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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Kedem Pharmaceuticals Inc.ex31-2.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Kedem Pharmaceuticals Inc.ex32-2.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Kedem Pharmaceuticals Inc.ex32-1.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Kedem Pharmaceuticals Inc.ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2011

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to________________

Commission file number 333-137888

GLOBAL HEALTH VENTURES INC.
(Exact name of registrant as specified in its charter)

Nevada
 
98-0633727
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
409 Granville Street, Suite 1023
Vancouver, British Columbia, Canada
 
V6C 1T2
(Address of principal executive offices)
 
(Zip Code)

(604) 324-4844
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None
 
N/A
Title of each class
 
Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0001 par value
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o  No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o  No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No þ

As of November 30, 2010, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $3,599,556, based on 80,335,559 issued and outstanding shares of common stock and a closing price of $0.0511 per share.

As of August 24, 2011 the registrant’s outstanding common stock consisted of 191,333,192 shares.
 
 
 

 
 
PRESENTATION OF INFORMATION

As used in this annual report, the terms “we”, “us”, “our”, “Global Health” and the “Company” mean Global Health Ventures Inc. and its subsidiaries, unless otherwise indicated.

This annual report includes our audited financial statements as at and for the years ended May 31, 2011 and 2010. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).

All financial information in this annual report is presented in U.S. dollars, unless otherwise indicated, and should be read in conjunction with our audited consolidated financial statements and the notes thereto included in this annual report.

FORWARD-LOOKING STATEMENTS

This annual report, any supplement to this annual report, and any documents incorporated by reference in this annual report, include “forward-looking statements”.  To the extent that the information presented in this annual report discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking.  Such forward-looking statements can be identified by the use of words such as “intends”, “anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”, “plans” and “proposes”.  Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.  These include, among others, the risks and uncertainties outlined under the “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this annual report, many of which are beyond our control.

These forward-looking statements include, but are not limited to, the following:

  
statements contained in Item 7 and the notes to our audited consolidated financial statements concerning our results of operations, financial condition and our ability to finance our business;

  
statements contained in Item 1 concerning our products, operations and compliance with law; and

  
statements throughout this annual report concerning our legal structure, the regulation of our business and the markets for our common stock.

Factors that could cause actual results to differ materially include, but are not limited to the following:

  
risks related to government regulations and approvals of our products;

  
our need for additional capital to pursue our plan of operations;

  
our dependence on key personnel; and

  
our ability to compete effectively with competitors that have greater financial, marketing and other resources.

The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.  You should read this annual report and the documents that we reference in this annual report and have filed as exhibits with the understanding that our actual future results may be materially different from what we expect.  You should not rely upon forward-looking statements as predictions of future events.

Other sections of this annual report include additional factors which could adversely impact our business and financial performance.  Moreover, we operate in an evolving environment.  New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties.  We cannot assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
 

 
 
TABLE OF CONTENTS
 
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1

 



Overview

We were incorporated on April 25, 2006 pursuant to the laws of the State of Nevada. Our principal executive offices are located at 409 Granville Street, Suite 1023, Vancouver, British Columbia, Canada V6C 1T2.  Our telephone number is (604) 324-4844 and our website is www.globalhealth3000.com.  The information contained on our website does not form part of this annual report.

We are a development stage specialty pharmaceutical company engaged in developing proprietary platform technology that delivers drugs via the sublingual (under the tongue) route.  We are also developing oral formulations of drugs which are intended to cause fewer stomach side effects than formulations of such drugs previously marketed by other pharmaceutical companies.

As at May 31, 2011, we had had not generated any revenues, had achieved losses since inception and had been issued a going concern opinion by our auditors.  Since our inception, we have relied upon the sale of our securities or loans to fund our operations.

Development of Business

We were incorporated on April 25, 2006, under the name “Acting Scout Inc.”, pursuant to the laws of the State of Nevada.

On September 10, 2007, we filed Articles of Amendment to decrease our authorized capital from 80,000,000 shares of common stock to 14,000,000 shares of common stock.

On September 20, 2007, we changed our name to “Goldtown Investments Corp.” to better reflect our new business model.  In addition, on September 20, 2007, we filed a Certificate of Change to increase our issued and outstanding, and our authorized, capital on a basis of fourteen (14) new shares of common stock for every one (1) existing share, from 11,023,000 issued and outstanding shares of common stock to 154,322,000 issued and outstanding shares, and from 14,000,000 authorized shares of common stock to 196,000,000 authorized shares.

On October 2, 2007, we entered into an agreement with Blair Law, our sole director and officer at the time, pursuant to which Mr. Law agreed to cancel 93,800,000 shares of our common stock which were held by him.

On September 29, 2008, Mr. Law resigned as our President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer, and we appointed Dr. Hassan Salari to fill the resulting vacancies.

On October 6, 2008, we changed our name from “Goldtown Investments Corp.” to “Global Health Ventures Inc.” as a result of a merger with Global Health Ventures Inc., our wholly-owned subsidiary that was incorporated solely to effect the name change.  Our common stock trades on the OTC Bulletin Board and OTCQB under the symbol GHLV.

On March 15, 2009, we entered into a research contract with Globe Laboratories Inc. (“Globe Labs”), a company controlled by two individuals related to Dr. Salari, to engage Globe to conduct research on the sublingual technologies developed by Globe.

On May 14, 2009, we appointed Dr. David Filer and Christian Bezy to our Board of Directors.  Also on May 14, 2009, we appointed Audrey Lew as our Chief Financial Officer and Dr. Salari resigned from this position.

On December 11, 2009, we acquired all of the outstanding shares of Posh Cosmeceuticals Inc. (“Posh”) in consideration for 4,000,000 shares of our common stock pursuant to a share exchange agreement with the shareholders of Posh.  Posh owns technologies for dermal drug delivery, in particular for the growth of hair follicles and treatment of cellulite.  These products are in the research stage.

On March 15, 2010, we entered into a license agreement (the “License Agreement”) with Globe for the exclusive use of Globe’s sublingual technology for our products.  Under the License Agreement, we agreed to pay $50,000 per quarter to Globe from April 1, 2009 until the technology is put into commercial production, or the technologies are sold or sublicensed.

On June 15, 2011, we filed a Certificate of Designation to designate 10,000,000 shares of our authorized but unissued preferred stock as Series “A” Preferred Stock, and we entered into a debt conversion agreement with Dr. Salari pursuant to which he converted $54,000 worth of debt into 1,800,000 shares of our Series “A” Preferred Stock at a price of $0.03 per share.

On June 16, 2011, the holders of a majority of our issued and outstanding stock approved an amendment to our bylaws and an increase in our authorized capital from 196,000,000 shares of common stock, par value $0.0001, to 1,000,000,000 shares of common stock, par value $0.0001.

 
2

 
 
Our Business

We are a specialty pharmaceutical company that develops advanced next-generation drugs to displace current “blockbuster” drugs upon their loss of patent protection.  Our core strength is our exclusive access to sublingual platform technology.  This technology provides the foundation to design unique pharmaceuticals with properties that result in a market advantage through faster onset of action, increased availability, lower dosage, improved safety, fewer or less severe side effects, reduced dosing regiments, safer systems, taste masking and others. We believe these advantages will enable our products to establish themselves quickly in the market by displacing existing products in a relatively short period of time.  Our lifestyle products are related to male sexual enhancement, anti-addiction and energy boosters.  Our therapeutic products are related to weight loss and pulmonary disease management.  We work with products that are already approved by the U.S. Food and Drug Administration (the “FDA”), but require better or faster absorption.

We also plan to reformulate existing products that currently have considerable side effects when manufactured with their current chemical formulation.  We intend to develop these new products internally or license them from other pharmaceutical companies.  We expect to have several products under development and we plan to bring them to the stages of partnership and co-marketing. Our most advanced product, X-Excite, has been contracted out to a manufacturing company in Romania to produce exclusively for the European market.  This product has been manufactured and sent to a hospital in Bulgaria for human clinical trials.  The clinical trials are supervised by Clinical Investigation Limited, a contract research organization incorporated in the United Kingdom.

Our Advantage

Over 85% of pharmaceutical drugs are administered in oral solid dosage form (i.e. tablets, caplets or capsules).  These dosage forms are hampered by the amount that can be administered in one unit.  Most quantities of drugs typically do not fully absorb and reach the blood stream because they are discharged through feces.  Consequently, the dosage form has to be increased in order for a sufficient quantity to reach the blood stream.  The oral tablet likely becomes unpractical when the dosage reaches 500 mg due to its amount and size, and our licensing agreement provides exclusive access to sublingual technologies which enable us to overcome typical limitations and create new, unique and better-performing branded specialty pharmaceutical products.  Because the sublingual form generates a higher degree of drug absorption in the blood, formulations can be made smaller and with lower doses, yet the degree of efficacy may remain similar to larger formulations administered orally.

Products

We are a multi-product company. Our current portfolio of products includes:

1.  
X-Excite (male sexual enhancement drug)

2.  
Relax-B (anti-stress drug)

3.  
Nico-Z (nicotine replacement product)

4.  
V-Energy (energy booster product)

5.  
T-Slim (appetite suppressor drug)

6.  
POS001 (growth of hair follicles product)

7.  
POS002 (treatment of cellulite product)

 
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X-Excite

X-Excite is a development stage sublingual formulation of sildenafil.  Sildenafil is registered under the trade name of Viagra® and is currently marketed by Pfizer under patent protection until 2012/2013 (depending on the jurisdiction).  Viagra® (sildenafil citrate) is indicated for the treatment of erectile dysfunction, which is the inability to achieve or maintain a penile erection sufficient for satisfactory sexual performance.

Pharmacodynamic of Sildenafil

After patients have taken Viagra®, it is unknown when nitrates, if necessary, can be safely administered.  Plasma levels of sildenafil at 24 hours post-dose are much lower (2 ng/ml) than at peak concentration (440 ng/ml).  In patients older than 65, hepatic impairment (e.g. cirrhosis), severe renal impairment (e.g. CLcr <30ml/min), concomitant use of potent cytochrome P-450 3A inhibitors (erythromycin) and plasma levels of sildenafil at 24 hours post-dose have been found to be three to eight times higher than those seen in younger, healthy patients.  Although plasma levels of sildenafil at 24 hours post-dose are much lower than at peak concentration (i.e. 2 hours), it is unknown whether nitrates can be safely co-administered at this point.  According to the study reported by Pfizer, some of the major side effects of orally administered dosages are documented in the clinical trials report.

