UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]

Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended January 31, 2014.

 

[  ]

Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ________ to ________ .

 

Commission file number 000-28761

 

CARDIOGENICS HOLDINGS INC.

(Exact name of registrant as specified in its Charter)

 

Nevada		88-0380546
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

6295 Northam Drive, Unit 8

Mississauga, Ontario L4V 1WB

(Address of Principal Executive Offices)

 

(905) 673-8501

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [X] No [  ]

 

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 or the Exchange Act. (Check one):

 

Large Accelerated filer	[  ]	Accelerated Filer	[  ]
Non-Accelerated Filer	[  ]	Smaller Reporting Company	[X]
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 [X] No [  ]

 

As of March 12, 2014 the Registrant had the following number of shares of its capital stock outstanding: 36,177,864 shares of Common Stock and 1 share of Series 1 Preferred Voting Stock, par value $0.0001, representing 13 exchangeable shares of the Registrant’s subsidiary, CardioGenics ExchangeCo Inc., which are exchangeable into 24,176,927 shares of the Registrant’s Common Stock.

 

 

 

CARDIOGENICS HOLDINGS INC.

FORM 10-Q

For the Quarter Ended January 31, 2014

INDEX

 

		Page
Part I. Financial Information
Item 1: Financial Statements (Unaudited)		F-1
Condensed Consolidated Balance Sheets at January 31, 2014 (Unaudited) and October 31, 2013		F-1
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended January 31, 2014 and 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014		F-2
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended January 31, 2014 and 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014		F-3
Condensed Consolidated Statement of Changes in Deficiency (Unaudited) for the Three Months ended January 31, 2014		F-4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months ended January 31, 2014 and 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014		F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)		F-6
Item 2: Management’s Discussion and Analysis of Financial Conditions and Operations		3
Item 3: Quantitative and Qualitative Disclosures About Market Risk		5
Item 4: Controls and Procedures		5
Part II. Other Information
Item 1: Legal Proceedings		6
Item 1A: Risk Factors		6
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		6
Item 3: Defaults Upon Senior Securities		6
Item 4: Mine Safety Disclosures		6
Item 5: Other Information		6
Item 6: Exhibits		6
Signatures		7

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

 

		January 31, 2014				October 31, 2013
		(Unaudited)				(Note 2)
Assets
Current Assets
Cash and Cash Equivalents		$	121,783			$	263,103
Accounts Receivable			231				246
Deposits and Prepaid Expenses			46,122				49,267
Refundable Taxes Receivable			4,305				3,302
Government Grants and Investment Tax Credits Receivable			69,734				60,104
			242,175				376,022
Long-Term Assets
Property and Equipment, net			50,753				53,496
Patents, net			116,706				118,432
			167,459				171,928
Total Assets		$	409,634			$	547,950
Liabilities and Deficiency
Current Liabilities
Accounts Payable and Accrued Expenses		$	933,077			$	1,050,115
Funds Held in Trust for Redemption of Class B Common Shares			4				4
Notes Payable, net of debt discount			21,227				11,983
Derivative Liability on Notes Payable			58,656				99,702
Total Liabilities			1,012,964				1,161,804
Long Term Liabilities
Debentures Payable			347,760				303,190
Total Liabilities			1,360,724				1,464,994
Commitments and Contingent Liabilities
Deficiency
Preferred stock; par value $.0001 per share, 50,000,000 shares authorized, none issued			—				—
Common stock; par value $.00001 per share; 150,000,000 shares authorized, 36,023,206 and 34,726,668 common shares and 24,176,927 and 24,176,927 exchangeable shares issued and outstanding as at January 31, 2014 and October 31, 2013 respectively			578				565
Additional paid-in capital			44,427,230				44,514,000
Deficit accumulated during development stage			(45,366,261	)			(44,957,870	)
Accumulated other comprehensive loss			(12,637	)			(117,515	)
Total Deficiency Attributable to CardioGenics Holdings Inc.			(951,090	)			(560,820	)
Non-controlling interest			—				(356,224	)
Total Deficiency			(951,090	)			(917,044	)
Total liabilities and deficiency		$	409,634			$	547,950

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (unaudited)

For the Three Months Ended January 31, 2014 and 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014

 

