exchanged on a dollar for dollar basis for convertible debenture units. Each unit includes
a debenture having a term of three years, bearing interest at 10%, and a warrant having a term of three years.The debentures are
convertible at any time into common shares of the Company’s stock at a price of $0.25 per share. The warrants entitle the
holder to purchase an equal number of common shares of the Company’s stock at a price of $0.25 per share exercisable at any
time during the term of the warrant.