Sildenafil Clinical Trial Adverse Drug Reactions

Clinical trials are conducted under very specific conditions.  The adverse reaction rates observed in the clinical trials may not reflect the rates observed in practice and should not be compared to the rates in the clinical trials of another drug.  Adverse drug reaction information from clinical trials is useful for identifying drug-related adverse events and for approximating rates.  In trials of all designs, adverse events reported by patients receiving Viagra® were generally similar.  In fixed-dose studies, the incidence of some adverse events increased with the dose.  The nature of the adverse events in flexible-dose studies, which more closely reflect the recommended dosage regimen, was similar to that for fixed-dose studies.

When Viagra® was taken as recommended (on an as-needed basis) in flexible-dose and placebo-controlled clinical study trials, the following adverse events were reported:

Table 1.  Adverse Events Reported by >2% of Patients Treated with Viagra® or Placebo in PRN Flexible-Dose Phase II/III Studies (Source: public info provided by Pfizer)

Percentage of Patients Reporting Event
Adverse Event
VIAGRA (n=734)
PLACEBO (n=725)
Headache
15.8%
3.9%
Flushing
10.5%
0.7%
Dyspepsia
6.5%
1.7%
Nasal Congestion
4.2%
1.5%
Respiratory Tract Infection
4.2%
5.4%
Flu Syndrome
3.3%
2.9%
Urinary Tract Infection
3.1%
1.5%
Abnormal Vision*
2.7%
0.4%
Diarrhea
2.6%
1.0%
Dizziness
2.22%
1.2%
Rash
2.22%
1.4%
Back Pain
2.22%
1.7%
Arthralgia
2.0%
1.5%

*
Abnormal Vision: Mild and transient changes, predominantly impairment of color discrimination (blue/green), but also increased perception to light of blurred vision.  At doses above the recommended dose range, adverse events are similar to those detailed above but generally were reported more frequently.

 
4

 
 
Gastrointestinal side effects: vomiting, gastritis, gastrointestinal disorder, flatulence, increased appetite, gastroenteritis, stomatitis, eructation, dysphagia, colitis, glossitis, constipation, rectal hemorrhage, mouth ulceration, esophagitis, rectal disorder, gingivitis and tooth disorder.

Liver/ Bilary: Liver function tests showed abnormal alanine aminotransferase enzyme (ALT) which is an indicative of higher liver damage in the blood.

Clearly, some of the side effects are due to the gastrointestinal absorption and liver/bilary system absorption of the drug.  By avoiding gastric pathway and hepatic breakdown using a new route of administration (i.e. sublingual) some of those side effects can be reduced or prevented.  Additionally, the rapid blood absorption will help to reduce the dosage while achieving the same benefits as orally administered drugs.
 
Relax-B

This product utilizes propranolol as its active ingredient.  Propranolol is an FDA approved drug for hypertension and anxiety attack prescribed worldwide.  When it is used at a low dose, the product has a relaxant property and can reduce stress and anxiety.  We have formulated propranolol to absorb sublingually and have used taste masking products to reduce the taste.  Our plan is to develop this product once we secure further financing.

Nico-Z

Nico-Z is a sublingual formulation of nicotine designed for cigarette replacement.  We are using a small dose of nicotine (about 5 times less than commercial nicotine) and plan to achieve a higher concentration of nicotine in the blood in a much shorter time span.  The rapid absorption of nicotine will be beneficial for individuals craving cigarette or tobacco products.  Nico-Z is not designed for smoking cessation.

V-Energy

This product is a sublingual formulation of vitamin B6/B12.  Vitamin B6/B12 is a stimulus and anti-tiredness compound.  This product is reported to be a stimulant several times more powerful than caffeine, yet does not produce the side effects of caffeine such as an increased heart rate and sleeping disorders.  Vitamin B6/B12 is often used in cancer patients to help them be less tired and more energetic.  Currently, vitamin B6/B12 is administered by injection or taken orally.  Injection is not a convenient way for drug delivery and also carries certain risks including infection.  A sublingual formulation would therefore likely be the most convenient and acceptable route of administration.

T-Slim

T-Slim is a novel formulation of catechin.  Catechin is a flavonoid that is found in higher plants and green tea.  Catechin is a major component in reducing appetite but has a poor oral absorption rate.  A sublingual formulation should result in increased availability, thus, it would be most beneficial if used whenever a person feels hungry to reduce their desire for food appreciably.

POS001

This product is a growth factor which is believed to promote the growth of hair follicles.  We intend to develop this product for hair growth.

POS002

This is an analog of vitamin K2 which is designed for the treatment of cellulite.  We plan to develop this product once all of our other products have been developed.

We acquired POS001 and POS002 pursuant to our acquisition of Posh on December 11, 2009. These products are in the research stage and have not materially increased our expenditures.

 
5

 
 
Product Research and Development

Our primary research has been focused on developing our new formulation of drug delivery technology.  We continue to improve drug bioavailability and formulations to maximize absorption.  During the next 12 months, we intend to work on the formulation of our drugs, including the study and investigation of the rate of absorption into the blood stream.  Further, we intend to evaluate the dose ratio between active chemicals and other ingredients.  Our aim is to improve drug availability and maximize absorption, and we also intend to set out a formula for drug to body mass ratio.  We plan to conduct research on other ingredients which can be used to enhance skin penetration.  During the years ended May 31, 2011 and 2010, we spent approximately $664,499 and $482,502, respectively, on research and development activities.

The following sets forth information relating to the stage of development of our products:

Product
Stage of Development
Approximate Marketing Date
X-Excite
Clinical Phase I
2013
Relax-B
Filing for Phase I
2014
Nico-Z
Research
2016
V-Energy
Research
2016
T-Slim
Research
2016
POS001
Research
2018
POS002
Research
2018

X-Excite is our most advanced product and has been contracted out to a manufacturing company in Romania to produce exclusively for the European market.  The product was manufactured in accordance with European regulatory guidelines and was sent to a hospital in Bulgaria for Phase I human clinical trials.  The clinical trials were supervised by Clinical Investigation Limited, a contract research organization incorporated in the United Kingdom.  The data from the clinical trials met our expectations and we plan to proceed with Phase III trials in June 2012.  Phase III clinical trials of X-Excite are planned for 2012.  We do not anticipate any hindrances to the progress of this product.

We have filed with regulatory bodies in Europe to conduct Phase I clinical trials for Relax-B and are awaiting the required approval in that regard.  Our remaining products are in the early stages of development and we are conducting research for their development.

Our Technology

The sublingual technology is exclusively available to us through our License Agreement with Globe dated March 15, 2010.  It consists of a diverse portfolio of products as described in this annual report.

We will most likely use specific formula technologies oriented around sublingual dosage to develop our specialty pharmaceutical products.  However, all of the technologies will be available to us depending on the particular needs of development and commercial programs.

It is our goal to develop technologies beyond those available from Globe and other partners to meet future market demands.  Such efforts are expected to drive branded pharmaceutical manufacturers to us as these companies look to maintain their market position.

Competitive Technologies

We believe current technologies used by other specialty pharmaceutical companies are deficient in several ways.  Overall, current technologies add significant manufacturing expenses beyond the inherent cost of the chemically active ingredient (i.e. drug) and standard costs associated with making more classical dosage forms such as tablets and capsules.  In addition, most of the technology platforms fall short of being able to deliver the performance required for acceptance of the product.  For example, taste-masked systems usually do not mask the taste of the drug in a sufficient manner to render it palatable.  Also, such systems can inhibit the drug from being readily absorbed, which would prevent it from being classified as an immediate release system.  Our formulation has overcome these problems.  The combination of taste masking, rapid dissociation and adhesiveness make our products rapidly absorbable through the pores and provide superior performance activity, thereby reducing dosage and side effects.

 
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The current formulations used by other companies consist of coating beads or large particles that are typically over 300 microns with an aqueous-based coating.  These systems pose the following problems:

1.  
Particles are too large and leave a gritty feel in the mouth;

2.  
Tablets have a drug content that is about 50% of their total weight;

3.  
Pharmaceutical products are restricted to lower dosage products;

4.  
Coatings are non-elastic and break quickly;

5.  
Coatings inhibit the release of drugs into the mouth and do not meet strict requirements for immediate release; and

6.  
Processes are lengthy, costly and require strict handling.

The leaders in the field that promote these services include Catalent Pharma Solutions, Coating Place, Inc., Contract PharmaCal, Eurand and EthyPharm.

Our products that require taste masking have many advantages over competing technologies and, in most cases, offer the only means known to produce the desired benefits.  We believe that the formulation systems we employ are state-of-the art and are not known to be in practice anywhere in the pharmaceutical field.  These technologies are very robust and consist of taste-masking small drug particles that are typically less than 250 microns with an adhesive component.  These systems pose the following advantages:

1.  
Particles are very small and do not leave a gritty feel in the mouth;

2.  
Particles are small enough to be placed in thin films, similar to Listerine Thin Strips; and

3.  
Particles have drug content in excess of 50% w/w and typically greater than 80% w/w enabling products to be smaller and contain a higher dosage – some products may be capable of delivering up to a 1,500 mg oral equivalent in a single tablet.

Our products contain rapidly disintegrating compositions that are coated by taste masking chemicals.

Other companies’ technologies enable drugs to be absorbed in the gastrointestinal tract, but produce unwanted side effects.  Additionally, orally absorbed drugs break down in the liver upon first absorption by the body.  It is known that a large number of side effects associated with drugs are due to the liver breakdown metabolites.  According to Pfizer filings with FDA, sildenafil breaks down in the liver, which may involve some side effects such as headaches, flushing, etc.

Intellectual Property

Our success depends, in part, on our ability to obtain and maintain proprietary protection for our products, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights.  Our policy is to protect our proprietary position by, among other methods, filing patent applications in the United States and elsewhere related to our proprietary technology, inventions and improvements that are important to the development of our business.  We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Our patent portfolio includes one patent pending in the United States and a similar patent pending in foreign countries and regions under the Patent Cooperation Treaty.  Our patent appears under the heading “Method of Delivering Pharmaceutical Products Sublingually,” and is our core asset.  The patent was filed by Globe, but under the License Agreement we obtained the rights to use the patent worldwide, on an exclusive basis, for any drug or product that uses the technology described in the patent.