										Cumulative
										From
										November 20, 1997
										(Date of Inception)
		For the three months Ended								to
		January 31,								January 31,
		2014				2013				2013
Revenue		$	—			$	—			$	10,173
Operating Expenses
Depreciation and Amortization of Property and Equipment			2,743				3,524				236,971
Amortization of Patent Application Costs			1,726				1,734				28,304
Write-off of Patent Application Costs			—				—				239,530
General and Administrative			172,218				112,732				10,475,918
Write-off of Goodwill			—				—				12,780,214
Research and Product Development, Net of Investment Tax Credits			85,483				103,444				4,655,180
Cost of Settlement of Lawsuit			—				—				1,952,800
Total operating expenses			262,170				221,434				30,368,917
Operating Loss			(262,170	)			(221,434	)			(30,358,744	)
Other Expenses
Interest Expense and Bank Charges, Net			111,922				3,824				2,570,349
(Gain) loss on Change in Value of Derivative Liability			(22,646	)			—				12,515,040
Loss on Foreign Exchange Transactions			56,945				8,039				240,641
Total other expenses			146,221				11,863				15,326,030
Loss from Continuing Operations			(408,391	)			(233,297	)			(45,684,774	)
Discontinued Operations
Gain on Sale of Subsidiary			—				—				90,051
Loss from Discontinued Operations			—				—				(127,762	)
Net Loss			(408,391	)			(233,297	)			(45,722,485	)
Net Loss attributable to non-controlling interest			—				(1,490	)			(356,224	)
Net Loss attributable to CardioGenics Holdings Inc.		$	(408,391	)		$	(231,807	)		$	(45,366,261	)
Basic and Fully Diluted Net Loss per Common Share attributable to CardioGenics Holdings Inc. Shareholders		$	(0.01	)		$	(0.00	)
Weighted-average shares of Common Stock outstanding			59,401,454				56,676,166

 

See notes to condensed consolidated financial statements. 

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

For the Three Months Ended January 31, 2014 and 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014

 

										Cumulative from
										November 30, 1997
		Three Months Ended								(Date of Inception)
		January 31								To January 31,
		2014				2013				2014
Net Loss		$	(408,391	)		$	(233,297	)		$	(45,722,485	)
Net loss attributable to non-controlling interest			—				(1,490	)			(356,224	)
			(408,391	)			(231,807	)			(45,366,261	)
Other comprehensive income (loss), currency translation adjustments			104,878				8,425				(12,637	)
Comprehensive loss		$	(303,513	)		$	(223,382	)		$	(45,378,898	)

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Changes in Deficiency (unaudited)

For the three months ended January 31, 2014

 

														Deficit
														Accumulated
														During				Accumulated
										Additional				the				Other
		Common Stock								Paid-in				Development				Comprehensive				Noncontrolling				Total
		Shares				Amount				Capital				Stage				Income (Loss)				Interest				Deficiency
Balance November 1, 2013			58,903,595			$	565			$	44,514,000			$	(44,957,870	)		$	(117,515	)		$	(356,224	)		$	(917,044	)
Issuance of common shares on conversion of notes payable January 2014			100,000				1				12,066																12,067
Issuance of shares on settlement of suit January 2014			700,000				7				188,993																189,000
Issuance of common shares for cash January 2014 at $0.25			200,000				2				49,998																50,000
Issuance of common shares on conversion of shares of subsidiary			296,538				3				(356,227	)											356,224				—
Settlement of derivative value of notes payable on conversion to common shares											18,400																18,400
Comprehensive Income (Loss):
Net Loss															(408,391	)											(408,391	)
Other Comprehensive Income Currency Translation Adjustment																			104,878								104,878
Total Comprehensive Income (Loss)															(408,391	)			104,878								(303,513	)
Balance January 31, 2014			60,200,133			$	578			$	44,427,230			$	(45,366,261	)		$	(12,637	)		$	—			$	(951,090	)

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (unaudited)

Three Months Ended January 31, 2014 and 2013 and

Cumulative from November 20, 1997 (Date of Inception) to January 31, 2014

 

