Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - BIOFIELD CORP \DE\c95249exv32w1.htm
EX-32.2 - EXHIBIT 32.2 - BIOFIELD CORP \DE\c95249exv32w2.htm
EX-31.2 - EXHIBIT 31.2 - BIOFIELD CORP \DE\c95249exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - BIOFIELD CORP \DE\c95249exv31w1.htm
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
to
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008
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 000-27848
BIOFIELD CORP.
(Exact name of registrant as specified in its charter)
     
Delaware   13-3703450
     
(State of Incorporation)   (IRS Employer Identification No.)
     
175 Strafford Avenue, Suite 1, Wayne, PA   19087
     
(Address of principal executive offices)   (Zip Code)
(215) 972-1717
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 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 Section 15(a) 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 þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. (Check one):
             
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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the average closing price of the registrant’s common stock on December 31, 2008 was approximately $867,773, based on a closing price ($0.035), as reported by the Pink Sheet Electronic OTC Markets.
The number of outstanding shares of the registrant’s common stock on March 23, 2009 was 28,486,833 shares of Common Stock and 12,300,000 shares of Series A Preferred Stock.
 
 

 


 

EXPLANATORY NOTE
Biofield Corp. (the “Company”) is filing this Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, which was originally filed with the Securities and Exchange Commission (“SEC”) on April 13, 2009 (the “original Form 10-K”), to include new certifications as exhibits 31.1, 31.2, 32.1 and 32.2 by our principal executive officer and principal financial officer as required by Rules 12b-15 and 13a-14 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Except for the amended disclosures and reclassification described above, the information in this Form 10-K/A has not been updated to reflect events that occurred after April 13, 2009, the filing date of our original Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the original Form 10-K, including any amendments to those filings.

 


 

LIQUIDITY AND CAPITAL RESOURCES
During 2008, we had a net loss of approximately $11.1 million, compared to approximately $1.3 million for 2007, an increase of approximately $9.8 million. The increase was primarily due to the Company’s issuance of $8,567,009 of common stock, in lieu of cash compensation to consultants, in efforts to update the design of BDS device and sensors for distribution and manufacture in China, the Philippines and other parts of Asia. During the year ended December 31 2008, our net cash used in operating activities was approximately $0.5 million, compared to approximately $1.0 million for the year ended December 31, 2007, a decrease of approximately $0.5 million. The decrease was primarily due to cost of common stock issued for services, an increase in accounts payable and accrued expenses offset primarily by the net loss.
FIN 12
On July 31, 2008, 19,266,840 common shares were issued to consultants for consulting services in lieu of cash compensation for a value of $8,407,009 based on the market price that day of $0.44 per common share. On August 22, 2008, 160,000 common shares were issued to a consultant for consulting services in lieu of cash compensation for a value of $160,000 based on a consulting agreement. Total compensation in 2008 of the 19,426,840 common shares issued in lieu of cash compensation was $8,567,009.
On August 22, 2008, 100,000 common shares were issued per an outstanding stock subscription agreement for a value of $100,000 based upon the subscription agreement price of $1.00 per common share.
ITEM 9A.  
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon this review, management concluded that our disclosure controls and procedures are effective.
There have been no significant changes in internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) that occurred during the fiscal period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-5(f) under the Securities Exchange Act of 1934). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 


 

Limitations of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Accounting Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As required by Rule 13a-15(d), the Company’s Chairman and Chief Accounting Officer, also conducted an evaluation of Biofield’s internal controls over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the preparation of the Company’s financial statements as of and for the year ended December 31, 2008, the Company concluded that the then current system of disclosure controls and procedures needed improvement, partly due to the transition to new management, facilities, and auditors. As a result of this conclusion, the Company initiated changes in internal control. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

 


 

PART IV
ITEM 15.  
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The following consolidated financial statements are filed as part of this report under Item 8 of Part II “Financial Statements and Supplementary Data.:
         
      Reports of Independent Registered Public Accounting Firms
 
      Balance Sheets
 
      Statements of Operations
 
      Statement of Stockholders’ Equity
 
      Notes to Financial Statements
(b) Exhibits.
2. Plan of purchase, sale, reorganization, arrangement, liquidation or succession. — None
3. (i) Articles of incorporation.
             
 
    3.1     Fifth Amended and Restated Certificate of Incorporation of Biofield Corp., as filed with the Secretary of State of the State of Delaware on October 6, 2000. (1)
     
   
3. (ii) By-laws.
             
 
    3.2     By-laws of Biofield Corp. (2)
4. Instruments defining the rights of security holders, including indentures.
             
 
    4.1     Form of Promissory Note, due December 31, 2004, issued by Biofield Corp. in 2003 private placement. (8)
             
 
    4.2     Form of Subscription Agreement between Biofield Corp. and investors who participated in 2003 private placement. (8)
9. Voting trust agreement and amendment. — None
10. Material contracts.
             
 
    10.01     Registration Rights Agreement between Biofield Corp. and John D. Stephens dated as of April 22, 1993. (3)
 
           
 
    10.02     Form of Stock Purchase Option Agreement between Biofield Corp. and Abel Laboratories, Inc., dated as of June 1, 1992. (3)
 
           
 
    10.03     Patent Royalty Agreement between Biofield Corp. and Abel Laboratories, Inc., dated as of June 1, 1992. (3)

 

32


 

             
 
    10.04     Master Laboratory Services Agreement between Biofield Corp. and Abel Laboratories, Inc., dated as of January 1, 1994. (3)
 
           
 
    10.05     Biofield Corp. 1992 Stock Incentive Plan. (3)
 
           
 
    10.6     Biofield Corp. 1996 Stock Option Plan, as amended. (4)
 
           
 
    10.7     Biofield Corp. 1996 Stock Option Plan for Non-Employee Directors. (3)
 
           
 
    10.8     Escrow Agreement among C. Leonard Gordon, Biofield Corp. and Warshaw Burstein Cohen Schlesinger & Kuh, LLP, as escrow agent, dated December 28, 1999. (1)
 
           
 
    10.9     License Agreement between Biofield Corp. and Cardio Dynamics International Corporation dated October 16, 2000. (1)
 
           
 
    10.10     Share Option Agreement, dated as of March 16, 1995, between Biofield Corp. and David M. Long, Jr., M.D. (1)
 
           
 
    10.11     Form of Share Option Agreement between Biofield Corp. and Raymond A. Long, M.D., dated September 5, 2001. (5)
 
           
 
    10.12     Share Option Agreement, dated as of November 29, 2001, with David M. Long, Jr., M.D. (5)
 
           
 
    10.13     Share Option Agreement, dated as of November 29, 2001, with John D. Stephens. (5)
 
           
 
    10.14     Form of Share Option Agreement, dated November 29, 2001, with Steven Preiss. (5)
 
           
 
    10.15     Form of Share Option Agreement, dated November 29, 2001, with various Biofield Corp. employees. (5)
 
           
 
