STATSURE
DIAGNOSTIC SYSTEMS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
1,473,935
|
|
$
|
(7,701,887
|
)
|
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
22,495
|
|
|
37,547
|
|
|
Amortization
of deferred costs
|
|
12,207
|
|
|
169,630
|
|
|
Options
granted to non-employees
|
|
34,866
|
|
|
34,863
|
|
|
Beneficial
conversion feature of convertible debentures
|
|
108,272
|
|
|
1,020,189
|
|
|
Stock
issued for consulting services
|
|
—
|
|
|
250,775
|
|
|
Stock
and warrants issued for termination penalty
|
|
291,499
|
|
|
—
|
|
|
Stock
issued for consulting services
|
|
6,800
|
|
|
—
|
|
|
Options
granted to employees as compensation
|
|
187,081
|
|
|
499,329
|
|
|
Induced
conversion expense on debentures
|
|
—
|
|
|
403,872
|
|
|
Financing
costs on derivative instruments
|
|
—
|
|
|
3,644,248
|
|
|
Mark-to-Market
(gain) loss on derivative instruments
|
|
(2,728,956
|
)
|
|
798,315
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
116,409
|
|
|
(59,664
|
)
|
|
Inventories
|
|
(7,206
|
)
|
|
(19,421
|
)
|
|
Prepaid
expenses
|
|
(9,459
|
)
|
|
(850
|
)
|
|
Deposits
|
|
11,850
|
|
|
11,669
|
|
|
Increase
in bank overdraft
|
|
47,910
|
|
|
—
|
|
|
Accounts
payable, accrued payroll expense to officers, accrued expenses and
customer advances
|
|
325,736
|
|
|
20,397
|
|
|
Deferred
rent
|
|
(6,745
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
(113,306
|
)
|
|
(890,988
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
(7,231
|
)
|
|
(1,321
|
)
|
|
Acquisitions
of patents and trademarks
|
|
(7,608
|
)
|
|
(50,857
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(14,839
|
)
|
|
(52,178
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from shareholder loans
|
|
175,000
|
|
|
634,722
|
|
|
Repayments
of shareholder loans
|
|
(143,687
|
)
|
|
(1,381,012
|
)
|
|
Repayment
of debentures
|
|
(37,500
|
)
|
|
(112,500
|
)
|
|
Advances
from officer
|
|
25,000
|
|
|
—
|
|
|
Gross
proceeds from issuance of Series 2006-A preferred shares
|
|
—
|
|
|
2,150,000
|
|
|
Payment
for financing costs
|
|
—
|
|
|
(181,000
|
)
|
|
Proceeds
from issuance of common stock
|
|
—
|
|
|
17,500
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
18,813
|
|
|
1,127,710
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(109,332
|
)
|
|
184,544
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
109,332
|
|
|
76,321
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
—
|
|
$
|
260,865
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
22,689
|
|
$
|
35,250
|
|
|
Income
taxes
|
$
|
—
|
|
$
|
1,739
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FLOW FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Reclassification
of accrued interest to loan principal
|
$
|
—
|
|
$
|
251,282
|
|
|
Conversion
of debenture and interest payable into common stock
|
$
|
—
|
|
$
|
1,109,608
|
|
|
Issuance
of 470,312 warrants to a placement agent and recorded as additional
paid
in capital and warrant liability
|
$
|
—
|
|
$
|
645,881
|
|
|
Common
stock issued in lieu of cash dividend payments
|
$
|
99,000
|
|
$
|
—
|
|
|
Preferred
stock dividends accrued and not paid
|
$
|
79,200
|
|
$
|
53,750
|
|
|
Issuance
of 1,500,000 shares of common stock for a warrant conversion at $0.01,
payment
was offset to a note payable to this stockholder
|
$
|
—
|
|
$
|
15,000
|
|
The
accompanying notes are an integral part of these statements.
1.
Description
of Business
On
September 29, 2006, the Company
announced it had signed several agreements relating to its patented barrel
technology for use in screening antibodies to HIV (Human Immunodeficiency Virus,
the virus that causes AIDS). As part of a three-way alliance with Inverness
Medical Innovations (AMEX:IMA) Chembio Diagnostics (CEMI.OB) (“Chembio”), and
the Company signed a worldwide, exclusive distribution deal for a rapid,
point-of-care HIV test with Inverness. In a two-way deal with Chembio, the
Company granted an exclusive license to Chembio solely to manufacture the
recently FDA approved HIV barrel product for Inverness. This product is being
marketed under the IMA brand. In this two-way agreement (“Joint HIV Barrel
Commercialization Agreement”), a long- term strategic “partnership” was
established, wherein both companies equally split the margin dollars of the
HIV
barrel product once the actual cost of manufacturing is reimbursed.
At
the
beginning of business on January 24, 2006, the Company effected a name change
from Saliva Diagnostic Systems, Inc. to StatSure Diagnostic Systems, Inc.
