Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
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 April 30, 2014, their results of operations for the three and six months ended April 30, 2014 and 2013, and the period from
November 20, 1997 (date of inception) to April 30, 2014, changes in deficiency for the six months ended April 30, 2014 and cash
flows for the six months ended April 30, 2014 and 2013, and the period from November 20, 1997 (date of inception) to April 30,
2014. 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, 2013 and 2012 (the “Audited Financial
Statements”) included in the Company’s Form 10-K that was previously filed with the SEC on February 13, 2014 and from
which the October 31, 2013 consolidated balance sheet was derived.
The
results of the Company’s operations for the six months ended April 30, 2014 are not necessarily indicative of the results
of operations to be expected for the full year ending October 31, 2014.
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 April 30, 2014 of approximately $45.7 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)
April
30, 2014 and 2013
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.
|
3.
|
|
Summary
of Significant Accounting Policies
.
|
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 consolidated 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 consolidated balance sheet date.
Beneficial
Conversion Charge
The
intrinsic value of beneficial conversion features arising from the issuance of convertible debentures with conversion rights that
are in-the-money at the commitment date is recorded as debt discount and amortized to interest expense over the term of the debentures.
The intrinsic value of a beneficial conversion feature is determined after initially allocating an appropriate portion of the
proceeds received from the sale of the debentures to any detachable instruments, such as warrants, included in the sale or exchange
based on relative fair values.
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 April 30, 2014, approximated $9,615,000 (2013 - $6,750,000)
which will expire from 2015 through 2033. 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 2013, 2012, 2011, 2010, 2009, 2008 and 2007 and
July 2009.
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
As
of April 30, 2014, the Company had net operating loss carryforwards from US sources of approximately $41,305,000 (2012 - $40,769,000)
available to reduce future Federal taxable income which will expire from 2020 through 2033. Returns for the years 2008 through
2013 are yet to be filed.
For
the six months ended April 30, 2014 and 2013, the Company’s effective tax rate differs from the statutory rate principally
due to the net operating losses for which no benefit was recorded.
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 is as follows:
|
|
|
April
30, 2014
|
|
|
October
31, 2013
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Payable, due June 27, 2014
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
Convertible Note Payable, due September 26, 2014
|
|
|
12,653
|
|
|
|
35,000
|
|
|
Convertible Note Payable, due February 20, 2015
|
|
|
35,000
|
|
|
|
-
|
|
|
Debt Discount - value attributable to conversion feature
attached to notes, net of accumulated amortization of $14,104 and $11,983
|
|
|
(33,549
|
)
|
|
|
(48,017
|
)
|
|
Total
|
|
|
14,104
|
|
|
|
11,983
|
|
|
Less: Current portion
|
|
|
14,104
|
|
|
|
11,983
|
|
|
Total Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
As
described in further detail in Note 6, “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. The discount to the Notes is amortized
to Loss (Gain) in Change in Value of Derivative Liability over the life of the Note or until conversion. The amount charged to
Loss (Gain) in Change in Value of Derivative Liability for the three and six months ended April 30, 2014 and 2013 was $23,465
and $819, respectively. Upon conversion of the Notes and related interest and original issue discount to Common Stock, any remaining
unamortized discount is charged to financing expense. During the three and six months ended April 30, 2014 and 2013, Notes in
the principal amount of $37,497 and $47,347, respectively, plus interest and original issue discount totaling $8,437 and $10,654,
respectively, were exchanged for 464,658 and 564,658 common shares, respectively.
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
|
6.
|
Derivative
Liabilities
|
Convertible
notes - embedded conversion features:
The
Notes meet the definition of a hybrid instrument, as defined in Accounting Standards Codification (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 $74,445 and $99,702 at April 30, 2014 and October 31, 2013, respectively.
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.