    10.16     10% Convertible Promissory Note, dated November 8, 2002 by Biofield Corp. in favor of David M. Long, Jr. (6)
 
           
 
    10.17     Demand Promissory Note, dated January 3, 2003, by Biofield Corp. in favor of David M. Long Separate Property Trust. (7)
 
           
 
    10.18     Investment Banking Services Agreement, dated March 5, 2003, between Biofield Corp. and iCapital Finance, Inc. (7)
 
           
 
    10.19     Consulting Agreement, dated March 5, 2003, between Biofield Corp. and Randall Letcavage and Rosemary Nguyen. (7)
 
           
 
    10.20     Redesign Agreement, dated October 15, 2001, between Biofield Corp. and TriVirix International Limited. (7)
 
           
 
    10.21     Form of Share Option Agreement, dated February 4, 2003, with various Biofield Corp. employees. (10)
 
           
 
    10.22     Service Agreement, dated July 8, 2003, between Biofield Corp. and MRB Investor Relations, LLC. (10)
 
           
 
    10.23     Agreement for Financial Advisor, Investment Banker & Placement Agent, dated April 25, 2003 between Biofield Corp and Brooks Houghton & Company, Inc. and Brooks, Houghton Securities, Inc. (10)
 
           
 
    10.24     Agreement, dated February 9, 2004, between Biofield Corp. and ROI Group Associates, Inc. (10)

 

33


 

             
 
    10.25     Agreement, dated October 16, 2003 between Biofield Corp, and CGF Securities, LLC. (10)
 
           
 
    10.26     Change in Terms Agreement, dated December 11, 2003, between Biofield Corp. and California Bank & Trust. (10)
 
           
 
    10.27     Agreement, dated June 11, 2003, as amended December 11, 2003, by Biofield Corp. to John Stephens. (10)
 
           
 
    10.28     Consulting agreement between The Mackay Group, Inc. and Dr. David Long dated March 30, 2006. (11)
 
           
 
    10.29     Stock Acquisition and Voting Agreement between The Mackay Group, Inc. and Dr. David Long, Jr., Donna R Long, Dr. Raymond A Long, the Long Family Trust and the Long Family Partners II LP dated March 30, 2006. (11)
 
           
 
    10.30     Sale of Shares Agreement for the sale and purchase of shares in VALIBIO dated December 2008. (12)
 
           
 
    10.31     Exclusive Distribution Agreement between The Company and ValiBio dated December 2008. (12)
13. Annual report to security holders for the last fiscal year, Form 10-Q or 10-QSB or quarterly report to security holders. — Not applicable.
14. Code of ethics
             
 
    14.1     Code of Ethics adopted on February 16, 2004. (10)
16. Letter on change in certifying accountant
             
 
    16.1     Letter from Deloitte & Touche, LLP, Certified Public Accountants to the Commission, dated November 24, 2003. (9)
18. Letter on change in accounting principles — Not applicable.
20. Other documents or statements to security holders or any other document incorporated by reference. — None
21. Subsidiaries of the small business issuer: Biofield International, Inc. — Incorporated in Delaware
22. Published report regarding matters submitted to vote of security holders — Not applicable.
23. Consent of experts and counsel — None
24. Power of attorney — Not applicable.
27. Financial Data Schedule — Not applicable.
31. Sarbanes Oxley Section 302 Certifications
     
   
*31.1 Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302
 
   
*31.2 Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302
32. Section 1350 Certifications
     
   
*32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
     
   
*32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99. Additional Exhibits — None

 


 

 
     
(*)  
Filed herewith.
1  
Filed with the Securities and Exchange Commission as an exhibit to Biofield’s Registration Statement on Form 10-SB (Registration No. 0-27848) which became effective on October 18, 2000.
 
2  
Incorporated by reference to Biofield’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
 
3  
Incorporated by reference to Biofield’s Registration Statement on Form S-1 (Registration No. 333-00796) declared effective on March 19, 1996.
 
4  
Incorporated by reference to Biofield’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
 
5  
Incorporated by reference to Biofield’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001.
 
6  
Incorporated by reference to Biofield’s Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 2002.
 
7  
Incorporated by reference to Biofield’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002.
 
8  
Incorporated by reference to Biofield’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.
 
9  
Incorporated by reference to Biofield’s Current Report on Form 8-K filed on April 6, 2006.
 
b  
Reports on Form 8-K — None

 


 

SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  BIOFIELD CORP.
 
 
  By:   /s/ David Bruce Hong    
    David Bruce Hong   
    Chief Executive Officer   
 
  By:   /s/ David Bruce Hong    
    David Bruce Hong   
    Chief Financial Officer   
Dated: February 1, 2010

 


 

Report of Independent Registered Public Accounting Firm
To The Shareholders and Board of Directors of Biofield Corp.
We have audited the accompanying balance sheets of Biofield Corp. (a Development Stage Company) as of December 31, 2008 and 2007 and the related statements of operations, changes in stockholders’ deficit and cash flows for the years ended December 31, 2008 and 2007 and the period from October 16, 1987 (inception) through December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provided a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biofield Corp. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007 and the period from October 16, 1987 (inception) through December 31, 2008 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company’s need to seek new sources or methods of financing or revenue to pursue its business strategy, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
         
 
      Jewett, Schwartz, Wolfe & Associates
 
       
 
      /s/ Jewett, Schwartz, Wolfe & Associates
 
       
 
      Hollywood, Florida
April 10, 2009

 


 

BIOFIELD CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
                 
    December 31,     December 31,  
    2008     2007  
 
               
ASSETS
               
 
CURRENT ASSETS:
               
Cash and cash equivalents
  $     $ 13,328  
Prepaids
          9,000  
Notes receivable
          11,004  
 
           
Total current assets
          33,332  
 
               
PROPERTY AND EQUIPMENT — Net
    5,211       6,601  
 
           
TOTAL ASSETS
  $ 5,211     $ 39,933  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
 
               
CURRENT LIABILITIES:
               
Bank overdraft
  $ 9,912     $  
Accounts payable
    1,402,514       1,402,513  
Accrued interest
    991,849       720,334  
Accrued expenses
    2,058,823       430,489  
Due to affiliate
    329,686       329,686  
Advances from stockholder
    2,378,973       2,162,703  
Notes payable
    2,410,951       2,223,893  
Line of credit
    418,920       342,180  
 
           
 
               
Total current liabilities
    10,001,628       7,611,798  
 
           
 
               
Commitments and contigencies
               
 
               
STOCKHOLDERS’ DEFICIT:
               
Preferred stock, $.001 par value, 12,300,000 shares authorized, 12,300,000 shares issued and outstanding at December 31, 2008 and, 2007, respectively
    12,300       12,300  
Common stock, $.01 par value, 50,000,000 shares authorized, 24,793,500 shares issued at December 31, 2008 and 4,514,294 shares issued and 999,455 shares issuable at December 31, 2007, respectively
    247,935       55,138  
Treasury stock - 2,306,131 shares
    (3,100 )     (3,100 )
Stock subscriptions
    3,849       3,849  
Additional paid-in capital
    74,935,552       66,461,340  
Accumulated deficit during development stage
    (85,192,953 )     (74,101,392 )
 
           
Total stockholders’ deficit
    (9,996,417 )     (7,571,865 )
 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 5,211     $ 39,933  
 
           
See notes to consolidated financial statements.