2.
Substantial
Doubt Regarding Ability To Continue As A Going
Concern
Since
July 1990, the Company has been engaged almost exclusively in research and
development activities focused on developing proprietary saliva based collection
devices and rapid assays for infectious diseases. Other than sales of the
Company's collection devices, the Company has not yet commenced any significant
product commercialization. The Company incurred significant operating losses
since its inception, resulting in an accumulated deficit of $
50,420,792
at
September 30, 2007. Such losses are expected to continue for the foreseeable
future and until such time, if ever, as the Company is able to attain revenues
levels sufficient to support its operations. There can be no assurance that
the
Company will achieve or maintain profitability in the future. In addition,
the
Company is in default on certain debt obligations. Despite the Company's
financings in 2006 and October 2007 (See Notes 6, 7, and 13), substantial
additional financing will be required in future periods.
The
Company's capital requirements have been and will continue to be significant.
The Company's capital base is smaller than that of many of its competitors,
and
there can be no assurance that the Company's cash resources will be able to
sustain its business. The Company is dependent upon its effort to raise capital
to finance its future operations, including the cost of development,
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company. The Company intends to continue to seek public or private
placement of its equity securities in order to provide the funds necessary
to
meet its obligations. In addition, Management believes that the agreements
it
entered into in September 2006 (See Note 1), could enable the Company to
increase its revenues significantly in the next fiscal year. The Company
announced on November 5, 2007, that the HIV 1/2 Rapid Test employing the
Company's patented "barrel" technology marketed and distributed worldwide by
Inverness Medical Innovations under its Clearview® brand as "Clearview COMPLETE
HIV ½, received an FDA waiver of the Clinical Laboratory Improvement Amendments
of 1988(CLIA). This CLIA waiver will allow sales of this product to a large
number of markets that do not operate under the standards of the CLIA (e.g.
doctors' offices, public health clinics). Until this waiver was obtained,
marketing and sales of the product was restricted to those laboratory settings
with CLIA certification, which seriously restricted the revenues derived from
the product.
The
Company's future capital needs will depend upon numerous factors, including
the
progress of the approval for sale of the Company's products in various
countries, including the United States, the extent and timing of the acceptance
of the Company's products, the cost of marketing and manufacturing activities
and the amount of revenues generated from operations, none of which can be
predicted with certainty. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The
Company's significant operating losses and significant capital requirements,
however, raise substantial doubt about the Company's ability to continue as
a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
3.
Summary
of Significant Accounting Policies
Basis
of Presentation:
The
accompanying unaudited financial statements as of, and for the three and nine
month periods ended September 30, 2007 and 2006, have been prepared in
conformity with accounting principles generally accepted in the United States
of
America. The financial information as of December 31, 2006, is derived from
StatSure Diagnostic Systems, Inc. (the "Company") financial statements included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
2006. Certain information or footnote disclosures in this filing that are
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted, pursuant to the rules and regulations of the Securities
and Exchange Commission for interim filings. In the opinion of management,
the
accompanying financial statements include all adjustments necessary (which
are
of a normal and recurring nature) for a fair presentation of the results of
the
interim periods presented. The accompanying financial statements should be
read
in conjunction with the Company's audited financial statements for the year
ended December 31, 2006, as included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2006. Operating results for the three
and
nine month period ended September 30, 2007 are not necessarily indicative of
the
results that may be expected for the entire year ending December 31, 2007,
or
any other portion thereof.
Inventories
Inventory
consists of the following at:
|
|
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
|
Raw
Materials
|
|
$
|
40,521
|
|
$
|
32,494
|
|
|
Finished
Goods
|
|
|
15,553
|
|
|
16,374
|
|
|
|
|
|
56,074
|
|
|
48,868
|
|
|
Allowance
for obsolete inventory
|
|
|
(8,627
|
)
|
|
(8,627
|
)
|
|
|
|
$
|
47,447
|
|
$
|
40,241
|
|
Earnings
(Loss) Per Common Share
Basic
and
diluted earnings (loss) per common share was calculated for all periods in
accordance with the requirements of Statement of Financial Accounting Standards
No. 128, “Earnings per Share”. The following table sets forth the computation of
the diluted loss per share for the three and nine months ended September 30,
2007 and 2006, respectively:
|
|
|
|
Three
Months Ended
September
30
|
|
|
Nine
Months Ended
September
30
|
|
|
Numerator:
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) to common
shareholders
|
|
$
|
246,445
|
|
$
|
941,260
|
|
$
|
1,345,235
|
|
$
|
(7,755,637
|
)
|
|
(Deduct)/Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market
gain (loss)-derivative liability
|
|
|
(688,260
|
)
|
|
(1,547,877
|
)
|
|
(2,728,956
|
)
|
|
798,315
|
|
|
Interest
on convertible debt
|
|
|
6,805
|
|
|
6,982
|
|
|
21,514
|
|
|
27,121
|
|
|
Dividends
on preferred
stock
payable
in shares
|
|
|
39,600
|
|
|
53,750
|
|
|
128,700
|
|
|
53,750
|
|
|
Net
loss to common
shareholders
and assumed
conversion
|
|
$
|
(395,410
|
)
|
$
|
(545,885
|
)
|
$
|
(1,233,507
|