In addition to the patent, we may rely in some circumstances on trade secrets to protect our technology.  However, trade secrets are difficult to protect, so we seek to protect our proprietary technology and processes, in part, by executing confidentiality agreements with our employees, consultants, scientific advisors and other contractors, as well as enforcing physical security of our premises and our information technology systems.  In addition, our trade secrets may otherwise become known or independently discovered by competitors.  If our consultants or contractors use intellectual property owned by others in their work for us, disputes may arise.

 
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License Agreement

On March 15, 2009, we entered into a research contract with Globe Laboratories Inc., a company controlled by two individuals related to Hassan Salari, our officer and director (Julian Salari and Frederick Salari), to engage Globe to conduct research on the sublingual technologies developed by Globe.

On March 15, 2010, we entered into the License Agreement with Globe, a company incorporated in British Columbia, Canada, pursuant which we acquired the exclusive use of Globe’s sublingual technology for drug delivery for our products.  We agreed to pay $50,000 per quarter to Globe from April 1, 2009 until the technology is put into commercial production, or the technologies are sold or sublicensed.  In addition, for each product we develop using the same formulation, we agreed to pay to Globe the following fees:

1.  
$25,000 upon the commencement of Phase I (drug safety and tolerability study);

2.  
$250,000 upon the completion of Phase I;

3.  
$1,000,000 upon the completion of Phase III (or similarly approved trials, such as 505(b)2) (drug concentration measurement in comparison to the existing formula);

4.  
$3,500,000 upon the first anniversary of sale; and

5.  
2% of the net sales of all products licensed to us by Globe (the “Royalty Payments”).

All payments under the License Agreement are due within 30 days of such milestone, excluding the Royalty Payments, which are due 60 days following the end of the fiscal quarter in which the sales occur.

Technology Assessment

The technologies of sublingual drug delivery are specific to our projects and business.  We will rely on our review of product development results from clinical trials as one means to measure the effectiveness of the technologies available and assess their commercial viability.

It is understood that the sublingual formulation is a platform which will apply to any of the products we propose. We have used this formulation to develop new drugs over the past few years and it has proven to be viable and applicable.  All of these remain patentable without any expected issues in the patent process.  Samplings of systems have already demonstrated a standard level in the pharmaceutical and life style market.  These systems were analyzed without compromising the ability to further secure the intellectual property rights of the technologies.

New Generations of Technology

It is our goal to continue to develop technologies and partnerships with other organizations equipped with novel systems to meet the future demand for pharmaceuticals.  These efforts are expected to drive branded pharmaceutical manufacturers to us, as they look to maintain their market position.  An example of this includes products that have tremendous market potential but weak market acceptance, such as Fosamax® from Merck, which is an excellent drug for the treatment of osteoporosis and bone associated cancers.  However, this drug has an extremely poor oral absorption rate, and as a result its sales have decreased significantly.

We believe that we can increase the oral absorption of our drugs by enhancing their oral dissociation and through chemical and mechanical technologies.  These technologies include using nano-particulate carbon fiber emulsified with active ingredients and better coating.  If the absorption of such drugs are significantly enhanced, then we believe that the revenue to be derived from them will increase significantly.

 
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Operations and Capacity

Our development plan requires technologies that are readily transferrable to commercial settings in order to quickly advance the development of new and unique branded specialty pharmaceutical products.

The technologies of sublingual products incorporate standard pharmaceutical manufacturing and process equipment, such as tablet presses and fluid bed coaters.  Drugs can be manufactured on site or with our business alliances.  This type of manufacturing equipment and operation, when used in accordance with the process specifications required by the technologies, is readily accepted by regulatory bodies as being capable of producing products under current Good Manufacturing Practices (cGMPs).

All equipment necessary to manufacture our products is available and supported by well established service providers that have been allied with us for many years, and with which we maintain agreements.

Employees

We are operated by Hassan Salari, who serves as our President, Chief Executive Officer, Secretary, Treasurer and director.  In addition, Audrey Lew serves as our Chief Financial Officer.  Currently, we have three employees.  We may hire additional employees when circumstances warrant, however, we do not anticipate hiring additional employees in the near future.  We presently conduct our business through agreements with consultants and arms-length third parties.

Marketing

Our marketing plan will be based on two strategies: our first strategy is to market directly to selective international markets if the cost of advertising and sales are reasonable.  Our other strategy is to recruit local and international partners.  We plan to enter into agreements with those companies that have a large marketing system and are recognized internationally.  In doing so, we anticipate maximizing the market potential for our products by collaborating with leading pharmaceutical and consumer-based companies.  We plan to enter into third party agreements with marketing specialists to help us determine various target indicators, which will facilitate our marketing process.  In entering into these agreements, our goal will be to maintain co-promotion and co-commercialization rights, in some countries and in various forms.  We expect to contract with third parties to warehouse and distribute our products and to provide administrative functions, such as accounts receivable management and other similar activities.

Competition

We are competing with other companies for both financing and the acquisition of prospective healthcare technologies.  In seeking out such technologies we have encountered intense competition from other development stage companies and established international companies.  Our competitors include fully integrated pharmaceutical and biotechnology companies as well as universities and public and private research institutions.  Many of our competitors have substantially greater capital resources, larger research facilities and development staffs, greater experience in product development and obtaining regulatory approvals and greater marketing capabilities than we do.  As a result, these competitors may be able to spend greater amounts on the acquisition and development of healthcare technologies.  This competition could result in our competitors obtaining technologies of greater quality and attracting prospective investors to finance the development of such technologies on more favorable terms.  Due to this competition, we may become involved in an acquisition with more risk or obtain financing on less favorable terms.

Currently, relatively few relevant specialty pharmaceutical manufacturers of sublingual drug delivery systems exist as compared to manufacturers of oral dosage drugs.  Currently, these companies accounted for approximately $1.8-2 billion in sales, which is a relatively small number relative to the overall size of the market.  One reason is that large pharmaceutical companies have continuously acquired drug delivery technology companies – examples include Johnson & Johnson’s purchase of Alza and Transform Pharmaceuticals; Ivax’s purchase of Teva Pharmaceuticals Industries, Ltd; NanoSystem’s sale by Eastman Kodak to Elan for $137 million; and Elan trying to sell this division to provide needed cash for its balance sheet.  Today the value of that deal is estimated at $1.5 billion.  Of the remaining specialty companies, Biovail Corporation and KV Pharmaceutical are the most dedicated to the field of drug delivery, but they remain burdened with inferior technologies to produce advance products.  These companies may be forced to aggressively seek to acquire technologies similar to ours.

 
9

 
 
Government Regulation

Government authorities in the United States at the federal, state and local levels, as well as authorities in other countries, extensively regulate, among other things, the research, development, testing, manufacturing, labeling, promotion, advertising, distribution, marketing and export and import of pharmaceutical products such as those we are developing.  The process of obtaining regulatory approvals and the subsequent substantial compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources.

In the United States, the information that must be submitted to the FDA in order to obtain approval to market a new drug varies depending on whether the drug is a new product whose safety and effectiveness has not previously been demonstrated in humans or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug.  A new drug will follow the New Drug Application route.  The approval process in other jurisdictions such as Europe, Japan and Canada is similar to the FDA approval process.

Our clinical work is contracted out to a contract research organization, Clinical Investigations Limited, which is incorporated in the United Kingdom. This organization is currently carrying out clinical trials of X-Excite on our behalf in human subjects at a hospital in Bulgaria and will carry out clinical trials on our behalf in human subjects in various cities in Western and Eastern part of Europe or Asia as we develop our other products.  Prior to commencing any studies, they must pass through the necessary regulatory bodies, such as the FDA or European Medical Association.

CROs are highly experienced in the design and conduct of human drug testing.  They have already designed and conducted many pharmaceutical drug trials for multi-national pharmaceutical companies and have been able to obtain approval for them.  Therefore, their skill and experience provides great comfort for us in terms of obtaining regulatory approval.  Following approval of our products in Europe it is our plan to seek FDA approval in the United States.  The FDA may ask us to carry out similar trials as we conduct in Europe in the United States.  However, at that stage, we should be able to conduct our trials in the United States more rapidly given our European experience.

FDA Approval

The U.S. Federal Food, Drug and Cosmetic Act, together with other federal and state statutes and regulations, governs, among other things, the testing, research, development, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, import and export of our products.  As a result of these laws and regulations, product development and product approval processes can be expensive and time consuming.

Pharmaceutical product development in the U.S. typically involves preclinical laboratory and animal tests, the submission to the FDA of an investigational new drug application (an “IND”) that must become effective before clinical testing may commence, and adequate and well-controlled human clinical trials to establish the safety and effectiveness of a drug for each indication for which FDA approval is sought.  The satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease.

Preclinical tests include laboratory evaluation, as well as animal trials, to assess the characteristics and potential pharmacology and toxicity of a product.  The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practices.  The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol.  Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after an IND is submitted.  A 30-day waiting period after the submission of each IND is required prior to commencing clinical testing in humans.  If the FDA has not objected to an IND within this 30-day period, the clinical trial proposed in the IND may begin.

Clinical trials involve the administration of an investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator.  Clinical trials must be conducted in compliance with federal regulations and good clinical practices (or GCP), as well as under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.  Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of an IND.

The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients.  The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board (an “IRB”) for approval.  An IRB may also require a clinical trial to be halted, either temporarily or permanently, for failing to comply with the IRB’s requirements, or it may impose other conditions on the conduct of the trial.

 
10

 
 
Estimate of Costs

An estimate of direct costs for activities related to the development of a single sublingual product is set forth below:

Cost ($)
Application
100,000
Raw materials sourcing
100,000
Active pharmaceutical ingredient (API)
4,000
Tablet dies
2,000
Raw materials method development (USP)
20,000
Raw materials analysis
318,000
GMP production run
4,000
Taste masking
10,000
Material analysis and release
2,000
Packaging sourcing
5,000
Packaging delivery
9,000
Impurity testing
40,000
Manufacturing validation
30,000
Analytical validation
40,000
Accelerated stability study and analysis
20,000
Review and file IND
400,000
Phase 1 clinical, multi dose PK bioequivalence study
16,000
Clinical study analysis
25,000
Raw materials manufacturers’ site audits
10,000
Manufacturing site audits
16,000
Raw materials analysis, purity
340,000
Pivotal GMP production for Phase III
10,000
Material analysis and release
50,000
Pivotal GMP production run(s) for tablets, and packaging
10,000
Product analysis and release
60,000
Real time stability study and analysis of product
1,500,000
Phase III bioequivalence studies
$3,141,000
Total Cost

Estimated development time: 18 - 24 months

Estimated regulatory review, comments, inspection and approval time: 3 - 12 Months

Estimated product market life:

 
(a)
3 years under 505(b)(2) new drug application filing (extra 0.5 years for pediatric product status)

 
(b)
17 - 20 years under patent protection

The total direct costs projected to develop new and unique branded specialty pharmaceutical products are approximately $3,141,000 per product, depending on the cost of the active ingredient, clinical evaluations and number of dosage forms.