 

F-1


 

BIOFIELD CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
                         
                    Period October 16,  
                    1987 (Date of  
                    Inception)  
    Year Ended     Through  
    December 31,     December 31,  
    2008     2007     2008  
 
                       
REVENUE
  $     $ 109,390     $ 244,522  
COST OF SALES
                       
Cost of goods sold
          19,664       95,111  
Loss on write down of inventory
                693,500  
 
                 
GROSS PROFIT
          89,726       (544,089 )
 
                 
 
                       
OPERATING EXPENSES:
                       
Research and development
                40,481,889  
Selling, general, and administrative
    10,530,286       821,375       42,641,985  
Impairment of intangible assets
                194,268  
Gain on disposition of fixed assets
                (8,084 )
 
                 
Total operating expenses
    10,530,286       821,375       83,310,058  
 
                 
 
                       
OTHER INCOME (EXPENSE):
                       
Interest income
                2,476,722  
Interest expense
    (561,275 )     (545,224 )     (3,605,123 )
Amortization of shares issued to lenders and other finance costs
                (405,523 )
Royalty income and other
                214,867  
 
                 
Net other expense
    (561,275 )     (545,224 )     (1,319,057 )
 
                 
 
                       
LOSS BEFORE INCOME TAXES
    (11,091,561 )     (1,276,873 )     (85,173,204 )
 
                       
PROVISION FOR INCOME TAXES
                (19,749 )
 
                 
 
                       
NET LOSS
  $ (11,091,561 )   $ (1,276,872 )   $ (85,192,953 )
 
                 
 
                       
NET LOSS PER SHARE:
                       
Basic and Diluted
  $ (0.46 )   $ (0.02 )        
 
                   
 
                       
WEIGHTED-AVERAGE SHARES
                       
Basic and Diluted
    23,897,943       53,704,609          
 
                   
See notes to consolidated financial statements.

 

F-2


 

BIOFIELD CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
                                                                                                                         
                                                                                            Deffered                      
                                                                                            Accumulated     Foreign                
    Series A             Series B             Series C                                             Additional     Deficit     Currency             Total  
    Preffered             Preffered             Preffered             Common             Treasury     Stock     Paid In     Development     Translation             Comprehensive  
    Stock     Amount     Stock     Amount     Stock     Amount     Stock     Amount     Stock     Subscriptions     Capital     Stage     Adjustment     Total     Loss  
Sale of Common Stock, October 16, 1987 (date of inception) (.16 per share, net)
        $           $           $       54,902     $ 55     $     $     $ 91,898     $     $     $ 91,953          
Issuance of Common Stock in connection with patent acquisition (.001 per share)
                                        23,529       24                   276                   300          
Net loss, October 16, 1987 to March 31, 1988
                                                                      (159,359 )           (159,359 )        
Total comprehensive income (loss)
                                                                                                                  $ (159,359 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1988
        $           $           $       78,431     $ 79     $     $     $ 92,174     $ (159,359 )   $     $ (67,106 )        
Net loss
                                                                      (495,520 )           (495,520 )        
Total comprehensive income (loss)
                                                                                                                  $ (495,520 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1989
        $           $           $       78,431     $ 79     $     $     $ 92,174     $ (654,879 )   $     $ (562,626 )        
Net loss
                                                                      (233,347 )           (233,347 )        
Total comprehensive income (loss)
                                                                                                                  $ (233,347 )
 
                                                                                         
BALANCE AT MARCH 31, 1990
        $           $           $       78,431     $ 79     $     $     $ 92,174     $ (888,226 )   $     $ (795,973 )        
Acquisition of 235,294 shares of Common Stock (.001 per share)
                                                    (300 )                             (300 )        
Net loss
                                                                      (285,179 )           (285,179 )        
Total comprehensive income (loss)
                                                                                                                  $ (285,179 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1991
        $           $           $       78,431     $ 79     $ (300 )   $     $ 92,174     $ (1,173,405 )   $     $ (1,081,452 )        
Retirement of Common Stock held in treasury
                                        (23,529 )     (24 )     300             (276 )                          
Issuance of Common Stock in exchange for notes and debt with accrued interest (2.90 per share, net)
                                        43,137       43                   1,248,638                   1,248,681          
Sale of Common Stock (.82 per share, net)
                                        2,451       2                   19,998                   20,000          
Amortization of deferred compensation
                                                                136,880                   136,880          
Net loss
                                                                      (461,061 )           (461,061 )        
Total comprehensive income (loss)
                                                                                                                  $ (461,061 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1992
        $           $           $       100,490     $ 100     $     $     $ 1,497,414     $ (1,634,466 )   $     $ (136,952 )        
Sale of Common Stock (7.67 per share, net)
                                        55,748       55                   4,275,223                   4,275,278          
Exercise of Common Stock options
                                        245       1                   624                   625          
Amortization of deferred compensation
                                                                477,453                   477,453          
Change in par value of common stock from .0001 to .001
                                              1,408                   (1,408 )                          
Net loss
                                                                      (3,099,637 )           (3,099,637 )        
Total comprehensive income (loss)
                                                                                                                  $ (3,099,637 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1993 (brought forward)
        $           $           $       156,483     $ 1,564     $     $     $ 6,249,306     $ (4,734,103 )   $     $ 1,516,767          
Exercise of Common Stock options
                                        74       1                   187                   188          
Sale of Series A Preferred Stock (3.97 per share, net)
    2,119,896       2,120                                                       8,411,370                   8,413,490          
Issuance of Series A Preferred Stock in exchange for notes (4.50 per share)
    222,222       222                                                       999,778                   1,000,000          
Issuance of Common Stock warrants
                                                                2,119                   2,119          
Amortization of deferred compensation
                                                                1,580,320                   1,580,320          
Net loss
                                                                      (6,899,515 )           (6,899,515 )        
Total comprehensive income (loss)
                                                                                                                  $ (6,899,515 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT MARCH 31, 1994
    2,342,118     $ 2,342           $           $       156,556     $ 1,565     $     $     $ 17,243,080     $ (11,633,618 )   $     $ 5,613,369          
Sale of Series B Preferred Stock (4.04 per share, net)
                481,644       482                                           1,947,149                   1,947,631          
Issuance of Common Stock warrants
                                                                6                   6          
Amortization of deferred compensation
                                                                14,859                   14,859          
Net loss
                                                                      (4,959,312 )           (4,959,312 )        
Total comprehensive income (loss)
                                                                                                                  $ (4,959,312 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1994
    2,342,118     $ 2,342       481,644     $ 482           $       156,556     $ 1,565     $     $     $ 19,205,094     $ (16,592,930 )   $     $ 2,616,553          