)
|
$
|
(6,876,451
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used for basic income
(loss)
per share
|
|
|
38,188,177
|
|
|
36,783,334
|
|
|
37,804,343
|
|
|
34,518,741
|
|
|
Effect
of dilutive items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Convertible
securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Shares
used for diluted income
(loss)
per share
|
|
|
38,188,177
|
|
|
36,783,334
|
|
|
37,804,343
|
|
|
34,518,741
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted:
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.20
|
)
|
The
numerator has been adjusted for the change in fair value of derivative liability
related to the convertible notes and warrants. The diluted income (loss) per
share for the three and nine months ended September 30, 2007 excludes from
the
calculation 126,667 shares issuable upon the exercise of stock options and
warrants and 4,260,000 shares issuable upon the conversion of convertible
securities. These shares are excluded due to their anti-dilutive effect as
a
result of the Company’s net loss after adjusting for the change in fair value of
derivative income effect during these periods. The calculation for the three
and
nine months ended September 30, 2006 excludes 3,847,188 shares issuable upon
exercise of stock options and warrants, 4,871,594 shares issuable upon the
conversion of convertible securities and 55,850 shares issuable for preferred
stock dividends due to net loss for these periods. For all periods presented
diluted income (loss) per share is the same as basic income (loss) per share.
Recent
Accounting Pronouncement:
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109 (FIN 48), which provides clarification related to the process
associated with accounting for uncertain tax positions recognized in financial
statements. FIN 48 prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken, or expected
to be
taken, in a tax return. FIN 48 also provides guidance related to, among other
things, classification, accounting for interest and penalties associated with
tax positions and disclosure requirements. We have adopted FIN 48 effective
January 1, 2007 and there is no impact of adoption FIN 48 on our financial
statements to date.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
entities to choose to measure, on an item-by-item basis, specified financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value has been elected are required to be reported
in earnings at each reporting date. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007, the provisions of which are required to
be
applied prospectively. The Company expects to adopt SFAS No. 159 in the first
quarter of fiscal 2008.
4.
Geographic Area Information
Under
the
disclosure requirements of SFAS No. 131, “Segment Disclosures and Related
Information,” we operate within one segment. Our products are sold principally
in the United States and Europe. Segmentation of identifiable assets is not
applicable since all of our assets are in the United States.
The
following table represents total product sales revenue by geographic
area:
|
|
|
|
For the three months
ended
September 30,
|
|
|
For
the nine months
ended
September 30,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,250
|
|
$
|
58,604
|
|
$
|
53,987
|
|
$
|
135,018
|
|
|
United
Kingdom
|
|
|
27,900
|
|
|
117,290
|
|
|
299,779
|
|
|
462,428
|
|
|
Africa
|
|
|
-
|
|
|
38,500
|
|
|
-
|
|
|
39,088
|
|
|
Other
|
|
|
25,610
|
|
|
11,017
|
|
|
67,860
|
|
|
32,943
|
|
|
|
|
$
|
54,760
|
|
$
|
225,411
|
|
$
|
421,626
|
|
$
|
669,477
|
|
5.
Advance
From Officer
On
April
5, 2007, Steve M. Peltzman, CEO loaned the Company $25,000 for the purpose
of
paying one of our vendors. The loan is not interest bearing and is not
collateralized. The Company expects to repay this loan during the 2007 fiscal
year.
6.
Debentures
Payable
On
January 19, 2005, the Company's board of directors authorized the issuance
and
sale of up to three million dollars of convertible debentures. These debentures
mature March 31, 2009, and carry an interest rate of 9% per year and are
convertible into common stock at the lower of 66.6% of the valuation of the
Company's next raise of equity or $1 per share. In accordance with EITF Issue
98-5 "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios", the Company had evaluated that
the convertible debt had a beneficial conversion feature as the conversion
price
was less than the fair value of the Company's common stock on the measurement
date. Under paragraph 6 of EITF 98-5, the discount related to the beneficial
conversion feature would be calculated based on its intrinsic value which was
$2,614,400, and is limited to the amount of the proceeds of $1,510,000 allocated
to the convertible debt instrument. Accordingly, the beneficial conversion
feature is being amortized using the interest method of accounting, resulting
in
a charge to interest expense of $35,830 and 108,272 for the three and nine
months ended September 30, 2007. The Company had sold an aggregate of $1,510,000
in convertible debentures. In September 2005, a debenture in the amount of
$60,000 was converted into 60,000 shares of common stock. In May 2006, the
Company issued 796,056 and 701,754 shares of common stock at $0.90 and $0.57
per
share, respectively, for the induced conversion of $1,109,608 in convertible
debentures including interest of $109,608. The debenture holders accepted these
shares as full consideration for the outstanding convertible debentures. The
Company recognized an additional expense of $403,872 because of the induced
conversion to the debenture holders pursuant to the accounting requirements
of
SFAS No. 84, Induced Conversions of Convertible Debt. The original terms of
the
debentures called for them to be converted at $1.00 per share. The Company
induced the debenture holders to convert at $0.90 and $0.57 per share. During
the year ended December 31, 2006, the Company repaid $112,500 of the debentures
in cash. During the nine months ended September 30, 2007, the Company repaid
an
additional $37,500 of the debentures in cash.