										Cumulative from
										November 20, 1997
		Three Months Ended								(Date of Inception)
		January 31								To January 31,
		2014				2013				2014
Cash flows from operating activities
Net Loss for the Period		$	(408,391	)		$	(233,297	)		$	(45,722,485	)
Adjustments to reconcile net loss for the period to net cash used in operating activities
Depreciation and Amortization of Property and Equipment			2,743				3,524				236,971
Amortization of Patent Application Costs			1,726				1,734				28,304
Write-off of Patent Application Costs			—				—				239,530
Amortization of Deferred Consulting Contract Costs			—				—				163,750
Write-off of Goodwill			—				—				12,780,214
Amortization of Deferred Debt Issuance Costs			—				—				511,035
Loss on Extinguishment of Debt			—				—				275,676
(Gain) loss on Change in Value of Derivative Liability			(22,646	)			—				12,515,040
Interest and Discount on Notes Payable			19,094				—				32,956
Amortization of Discount on Debentures Payable			63,078				—				175,687
Interest Accrued and Foreign Exchange Loss on Debt			—				—				922,539
Unrealized Foreign Currency Exchange Gains			—				—				25,094
Beneficial Conversion Charge included in
Interest Expense			—				—				452,109
Common Stock and Warrants issued on Settlement Of Lawsuit			—				—				1,653,800
Common Stock Issued as Employee or Officer/Director Compensation			—				—				2,508,282
Common Stock Issued for Services Rendered			—				—				4,203,287
Stock Options Issued for Services Rendered			—				—				192,238
Stock Options Issued to Directors and Committee Chairman			—				—				54,582
Changes in Operating Assets and Liabilities,
Net of Acquisition
Accounts Receivable			15				179				(231	)
Deposits and Prepaid Expenses			3,145				(88	)			(47,488	)
Refundable Taxes Receivable			(1,003	)			36,806				(4,587	)
Government Grants and Investment Tax Credits Receivable			5,929				60,026				(37,158	)
Accounts Payable and Accrued Expenses			119,250				40,700				556,048
Advances			—				—				131
Cash used in operating activities			(217,060	)			(90,416	)			(8,284,676	)
Cash flows from investing activities
Cash Acquired from Acquisition			—				—				195,885
Purchase of Property and Equipment			—				(157	)			(223,643	)
Patent Application Costs			—				(12,704	)			(334,460	)
Cash used in investing activities			—				(12,861	)			(362,218	)
Cash flows from financing activities
Due to Shareholders			—				200,712				100,000
Loan Payable			—				50,000				135,000
(Repayment) of Capital Lease Obligations			—				(1,504	)			(43,917	)
Due to Director			—				—				725,330
Issue of Debentures			—				—				2,078,305
Issue of Common Shares on Exercise of Stock options			—				—				2,781
Issue of Common Shares on Exercise of Warrants			—				—				45,652
Issue of Common Shares for Cash			50,000				—				6,036,669
Refund of Share Subscription			—				—				(15,000	)
Redemption of 10% Senior Convertible Debentures			—				—				(394,972	)
Cash provided by financing activities			50,000				249,208				8,669,848
Effect of foreign exchange on cash and cash equivalents			25,740				6,692				98,829
Cash and Cash Equivalents
Increase (decrease) in cash and cash equivalents during the period			(141,320	)			152,623				121,783
Beginning of Period			263,103				27,009				—
End of Period		$	121,783			$	179,632			$	121,783

 

See notes to condensed consolidated financial statements. 

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

1.	Nature of Business

 

CardioGenics Inc. (“CardioGenics”) was incorporated on November 20, 1997 in the Province of Ontario, Canada, and carries on the business of development and commercialization of diagnostic test products to the In Vitro Diagnostics testing market. CardioGenics has several test products that are in various stages of development.

 

CardioGenics’ business is that of a development-stage company, with a limited history of operations and whose revenues, to date, have been primarily comprised of grant revenue and Scientific Research Tax Credits from government agencies. There can be no assurance that the Company will be successful in obtaining regulatory approval for the marketing of any of the existing or future products that the Company will succeed in developing.

 

On October 27, 2009, the name of the Company was changed from JAG Media Holdings, Inc. to CardioGenics Holdings, Inc.

 

2.	Basis of Presentation

 

In the opinion of management, the unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the condensed interim consolidated financial position of CardioGenics Holdings Inc. and its subsidiaries under generally accepted accounting principles in the United States (“US GAAP”). CardioGenics Holdings Inc. and its subsidiaries are referred to together herein as the “Company”. Pursuant to rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the audited consolidated financial statements of the Company as of October 31, 2013 and 2012 (the “Audited Financial Statements”) included in the Company’s Form 10-K that was previously filed with the SEC on February 13, 2014 and from which the October 31, 2013 consolidated balance sheet was derived.