 

F-3


 

                                                                                                                         
                                                                                            Deffered                      
                                                                                            Accumulated     Foreign                
    Series A             Series B             Series C                                             Additional     Deficit     Currency             Total  
    Preffered             Preffered             Preffered             Common             Treasury     Stock     Paid In     Development     Translation             Comprehensive  
    Stock     Amount     Stock     Amount     Stock     Amount     Stock     Amount     Stock     Subscriptions     Capital     Stage     Adjustment     Total     Loss  
Sale of Series C Preferred Stock (4.11 per share, net)
                            2,914,771       2,915                               11,977,856                   11,980,771          
Issuance of Common Stock warrants
                                                                161                   161          
Amortization of deferred compensation
                                                                195,874                   195,874          
Net loss
                                                                      (8,739,858 )           (8,739,858 )        
Total comprehensive income (loss)
                                                                                                                  $ (8,739,858 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1995
    2,342,118     $ 2,342       481,644     $ 482       2,914,771     $ 2,915       156,556     $ 1,565     $     $     $ 31,378,985     $ (25,332,788 )   $     $ 6,053,501          
Sale of Common Stock
                                        181,900       1,819                   18,026,419                   18,028,238          
Conversion of Series A, B, and C
                                                                                                                       
Preferred Stock to Common Stock
    (2,342,118 )     (2,342 )     (481,644 )     (482 )     (2,914,771 )     (2,915 )     304,647       3,047                   2,692                            
Exercise of Common Stock warrants
                                        206       2                   20,145                   20,147          
Amortization of deferred compensation
                                                                26,093                   26,093          
Net loss
                                                                      (10,036,090 )           (10,036,090 )        
Total comprehensive income (loss)
                                                                                                                  $ (10,036,090 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1996
          $           $           $       643,310     $ 6,433     $     $     $ 49,454,334     $ (35,368,878 )   $     $ 14,091,889          
Sale of Common Stock (2.92 per share, net)
                                        286,767       2,868                   8,377,583                   8,380,451          
Warrants exchanged for Common Stock
                                        64,364       644                   (644 )                          
Exercise of Common Stock options
                                        5,067       50                   168,541                   168,591          
Exercise of Common Stock warrants
                                        953       10                   93,299                   93,309          
Issuance of Common Stock for consulting services (4.00 per share, net)
                                        2,500       25                   99,975                   100,000          
Amortization of deferred compensation
                                                                                    62,579                   62,579          
Net loss
                                                                      (10,151,041 )           (10,151,041 )        
Foreign currency translation adjustment
                                                                            1,333       1,333          
Total comprehensive income (loss)
                                                                                                                  $ (10,149,708 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1997
        $           $             $       1,002,961     $ 10,030     $     $     $ 58,255,667     $ (45,519,919 )   $ 1,333     $ 12,747,111          
Repurchase of Common Stock for treasury (2,246,131 shares)
                                                    (100 )                             (100 )        
Net loss
                                                                      (10,654,597 )           (10,654,597 )        
Foreign currency translation adjustment
                                                                            55,891       55,891          
Total comprehensive income (loss)
                                                                                                                  $ (10,598,706 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1998
        $           $             $       1,002,961     $ 10,030     $ (100 )   $     $ 58,255,667     $ (56,174,516 )   $ 57,224     $ 2,148,305          
Sale of Common Stock (.05 per share, net)
                                        1,400,000       14,000                   686,000                   700,000          
Net loss
                                                                      (1,253,696 )           (1,253,696 )        
Foreign currency translation adjustment
                                                                            (43,020 )     (43,020 )        
Total comprehensive income (loss)
                                                                                                                  $ (1,296,716 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 1999
        $           $             $       2,402,961     $ 24,030     $ (100 )   $     $ 58,941,667     $ (57,428,212 )   $ 14,204     $ 1,551,589          
Issuance of right to purchase Common Stock in lieu of compensation (0.45 per share)
                                                                198,000                   198,000          
Sale of common stock (0.05 per share)
                                        50,000       500                   24,500                     25,000          
Sale of common stock (0.50 per share)
                                        300,000       3,000                   1,497,000                   1,500,000          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                   100,000          
Repurchase of Common Stock for treasury (60,000 shares)
                                                    (3,000 )                             (3,000 )        
Net loss
                                                                      (1,522,233 )           (1,522,233 )        
Foreign currency translation adjustment
                                                                            (14,204 )     (14,204 )        
Total comprehensive income (loss)
                                                                                                                  $ (1,522,233 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2000
        $           $             $       2,752,961     $ 27,530     $ (3,100 )   $     $ 60,761,167     $ (58,950,445 )           $ 1,835,152          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                     100,000          
Net loss
                                                                      (2,238,687 )           (2,238,687 )        
Total comprehensive income (loss)
                                                                                                                  $ (2,238,687 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2001
        $           $           $       2,752,961     $ 27,530     $ (3,100 )   $     $ 60,861,167     $ (61,189,132 )   $     $ (303,535 )        
Exercise of Common Stock options
                                        6,275       63                   15,623                     15,686          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                   100,000          
Net loss
                                                                      (2,888,789 )           (2,888,789 )        
Total comprehensive income (loss)
                                                                                                                  $ (2,888,789 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2002
        $           $           $       2,759,235     $ 27,593     $ (3,100 )   $     $ 60,976,790     $ (64,077,921 )   $     $ (3,076,638 )        

 

F-4


 