 
11

 
 

Not applicable.

 
Not applicable.


We currently have 400 square feet of office space in a building in downtown Vancouver, British Columbia, Canada.  We share a boardroom, office supplies and machinery with other companies at a cost of CDN $1,650 per month.  We have also laboratory facilities and additional office space which we sub-lease from another biotech company, Kinexus Biopharma, at a cost of CDN $2,000 per month.  This space is located in the south of Vancouver, in an industrial part of town.  We currently share some of our laboratory equipment and utilities needs with Globe and Kinexus.


We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations.  There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or our officers or directors of those of our subsidiaries’ in their capacities as such, in which an adverse decision could have a material adverse effect.

 
 
12

 
 


Market

Our common stock was initially approved for quotation on the OTC Bulletin Board under the symbol ACSU.  Effective September 20, 2007, our trading symbol changed from ACSU to GTWV in connection with our change of name from “Acting Scout Inc.” to “Goldtown Investments Corp.”  Effective October 24, 2009, our trading symbol changed from GTWV to GHLV in connection with our name change from “Goldtown Investments Corp.” to “Global Health Ventures Inc.”  The high and low bid prices for our common stock for each full financial quarter on the OTC Bulletin Board for the two most recent fiscal years were as follows:

Quarter Ended
 
High Bid ($)
   
Low Bid ($)
 
May 31, 2011
    0.115       0.025  
February 28, 2011
    0.0675       0.0245  
November 30, 2010
    0.195       0.051  
August 31, 2010
    0.52       0.151  
May 31, 2010
    1.30       0.33  
February 28, 2010
    1.18       0.45  
November 30, 2009
    1.85       0.45  
August 31, 2009
    1.50       0.70  
May 31, 2009
    1.65       1.01  

As at May 31, 2011, we had issued options to acquire up to 5,200,000 shares of our common stock at a price of $0.07 per share to our directors and officers, exercisable until November 12, 2015.  As of May 31, 2011, we also had a total of 2,658,333 outstanding warrants to acquire shares of our common stock. The exercise price and expiration dates of the warrants are as follows:

  
800,000 warrants at a price of $1.00 per share, until October 28, 2011;

  
533,333 warrants at a price of $1.00 per share, until December 8, 2011;

  
625,000  warrants at a price of $1.20 until April 7, 2012; and

  
700,000 warrants at a price of $1.00 until between March 16, 2015 and May 28, 2015.

Holders

As of August 24, 2011, there were approximately 113 holders of record of our common stock. As of such date, we had 191,333,192 issued and outstanding shares of common stock.

Dividend Policy

We have not declared or paid any cash dividends since our inception.  Although there are no restrictions that limit our ability to pay dividends on shares of our common stock, we intend to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to pay any cash dividends for the foreseeable future.

 
13

 
 
Securities Authorized for Issuance Under Equity Compensation Plans

As of May 31, 2011, we had authorized the issuance of our common stock as described in the following table.

Plan Category
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights ($)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
Equity Compensation Plans Approved by Security Holders
-
-
-
Equity Compensation Plans Not Approved by Security Holders
5,200,000 (1)
0.07
n/a
Total
5,200,000 (1)
   

(1)
Includes options to purchase 4,000,000 shares of our common stock granted to Hassan Salari, our President, Chief Executive Officer, Secretary, Treasurer and director; options to purchase 400,000 shares of our common stock granted to Audrey Lew, our Chief Financial Officer; options to purchase 400,000 shares of our common stock granted to Dr. David Filer, our director; and options to purchase 400,000 shares of our common stock granted to Christian Bezy, our director.

Recent Sales of Unregistered Securities

Other than as disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, we did not issue any equity securities that were not registered under the Securities Act during our fiscal year ended May 31, 2011.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our shares of common stock or other securities during our fiscal year ended May 31, 2011.


Not applicable.


The following discussion and analysis of our results of operations and financial condition has been derived from and should be read in conjunction with our audited consolidated financial statements and the related notes thereto that appear elsewhere in this annual report, as well as Item 1 of this annual report.  These financial statements have been prepared in accordance with US GAAP, and all dollar amounts set out in these financial statements are presented in United States dollars.

 
14

 
 
Plan of Operations

Our plan of operations over the next 12 months is to work on the formulation of our drugs.  We anticipate that we will require approximately $2.25 million to pursue our plans over the next 12 months.  We plan to obtain the necessary funds from equity or debt financings, as required.  However, there can be no assurance that we will be able to obtain the additional financing required, or any at all.  If we are not able to obtain additional financing, we may be required to scale back our plans or eliminate them altogether.  There can be no assurance that we will achieve our plans, or any of them.  Our expenditures for the next 12 months, excluding the cost of clinical trials, include:
 
Description
 
Our Cost to Complete ($)
 
Equipment
    500,000  
Leasehold improvement / rent
    200,000  
Research (1)
    400,000  
Packaging
    100,000  
Wages
    350,000  
Professional fees
    200,000  
Travel
    100,000  
Overhead
    100,000  
Administration
    300,000  
Total
    2,250,000  

(1) 
Includes a quarterly payment of $50,000 to Globe.

Our projected clinical trial expenses are described In Item 1 under the heading “Estimate of Costs”.

Results of Operations

We did not generate any revenues from inception on April 25, 2006 to May 31, 2011.  We do not anticipate generating any revenues until we have developed our products to the point where they are suitable for commercial production.  In order to generate revenues, we will incur substantial expenses in the development of our business and current products and the location and acquisition of new healthcare technologies.  We therefore expect to incur significant losses for the foreseeable future.  We recognize that if we are unable to generate significant revenues from our activities, our entire business may fail.  There is no history upon which to base any assumption as to the likelihood that we will be successful in our plan of operations, and we can provide no assurance to investors that we will generate any operating revenues or achieve profitable operations.

During the fiscal year ended May 31, 2011, we incurred $2,036,873 in total expenses, including $664,499 in research and development costs, $694,569 in salaries and wages, $360,140 in professional fees and $273,080 in general and administrative expenses.  During the fiscal year ended May 31, 2010, we incurred total expenses of $1,810,709, including $482,502 in research and development costs, $713,323 in salaries and wages, $377,852 in professional fees and $216,710 in general and administrative expenses.  The increase in our total expenses during the most recent fiscal year was primarily due to an increase in our research and development costs and general and administrative expenses during the period, which was in turn attributable to an increase in our overall operations.

Our general and administrative expenses consisted of rent, travel, advertising and promotion, office maintenance, communication expenses and courier and postage costs.  Our general and administrative expenses increased from $216,710 during the fiscal year ended May 31, 2010 to $273,080 during the fiscal year ended May 31, 2011 due the increase in our overall operations as described above, and particularly, increases in our travel and advertising and promotion expenses.  Our research and development costs increased between the two periods from $482,502 to $664,499 largely as a result of advances in our product development and clinical and manufacturing work, as well as an increase in our purchases of raw materials for conducting research on our products.

During the fiscal year ended May 31, 2011, we incurred a net loss from operations of $2,036,873, compared to a net loss from operations of $1,810,709 during the fiscal year ended May 31, 2010.  We also incurred $1,943,173 in interest expenses and $251,940 in financing charges during our most recent fiscal year, whereas we incurred $168,173 in interest expenses and no financing charges during our prior fiscal year.  The increase in our interest expenses and financing charges was entirely due to the sale of a $4,200,000 convertible debenture to one investor that we completed in March 2010.  The terms of this security are described more fully in note 4 of the notes to our audited consolidated financial statements appearing elsewhere in this annual report.

During the fiscal year ended May 31, 2011, we incurred a net loss of $4,171,986, compared to a net loss of $1,978,882 during the year ended May 31, 2010.  Our net loss per share for these periods was $0.04 and $0.03, respectively.

 
15

 
 
Liquidity and Capital Resources

As of May 31, 2011 we had $1,485,191 in cash and cash equivalents, $2,713,479 in total assets, $2,128,789 in total liabilities and a working capital deficit of $602,695.  As of May 31, 2011 we had an accumulated deficit of $9,063,630.

To date, we have experienced negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements.  We expect this situation to continue for the foreseeable future, and we anticipate that we will experience negative cash flows during the year ended May 31, 2012.  Accordingly, our ability to generate any revenues continues to be uncertain.

During the fiscal year ended May 31, 2011, we spent $1,437,941 in cash on operating activities, compared to $983,234 in cash spending on operating activities during the fiscal year ended May 31, 2010.  The increase in our cash spending on operating activities during the fiscal year ended May 31, 2011 was primarily attributable to the increase in our net loss as described above and a significant decrease in our accounts payable and accrued liabilities from $336,061 to $88,567, as offset by a number of adjustments to reconcile our net loss to cash spending on operating activities, notably in the categories of financing charges and interest expense.

We spent $301,828 in cash on investing activities during the fiscal year ended May 31, 2011, compared to cash spending of $109,715 on investing activities during our prior fiscal year.  The increase in our cash spending on investing activities during the recent fiscal year was primarily attributable to an increase in our spending on patents and medical licenses from $30,535 to $262,127, which was counterbalanced to some extent by a decrease in our capital asset purchases.

During the fiscal year ended May 31, 2011, we received $2,179,002 in net cash from financing activities, including $2,250,000 in proceeds from the issuance of a convertible debenture.  During the fiscal year ended May 31, 2010, we received $1,806,191 in cash from financing activities, including $1,472,868 in proceeds from the issuance of our common stock.  The increase in our cash receipts from financing activities during the fiscal year ended May 31, 2011 was primarily attributable to the debenture proceeds, as we did not receive any cash from the sale of our common stock during the period.  During the fiscal year ended May 31, 2010, we also received $400,000 in cash from the issuance of the debenture.