 

The results of the Company’s operations for the three months ended January 31, 2014 are not necessarily indicative of the results of operations to be expected for the full year ending October 31, 2014.

 

The accompanying condensed interim consolidated financial statements have been prepared using the accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.

 

The Company has incurred operating losses and has experienced negative cash flows from operations since inception. The Company has an accumulated deficit at January 31, 2014 of approximately $45.4 million. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The Company has funded its activities to date almost exclusively from debt and equity financings. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

The Company will continue to require substantial funds to continue research and development, including preclinical studies and clinical trials of its products, and to commence sales and marketing efforts, if the FDA and other regulatory approvals are obtained. In order to meet its operating cash flow requirements management’s plans include financing activities such as private placements of its common stock and issuances of convertible debt instruments. Management is also actively pursuing industry collaboration activities including product licensing and specific project financing.

 

While the Company believes it will be successful in obtaining the necessary financing to fund its operations, meet revenue projections and manage costs, there are no assurances that such additional funding will be achieved and that it will succeed in its future operations. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.

 

3.	Summary of Significant Accounting Policies.

 

Derivative Instruments

 

The Company’s derivative liabilities are related to embedded conversion features of the Notes Payable. For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in fair value recognized in earnings each reporting period. The Company uses the Black-Scholes model to value the derivative instruments at inception and subsequent valuation dates and the value is re-assessed at the end of each reporting period, in accordance with ASC 815. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

Beneficial Conversion Charge

 

The intrinsic value of beneficial conversion features arising from the issuance of convertible debentures with conversion rights that are in-the-money at the commitment date is recorded as debt discount and amortized to interest expense over the term of the debentures. The intrinsic value of a beneficial conversion feature is determined after initially allocating an appropriate portion of the proceeds received from the sale of the debentures to any detachable instruments, such as warrants, included in the sale or exchange based on relative fair values.

 

4.	Income Taxes

 

Based on the Company’s evaluation, management has concluded that there are no significant tax positions requiring recognition in the condensed interim consolidated financial statements.

 

The Company has incurred losses in Canada since inception, which have generated net operating loss carryforwards for income tax purposes. The net operating loss carryforwards arising from Canadian sources as of January 31, 2014, approximated $9,449,000 (2013 - $6,533,000) which will expire from 2015 through 2034. All fiscal years as originally filed have been assessed. Claims relating to research and development credits are open for review for the fiscal years ended October 2013, 2012, 2011, 2010, 2009, 2008 and 2007 and July 2009.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

As of January 31, 2014, the Company had net operating loss carryforwards from US sources of approximately $41,115,000 available to reduce future Federal taxable income which will expire from 2019 through 2033. Returns for the years 2008 through 2013 are yet to be filed.

 

For the three months ended January 31, 2014 and 2013, the Company’s effective tax rate differs from the statutory rate principally due to the net operating losses for which no benefit was recorded.

 

5.	Notes Payable

 

On November 19, 2012 the Company entered into an agreement (“Line”) with JMJ Financial (“Lender”) whereby the Company may borrow up to $350,000 from the Lender in increments of $50,000. The Line is subject to an original issue discount of $50,000. Advances under the Line (“Notes”) have a maturity date of one year from the date of the advance. If the advance is repaid within three months the advance is interest free. If not repaid within three months, the advance may not be repaid before maturity and carries interest at 5%. The Lender has the right at any time to convert all or part of the outstanding principal and accrued interest (and any other fees) into shares of fully paid and non-assessable shares of common stock of the Company at a price equal to the lesser of $0.23 and 60% of the lowest trade price in the 25 trading days previous to the conversion. Unless agreed in writing by the parties, at no time will the Lender convert any amount owing under the Line into common stock that would result in the Lender owning more than 4.99% of the common stock outstanding.