                                                                                                                         
                                                                                            Deffered                      
                                                                                            Accumulated     Foreign                
    Series A             Series B             Series C                                             Additional     Deficit     Currency             Total  
    Preffered             Preffered             Preffered             Common             Treasury     Stock     Paid In     Development     Translation             Comprehensive  
    Stock     Amount     Stock     Amount     Stock     Amount     Stock     Amount     Stock     Subscriptions     Capital     Stage     Adjustment     Total     Loss  
Issuance of Common Stock for consulting services (0.30 per share, net)
                                        5,000       50                     14,950                   15,000          
Issuance of Common Stock for consulting services (0.32 per share, net)
                                        46,875       468                   149,532                   150,000          
Issuance of Common Stock for consulting services (0.11 per share, net)
                                        27,500       275                   29,975                   30,250          
Issuance of Common Stock as incentive for funding by issue of notes (0.25 per share net)
                                        318,750       3,188                   793,687                   796,875          
Common Stock (410,358 shares) to be issued for interest accrued on stockholder’s advances
                                                          410       101,976                   102,386          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                   100,000          
Net loss
                                                                      (2,164,698 )           (2,164,698 )        
Total comprehensive income (loss)
                                                                                                                  $ (2,164,698 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2003
        $           $           $       3,157,360     $ 31,574     $ (3,100 )   $ 410     $ 62,166,910     $ (66,242,619 )   $     $ (4,046,825 )        
Issuance of Common Stock as incentive for funding by issue of notes (0.25 per share net)
                                        181,250       1,813                   451,312                   453,125          
Issuance of Common Stock as incentive for funding by issue of notes (0.31 per share net)
                                        189,500       1,895                   585,555                   587,450          
Sale of Common Stock (0.10 per share)
                                        122,400       1,224                   160,601                   161,825          
Common Stock (286,421 shares) to be issued for interest accrued on stockholder’s advances
                                                          287       64,456                   64,743          
Common Stock (2,500,000 shares) to be issued for payment penalty on notes payable
                                                          2,500       347,500                   350,000          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                   100,000          
Net loss
                                                                      (3,846,517 )           (3,846,517 )        
Total comprehensive income (loss)
                                                                                                                  $ (3,846,517 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2004
        $           $           $       3,650,510     $ 36,506     $ (3,100 )   $ 3,197     $ 63,876,334     $ (70,089,136 )   $     $ (6,176,199 )        
Sale of Common Stock ( for not less than $0.10 per share)
                                        324,033       3,240                   382,178                   385,418          
Common Stock (2,310,300 shares) to be issued for interest accrued on stockholder’s advances
                                                            2,310       83,430                   85,740          
Issue of shares of Common Stock for payment penalty on notes payable
                                        89,750       897                   17,052                   17,949          
Issue of shares of Common Stock for payment penalty on notes payable
                                        250,000       2,500             (2,500 )                                
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                100,000                   100,000          
Net loss
                                                                      (1,926,292 )           (1,926,292 )        
Total comprehensive income (loss)
                                                                                                                  $ (1,926,292 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2005
        $           $           $       4,314,294     $ 43,143     $ (3,100 )   $ 3,007     $ 64,458,994     $ (72,015,428 )   $     $ (7,513,384 )        
Common Stock (841,438 shares) to be issued for interest accrued on stockholder’s advances
                                                          842       24,401                   25,243          
Options issued for consulting services
                                                                47,512                   47,512          
Memorandum entry to record as expense for honorary services rendered by a shareholder
                                                                25,000                   25,000          
Debt converted to stock
    12,300,000       12,300                               999,455       9,995                   1,707,433                   1,729,728          
Net loss
                                                                      (809,091 )           (809,091 )        
Total comprehensive income (loss)
                                                                                                                  $ (809,091 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2006
    12,300,000       12,300                               5,313,749       53,138       (3,100 )     3,849       66,263,340       (72,824,519 )           (6,494,992 )        
Issuance of Common Stock for cash
                                                    100,000       1,000                       99,000                       100,000          
Issuance of Common Stock issued for conversion of debt
                                        100,000       1,000                   99,000                   100,000          
Net loss
                                                                      (1,276,873 )           (1,276,873 )        
Total comprehensive income (loss)
                                                                                                                  $ (1,276,873 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2007
    12,300,000     $ 12,300           $           $       5,513,749     $ 55,138     $ (3,100 )   $ 3,849     $ 66,461,340     $ (74,101,392 )   $     $ (7,571,865 )        
 
                                                                                         
10 for 1 Reverse split of Common Stock
                                                                                                                     
10 for 1 Reverse split of Common Stock — Rounding differences
                                                    51                                                                  
Issuance of Common Stock for consulting services
                                        19,179,700       191,797                   8,375,212                       8,567,009          
Issuance of Common Stock for subscriptions
                                        100,000       1,000                   99,000                       100,000          
Net loss
                                                                            (11,091,561 )             (11,091,561 )        
Total comprehensive income (loss)
                                                                                                                  $ (11,091,561 )
 
                                                                                         
 
                                                                                                                       
BALANCE AT DECEMBER 31, 2008
    12,300,000     $ 12,300           $           $       24,793,500     $ 247,935     $ (3,100 )   $ 3,849     $ 74,935,552     $ (85,192,953 )   $     $ (9,996,417 )        
 
                                                                                         
See notes to consolidated financial statements.

 

F-5


 

BIOFIELD CORP. (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
                    Period October 16,  
                    1987 (Date of  
                    Inception)  
    Year Ended     Through  
    December 31,     December 31,  
    2008     2007     2008  
 
                       
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net loss
  $ (11,091,561 )   $ (1,276,873 )   $ (85,192,953 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization
    1,390       816       2,762,596  
Amortization of premiums on short-term investments
                156,692  
Amortization of deferred financing costs
                2,129,643  
Loss on disposal of property and equipment
                194,102  
Loss on license and settlement agreements
                49,026  
Loss on abandonment of patent applications
                303,234  
Loss on inventory write-down
                693,500  
Impairment of intangible assets
                194,268  
Vendor settlements
                (77,257 )
Noncash compensation
                3,533,451  
Gain from disposition of fixed assets
                (159,473 )
Interest paid in common stock
                575,260  
Commisions and discounts on sale of common stock
                96,919  
Loan repayment default payable in shares of common stock
                350,000  
Consultancy fees paid in options
                242,762  
Issuances of common stock for outstanding stock obligations
    8,667,010             8,667,010  
Changes in assets and liabilities:
                       
Notes receivable
    11,004       (11,004 )     11,004  
Inventories
                (693,500 )
Prepaids
    9,000       (766 )     (131,816 )
Due to affiliate
          (8,234 )     337,921  
Accounts payable and accrued liabilities
    1,899,849       326,574       5,278,761  
 
                 
Net cash used in operating activities
    (503,308 )     (969,487 )     (60,678,850 )
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Acquisitions of property and equipment
          (6,948 )     (2,610,691 )
Costs incurred for patents and patent applications
                (782,527 )
Proceeds from sale of property and equipment
                294,748  
Purchases of short-term investments
                (26,476,638 )
Proceeds from sale and maturity of short-term investments
                26,406,378  
 
                 
Net cash used in investing activities
          (6,948 )     (3,168,730 )
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Bank overdraft
    9,912             9,912  
Repayments of capitalized lease obligations
                (82,234 )
Proceeds from issuance of preferred stock — net
                22,341,892  
Proceeds from issuance of common stock and common stock warrants — net
                35,203,258  
Proceeds from exercise of common stock
          100,000       298,546  
Proceeds from issuance of notes payable
    187,058       66,808       1,676,058  
Proceeds from borrowings on line of credit
    76,740       342,180       76,740  
Notes financing costs
          281,805       262,077  
Advances from stockholder and related party
    216,270       196,609       3,493,156  
Repayments of advances from stockholder
                (1,874,728 )
Repurchases of common stock held in treasury
                (3,100 )
Proceeds from notes payable issued to stockholder and related party
                2,546,533  
 
                 
Net cash provided by financing activities
    489,980       987,402       63,948,110  
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (13,328 )     10,967       100,530  
EFFECT OF EXCHANGE RATE CHANGES
                (111,497 )
BEGINNING OF PERIOD
    13,328       2,361        
 
                 
END OF PERIOD
  $     $ 13,328     $ (10,967 )
 
                 
 
                       
Supplementary disclosure of cash flow information:
                       
Cash paid for interest
  $     $     $  
 
                 
Cash paid for taxes
  $     $     $  
 
                 
See notes to consolidated financial statements.