As
of
September 30, 2007 there were outstanding $300,000 of 9% Convertible Debentures
due in January 2009. Holders of the 9% Convertible Debentures are entitled
to
convert principal amounts into shares of common stock at a conversion price
of
$1.00.
The
Company is in default to the debenture holders for not making payments on a
timely basis. As a result, in accordance with the debenture agreements, these
debentures became payable on demand unless the default is waived by the
investors. The amount of debentures at September 30, 2007 of $300,000 plus
accrued interest of $17,252 has therefore been reflected as a current liability.
The Company has not received any notice of default from any of the holders
of
the outstanding debentures.
Accordingly,
debentures payable-net of discount in the amount of $141,340, is the net of
gross amount of debenture payables of $300,000 reduced by unamortized debt
discount of $158,660, and is shown on the balance sheet as a current
liability.
7.
Financing
From Shareholders
Per
a
promissory note dated February 2003, Jules Nordlicht, a shareholder, agreed
to
advance in total or in installments, up to the amount of $1,000,000 to the
Company. In November 2003 and August 2004, agreements were executed with this
shareholder to cause additional advances in total or in installments up to
the
amount of $2,500,000 to advance the process of the FDA approval. In
consideration for the financing, the Company agreed to repay such borrowed
funds
with accrued interest at 12% per annum and the shareholder reserved the right
to
demand payment in full or in part at anytime after December 31, 2006. On May
8,
2006 the shareholder agreed to extend the maturity date to December 31, 2008
provided that (i) a partial payment of $350,000 will be made by the Company
on
or prior to July 31, 2006 and (ii) accrued interest will be paid quarterly
thereafter, commencing September 30, 2006. The agreement was amended on
September 4, 2006 so that the Company need no longer pay the quarterly accrued
interest but an amount of $60,000 quarterly as a principal reduction. If the
Company should default in these payments, the promissory note reverts to the
original maturity date of December 31, 2006. As of September 30, 2007, the
loan
balance to this shareholder aggregated $1,632,817. An additional amount of
$376,269 of interest on this note has been accrued during 2007 and remains
owed
as of September 30, 2007. The lender has filed a Uniform Commercial Code (UCC)
Lien on the Company's equipment and patents as security for this loan. The
Company was unable to make its quarterly principal payment of $60,000 for the
three months ended September 30, 2007 and therefore, the remaining principal
balance is being classified as a current liability due on demand.
On
September 22, 2007, the Company advised Mr. Nordlicht that in consideration
of
his forebearing from calling the Company in default on the loan outstanding
of
principal and all accrued interest, the Company agrees to pay him no later
than
December 31, 2008, an amount totaling $2,600,000 as full payment of loan
(principal and interest). Any payments made during the interim period between
October 1, 2007 and December 31, 2008 will be deducted from this total amount.
As of the date of this filing, Mr. Nordlicht has not sent the Company a default
notice.
8.
Series
2006-A Convertible Preferred Stock
On
June
8, 2006, the Company completed a private placement of $2,150,000 with 10
institutional and accredited investors pursuant to the 2006 Series A Convertible
Preferred Stock Agreement dated June 7, 2006. Net proceeds from the placement
were approximately $1,969,000. The Company issued 2,150 shares of Series 2006-A
Convertible Preferred Stock, par value $0.001 per share (the “Convertible
Preferred Stock”), at a purchase price of $1,000 per share. Each investor also
received a Series A Warrant (a “Warrant”) to purchase up to 75% of the number of
shares of common stock issuable to him upon conversion of his Convertible
Preferred Stock. If all of the Warrants are exercised, the Company will issue
a
total of 2,015,625 shares of common stock. In addition, the Company issued
to
the placement agent 631,562 warrants valued at $645,881 and paid fees of
$181,000. All the warrants have a term of 5 years and the initial exercise
price
of $1.50 per share has been adjusted to $1.00 per share as the contingent event
stated in the agreement failed to materialize. This $1.00 exercise price is
subject to adjustments for certain corporate events such as merger,
reorganization or future sale of securities at a price below the exercise
price.