 

A summary of the Notes at January 31, 2014 is as follows:

 

		January 31, 2014				October 31, 2013
Convertible Note Payable, due June 27, 2014		$	15,150			$	25,000
Convertible Note Payable, due September 26, 2014			35,000				35,000
Debt Discount - value attributable to conversion feature attached to notes, net of accumulated amortization of $21,227			(28,923	)			(48,017	)
Total			21,227				11,983
Less: Current portion			21,227				11,983
Total Long-term portion		$	—			$	—

 

As described in further detail in Note 6, “Derivative Liabilities”, the Company determines the fair value of the embedded derivatives and records them as a discount to the Notes and as a derivative liability. Upon conversion of the Notes to Common Stock, any remaining unamortized discount is charged to financing expense.

 

6.	Derivative Liabilities

 

Convertible notes - embedded conversion features

 

The Notes meet the definition of a hybrid instrument, as defined in ASC 815. The hybrid instrument is comprised of a i) a debt instrument, as the host contract and ii) an option to convert the debentures into common stock of the Company, as an embedded derivative. The embedded derivatives derive their value based on the underlying fair value of the Company’s common stock. The embedded derivatives are not clearly and closely related to the underlying host debt instrument since the economic characteristics and risk associated with these derivatives are based on the common stock fair value.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

The Company determines the fair value of the embedded derivatives and records them as a discount to the Notes and a derivative liability. The Company has recognized a derivative liability of $58,656 at January 31, 2014. Accordingly, changes in the fair value of the embedded derivative are immediately recognized in earnings and classified as a gain or loss on change in value of Derivative Liability in the accompanying statements of operations.

 

The Company estimated the fair value of the embedded derivatives using a Black Scholes model with the following assumptions: conversion price $0.12 per share according to the agreements; risk free interest rate of .11%; expected life of 1 year; expected dividend of zero; a volatility factor of 175%, as of as of January 31, 2014. The expected lives of the instruments are equal to the contractual term of the conversion option. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.

 

7.	Fair Value Measurements

 

As defined by the Accounting Standard Codification (ASC), fair value measurements and disclosures establish a hierarchy that prioritizes fair value measurements based on the type of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of hierarchy are described below:

 

	●	Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
	●	Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.
	●	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

 

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of January 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Quoted Prices in

Total Increase (Reduction)

Active Markets for

Significant Other

Significant

in Fair Value

Balance Sheet

Identical Assets or

Observable Inputs

Unobservable

January 31, 2014

Recorded at

Location

Liabilities (Level 1)

(Level 2)

Inputs (Level 3)

Total

January 31, 2014

Liabilities:

Derivative liability - Notes

$

—

$

—

$

58,656

$

58,656

$

(22,646

)

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liability, or derivative liabilities related to the senior secured convertible notes and warrants, for the period ended January 31, 2014.

 

		2014				2013
Balance at beginning of year		$	99,702			$	—
Additions to derivative instruments			—				50,000
Change in fair value of derivative liabilities			(22,646	)			—
Settlements			(18,400	)			—
Balance at end of period		$	58,656			$	50,000

 

8.	Debentures Payable

 

In February 2013, shareholder loans were converted on a dollar-for-dollar basis for Series A Convertible Debenture Units (the “A Units”). Each A Unit includes a debenture having a term of three years, bearing interest at 10%, and a warrant having a term of three years. The debentures are convertible at any time into common shares of the Company’s stock at a price of $0.25 per share. The warrants entitle the holder to purchase 2 times the number of common shares of the Company’s stock allowed in conjunction with the debentures at a price of $0.25 per share at any time up to three years.

 

In May and June 2013 the Company sold Series B Convertible Debenture Units (the “B Units”). Each B Unit includes a debenture having a term of three years, bearing interest at 10%, and a warrant having a term of three years. The debentures are convertible at any time into common shares of the Company’s stock at a price of $0.25 per share. The warrants entitle the holder to purchase 1.5 times the number of common shares of the Company’s stock allowed in conjunction with the debentures at a price of $0.15 at any time up to three years.

 

The Company allocated proceeds of $306,900 to the fair value of the warrants using a Black Scholes calculation. Accordingly, the Company recorded an increase in additional paid-in capital and debt discount of $650,896 in connection with the issuance of the Convertible Debentures and warrants, which discount is being amortized to interest expense over the life of the debentures.