The
Company estimated the fair value of the embedded derivatives using a Black Scholes model with the following assumptions: conversion
price $0.078 per share according to the agreements; risk free interest rate of .11%; expected life of 1 year; expected dividend
of zero; a volatility factor of 154%, as of April 30, 2014. 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.
|
7.
|
Fair
Value Measurements
|
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:
|
|
●
|
Level
1: Observable inputs such as quoted market prices in active markets for identical assets
or liabilities.
|
|
|
●
|
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.
|
|
|
●
|
Level
3: Unobservable inputs that reflect the reporting entity’s own assumptions, as
there is little, if any, related market activity.
|
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
The
following table summarizes the financial liabilities measured at fair value on a recurring basis as of April 30, 2014, segregated
by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction)
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
in Fair Value
|
|
|
Balance Sheet
|
|
Identical Assets or
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
April 30, 2014
|
|
|
Recorded at
|
|
|
Location
|
|
Liabilities (Level
1)
|
|
|
(Level
2)
|
|
|
Inputs (Level
3)
|
|
|
Total
|
|
|
April 30, 2014
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability – on Notes Payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
74,445
|
|
|
$
|
74,445
|
|
|
$
|
23,465
|
|
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 six months ended April 30, 2014:
|
Balance at beginning of period
|
|
$
|
99,702
|
|
|
Additions to derivative instruments
|
|
|
35,000
|
|
|
Change in fair value of derivative liabilities
|
|
|
819
|
|
|
Settlements
|
|
|
(61,076
|
)
|
|
Balance at end of period
|
|
$
|
74,445
|
|
In
February 2013, shareholder loans were converted on a dollar-for-dollar basis for Series A Convertible Debenture Units (the “A
Units”). Each A 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 2 times the number of common shares of the Company’s stock
allowed in conjunction with the debentures at any time up to three years.
A
summary of the Debentures is as follows:
|
|
|
April 30, 2014
|
|
|
October 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Debentures Payable, interest at 10% per annum to maturity at
February 27, 2016
|
|
$
|
282,482
|
|
|
$
|
288,584
|
|
|
Series B Convertible Debentures Payable, interest at 10% per annum to maturity at May 31, 2016
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Series B Convertible Debentures Payable, interest at 10% per annum to maturity at June 3, 2016
|
|
|
141,423
|
|
|
|
148,653
|
|
|
Debt Discount - value attributable to conversion feature attached to notes
|
|
|
(509,949
|
)
|
|
|
(634,047
|
)
|
|
Total
|
|
|
413,956
|
|
|
|
303,190
|
|
|
Less: Current portion
|
|
|
-
|
|
|
|
-
|
|
|
Total Long-term portion
|
|
$
|
413,956
|
|
|
$
|
303,190
|
|
Debt
discount is amortized to interest expense over the life of the debentures. The amount amortized to interest expense for the period
was $124,098.
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
|
9.
|
Stock
Based Compensation
|
Stock-based
employee compensation related to stock options for the six months ended April 30, 2014 and 2013 amounted to $-0-.
The
following is a summary of the common stock options outstanding, granted, forfeited or expired and exercised under the Plan:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding – October 31, 2012
|
|
|
30,000
|
|
|
$
|
0.90
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/Expired
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding – October 31, 2013
|
|
|
30,000
|
|
|
$
|
0.90
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited/Expired
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding – April 30, 2014
|
|
|
30,000
|
|
|
$
|
0.90
|
|
Options
typically vest immediately at the date of grant. As such, the Company does not have any unvested options or unrecognized compensation
expense at April 30, 2014.