As
the
fair value of warrants and conversion option exceeded the net proceeds of
$2,150,000 from preferred stock, the Company deemed the fair value of the
preferred stock to be $0 at inception. The $2 reflects the minimum par value
of
the stock on the balance sheet. In October 2006, 170 shares of the Company’s
Series 2006-A Convertible Preferred Stock were converted into 340,000 shares
of
the Company’s common stock at a conversion price of $0.50 per common
share.
The
Convertible Preferred Stock is convertible to shares of common stock at an
initial conversion price of $0.80 per share, which has been since adjusted
to
$0.50 per share, as the contingent event stated in the agreement failed to
materialize. The conversion price of $0.50 per share is subject to adjustment
in
the event of certain corporate events such as merger, reorganization or future
sale of securities at a price below the conversion rate. Cash dividends accrue
on the Convertible Preferred Stock at the rate of 8% per annum, payable
quarterly beginning in October 2006; or, at the Company's option, dividends
are
payable in shares of the Company’s common stock, accruing at the rate of 10% per
annum based on the volume-weighted average market price for shares of common
stock for the 10 trading days preceding payment. In January 2007, a dividend
was
paid on the
Company’s
2006
Series A Convertible Preferred Stock with 81,068 shares of the Company’s common
stock valued at $49,500. The Company also paid a dividend in April 2007 with
138,306 shares of the Company’s common stock valued at $49,500.
As
of
September 30, 2007, the Company has accrued $79,200 in dividends at the rate
of
8% per annum for the dividends declared in July 2007 and October 2007,
subsequent to the balance sheet date. These dividends are to be paid in
cash.
The
Company may mandate conversion of the Convertible Preferred Stock if the closing
bid price of the common stock exceeds $2.50 for twenty (20) consecutive trading
days. In the event of a merger or sale of more than 50% of the assets of the
Company, or in the event shares of common stock issuable upon the conversion
of
Convertible Preferred Stock or exercise of warrants fail or cease to be
registered as contemplated by the terms of the Certificate of Designation of
the
Relative Rights and Preferences of Series 2006 A Convertible Preferred Stock,
the Convertible Preferred Stock is redeemable at a price of $1,000 per share,
plus any accrued and unpaid dividends payable thereon, payable at the option
of
the Company in cash or in shares of the Company’s common stock.
In
connection with the issuance of the Preferred Stock and Warrants pursuant to
the
June 8, 2006 private placement described above, we agreed to file a registration
statement with the Securities and Exchange Commission to register for sale
the
shares of common stock issuable upon conversion of Convertible Preferred Stock
and the exercise of Warrants. The Company was required to file a registration
statement on or before August 4, 2006, which was timely filed. If the
registration statement is not timely declared effective or is suspended for
a
certain length of time, the Company is required to pay 1% of the purchase price
of the Convertible Preferred Stock for each 30 day period or portion thereof
after such effective date until the registration statement is declared effective
or reinstated.
There
is
no stated limit on the maximum penalty that could be incurred. However, the
maximum penalty is effectively capped as the period or periods for which
payments are due for events of default and limited under the registration rights
agreement to 24 months. Accordingly, the penalty is capped at 24%.
The
Company is required to keep the Registration Statement continuously effective
until such date as is the earlier of (x) the date when all Registrable Shares
covered by the registration statement have been sold or (y) the date on which
the Registrable Shares may be sold without any restriction pursuant to Rule
144
as determined by Counsel to the Company. The registration statement was timely
filed and declared effective. On October 13, 2006, the Company announced its
intention to restate financial statements, and suspended use of its Registration
Statement declared effective by the SEC October 4, 2006. For such time as the
Registration Statement is not effective, the Company is obligated, pursuant
to
the Company’s Registration Rights Agreement with holders of the Company’s
Convertible Preferred Stock, to pay such holders an amount equal to one percent
per month of the original purchase price of the Convertible Preferred Stock
until the earlier of the date the Registration Statement is again declared
effective by the SEC, or June 2008. As of September 30, 2007, a penalty of
$93,629 was accrued for the nine months ending September 30, 2007 and $129,329
in cumulative penalties has been accrued since the registration was suspended.
The Company’s Registration Statement became effective again on May 11, 2007.
The
Company has accounted for the conversion option in the preferred
stock as an embedded derivative under the provisions of FAS 133: Accounting
for Derivative Instruments and Hedging Activities. Pursuant to the provisions
of
Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company's Own Stock” (“EITF 00-19”), the Company has recorded initially the
value of the warrants and conversion option at $2,095,930 and $3,698,316,
respectively which are reflected as derivative instruments on the balance sheet.
As the proceeds from the issuance of preferred shares of $2,150,000
were less than the combined fair value of the warrants and the conversion
option, the initial difference of $3,644,246 was charged to financing costs,
a
non-operating expense, in the statements of operations.