 

A summary of the Debentures at January 31, 2014 is as follows:

 

		January 31, 2014				October 31, 2013
Series A Convertible Debentures Payable, interest at 10% per annum to maturity at February 27, 2016		$	270,163			$	288,584
Series B Convertible Debentures Payable, interest at 10% per annum to maturity at May 31, 2016			500,000				500,000
Series B Convertible Debentures Payable, interest at 10% per annum to maturity at June 3, 2016			148,566				148,653
Debt Discount			(570,969	)			(634,047	)
Total			347,760				303,190
Less: Current portion			—				—
Total Long-term portion		$	347,760			$	303,190

 

Debt discount is amortized to Interest Expense over the life of the Debentures. The amount amortized to Interest Expense for the period was $63,078.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

9.	Stock Based Compensation

 

Stock-based employee compensation related to stock options for the three months ended January 31, 2014 and 2013 amounted to $-0-.

 

The following is a summary of the common stock options granted, forfeited or expired and exercised under the Plan:

 

						Weighted
						Average
						Exercise
		Options				Price
Outstanding – October 31, 2012			30,000			$	0.90
Granted			—				—
Forfeited/Expired			—				—
Exercised			—				—
Outstanding – October 31, 2013			30,000			$	0.90
Granted			—				—
Forfeited/Expired			—				—
Exercised			—				—
Outstanding – January 31, 2014			30,000			$	0.90

 

Options typically vest immediately at the date of grant. As such, the Company does not have any unvested options or unrecognized compensation expense at January 31, 2014.

 

10.

Warrants

 

Outstanding warrants are as follows:

 

		January 31, 2014				October 31, 2013
Issued to Flow Capital Advisors Inc. on settlement of lawsuit in August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.30 per common share up to and including August 23, 2016			250,000				250,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including August 23, 2016			250,000				250,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016			500,000				500,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $1.00 per common share up to and including August 23, 2016			500,000				500,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016			500,000				500,000
Issued to debenture holders February 2013 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.25 per common share up to and including February 27, 2016			600,000				600,000
Issued to debenture holders May 2013 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.15 per common share up to and including June 3, 2016			750,000				750,000
Issued to debenture holders June 2013 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.15 per common share up to and including June 3, 2016			232,500				232,500
Issued to consultants in August 5, 2013 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.15 per common share up to and including August 4, 2023			2,500,000				2,500,000
Issued to consultants in August 5, 2013 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.10 per common share up to and including August 4, 2023			1,500,000				1,500,000
Issued to consultant in September 3, 2013 entitling the holder to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including July 31, 2018			500,000				500,000
Issued to shareholder October 29, 2013 entitling the holder to purchase 1 common share in the Company at an exercise price of $0.15 per common share up to and including October 29, 2016			250,000				250,000
Issued to shareholder November 7, 2013 entitling the holder to purchase 1 common share in the Company at an exercise price of $0.15 per common share up to and including November 7, 2016			125,000				—
Total Warrants outstanding			8,457,500				8,332,500

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2014 and 2013

 

11.	Issuance of Common Stock

 

During the three months ended January 31, 2014, the Company issued the following common shares:

 

Issued to shareholder for cash at $0.25 per share			200,000
Issued on conversion of notes payable			100,000
Issued on settlement of suit			700,000
Issued to minority shareholders on conversion of subsidiary’s shares			296,538
			1,296,538

 

On January 3, 2014 shareholders of Cardiogenics Inc. that had at July 31, 2009 opted not to exchange their shares in Cardiogenics Inc. for shares in Cardiogenics Holdings Inc. elected to exchange their shares in Cardiogenics Inc. for 296,538 common shares of Cardiogenics Holdings Inc. which is the same number of shares to which they would have been entitled had they exercised their option July 31, 2009.

 

12.	Net Loss per Share

 

The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share (EPS):

 

		Three Months Ended January 31,
		2014				2013
Weighted-average shares - basic			59,401,454				56,676,166
Effect of dilutive securities			—				—
Weighted-average shares - diluted			59,401,454				56,676,166

 

Basic earnings per share “EPS” and diluted EPS for the three months ended January 31, 2014 and 2013 have been computed by dividing the net loss available to common stockholders for each respective period by the weighted average shares outstanding during that period. All outstanding options, warrants and shares to be issued upon the exercise of the outstanding options and warrants and conversion of debt representing 12,725,418 and 6,317,085 incremental shares respectively have been excluded from the three months ended January 31, 2014 and 2013 computation of diluted EPS as they are antidilutive given the net losses generated.