 

F-6


 

BIOFIELD CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                         
                    Period October 16,  
                    1987 (Date of  
                    Inception)  
                    Through  
    December 31,     December 31,  
    2008     2007     2008  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
Cash paid for interest
  $     $     $ 857,003  
 
                 
Cash paid for taxes
  $     $     $  
 
                 
 
                       
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING AND FINANCING ACTIVITIES:
                       
During the fiscal year ended December 31, 2005, 897,500 shares of Common Stock due as penalty for non-payment of notes payable on maturity issued:
  $     $     $ 17,949  
 
                 
 
During the fiscal year ended December 31, 2005, a principal shareholder and his associates repaid the Company’s line of credit and the debt is reflected in the financial statements as advances from stockholder:
  $     $     $ 1,200,000  
 
                 
 
During the fiscal year ended December 31, 2007, 1,000,000 shares of Common Stock issued to former employee, in liue of accrued liabilities
  $     $     $ 100,000  
 
                 
See notes to consolidated financial statements.

 

F-7


 

BIOFIELD CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION
Organization
Biofield Corp. (the “Company”) has developed a highly proprietary system to assist in detecting breast cancer. The procedure is non-invasive and radiation- and compression-free. The procedure produces objective results within 20 minutes without the need for interpretation by a radiologist. The Company’s breast cancer diagnostic device, the Biofield Diagnostic System (“BDS”), employs single-use sensors to measure and analyze changes in cellular electrical charge distributions associated with the development of epithelial cancers, such as breast cancer. The new prototype of the device is portable and the size of a laptop computer. The sensors are similar in size to an EEG/ EKG sensor. The current system is a final complete product and has received CE mark certification from the European regulatory authorities. The CE mark certification, which permits companies to market in European Union member countries, was received in connection with our former facility in Alpharetta, Georgia. The Company is considering other facilities which have already secured CE Mark certification. The Company currently operates in the biomedical device market segment. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Through March 31, 2006, the Company’s focus and resources were primarily directed towards securing approval of the BDS from the U.S. Food and Drug Administration (“U.S. FDA”) to distribute in the U.S. The Company continued to incur significant losses associated with these activities and generated little or no sales. Subsequent to March 31, 2006, The MacKay Group (“MKG”) took control of the Company’s management and operations (the “MKG Acquisition”). Post-MKG Acquisition, the Company changed its primary focus towards penetrating foreign markets with significant populations of women, where MKG had significant industry and government contacts and relationships, where the need for the BDS appeared compelling, and where the regulatory hurdles were not as burdensome. The Company has secured or is working to secure significant government, distribution, research and development and manufacture networks in the People’s Republic of China, India, the Philippines and other parts of Asia, Mexico, Latin America, the Caribbean, Africa, Europe, and the Middle East. The Company will continue its efforts to secure U.S. FDA approval. The Company believes that the government and industry relationships, the possible significant clinical data and research and development (especially as it may pertain to screening and other cancers), and revenues it secures abroad will facilitate its efforts to secure U.S. FDA approval in the future.
From April 1, 2006 to December 31, 2006, the Company’s time, energies, and resources were focused towards transitioning the Company from prior management to MKG. This included the tasks of moving the Company’s facilities, inventory, and operations from Alpharetta, Georgia to Philadelphia, Pennsylvania and transferring and reorganizing voluminous amounts of clinical and technological data, and financial records. The Company has since completed the move to a facility in King of Prussia, Pennsylvania. With the transfer of vital financial and regulatory records, the Company diligently proceeded during 2007 to bring all of its Security and Exchange Commission (“SEC”) filings current. During the transition, MKG successfully reduced approximately $2 million of the Company’s debt by converting it to stock, and continues to work toward further debt reduction.
In 2008, the Company recommitted its efforts to secure CE mark certification for BDS, recruited a new management team, opened an office in Hong Kong, in conjunction with the Company’s controlling stockholder, MKG, opened a sales office in Bangalore, India, moved its US offices from King of Prussia, Pennsylvania to Philadelphia, Pennsylvania, and embarked on a strategy to assemble a portfolio of medical technology products that can be distributed using the same sales channels the Company intends to use to market the BDS.
The Company, as of December 31, 2008, is still considered to be in the development stage.

 

F-8


 

The financial statements are presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has incurred operating losses since its inception. This condition raises substantial doubt as to the Company’s ability to continue as a going concern as such continuance is dependent upon the Company’s ability to raise sufficient capital. Management’s plans regarding these matters, with the objective of improving liquidity and sustaining profitability in future years encompass the following:
   
Move from a development stage entity to an operating entity;
 
   
Settling legacy outstanding obligations;
 
   
Continued review of all expenditures in order to minimize costs;
 
   
Raise additional working capital as necessary; and
 
   
Generate revenue from foreign markets such as China and India where MKG has significant government and industrial relationships.
In the absence of additional financing the Company may be unable to satisfy past due obligations. Management believes that the actions presently being taken provide the opportunity to improve liquidity and sustain profitability. However, there are no assurances that management’s plans will be achieved. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Ultimately, the Company must achieve profitable operations if it is to be a viable entity.
The Company has never declared or paid any cash dividends on capital stock and do not intend to pay any cash dividends in the foreseeable future.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Estimates that are critical to the accompanying financial statements arise from the determination of the fair value of the Company’s investment. Because such determination involves subjective judgment, it is at least reasonably possible that the Company’s estimates could change in the near term with respect to this matter.
Cash and Cash Equivalents
The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Inventory and Inventory Valuation Reserve
Inventories are stated at the lower of cost or market, determined by the first-in, first-out (FIFO) method, including provisions for obsolescence. Obsolescence is based upon assumptions concerning future demand, market conditions and anticipated timing of the release of next generation products. If actual market conditions or future demand are less favorable than those projected by management, or if next generation products are released earlier than anticipated, additional inventory write-downs may be required.
Fair Value of Financial Instruments
Cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

F-9


 

Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using straight-line methods over the estimated useful lives of the assets, principally three to five years, or the term of the lease, if shorter, for leasehold improvements. Repairs and maintenance are expensed as incurred.
Patents and Other Intangible Assets
The costs of patents are amortized on a straight-line basis over their estimated economic life, but not exceeding 17 years. For the years ended December 31, 2008 and 2007, we have no intangible assets.
Revenue Recognition
The Company has adopted and follows the guidance provided in the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, which provides guidance on the recognition, presentation and disclosure of revenue in the financial statements.
Income Taxes
The Company accounts for income taxes under Statement of Financial Account Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS No. 109”). Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Due to the net loss incurred in all periods, there is no provision for income taxes provided as a full valuation allowance has been established.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
The Company reviews the terms of convertible debt and equity instruments that are issued to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. When the risks and rewards of any embedded derivative instrument are not “clearly and closely” related to the risks and rewards of the host instrument, the embedded derivative instrument is generally required to be bifurcated and accounted for separately.
The conversion option has the risks and rewards associated with an equity instrument, not a debt instrument, because its value is related to the value of our common stock. Nonetheless, if the host instrument is considered to be “conventional convertible debt” (or “conventional convertible preferred stock”), bifurcation of the embedded conversion option is generally not required. However, if the instrument is not considered to be conventional convertible debt (or conventional convertible preferred stock), bifurcation of the embedded conversion option may be required in certain circumstances. Generally, where the ability to physical or net-share settle the conversion option is deemed to be not within the control of the Company, the embedded conversion option is required to be bifurcated and accounted for as a derivative financial instrument liability. The Company currently does not have any such instruments requiring classification as a liability.
In connection with the sale of convertible debt and equity instruments, the Company may also issue freestanding options or warrants. Additionally, the Company may issue options or warrants to non-employees in connection with consulting or other services they provide. Although the terms of the options and warrants may not provide for net-cash settlement, in certain circumstances, physical or net-share settlement may be deemed to not be within the control of the Company and, accordingly, the Company may be required to account for these freestanding options and warrants as derivative financial instrument liabilities, rather than as equity. The Company currently does not have any such instruments requiring classification as a liability.

 

F-10


 

Derivative financial instruments are required to be initially measured at their fair value. For derivative financial instruments that shall be 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 the fair value reported as charges or credits to income.
If the embedded derivative instrument is to be bifurcated and accounted for as a liability, the total proceeds received will be first allocated to the fair value of the bifurcated derivative instrument. If freestanding options or warrants were also issued and are to be accounted for as derivative instrument liabilities (rather than as equity), the proceeds are next allocated to the fair value of those instruments. The remaining proceeds, if any, are then allocated to the convertible instrument itself, usually resulting in that instrument being recorded at a discount from its face amount. In circumstances where a freestanding derivative instrument is to be accounted for as an equity instrument, the proceeds are allocated between the convertible instrument and the derivative equity instrument, based on their relative fair values.
During 2008 and 2007 none of the above mentioned convertible debt and equity instruments were considered to be derivative instruments.
Warrants
The Company issues warrants to purchase the Company’s common stock in conjunction with debt and certain preferred stock issues. Warrants are accounted for in accordance with the provisions of Accounting Principles Bulletin (“APB”) No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB No.14”) and Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Accounting for Derivative Financial Instruments Indexed to or Potentially Settled in Indexed to or Potentially Settled in a Company’s Own Stock” (“EITF 00-19”). The fair value of warrants granted in conjunction with debt and equity issuances is estimated on the grant date using the Black-Scholes option pricing model. The value of warrants is separated from the total consideration of each issue and included as an element of additional paid-in capital.
Net Loss Per Share
Basic and diluted net losses per common share are presented in accordance with SFAS No.128, “Earning Per Share,” for all periods presented. Stock subscriptions, options and warrants have been excluded from the calculation of the diluted loss per share for the years ended December 31, 2008 and 2007, because all such securities were anti-dilutive. The net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the periods.
Reclassification
Certain amounts in the prior year consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year consolidated financial statements.
Impairment of Long-Lived Assets
The Company has adopted SFAS No. 144 “Impairment of Long-Lived Assets”, which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. SFAS No. 144 also requires that assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

F-11


 

Research and Development
The Company accounts for research and development costs in accordance with the SFAS No. 2, “Accounting for Research and Development Costs”. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development incurred for the period from October 16, 1987 (date of inception) to December 31, 2008 were $40,481,889. In 2008 and 2007 there were no additional expenditures on research and product development.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity, except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Employers’ Disclosures about Postretirement Benefit Plan Assets
In December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position on Financial Accounting Standard (“FSP FAS”) No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends FASB Statement No. 132(R) (“SFAS No. 132(R)”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS No. 132(R)-1 also includes a technical amendment to SFAS No. 132(R) that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The required disclosures about plan assets are effective for fiscal years ending after December 15, 2009. The technical amendment was effective upon issuance of FSP FAS No. 132(R)-1. The Company is currently assessing the impact of FSP FAS No. 132(R)-1 on its consolidated financial position and results of operations.
Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises
In December 2008, the FASB issued FSP FIN No. 48-3, “Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises.” FSP FIN No. 48-3 defers the effective date of FIN No. 48, “Accounting for Uncertainty in Income Taxes,” for certain nonpublic enterprises as defined in SFAS No. 109, “Accounting for Income Taxes.” However, nonpublic consolidated entities of public enterprises that apply U.S. generally accepted accounting principles (GAAP) are not eligible for the deferral. FSP FIN No. 48-3 was effective upon issuance. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities
In December 2008, the FASB issued FSP FAS No. 140-4 and FIN No. 46(R) -8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financials assets. FSP FAS No. 140-4 also amends FIN No. 46(R)-8, “Consolidation of Variable Interest Entities,” to require public enterprises, including sponsors that have a variable interest entity, to provide additional disclosures about their involvement with a variable interest entity. FSP FAS No. 140-4 also requires certain additional disclosures, in regards to variable interest entities, to provide greater transparency to financial statement users. FSP FAS No. 140-4 is effective for the first reporting period (interim or annual) ending after December 15, 2008, with early application encouraged. The Company is currently assessing the impact of FSP FAS No. 140-4 on its consolidated financial position and results of operations.

 

F-12


 

Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That is Based on the Stock of an Entity’s Consolidated Subsidiary
In November 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 08-8, “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That is Based on the Stock of an Entity’s Consolidated Subsidiary.” EITF No. 08-8 clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. EITF No. 08-8 also clarifies whether or not stock should be precluded from qualifying for the scope exception of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or from being within the scope of EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” EITF No. 08-8 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the impact of EITF No. 08-8 on its consolidated financial position and results of operations.
Accounting for Defensive Intangible Assets
In November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets.” EITF No. 08-7 clarifies how to account for defensive intangible assets subsequent to initial measurement. EITF No. 08-7 applies to all defensive intangible assets except for intangible assets that are used in research and development activities. EITF No. 08-7 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the impact of EITF No. 08-7 on its consolidated financial position and results of operations.
Equity Method Investment Accounting Considerations
In November 2008, the FASB issued EITF Issue No. 08-6 (“EITF No. 08-6”), “Equity Method Investment Accounting Considerations.” EITF No. 08-6 clarifies accounting for certain transactions and impairment considerations involving the equity method. Transactions and impairment dealt with are initial measurement, decrease in investment value, and change in level of ownership or degree of influence. EITF No. 08-6 is effective on a prospective basis for fiscal years beginning on or after December 15, 2008. The Company is currently assessing the impact of EITF No. 08-6 on its consolidated financial position and results of operations.
Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active
In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active. The FSP also provides examples for determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.
Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement
In September 2008, the FASB issued EITF Issue No. 08-5 (“EITF No. 08-5”), “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement.” This FSP determines an issuer’s unit of accounting for a liability issued with an inseparable third-party credit enhancement when it is measured or disclosed at fair value on a recurring basis. FSP EITF No. 08-5 is effective on a prospective basis in the first reporting period beginning on or after December 15, 2008. The Company is currently assessing the impact of FSP EITF No. 08-5 on its consolidated financial position and results of operations.