During the fiscal year ended May 31, 2011, we incurred a comprehensive loss of $4,178,948.  We estimate that our working capital requirements and projected operating expenses for the next 12 months will be approximately $1,300,000 as described in the “Plan of Operations” section, above.  We do not currently have sufficient cash resources to meet our operating expenses for the next 12 months, so we plan to raise additional funds through the issuance of equity securities or through debt financing. There are no assurances that we will be able to obtain the funds required for our continued operation.  If we are not able to obtain additional financing on a timely basis, we will not be able to meet our obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.  The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders, while obtaining commercial loans, assuming that such loans are available, would increase our liabilities and future cash commitments.

Going Concern

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our annual financial statements for the fiscal year ended May 31, 2011, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern.

We do not anticipate generating positive internal operating cash flow until we can generate substantial revenues from the commercialization of our products, and there is no assurance that we will achieve profitable operations in the future.  We have historically financed our operations primarily through cash flows generated from the sale of our equity securities and through cash infusions from officers and affiliates in exchange for debt and/or common stock.  No officer or affiliate has made any commitment or is obligated to continue to provide cash through loans or purchases of equity.

We intend to meet the balance of our cash requirements for the next 12 months through a combination of debt financing and equity financing through private placements.  Currently we are active in contacting broker/dealers in Canada and elsewhere regarding possible financing arrangements.  However, we do not currently have any arrangements in place to complete any further private placement financings and there is no assurance that we will be successful in completing any such financings.  If we are unsuccessful in raising sufficient funds through our capital raising efforts, we may review other financing options.

To date, we have not generated any revenues and have incurred significant operating losses from operations.  Since we anticipate expanding our operational activities in the future, we may continue to experience net negative cash flows from operations and may be required to obtain additional financing to fund our operations through offerings of equity securities and bank borrowings to the extent necessary to provide working capital.  Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow from stockholders or other outside sources to sustain operations and meet our obligations on a timely basis and ultimately to attain profitability.

 
16

 
 
Purchase of Significant Equipment

During the next 12 months, we intend to purchase a freezer, freeze dryer, autoclave and centrifuge.  We also intend to purchase additional laboratory equipment as required.  We will not be able to rely on the use of equipment provided by Kinexus or Globe for much longer, and as a result we believe that we will spend approximately $500,000 on such purchases.

Off-Balance Sheet Arrangements

As of May 31, 2011, we had no off-balance sheet arrangements, including outstanding derivative financial statements, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.  We do not engage in trading activities involving non-exchange traded contracts.

Application of Critical Accounting Policies

We have identified certain accounting policies, described below, that are important to the portrayal of our current financial condition and results of operations.

Long-Lived Assets

In accordance with ASC 360 “Property, Plant and Equipment, we test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable.  Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of an asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.

Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

Foreign Currency Translation

Our functional currency is the Canadian dollar with the reported amounts being stated in the United States dollar.  In accordance with ASC 830 “Foreign Currency Matters”, assets and liabilities are translated at the rates of exchange at the balance sheet dates. Income and expense items are translated at average annual rates of exchange. The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

Research and Development Costs

Research costs are expensed in the period incurred.  Development costs are expensed in the period incurred unless we believe a development project meets generally accepted accounting criteria for deferral and amortization.  No such costs have been deferred as at May 31, 2011 and 2010.

Stock-based Compensation

In accordance with ASC 718 “Stock Compensation”, we account for share-based payments using the fair value method.  Common shares issued to third parties for non-cash consideration are valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever is more readily determinable.


Not applicable.
 
 
17

 


Global Health Ventures Inc.
(A Development Stage Company)
May 31, 2011
 
Report of Independent Public Accounting Firm  F-1 
Consolidated Balance Sheets
F-2
Consolidated Statements of Operations
F-3
Consolidated Statements of Cash Flows
F-4
Consolidated Statement of Stockholders’ Deficit
F-5
Notes to the Consolidated Financial Statements
F-6
 
 
18

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Stockholders and Board of Directors of:
Global Health Ventures Inc.

We have audited the accompanying consolidated balance sheets of Global Health Ventures Inc. (a Development Stage Company) as at May 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended May 31, 2011, 2010 and 2009, and cumulative for the period from April 25, 2006 (inception) to May 31, 2011.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  The cumulative statements of operations, stockholders' equity and cash flows for the period from April 25, 2006 (inception) to May 31, 2011 include amounts for the period from April 25, 2006 (inception) to May 31, 2008 which were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the period April 25, 2006 (inception) to May 31, 2008 is based solely on the reports of other auditors.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global Health Ventures Inc. (a Development Stage Company) as at May 31, 2011 and 2010 and the results of its operations and cash flows for the years ended May 31, 2011, 2010  and 2009 and cumulative for the period from April 25, 2006 (inception) to May 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has limited capital and has suffered losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/UHY LDMB Advisors Inc.
Chartered Accountants
Surrey, British Columbia, Canada
August 22, 2011
 
 
F-1

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in US Dollars)
 
   
May 31,
   
May 31,
 
   
2011
   
2010
 
         
(restated)
 
         
(Note 12)
 
   
$
   
$
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
    1,485,191       1,045,958  
GST/HST receivable
    14,314       40,458  
Prepaid expenses
    26,589       5,127  
Due from shareholders
    -       13,525  
Due from related party
    -       4,080  
      1,526,094       1,109,148  
                 
Property, Plant and Equipment
               
     Laboratory equipment
    178,547       141,748  
     Accumulated depreciation
    (45,482 )     (16,816 )
     Computer hardware
    14,398       12,394  
     Accumulated depreciation
    (8,071 )     (3,714 )
     Office furniture and fixtures
    5,496       4,692  
     Accumulated depreciation
    (3,136 )     (2,647 )
     Office machines and equipment
    550       550  
     Accumulated depreciation
    (352 )     (302 )
      141,950       135,905  
                 
Intangible Assets
               
     Patents and medical licenses
    303,670       53,093  
     Accumulated amortization
    (1,160 )     -  
     Deferred finance charges (Note 6)
    742,925       1,214,654  
      1,045,435       1,267,747  
                 
Total Assets
    2,713,479       2,512,800  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current Liabilities
               
Accounts payable
    342,306       350,150  
Accrued liabilities (Note 3)
    676,401       623,340  
Convertible debenture (Note 4)
    1,109,500       467,708  
Due to shareholders
    568       -  
Due to related party
    14       -  
                 
      2,128,789       1,441,198  
                 
Stockholders’ Equity
               
Preferred Stock: 80,000,000 shares authorized, $0.0001 par value
No shares issued and outstanding
               
Common Stock: 196,000,000 shares authorized, $0.0001 par value
166,983,192 shares issued and outstanding (May 31, 2010 – 68,871,946 shares)
    16,663       6,868  
                 
Additional Paid-In Capital
    7,139,018       3,456,777  
                 
Donated Capital
    2,474,000       2,474,000  
                 
Accumulated other comprehensive income
    18,639       25,601  
                 
Deficit accumulated during the development stage
    (9,063,630 )     (4,891,644 )
                 
      584,690       1,071,602  
                 
Total Liabilities and Stockholders’ Equity
    2,713,479       2,512,800  
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-2

 

Global Health Ventures Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in US Dollars)

         
Year Ended
         
Accumulated
From
April 25,
2006
 
   
Year Ended
   
May 31,
2010
   
Year Ended
   
(Date of
inception)
 
   
May 31,
2011
   
(restated)
(Note 12)
   
May 31,
2009
   
to May 31,
2011
 
   
$
   
$
   
$
   
$
 
Revenue
    -       -       -       -  
                                 
Expenses
                               
                                 
Amortization
    1,160       2,090       418       3,668  
Depreciation
    33,656       18,232       377       52,265  
General and administrative
    273,080       216,710       28,549       573,084  
Professional fees:
                               
     Stock-based compensation
    136,419       137,609       -       274,028  
     Incurred
    223,721       240,243       61,542       605,385  
Research and development
    664,499       482,502       33,333       1,180,334  
Salaries and wages:
                               
     Stock-based compensation
    324,679       383,768       -       708,447  
     Incurred
    369,890       329,555       48,893       748,338  
Write-off of licensing costs
    9,769       -       -       9,769  
                                 
Total Expenses
    2,036,873       1,810,709       173,112       4,155,318  
                                 
Net Loss Before Other Income or Expense
    (2,036,873 )     (1,810,709 )     (173,112 )     (4,155,318 )
                                 
Other Income or Expense
                               
      Gain on settlement of payable (Note 8)
    60,000       -       -       60,000  
      Interest expense
    (1,943,173 )     (168,173 )     (147 )     (2,112,251 )
      Financing charges (Note 8)
    (251,940 )     -       -       (251,940 )
                                 
Total Other Income or Expense
    (2,135,113 )     (168,173 )     (147 )     (2,304,191 )
                                 
Net Loss
    (4,171,986 )     (1,978,882 )     (173,259 )     (6,459,509 )
                                 
Other Comprehensive Income
                               
Foreign currency translation adjustment
    (6,962 )     (16,031 )     41,632       18,639  
                                 
Comprehensive Loss
    (4,178,948 )     (1,994,913 )     (131,627 )     (6,440,870 )
                                 
Net Loss Per Share – Basic and Diluted
    (0.04 )     (0.03 )     -          
                                 
Weighted Average Shares Outstanding
    96,071,575       65,361,702       58,358,000          
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-3

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
 
   
Year Ended
May 31,
2011
$
   
Year Ended
May 31,
2010
(restated)
(Note 12)
$
   
Year Ended
May 31,
2009
$
   
Accumulated
from April 25,
2006
(Date of
inception)
to May 31,
2011
$
 
Operating Activities
                       
                         
Comprehensive loss
    (4,178,948 )     (1,994,913 )     (131,627 )     (6,440,870 )
                                 
Adjustment to reconcile net loss to net cash used in operating activities:
                               
Donated services
    -       -       5,250       24,000  
Amortization
    1,160       2,090       418       3,668  
Depreciation
    33,656       18,232       377       52,264  
Write-off of licensing costs
    9,769       -       -       9,769  
Gain on settlement of payable
    (60,000 )     -       -       (60,000 )
Financing charges
    251,940       -       -       251,940  
Interest expense; Amortization of deferred finance charges  and debt discount
    1,943,173       123,883        -       2,067,056  
Stock based compensation
    461,098       521,377       -       982,475  
Foreign currency translation adjustment
    6,962       -       -       6,962  
Change in operating assets and liabilities:
                               