At
inception, the Warrants and Conversion Options had a reset provision for the
exercise price based on the same contingent event. Management assigned an equal
probability of 50% to each of the conditions at inception to weight the fair
value. The Company computed the weighted fair value at June 8, 2006 of the
Series A Warrants and Conversion Options using the Black-Scholes pricing model
with the following weighted average assumptions:
|
Stock price
|
$1.10
|
|
|
|
|
Exercise price
|
$0.50-$1.50
|
|
|
|
|
Expected life in years
|
4.5
years
|
|
|
|
|
Risk free interest rate
|
5.04%
|
|
|
|
|
Expected volatility
|
179%
|
|
|
|
|
Dividend yield
|
0%
|
As
of
September 30, 2007, the Company believed that none of the events that
trigger redemption upon major corporate events were probable of occurring.
The Company believes that many of these events are within its control and
accordingly the probability of occurrence of any of such events is small. Other
events that are not within the Company’s control and which trigger redemption
are lapse of registration or unavailability of registration and suspension
of
listing. The Company believes that although these events are not in its control,
as of September 30 2007, redemption was not likely and that the
Company could cure within any cure period after receipt of a Notice of
Redemption. As such, in accordance with paragraph 15 of EITF Topic D-98:
Classification and Measurement of Redeemable Securities, the Preferred Stock
is
not currently accreted to its redemption value
.
There
is
no likelihood that it will become redeemable; accordingly, no accretion is
being
made to bring the carrying value up to its redemption value.
As
of September 30, 2007, the liability for the value of the warrants and
conversion option was “marked to market” and the difference of $1,034,359 and
$1,571,784, respectively, totaling $2,606,143, has been accounted for as a
decrease to the derivative expense initially recognized in the statements
of operations. The liability for the value of the conversion option and warrants
will be “marked to market” in future accounting periods until such time as the
preferred shares are converted and the warrants are exercised or they meet
the
criteria for equity classification. As of September 30, 2007, the Company
used the Black-Scholes option pricing model to revalue the fair value of
warrants and conversion options with the following assumptions:
|
Stock price
|
$0.15
|
|
|
|
|
Exercise price
|
$0.50-$1.00
|
|
|
|
|
Expected life in years
|
3.67
years
|
|
|
|
|
Risk free interest rate
|
4.89%
|
|
|
|
|
Expected volatility
|
133.20%
|
|
|
|
|
Dividend yield
|
0%
|
9.
Shareholders’
Equity Transactions
On
January 7, 2007 the Company issued 81,068 shares of common stock for payment
of
accrued dividends in the amount of $49,500.
Dividends
declared to the holders of the 2006 Series A Convertible Preferred Stock for
the
nine months ended September 30, 2007, resulted in $49,500 in dividend
obligations (for the first quarterly dividend) at the rate of 10% per annum
paid
with 138,306 shares of the Company’s common stock; and $79,200 in dividend
obligations (for the second and third quarterly dividend, at the rate of 8%
per
annum) to be paid in cash.
On
May 1,
2007, the Company issued 750,000 shares of common stock and 250,000 warrants
to
former distributors.
Subsequent
to the signing of an exclusive worldwide distribution agreement with Inverness
Medical (IMA) for the Company's patented HIV test in a barrel format,
the Company was contacted by two of its distributors claiming that they
continue to have certain distribution rights. The Company settled the claim
by issuing these equities to cancel all their distribution rights and
settle all potential claims by these former distributors.
Based
upon the fair market value of the 750,000 shares of common stock on May 1,
2007,
the Company recorded a termination expense of $225,000. The warrants granted
allow for the purchase of 250,000 shares of common stock at $.50 per share.
These warrants, if not exercised will expire in May 2012. The fair value of
these warrants in the amount of $66,499 was recorded as a termination
expense.
The
fair
value of the Company’s option-based awards granted was estimated using the
Black-Scholes option-pricing model with the following assumptions.
|
Expected
term (in years)
|
|
|
4.83
|
|
|
Expected
stock price volatility
|
|
|
150.47
|
%
|
|
Risk-free
interest rate
|
|
|
4.54
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
Estimated
fair value per option granted
|
|
|
|
|
On
September 18, 2007, the Company awarded 40,000 shares of common stock to an
individual for certain financing and other services. These shares were valued
at
$0.17 per share or $6,800 and has been included in the accompanying Condensed
Statements of Operations.
10.
Stock-Based
Compensation Plans
Plan
Options
The
Company has two stock option plans, a "1992 Plan", under which 350,000 shares
of
its common stock have been reserved for issuance, and a "1994 Plan", under
which
an additional 350,000 shares of its common stock have been reserved for
issuance. Under both plans, the Company's Board of Directors may grant either
incentive stock options with an exercise price of not less than the fair market
value of the common stock at the date of grant or non-qualified stock options
with an exercise price of not less than 85% of the fair market value of the
common stock at the date of grant. The Board of Directors shall determine the
period of each option and the time or times at which options may be exercised
and any restrictions on the transfer of stock issued upon exercise of any
options. Both plans also provide for certain automatic grants to each
non-employee director at a price of 100% of fair market value of the common
stock at the time of grant. Options generally vest over a period of six months
and are exercisable over a period of five years.