Outstanding
warrants are as follows:
|
|
|
April 30, 2014
|
|
|
October 31, 2013
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
250,000
|
|
|
|
250,000
|
|
|
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
|
|
|
250,000
|
|
|
|
250,000
|
|
|
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
|
|
|
500,000
|
|
|
|
500,000
|
|
|
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
|
|
|
500,000
|
|
|
|
500,000
|
|
|
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
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Issued to debenture holders February 2013 entitling the holders to purchase 1 common share
in the Company at an exercise price of $0.25 per common share up to and including February 27, 2016
|
|
|
600,000
|
|
|
|
600,000
|
|
|
Issued to debenture holders May 2013 entitling the holders to purchase 1 common share in the
Company at an exercise price of $0.15 per common share up to and including June 3, 2016
|
|
|
750,000
|
|
|
|
750,000
|
|
|
Issued to debenture holders June 2013 entitling the holders to purchase 1 common share in
the Company at an exercise price of $0.15 per common share up to and including June 3, 2016
|
|
|
232,500
|
|
|
|
232,500
|
|
|
Issued to consultants on August 5, 2013 entitling the holders to purchase 1 common share in
the Company at an exercise price of $0.15 per common share up to and including August 4, 2023
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
Issued to consultants on August 5, 2013 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 August 4, 2023
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
Issued to consultant on September 3, 2013 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 July 31, 2018
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Issued to shareholder on October 29, 2013 entitling the holder to purchase 1 common share
in the Company at an exercise price of $0.15 per common share up to and including October 29, 2016
|
|
|
250,000
|
|
|
|
250,000
|
|
|
Issued to shareholder on November 7, 2013 entitling the holder to purchase
1 common share in the Company at an exercise price of $0.15 per common share up to and including November 7, 2016
|
|
|
125,000
|
|
|
|
-
|
|
|
Total Warrants outstanding
|
|
|
8,457,500
|
|
|
|
8,332,500
|
|
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
|
11.
|
Issuance
of Common Stock
|
During
the six months ended April 30, 2014, the Company issued the following common shares:
|
Issued for services rendered
|
|
|
116,279
|
|
|
Issued to shareholder for cash at $0.25 per share
|
|
|
200,000
|
|
|
Issued on conversion of notes payable
|
|
|
564,658
|
|
|
Issued on settlement of suit
|
|
|
700,000
|
|
|
Issued to minority shareholders on conversion of subsidiary’s
shares
|
|
|
296,538
|
|
|
|
|
|
1,877,475
|
|
The
following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per
share (EPS):
|
|
|
Three Months Ended
April 30,
|
|
|
Six Months Ended
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares - basic
|
|
|
60,447,704
|
|
|
|
56,676,166
|
|
|
|
59,915,908
|
|
|
|
56,676,166
|
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted-average shares - diluted
|
|
|
60,447,704
|
|
|
|
56,676,166
|
|
|
|
59,915,908
|
|
|
|
56,676,166
|
|
Basic
earnings per share “EPS” and diluted EPS for the three and six months ended April 30, 2014 and 2013 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 and conversion of debt representing 12,918,436 and 2,917,085 incremental shares, respectively, have been excluded from
the three and six months ended April 30, 2014 and 2013 computation of diluted EPS as they are antidilutive given the net losses
generated.
|
13.
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
For the Six Months Ended
|
|
|
|
|
April 30
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,834
|
|
|
$
|
6,735
|
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
|
Conversion of notes payable
|
|
$
|
58,001
|
|
|
$
|
—
|
|
|
Settlement of derivative liability
|
|
$
|
61,076
|
|
|
$
|
—
|
|
|
Issuance of shares on settlement of suit
|
|
$
|
189,000
|
|
|
$
|
—
|
|
|
14.
|
Commitments
and Contingent Liabilities
|
Lawsuit
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. On January 3, 2014 the suit was settled for cash consideration of $10,000 plus 700,000 common shares.
CardioGenics
Holdings Inc.
(A
Development Stage Company)
Notes
to Condensed Consolidated Financial Statements (unaudited)
April
30, 2014 and 2013
|
|
(i)
|
On
May 20, 2014, notes payable amounting to $15,500, including interest and original discount,
were converted for 258,333 common shares in the Company’s stock.
|
|
|
|
|
|
|
(ii)
|
In
May 2014, an officer of the Company advanced $22,810 to the Company.
|
|
|
|
|
|
|
(iii)
|
In
June 12, 2014, the Company sold $1.3 million of its common stock in a private placement
to European institutional and other investors. Closing of the transaction is subject
to listing of the shares on the NewConnect Market of the Warsaw Stock Exchange. As a
result of this financing, the Company will issue 12 million shares of common stock to
European investors (13 entities in total, including three institutional investors) at
$.11 per share.
|