Accounts receivable
    26,144       (7,806 )     -       18,338  
Prepaid expenses
    (21,462 )     17,842       (15,892 )     (19,512 )
Accounts payable and accrued liabilities
    88,567       336,061       62,294       495,481  
                                 
Net Cash Used In Operating Activities
    (1,437,941 )     (983,234 )     (79,180 )     (2,608,430 )
                                 
Investing Activities
                               
                                 
      Cash acquired on investment in Posh
    -       61,649       -       61,649  
      Credit on purchased capital assets
    15,000       -       -       15,000  
      Capital assets purchased
    (54,701 )     (140,829 )     (3,769 )     (199, 299 )
      Website development costs
    -       -       (2,509 )     (2,509 )
      Patents and medical licenses
    (262,127 )     (30,535 )     -       (292,662 )
                                 
Net Cash Used in Investing Activities
    (301,828 )     (109,715 )     (6,278 )     (417,821 )
                                 
Financing Activities
                               
                                 
Payment of share offering costs
    -       -       -       (28,400 )
Advances from (repayments to) shareholders
    14,093       (13,525 )      -       568  
Advances from (repayments to) a related party
    4,054       3,849       32,305       125,402  
Proceeds from issuance of common stock
    -       1,472,868       385,000       1,910,018  
Proceeds from debenture payable
    2,250,000       400,000       -       2,650,000  
Proceeds (repayments) of loan payable
    -       -       (4,857 )     -  
Deferred charges
    (89,145 )     (57,001 )     -       (146,146 )
                                 
Net Cash Provided by Financing Activities
    2,179,002       1,806,191       412,448       4,511,442  
                                 
Increase in Cash
    439,233       713,242       326,990       1,485,191  
                                 
Cash - Beginning of Period
    1,045,958       332,716       5,726       -  
                                 
Cash - End of Period
    1,485,191       1,045,958       332,716       1,485,191  
                                 
Supplemental Disclosures
                               
Interest paid
    2,205       -       184       902  
Income taxes paid
    -       -       -       -  
 
Non-cash Financing Transactions
                       
Payable settled with common shares
    343,600       -       -       343,600  
Common stock issued for shares of Posh
    -       400       -       400  
Shares issued in settlement of advances from related party
    -       -       116,000       116,000  
Shares issued in partial settlement of debenture payable
    1,616,273       -        -       1,616,273  
Shares issued for deferred finance costs
    252,000       895,250       -       1,147,250  
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-4

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Deficit
For the period from May 31, 2008 to May 31 2011
(Expressed in US Dollars)
 
 
                                 
Deficit
       
                           
Accumulated
   
Accumulated
       
                           
Other
   
During the
       
   
CommonStock
   
Paid-In
   
Donated
   
Comprehensive
   
Development
       
   
Shares
   
Amount
   
Capital
   
Capital
   
Income
   
Stage
   
Total
 
               
(restated)
               
(restated)
   
(restated)
 
   
#
   
$
   
$
   
$
   
$
   
$
   
$
 
Balance – May 31, 2008
    60,522,000       6,052       17,698       18,750       -       (135,382 )     (92,882 )
Donated services and rent
    -       -               5,250       -       -       5,250  
Sep 30, 2008 – common shares issued at $0.0001 per share in loan settlement
    10,000,000       1,000       2,499,000               -       (2,499,000 )     1,000  
Sep 30, 2008 – common shares returned in treasury
    (9,800,000 )     (980 )     (2,449,020 )     2,450,000       -       -       -  
Jan 20, 2009 – common shares issued at $0.25 per share in loan settlement
    460,000       46       114,954       -       -       -       115,000  
Jan 20, 2009 – common shares issued for cash at $0.25 per share
    1,540,000       154       384,846       -       -       -       385,000  
Foreign currency translation adjustment
    -       -       -       -       41,632       -       41,632  
Net loss for the year
    -       -       -       -       -       (173,259 )     (173,259 )
Balance – May 31, 2009
    62,722,000       6,272       567,478       2,474,000       41,632       (2,807,641 )     281,741  
Oct 28, 2009 - common shares issued for cash at $0.75 per share (Note 6)
    133,333       13       99,987       -       -       -       100,000  
Oct 28, 2009 - common shares issued for cash at $0.75 per share (Note 6)
    666,667       67       499,933       -       -       -       500,000  
Dec 8, 2009 - common shares issued for cash at $0.75 per share (Note 6)
    533,333       53       392,815       -       -       -       392,868  
Dec 11, 2009 – share exchange with Posh
    4,000,000       400       -       -       -       (105,121 )     (104,721 )
Apr 7, 2010 – common shares issued for cash at $0.80 per share (Note 6)
    625,000       63       479,937       -       -       -       480,000  
Cashless exercise of warrants
    191,613       -       -       -       -       -       -  
Convertible debenture financing
    -       -       1,231,983       -       -       -       1,231,983  
Beneficial conversion feature related to convertible debenture
    -       -       63,267       -       -       -       63,267  
Foreign currency translation adjustment
    -       -       -       -       (16,031 )     -       (16,031 )
Stock-based compensation
    -       -       521,377       -       -       -       521,377  
Net loss for the period
    -       -       -       -       -       (2,177,023 )     (2,177,023 )
Balance – May 31, 2010 (previously reported)
    68,871,946       6,868       3,856,777       2,474,000       25,601       (5,089,785 )     1,273,461  
Correction of convertible debenture
(Note 13 )
    -       -       (400,000 )     -       -       -       (400,000 )
Adjustment to discount amortization
(Note 13)
    -       -       -       -       -       154,514       154,514  
Adjustment to salary expense
(Note 13)
    -       -       -       -       -       85,429       85,429  
Adjustment to accrued interest expense
(Note 13)
                                            (41,802 )     (41,802 )
Balance – May 31, 2010 (as restated)
    68,871,946       6,868       3,456,777       2,474,000       25,601       (4,891,644 )     1,071,602  
Commitment shares issued
    600,000       60       251,940                               252,000  
Share issuance costs
    -       -       (312,000 )                             (312,000 )
Write-off of share issuance costs (Note 8)
                    251,940                               251,940  
Oct 4, 2010 - common shares issued for services
    230,000       23       19,077       -       -       -       19,100  
Jan 1, 2011 - common shares issued for services
    250,000       25       12,475       -       -       -       12,500  
Cashless exercise of warrants
    163,226       -       -       -       -       -       -  
Common shares for note conversion
    44,470,387       4,447       1,500,306       -       -       -       1,504,753  
Beneficial conversion feature related to convertible debenture
    -       -       1,502,645       -       -       -       1,502,645  
Cashless exercise of warrants related to convertible debenture
    52,397,633       5,240       (5,240 )     -       -       -       -  
Foreign currency translation adjustment
    -       -       -       -       (6,962 )     -       (6,962 )
Stock-based compensation
    -       -       461,098       -       -       -       461,098  
Net loss for the period
    -       -       -       -       -       (4,171,986 )     (4,171,986 )
Balance – May 31, 2011
    166,983,192       16,663       7,139,018       2,474,000       18,639       (9,063,630 )     584,690  
 
(The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-5

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

1.   Development Stage Company
 
Global Health Ventures Inc. (the “Company”) was incorporated in the State of Nevada on April 25, 2006 under the name Acting Scout Inc.  The Company changed its name to Goldtown Investments Corp. on September 20, 2007 and on October 6, 2008 changed its name to Global Health Ventures Inc. The Company is located in British Columbia, Canada.  The Company is a development stage specialty pharmaceutical company that is in the business of acquiring and licensing current outstanding and promising healthcare related technologies for further development and re-licensing to major pharmaceutical companies.   The Company is a Development Stage Company, as defined under Accounting Standards Codification (“ASC”) 915 “Development Stage Entities”.
 
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business.  The Company has not generated significant revenues since inception and has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future.  The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations.  These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. As at May 31, 2011, the Company has never generated any significant revenue and has accumulated losses of $9,063,630               since inception.  These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
The Company’s common shares trade on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “GHLV”.

2.   Summary of Significant Accounting Policies
 
a)  Basis of Presentation
 
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in U.S. dollars.  These consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, Posh Cosmeceuticals Ltd., and its inactive wholly-owned subsidiary, Global Health (BC) Ventures Inc.
 
b)  Use of Estimates
 
The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period.  The Company regularly evaluates estimates and assumptions related to deferred income tax asset valuation allowance, useful life of property, plant & equipment, stock based compensation, convertible debenture, and valuation of patents and medical licenses.  The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.  The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
 
c)  Basic and Diluted Net Income (Loss) Per Share
 
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.  Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period.  Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.
 
 
F-6

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

2.   Summary of Significant Accounting Policies (continued)
 
d)  Revenue Recognition
 
The Company recognizes revenue in accordance with ASC 605 “Revenue Recognition”.  The Company has not generated any revenue since inception.
 
e)  Comprehensive Loss
 
ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements.
 
f)  Cash and Cash Equivalents
 
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
 
g)  Property, Plant and Equipment
 
Property, plant and equipment are recorded at cost.  Depreciation is provided annually at rates calculated to write off the assets over their estimated useful lives as follows:

Laboratory equipment
20%   diminishing balance
Computer hardware
45%   diminishing balance
Office furniture and fixtures
20%   diminishing balance
Office machines and equipment
20%   diminishing balance
 
In the year of acquisition, these rates are reduced by one-half.
 
h)  Medical Technology Licenses
 
The Company amortizes the cost of acquired medical technology licenses over the lesser of the license term or the estimated period of benefit. The term of the current medical license is the later of the date on which all the licensed patents have expired or been revoked without a right of further appeal, and the date on which  the marketing for the license agreements and the licenses granted under the agreement is seized. The medical technology licenses are being amortized over 7 years.
 
i)  Long-Lived Assets
 
In accordance with ASC 360 “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable.  Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
 
Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.  An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

 
F-7

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

2.   Summary of Significant Accounting Policies (continued)

j)  Financial Instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued liabilities, amounts due to a related party, a convertible debenture, and amounts due to shareholders.  The fair value of financial instruments cash and cash equivalents, accounts payable and accrued liabilities, amounts due to a related party and amounts due to shareholders were estimated to approximate their carrying values due to the immediate or short-term maturity of these financial instruments.  The carrying value of the Company’s long-term convertible debenture approximates its fair value based on current market borrowing rates. Accordingly, the long-term convertible debenture is classified as level 2 in the fair value hierarchy.
 