Non-Plan
Options
Method
of
Accounting
On
March
25, 2005, 550,000 stock options were granted to one employee and on May 2,
2005,
another 550,000 stock options were granted to a second employee in accordance
with their employment agreements. Both employment agreements provided for
immediate vesting of 100,000 stock options at an exercise price of $0.10 on
date
of grant and then vesting of the remaining 450,000 stock options in three equal
tranches of 150,000 stock options on October 1, 2005, October 1, 2006 and
October 1, 2007, at an exercise price of $1.00 per share. These options are
exercisable until June 1, 2015.
Effective
January 1, 2006, the Company’s Plan and options granted outside of the Plan are
accounted for in accordance with the recognition and measurement provisions
of
Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004),
Share-Based Payment ("FAS 123(R)"), which replaces FAS No. 123, Accounting
for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. FAS 123 (R) requires compensation costs related to share-based
payment transactions, including employee stock options, to be recognized in
the
financial statements. In addition, the Company adheres to the guidance set
forth
within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 107, which provides the Staff's views regarding the interaction
between FAS No. 123(R) and certain SEC rules and regulations and provides
interpretations with respect to the valuation of share-based payments for public
companies.
In
adopting FAS 123(R), the Company applied the modified prospective approach
to
transition. Under the modified prospective approach, the provisions of FAS
123(R) are to be applied to new awards and to outstanding awards modified,
repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of awards for which the requisite service
has
not been rendered that are outstanding as of the required effective date shall
be recognized as the requisite service is rendered on or after the required
effective date. The compensation cost for that portion of awards shall be based
on the grant-date fair value of those awards as calculated for either
recognition or pro-forma disclosures under FAS 123.
As
a
result of the adoption of FAS 123(R), the Company's results for the three and
nine months ended September 30, 2007 include share-based compensation expense
of
$11,622 and $34,866, respectively, recorded in the selling, general and
administrative expenses.
No
income
tax benefit has been recognized in the income statement for share-based
compensation arrangements as the Company has provided a 100% valuation allowance
on its’ net deferred tax asset.
Stock
option compensation expense in fiscal 2006 and 2007 is the estimated fair value
of options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award. The Company has not adjusted the
expense by estimated forfeitures, as required by FAS 123(R) for employee
options, since the forfeiture rate based upon historical data was determined
to
be immaterial.
The
fair
value for stock awards was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions:
|
Expected
term (in years)
|
5
|
|
|
|
|
Expected
stock price volatility
|
182%
|
|
|
|
|
Risk-free
interest rate
|
4.35%
|
|
|
|
|
Expected
dividend yield
|
0%
|
|
|
|
|
Estimated
fair value per option granted
|
1.395
|
The
following table summarizes all stock option activity for options granted under
the 1992 Plan, the 1994 Plan and non-plan options during the nine months ended
September 30, 2007:
|
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Outstanding
at January 1, 2007
|
|
|
1,200,000
|
|
$
|
0.85
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
|
|
|
Forfeited/expired
|
|
|
--
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,200,000
|
|
$
|
0.85
|
|
|
Exercisable
at September 30, 2007
|
|
|
833,333
|
|
$
|
0.79
|
|
As
of
September 30, 2007, there was $52,856 of unrecognized compensation cost related
to non-vested awards granted, which is expected to be recognized over a
weighted-average period of less than a year. The following table summarizes
the
information about stock options outstanding at September 30, 2007:
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Range
of
Exercise
Price
Per
Share
|
|
|
Number
Outstanding at
September
30 2007
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
Number
Exercisable
at
September
30, 2007
|
|
|
Weighted
Average
Exercise
Price Per Share
|
|
|
$0.10-$1.00
|
|
|
1,200,000
|
|
|
7.43
|
|
$
|
0.85
|
|
|
833,333
|
|
$
|
0.79
|
|
During
the nine months ended September 30, 2007, the Company issued 250,000 warrants
valued at $66,499, to former distributors. The Company has recorded this amount
as contract termination costs in the accompanying Statements of
Operations.
The
fair
value for these warrants was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions:
|
Expected
term (in years)
|
|
|
4.83
|
|
|
|
|
|
Expected
stock price volatility
|
|
|
150.47
|
|
|
%
|
%
|
|
Risk-free
interest rate
|
|
|
4.54
|
|
|
%
|
%
|
|
Expected
dividend yield
|
|
|
0
|
|
|
%
|
%
|
|
Estimated
fair value per option granted
|
|
|
|
|
|
|
|
The
following table summarizes the information about warrants outstanding at
September 30, 2007:
|
|
|
|
Number
of
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Outstanding
at January 1, 2007
|
|
|
2,707,187
|
|
$
|
0.98
|
|
|
Granted
|
|
|
250,000
|
|
$
|
0.50
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
Forfeited/expired
|
|
|
-
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
2,957,187
|
|
$
|
0.94
|
|
Of
the
above warrants, 60,000 expire in 2007, 2,647,187 expire in 2011, and 250,000
expire in 2012.