 

13.	Commitments and Contingent Liabilities

 

Lawsuits

 

On April 22, 2009, the Company was served with a statement of claim from a former employee claiming compensation for wrongful dismissal and ancillary causes of action including payment of monies in realization of his investment in the Company, with an aggregate claim of $514,000. On January 3, 2014 the suit was settled for cash consideration of $10,000 plus 700,000 common shares.

 

14.	Supplemental Disclosure of Cash Flow Information

 

		For the Three Months Ended
		January 31
		2014				2013
Cash paid during the year for:
Interest		$	3,856			$	3,364
Income taxes		$	—			$	—
Non-cash financing activities:
Conversion of notes payable		$	12,066			$	—
Settlement of derivative liability		$	18,400			$	—
Issuance of shares on settlement of suit		$	189,000			$	—

 

15.	Subsequent Event

 

On February 10, 2014 notes payable amounting to $18,559, including interest and original discount, were converted for 154,658 common shares of the Company’s stock.

  

 

Item 2. Management’s Discussion and Analysis of Financial Conditions and Operations

 

You should read this Management’s Discussion and Analysis (“MD&A”) in combination with the accompanying unaudited condensed interim consolidated financial statements and related notes as well as the audited consolidated financial statements and the accompanying notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) included within the Company’s Annual Report on Form 10-K filed on February 13, 2014.

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed interim consolidated financial statements, which have been prepared in accordance with U.S. GAAP for interim financial statements filed with the Securities and Exchange Commission.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements filed with the Securities and Exchange Commission. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts receivable, equipment, stock-based compensation, derivative liabilities, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The accounting policies and estimates used as of October 31, 2013, as outlined in our previously filed Form 10-K, have been applied consistently for the three months ended January 31, 2014.

 

Off-Balance Sheet arrangements

 

We are not party to any off-balance sheet arrangements.

 

Results of operations

 

Three months ended January 31, 2014 as compared to three months ended January 31, 2013.

 

		Three Months
		Ended January 31,
		2014				2013				$ Change
Revenue		$	—			$	—			$	—
Operating expenses:
Depreciation and amortization of property and equipment			2,743				3,524				(781	)
Amortization of patent application costs			1,726				1,734				(8	)
General and administrative expenses			172,218				112,732				59,486
Research and product development, net of investment tax credits			85,483				103,444				(17,961	)
Total operating expenses			262,170				221,434				40,736
Operating Loss			262,170				221,434				40,736
Other expenses (income)
Interest expense and bank charges, net			111,922				3,824				108,098
(Gain) on change in fair value of derivative liability			(22,646	)			—				(22,646	)
Loss on foreign exchange			56,945				8,039				48,906
Net loss		$	408,391			$	233,297			$	175,094

 

 

Revenues

 

During the three months ended January 31, 2014 and 2013 we generated no revenues from sales of paramagnetic beads.

 

Operating expenses

 

Operating expenses include the costs to a) develop and patent a method for controlling the delivery of compounds to a chemical reaction; b) developing the QL Care Analyzer, a small, automated, robust and proprietary point of care testing device; and, c) customizing paramagnetic beads through our proprietary method which improves their light collection. In addition, the Company is in the process of adapting test products for the POC disposable, single-use cartridge-format. Detailed manufacturing specifications and costing have been created and custom manufacturers have been sourced.

 

General and administrative expenses

 

General and administrative expenses consist primarily of compensation to officers, occupancy costs, professional fees, listing costs and other office expenses. The increase in general and administrative expenses is attributable primarily to an increase in professional and consulting fees.

 

Research and product development, net of investment tax credits

 

Research and development expenses consist primarily of salaries and wages paid to officers and employees engaged in those activities and supplies consumed therefor. The decrease in research and development expenses is attributed primarily to a decrease in staff engaged in those activities in the current quarter vs. the same period in the prior year.

 

Interest expense

 

The increase in interest expense is attributed primarily to the cost of carrying notes and debentures payable.

 

Liquidity and Capital Resources

 

We have not generated significant revenues since inception. We incurred a net loss of approximately $408,000 and a cash flow deficiency from operating activities of approximately $183,000 for the three months ended January 31, 2014. We had sufficient cash at January 31, 2014 to fund approximately two months’ operations. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. We have funded our activities to date almost exclusively from debt and equity financings. These matters raise substantial doubt about our ability to continue as a going concern.