The Company’s operations will be in Canada and the United States, resulting in exposure to market risks from changes in foreign currency rates.  The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates.  Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk.
 
k)  Income Taxes
 
The Company follows the asset and liability method of accounting for income taxes.  Under this method, current taxes are recognized for the estimated income taxes payable for the current period.

Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases as well as the benefit of losses available to be carried forward to future years for tax purposes.

Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be covered or settled.  The effect of deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.  A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized.

l)  Foreign Currency Translation
 
The functional currency of the Company is the Canadian dollar with the reported amounts being stated in the United States dollar. In accordance with ASC 830 “Foreign Currency Matters”, assets and liabilities are translated at the rates of exchange at the balance sheet dates.  Income and expense items are translated at average annual rates of exchange.  The resulting translation adjustments are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
 
m)  Research and development costs
 
Research costs are expensed in the period incurred.  Development costs are expensed in the period incurred unless the Company believes a development project meets generally accepted accounting criteria for deferral and amortization. No such costs have been deferred as at May 31, 2011 and 2010.

n)  Stock-based Compensation
 
In accordance with ASC 718 “Stock Compensation”, the Company accounts for share-based payments using the fair value method.  Common shares issued to third parties for non-cash consideration are valued based on the fair market value of the services provided or the fair market value of the common stock on the measurement date, whichever is more readily determinable.
 
 
F-8

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011
 
2.   Summary of Significant Accounting Policies (continued)
 
Recently Issued
 
In September 2009, the Financial Accounting Standards Board (the “FASB”) issued ASC 820-10 “Measuring Liabilities at Fair Value”.  ASC 820-10 provides additional guidance on how companies should measure liabilities at fair value.  Specifically, the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer.
 
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements.  This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers.  Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements.  This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  
 
In February 2010, the FASB issued ASU 2010-09, which amends ASC 855 to address certain implementation issues related to an entity's requirement to perform and disclose subsequent events procedures. ASU 2010-09 requires entities that make filings with the Securities and Exchange Commission (the “SEC”) to evaluate subsequent events through the date the financial statements are issued. The new guidance became effective immediately for financial statements that are issued or available to be issued.
 
Future Pronouncements
 
The SEC is considering timelines for the use of International Financial Reporting Standards (“IFRS”) by SEC issuers. The Company expects to adopt IFRS as its reporting standard when the SEC requires its domestic registrants in the U.S. to transition to IFRS. The Company has not assessed the impact of this potential change on its financial position, results of operations or cash flows.
 
In March 2010, the FASB issued ASU No. 2010-11 "Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives" (codified within ASC 815 - Derivatives and Hedging). ASU 2010-11 improves disclosures originally required under SFAS No. 161. ASU 2010-11 is effective for interim and annual periods beginning on or after June 15, 2010.
 
In April 2010, FASB published guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. The amendments are effective on a prospective basis for milestones achieved in fiscal years, and interim periods with those years, beginning on or after June 15, 2010.

3.   Accrued Liabilities
 
   
May 31,
2011
   
May 31,
2010
 
    $    
(restated)
(Note 12)
$
 
             
Accrued interest
    340,235       48,381  
Professional fees
    25,000       25,000  
Research and development
    33,333       30,833  
Salaries
    271,098       207,126  
Accrued finance costs
    -       312,000  
Other
    6,735       -  
      676,401       623,340  
 
 
F-9

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

4.   Convertible Debenture

On March 19, 2010, the Company sold to one investor (the “Lender”) a $4,200,000 convertible debenture due March 18, 2014, unless converted in accordance with the repayment terms prior to such date. The debenture bears interest at a rate of 12% per annum payable on maturity, is unsecured and ranks equally to any of the Company’s existing and future unsecured debts.
 
The debenture was sold with a 25% discount from face value for a net book value of $3,150,000.  The $3,150,000 consists of cash of $400,000 paid at closing and eleven investor notes in the amount of $250,000 each. The investor notes are mandatorily pre-payable in sequence, at the rate of one note per month commencing on the seven month anniversary of the closing date. In March 2011, at the Lender’s discretion, two monthly investments notes were received by the Company.

Beginning six months from the closing date, the Lender may require the Company to repay the principal amount and accrued interest, in full or in part, in fully-paid and non-assessable shares of the Company’s common stock at a rate per share equal to the market price as calculated under the Debenture Agreement.  The Lender is not permitted to deliver a request for repayment where the dollar amount of the request for repayment would exceed 125% of the amounts outstanding under the debenture.  In September 2010, the conversion price was amended, providing for an additional 10% discount to the market price as defined under the Agreement.  
 
As long as any amounts due under the debenture are outstanding, the Company is prohibited, unless consented to by the Lender, from selling, leasing or otherwise disposing of any of its assets other than in its ordinary course of business, from merging or consolidating with any other person unless the debenture is assumed by the surviving entity and from adopting any plan or arrangement for the dissolution or liquidation of the Company.  Debenture covenants also prohibit the Company from redeeming or repurchasing any of its capital stock or making any advance or loan to any person, firm or corporation except for reasonable business expenses advanced to Company employees or independent contractors in the ordinary course of business.  Under the terms of the agreement, the Company also has to reserve for issuance 50,000,000 shares of its common stock as may be issuable from time to time upon a request for repayment of the debenture in common stock. As at May 31 2011, only 29,016,808 shares of the Company’s common stock were available for issuance. On June 16 2011, the holders of a majority of the Company’s issued and outstanding stock approved an amendment to the Company’s bylaws and an increase in the Company’s authorized capital from 196,000,000 shares of common stock, to 1,000,000,000 shares of common stock, in order to comply with the terms of the Debenture Agreement. See Note 13: Contingencies and Note 14: Subsequent Events.

Events of default under the terms of the Agreement include the following:
 
a) 
Default of payment of interest or principal or any amount due under the Debenture Agreement;
b) 
Material default, misrepresentation, or material breach of the covenants described in the paragraph above;
c) 
Any transfer, conveyance, or assignment of substantial Company or subsidiary assets;
d)
Any money judgment, writ of warrant or attachment, or similar process against the Company in excess of $100,000;
e)
Failure to issue common stock within 5 business days of receipt of a written request for repayment of outstanding amounts in common stock;
f) 
The average dollar volume of common stock for any consecutive 10 day trading period falls below $40,000 per day;
g) 
Control of the whole or substantial portion of the Company by any governmental agencies;
h) 
Order by a court adjudging the Company bankrupt or insolvent, or seeking reorganization;
i) 
Failure of the Company to maintain its status as a reporting company under the federal securities laws; and
j) 
Failure to timely file reports required to be filed by the SEC

Upon occurrence of one of the above events, the amount due under the debenture will be immediately due and payable at the rate of 110% of the sum of the principal outstanding immediately prior to the event of default and all interest, fees, costs and penalties.  These amounts will accrue interest at the rate of 12% per annum until payment.

 
F-10

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

4.   Convertible Debenture (continued)

On July 16, 2010, the Company had an event of default under the terms of the debenture.  The Lender waived the default, and in exchange, raised the interest rate on the debenture from 6% per annum to 9% per annum.

On September 2, 2010, the Company had an event of default under the terms of the debenture.  The Lender waived the default, and in exchange, raised the interest rate on the debenture from 9% per annum to 12% per annum and negotiated a 10% discount on the market price as defined under the Debenture Agreement for all conversions of the debenture into common stock.

In connection with the issuance of the debenture, the Company incurred $952,250 of issuance costs which consisted of $895,250 of non-cash costs for warrants issued to the Lender and for warrants issued as a finder’s fee and $57,000 of cash costs for commissions and related professional fees.  Additional cash costs for commissions of $89,146 were incurred in the twelve month period ending May 31, 2011.  These costs are being amortized and are recorded as interest expense through March 18, 2014, the maturity date of the debenture.

The Company has separately accounted for the liability and equity components of the debenture by allocating the proceeds from the issuance of the debenture between the liability component and the beneficial conversion option, or equity component.  Based on this calculation, $1,502,645 has been allocated to the equity component to date.  During the twelve month period ended May 31, 2011, the Company recorded amortization of the debt discount in the amount of $1,110,144, which was charged to interest expense.

   
May 31,
2011
   
May 31,
2010
 
         
(restated)
 
         
(Note 12)
 
   
$
   
$
 
Principal amount of liability component
    3,533,330       533,333  
Amount converted to common shares
    (1,533,332 )     -  
Unamortized discount
    (890,498 )     (65,625 )
Net carrying amount
    1,109,500       467,708  

During the twelve month period ending May 31, 2011, the Lender converted $1,616,273 of the debenture, including principal and interest, into 44,470,387 shares of the Company’s common stock.  During the twelve month period ending May 31, 2011, the lender elected to exercise 1,105,991 share purchase warrants attached to the debenture to purchase 52,397,633 shares of the Company’s common stock using a cashless provision.

5.   Related Party Transactions
 
a) 
During the twelve month period ended May 31, 2011, the President of the Company advanced $13,308 (2010 - $nil) to the Company, was repaid $405 (2010 - $4,557) by the Company, incurred $5,469 (2010 - $17,256) of expenses on behalf of the Company, owed $11,011 (2010 - $nil) in expenses to the Company and repaid $6,916 (2010 - $nil) in expenses to the Company. Included in accrued liabilities (see Note 3) is $271,098 (2010 - $207,126) for salaries owed to the President of the Company.
 
b) 
During the twelve month period ended May 31, 2011, the Company paid $Nil (2010 - $27,132) to a relative of the President of the Company for finder’s fees incurred on two private placements.
 
c) 
During the twelve month period ended May 31, 2011, the Company paid $47,336 (2010 - $36,719) to two companies related to the President of the Company for rent of office and laboratory space.
 