11.
Operating Leases
The
Company leases premises in Brooklyn, New York. This lease has a three-year
term
ending August 30, 2008 and a base annual rental rate starting at $15,000 and
increasing to $15,913 per year.
Minimum
future lease payments required under the operating lease for the Brooklyn office
is $14,166 for the twelve month period ended September 30, 2008.
12.
Contingencies
Employment
Contracts
In
March
and May of 2005, the Company entered into employment agreements respectively
with Steve Peltzman, Chief Executive Officer and Chairman of the Board, and
Bruce Pattison, President. Both agreements provide a minimum annual base salary
of $120,000 for a term of two years and renewable annually. Either party can
terminate the agreement upon 90 days notice. This base salary will increase
to
$180,000 per year upon closing of a financing to the Company with minimum gross
proceeds of $3,000,000. The Company is also obligated to pay health and life
insurance benefits and reimburse expenses incurred by the officers on behalf
of
the Company. Each executive, if terminated by the Company without cause, would
be entitled to six months’ severance.
Economic
Dependency:
For
the
nine months ended September 30, 2007, sales to two customers were in excess
of
10% of the Company's total sales. Sales to these customers were approximately
$299,000 and $52,000 and accounts receivable from these customers as of
September 30, 2007, aggregated $29,000 and $0, respectively. Royalties and
equipment rental income earned from Inverness Medical and Chembio Diagnostic
Systems for the nine months ended September 30, 2007 (See Note 1-
Description
of Business) aggregated approximately $118,000 and $70,000, respectively.
During
the third quarter of 2007, the Company had sales to three customers that were
in
excess of 10% of the Company's total sales. Sales to one customer were
approximately $28,000. The loss of this customer could have a material adverse
effect on the Company. The other two were new customers and we are uncertain
if
they will continue placing orders. No royalties were earned from Inverness
Medical and Chembio Diagnostic Systems for the three months ended September
30,
2007 (See Note 1-
Description
of Business). The Company believes that there will be limited royalty income
until such time, if ever, that a waiver from CLIA is granted.
(SEE NOTE 2- Substantial Doubt Regarding Ability To Continue As A Going Concern)
For
the
nine months ended September 30, 2007, purchases from four suppliers were in
excess of 10% of the Company's total purchases. The purchases from these
suppliers for the nine months ended September 30, 2007 ranged from $18,000
to
$53,000. The corresponding accounts payable to these suppliers at September
30,
2007, aggregated approximately $29,000.
13.
Subsequent Event
Subsequent
to September 30, 2007, the Company signed two agreements with Inverness Medical
Innovations, Inc. (Inverness). As part of these agreements, Inverness entered
into a $500,000 strategic investment with the Company.
First,
the two companies signed an agreement whereby Inverness acquired an option
for
the exclusive, worldwide marketing and distribution rights to certain infectious
disease diagnostic tests developed by the Company that may utilize specified
Inverness and/or the Company intellectual property. If exercised by Inverness,
the option provides for the Company and Inverness to equally share development
expenses and profits. The Company and Inverness also entered into a license
agreement whereby Inverness granted to the Company a license to certain
Inverness lateral flow patents for use in a rapid test to detect HIV antibodies
in point-of-care markets subject to payment of royalties to Inverness. This
license pertains to HIV tests using formats other than the Company’s "barrel
format" which is already being sold by Inverness and awaiting a CLIA Waiver
from
the FDA.
The
strategic investment consists of a purchase of 1,428,572 common shares at a
price of $0.35 per share. Additionally, Inverness received 5 year warrants
to
purchase up to an additional 1.1 million shares of the Company's stock at a
price of $0.75 per share. The proceeds of this investment will be used for
general corporate purposes and to fund development of other infectious disease
applications for the Company's patented test format.
On
November 5, 2007 StatSure announced that the U.S. Food and Drug Administration
("FDA"), through its Center for Devices and Radiological Health, has approved
a
waiver under the Clinical Laboratory Improvements Amendments of 1988 ("CLIA")
for an
HIV
1/2
Rapid
Test
employing the Company’s patented “barrel” technology.
The
HIV
1/2 product is marketed and distributed worldwide by Inverness Medical
Innovations (Amex: IMA) under its Clearview(R) brand as "Clearview COMPLETE
HIV
1/2".
Specifically,
the test has been waived for use in detecting HIV-1 and HIV-2 antibodies in
human
whole blood, serum, and plasma and
demonstrates
a sensitivity of 99.7% and a specificity of 99.9% in clinical trials. Receipt
of
the waiver allows the test to be used in a broader range of clinical settings
including outreach clinics, community-based healthcare organizations and
physicians offices.