 

We will continue to require substantial funds to continue research and development, including preclinical studies and clinical trials of our products, and to commence sales and marketing efforts. Our plans include financing activities such as private placements of our common stock and issuances of convertible debt instruments. We are also actively pursuing industry collaboration activities including product licensing and specific project financing.

 

We believe we will be successful in obtaining the necessary financing to fund our operations, meet revenue projections and manage costs; however, there are no assurances that such additional funding will be achieved and that we will succeed in our future operations.

 

 

Seasonality

 

We do not believe that our business is subject to seasonal trends or inflation. On an ongoing basis, we will attempt to minimize any effect of inflation on our operating results by controlling operating costs and whenever possible, seeking to insure that subscription rates reflect increases in costs due to inflation.

 

Recent Accounting Pronouncements

 

The FASB had issued certain accounting pronouncements as of January 31, 2014 that will become effective in subsequent periods; however, we do not believe that any of those pronouncements would have significantly affected our financial accounting measurements or disclosures had they been in effect during the three months ended January 31, 2014 and 2013 or that they will have a significant effect at the time they become effective.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

N/A.

 

Item 4. Controls and Procedures

 

(a)	Evaluation of Disclosure Controls and Procedures:

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of the inherent limitations in all control systems, internal controls over financial reporting may not prevent or detect misstatements. The design and operation of a control system must also reflect that there are resource constraints and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls.

 

Our management assessed the effectiveness of our internal controls over financial reporting for the quarter ended January 31, 2014 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on such assessment, our management concluded that during the period covered by this report, our internal controls over financial reporting were not effective. Management has identified the following material weaknesses in our internal controls over financial reporting:

 

	●	lack of documented policies and procedures;
	●	there is no effective separation of duties, which includes monitoring controls, between the members of management; and,
	●	lack of resources to account for complex and unusual transactions.
	●	Inadequate coordination between executive and financial management that led to transactions not being property recorded in the correct period.

 

Management is currently evaluating what steps can be taken in order to address these material weaknesses.

 

(b)	Changes in Internal Control over Financial Reporting:

 

During the fiscal quarter ended January 31, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On April 22, 2009, CardioGenics was served with a statement of claim in the Province of Ontario, Canada, from a prior employee claiming compensation for wrongful dismissal and ancillary causes of action including payment of monies in realization of his investment in CardioGenics, with an aggregate claim of $514,000. On January 3, 2014, the Company and the former employee agreed to a settlement of all claims that the employee had against the Company. As a result of such settlement, a charge of $199,000, for the cost of settlement of the lawsuit, was taken in the Company’s consolidated statement of operations for the fiscal year ended October 31, 2013.

 

Item 1A. Risk Factors

 

Not Applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1	Section 302 Certification of Chief Executive Officer.*
31.2	Section 302 Certification of Chief Financial Officer.*
32.1	Section 906 Certification of Chief Executive Officer and Chief Financial Officer.*
101 INS	XBRL Instance Document**
101 SCH	XBRL Schema Document**
101 CAL	XBRL Calculation Linkbase Document**
101 LAB	XBRL Label Linkbase Document**
101 PRE	XBRL Presentation Linkbase Document**
101 DEF	XBRL Definition Linkbase Document**

 

*		Filed herewith.
**		In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CARDIOGENICS HOLDINGS INC.
Date: March 17, 2014	By:	/s/ Yahia Gawad
		Name: Yahia Gawad
		Title: Chief Executive Officer
Date: March 17, 2014	By:	/s/ James Essex
		Name: James Essex
		Title: Chief Financial Officer

 

 

EXHIBIT INDEX

 

31.1	Section 302 Certification of Chief Executive Officer.*
31.2	Section 302 Certification of Chief Financial Officer.*
32.1	Section 906 Certification of Chief Executive Officer and Chief Financial Officer.*
101 INS	XBRL Instance Document**
101 SCH	XBRL Schema Document**
101 CAL	XBRL Calculation Linkbase Document**
101 LAB	XBRL Label Linkbase Document**
101 PRE	XBRL Presentation Linkbase Document**
101 DEF	XBRL Definition Linkbase Document**

 

*		Filed herewith.
**		In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.