 
F-11

 
 
Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

5.    Related Party Transactions (continued)
 
d) 
On March 15, 2009, the Company entered into a research contract with Globe Laboratories Inc. (“Globe”), a company controlled by two individuals related to the President of the Company, to engage Globe for research on the sublingual technologies developed by Globe.  The Company agreed to pay $50,000 per quarter to Globe from April 1, 2009 until the technology is put into commercial production, or the technologies are sold or sublicensed.  To date, $433,333 in research costs have been accrued under this agreement, of which $400,000 has been paid to Globe.  In addition, for the twelve month period ended May 31, 2011, the Company paid $121,349 to Globe for research and development costs incurred in excess of the contracted amount.  The Company also paid an additional $250,000 to Globe in the twelve month period ended May 31, 2011, for Milestone II payments per the Medical License Agreement with Globe for the development of the sublingual technology.
 
e) 
During the twelve month period ended May 31, 2011, the Company paid $8,000 (2010 - $6,000) to a Director of the Company for consulting services.
 
f)
Effective December 11, 2009, the Company issued an aggregate of 4,000,000 shares of its common stock to the shareholders of Posh, a company controlled by the President of the Company, pursuant to a share exchange agreement dated June 12, 2009.  The Company issued the securities to 27 non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933) in an offshore transaction relying on Regulation S and/or Section 4(2) of the Securities Act of 1933.  Due to the fact that the two companies were not dealing at arm’s length, and due to the transaction not being in the normal course of business, the transaction was recorded at the carrying value of the company acquired.
 
Working capital deficiency acquired
 
$
(205,685
)
Property, Plant and Equipment
   
9,916
 
Patents and rights
   
22,557
 
Other long-term assets
   
68,492
 
   
$
(104,720
)
 
Consideration:
     
Common shares of the Company
 
$
(400
)
Related party adjustment on purchase charged to deficit
   
105,120
 
   
$
104,720
 
 
6.   Deferred Financing Costs
 
On March 19, 2010, the Company sold to one investor a $4,200,000 convertible debenture due March 18, 2014.  As part of the debenture financing the Company issued share purchase warrants to purchase up to $800,000 worth of common stock and also issued warrants to purchase 100,000 shares of common stoas a finders fee.  These warrants were valued using the Black-Scholes model using the following assumptions:
 
 Risk-free interest rate 
    2.85%  
 Expected term to exercise 
 
4 years
 
 Expected volatility of  
    253%  
 Expected dividend yield  
    0%  
 
Based on this calculation $895,250 was recorded as a deferred financing cost.

To date, the Company has also incurred direct cash costs relating to this financing of a total of $146,146 which have also been recorded as deferred financing costs.
 
 
F-12

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

6.   Deferred Financing Costs (continued)

The deferred financing costs are being amortized over the term of the debt.
 
   
May 31,
2011
   
May 31,
2010
 
         
(restated)
 
         
(Note 12)
 
       
$
 
Deferred financing costs
    1,041,396       952,250  
Accumulated amortization
    (298,471 )     (49,596 )
Net carrying amount
    742,925       902,654  
                 
Share purchase agreement
               
Commitment fee (Note 8)
    312,000       312,000  
Write-off of commitment fee (Note 8)
    (312,000 )     -  
      -       312,000  
                 
      742,925       1,214,654  

7.   Income Taxes
 
The Company accounts for income taxes using the liability method of tax allocation.  Deferred income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases.  Deferred income tax assets are evaluated periodically and if realization is not considered likely, a valuation allowance is provided.
 
a)  Deferred tax assets and liabilities
 
   
May 31,
2011
   
May 31,
2010
 
         
(restated)
 
         
(Note 12)
 
    $     $  
Property and equipment
    19,964       8,218  
Intangible assets
    1,284       878  
Operating loss carry forwards
    1,799,515       560,350  
Valuation allowance
    (1,820,763 )     (569,446 )
Net future tax asset
    -       -  

Management believes that it is not more likely than not that it will create sufficient taxable income sufficient to realize its deferred tax assets.
 
b)  Loss carryforwards
 
The Company has estimated accumulated non-capital losses of approximately $5,141,473 which will expire as follows:
 
2026
  $ 9,000  
2027
    52,000  
2028
    56,000  
2029
    168,000  
2030
    1,316,000  
2031
    3,540,473  
    $ 5,141,473  

 
F-13

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

8.   Share Purchase Agreement

Pursuant to a Purchase Agreement dated May 28, 2010 and a Registration Rights Agreement dated May 28, 2010 with Lincoln Park Capital Fund, LLC (“LPC”), the Company could have sold to LPC up to $20,000,000 of its common stock over a thirty month period.  As part of this agreement, the Company was required to issue 600,000 shares of its common stock to LPC as a commitment fee for entering into the Purchase Agreement.  The fee was recorded as a payable at May 31, 2010 of $312,000 based on the fair market price of the stock of $0.52.

On June 15, 2010, the shares were issued.  The fair market value of the stock on the date of issuance was $0.42, resulting in a gain on the settlement of the payable of $60,000.

On August 14, 2010, the agreement was cancelled and the commitment fee of $312,000 was written off to share issue costs.  On May 31, 2011, the commitment fee of $312,000 less the gain on the settlement of the payable of $60,000 and the par value of $60 on the 600,000 shares issued, which results in a net amount of $251,940, was expensed to financing charges.

9.   Warrants
 
On January 20, 2009, pursuant to the completion of a private placement for a total of 2,000,000 units, the Company issued 2,000,000 share purchase warrants exercisable to acquire 2,000,000 shares of the Company’s common stock at $0.40 per share, expiring January 20, 2011.  On May 27, 2010, 540,000 of the warrants were exercised and on June 15, 2010, 460,000 of the warrants were exercised. The remaining balance of 1,000,000 unexercised warrants expired on January 20, 2011.  At May 31, 2011, $nil (2010 - 1,460,000) warrants issued are still outstanding.
 
On October 28, 2009, pursuant to the completion of a private placement for a total of 800,000 units, the Company issued 800,000 share purchase warrants exercisable to acquire 800,000 shares of the Company’s common stock at $1.00 per share, expiring October 28, 2011.  At May 31, 2011, 800,000 (2010 - 800,000) warrants issued are still outstanding.
 
On December 8, 2009, pursuant to the completion of a private placement for a total of 533,333 units, the Company issued 533,333 share purchase warrants exercisable to acquire 533,333 shares of the Company’s common stock at $1.00 per share, expiring December 8, 2011.  At May 31, 2011, 533,333 (2010 - 533,333) warrants issued are still outstanding.

In March 2010, pursuant to the Company signing an agreement with one investor for a convertible debenture for the principle amount of U$4,200,000, the investor and other parties pursuant to the agreement were granted warrants to acquire 1,805,991 shares of the Company’s common stock at exercise prices ranging between $0.50 and $1.00 per share, expiring between March 16, 2015 and May 28, 2015.  In fiscal 2011, 1,105,991 of the warrants with an exercise price of $1.00 per share were exercised.  At May 31, 2011, 700,000 (2010 - 1,805,991) warrants are still outstanding.
 
On April 7, 2010, pursuant to the completion of a private placement for a total of 625,000 units, the Company issued 625,000 share purchase warrants exercisable to acquire 625,000 shares of the Company’s common stock at $1.20 per share, expiring April 7, 2012.  At May 31, 2011, 625,000 (2010 - 625,000) warrants issued are still outstanding.

 A summary of share purchase warrants outstanding is presented below:
 
 
Number of Warrants
Weighted Average
 Exercise Price
$
Warrants outstanding at June 1, 2010
5,224,324
$0.68
          Expired
(1,000,000)
$0.40
          Exercised
(1,565,991)
$1.00
Warrants outstanding at May 31,  2011
2,658,333
$0.93
 
 
F-14

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011

10.   Stock Options
 
On June 29, 2009, the Company granted 2,000,000 options to directors and officers of the Company.  On November 12, 2010, the Company cancelled these options and reissued 5,200,000 options to directors and officers of the Company.  Pursuant to ASC 718-20-35-8, cancellations with concurrent grants of replacement awards are to be treated as a modification of the terms of the cancelled award.  As a result, compensation costs recorded in the quarter include the compensation cost of the original award and the incremental cost resulting from the modification.
 
For the twelve months ending May 31, 2011, the fair value of the vested options of $461,098, under both the old plan and the new plan, have been expensed at May 31, 2011. The options are exercisable in full over the course of five years from date of grant, with four per cent (4%) of the total number of options granted to the optionee vesting each month on a monthly basis beginning on the first day of the month following the date of grant, until the option is fully vested.  As of May 31, 2011, 1,248,000 options under the new plan had vested and 3,952,000 were nonvested.
 
A summary of stock options outstanding is presented below:
 
 
Number of Options
 
Weighted Average
Exercise Price
$
Options outstanding at June 1, 2010
2,000,000
$0.70
          Granted
5,200,000
$0.07
          Exercised
0
$0.07
          Cancelled
(2,000,000)
(0.70)
Options outstanding at May 31, 2011
5,200,000
$0.07
 
The Company has estimated the fair value of each option under the new stock option plan on the date of grant,  and at fiscal quarters ended subsequent to the date of modification of November 12, 2010, using the Black-Scholes Options Pricing Model with the following weighted average assumptions:
 
   
May 31,
2011
   
February 28,
2011
 
             
Risk-free interest rate
    2.10%       2.36%  
Expected life of options
 
5 years
   
5 years
 
Expected volatility in the market price of the shares
    210%       205%  
Expected dividend yield
    0.0%       0.0%  
 
11.   Fair Value Measures
 
ASC 820 “Fair Value Measurements and Disclosures” requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value.  A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
 
Level 1
 
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2
 
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
 
 
F-15

 

Global Health Ventures Inc.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
May 31, 2011
 
11.   Fair Value Measures (continued)
 
Level 3
 
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, accounts payable and accrued liabilities, amounts due to a related party, amounts due to shareholders, and a convertible debenture. Pursuant to ASC 820, “Fair Value Measurements and Disclosures”,  the fair value of cash, is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.  The Company believes that the recorded values of its other financial instruments, accounts payable and accrued liabilities, amounts due to a related party and amounts due to shareholders, approximate their current fair values because of their nature and respective maturity dates or durations.
 
The Company’s convertible debt is classified as “Level 2” in the fair value hierarchy.  The Company believes that the carrying value of the convertible debt approximates its fair value based on current market borrowing rates.
 
12.   Restatement of Prior Year
 
During the quarter ending November 30, 2010, the Company identified that the compensation expense for the President of the Company for the year ended May 31, 2010 was overstated.  In addition, during the review of the financial statements, the Company discovered that the accounting for the convertible debenture considered a beneficial conversion feature in error.
 
The impact of these restatements on the 2010 financial statements was as follows:
 
   
May 31, 2010
 
   
As previously reported
   
Adjustment
   
As restated
 
Deficit
    5,089,785