 

F-13


 

Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161
In September 2008, the FASB issued FSP FAS No. 133-1, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” This FSP amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. The FSP also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require and additional disclosure about the current status of the payment/performance risk of a guarantee. Finally, this FSP clarifies the Board’s intent about the effective date of FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” FSP FAS No. 133-1 is effective for fiscal years ending after November 15, 2008. The Company is currently assessing the impact of FSP FAS No. 133-1 on its consolidated financial position and results of operations.
Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for all Endowment Funds
In August 2008, the FASB issued FSP FAS No. 117-1, “Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), and Enhanced Disclosures for all Endowment Funds.” The intent of this FSP is to provide guidance on the net asset classification of donor-restricted endowment funds. The FSP also improves disclosures about an organization’s endowment funds, both donor-restricted and board-designated, whether or not the organization is subject to the UPMIFA. FSP FAS No. 117-1 is effective for fiscal years ending after December 31, 2008. Earlier application is permitted provided that annual financial statements for that fiscal year have not been previously issued. The Company is currently assessing the impact for FSP FAS No. 117-1 on its consolidated financial position and results of operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
In June 2008, the FASB issued EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The EITF 03-6-1 affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF 03-6-1 on its consolidated financial position and results of operations.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an entity’s Own Stock
In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is indexed to an Entity’s Own Stock.” EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of EITF 07-5 on its consolidated financial position and results of operations.
Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60.” This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163 also clarifies how SFAS No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities to increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities of the insurance enterprise be effective for the first period (including interim periods) beginning after issuance of SFAS No. 163. Except for those disclosures, earlier application is not permitted.

 

F-14


 

Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” The FSP clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The FSP requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The FSP requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statement of operations. The FSP requires retrospective application to the terms of instruments as they existed for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008 and early adoption is not permitted. The Company is currently evaluating the potential impact of FSP APB 14-1 upon its consolidated financial statements.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. The Company is currently evaluating the potential impact of FSP FAS No. 142-3 on its consolidated financial statements.
Disclosure about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.” This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company is required to adopt SFAS No. 161 on January 1, 2009. The Company is currently evaluating the potential impact of SFAS No. 161 on the Company’s consolidated financial statements.

 

F-15


 

Delay in Effective Date
In February 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” This Statement replaces the original SFAS No. 141. This Statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. The objective of SFAS No. 141(R) is to improve the relevance, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, SFAS No. 141(R) establishes principles and requirements for how the acquirer:
  a.  
Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
 
  b.  
Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase.
 
  c.  
Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and may not be applied before that date. The Company is unable, at this time, to determine the effect that its adoption of SFAS No. 141(R) will have, if any, on its consolidated results of operations and financial condition.
Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This Statement amends the original Accounting Review Board (ARB) No. 51 “Consolidated Financial Statements” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and may not be applied before that date. The Company is unable, at this time, to determine the effect that its adoption of SFAS No. 160 will have, if any, on its consolidated results of operations and financial condition.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of SFAS No. 115,” which becomes effective for the Company on February 1, 2008, permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses in earnings. Such accounting is optional and is generally to be applied instrument by instrument. The election of this fair-value option did not have a material effect on its consolidated financial condition, results of operations, cash flows or disclosures.

 

F-16


 

Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 addresses the requests from investors for expanded disclosure about the extent to which companies’ measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by the Company in the first quarter of fiscal year 2008. There was no material impact on the Company’s consolidated results of operations and financial condition due to the adoption of SFAS No. 157.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections, and it establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 in the first quarter of fiscal year 2007 and did not have a material impact on its consolidated results of operations and financial condition.
NOTE 3 — MATERIAL DEVELOPMENTS
The March 30, 2006 MKG Acquisition
On March 30, 2006, MKG took control of the Company’s management and operations as a result of a series of agreements. The explicit objective of the agreements was to give MKG control of the Company’s management, board, operations, and 51% of the Company’s common shares on a fully diluted basis. The change of control was effectuated by way of, among other things, stock acquisitions, debt conversion, and board changes. As of the MKG Acquisition, all of the Company’s prior royalty, distribution, employment, research and development, and consulting agreements had been or were terminated.
MKG acquired all of the Company’s common shares (8,747,528 shares) owned by the Company’s former chairman and chief executive officer, Dr. David Long and his family and affiliates, pursuant to a Stock Acquisition and Voting Agreement (the “Long Agreement”) and a Stock Acquisition Agreement between MKG and the David and Donna Long Family Foundation (the “Long Foundation Agreement”). In total, MKG acquired approximately 17.49% of all common shares of the Company on a fully diluted basis or approximately 20.6% of all outstanding shares of common stock of the Company issued as of December 31, 2005 and 5,898,495 of those shares were subsequently assigned to James MacKay as MKG’s designee in accordance with the Long Agreement and Long Foundation Agreement.
Under the Long Agreement, MKG agreed to take control of the Company’s management and operations, fund the Company, help restructure the Company’s debt, and use its government and industry contacts and relationships in Asia, Europe, and elsewhere to distribute, manufacture, and develop the BDS in foreign markets. Additionally, MKG agreed to give the Longs a royalty equal to 1% of the Company’s net sales worldwide for three years commencing as of March 31, 2006. MKG also entered into a three-year, $60,000 per year consulting agreement with Dr. David Long or his nominee.
The Debt Conversion
The Long Agreement also provided for the reduction of $2 million of the Company’s debt owed to Dr. David Long and his family and affiliates by way of an assignment of this debt to MKG and the subsequent conversion of the debt into stock.

 

F-17


 

Under the Long Agreement, the Longs and their affiliates (“LFCG”) assigned approximately $2 million (comprising principal and accrued interest) of the total debt (over $4.3 million) owed them by the Company to MKG. MKG was entitled to designate which portion of the total LFCG debt to assign. The assigned debt was to be converted into stock of the Company at $0.05 per share (the “Converted Shares”). Upon conversion, MKG retained a portion of the Converted Shares so that, together with the shares MKG acquired from LFCG and the David and Donna Long Family Foundation, MKG would then hold 51% of all the shares of Common Stock issued and outstanding on a fully-diluted basis. Any shares remaining of the Converted Shares not retained by MKG were to be transferred to LFCG, provided that LFCG agreed to deliver a proxy with respect to all voting rights associated with those remaining shares. In addition, pursuant to the Long Agreement, to the extent that any other debt owed to LFCG by the Company is converted into shares of Common Stock, LFCG agreed to transfer 51% of such shares to MKG.
On April 3, 2006 MKG made a demand on the Company to effectuate the debt conversion, designating certain portions of the total LFCG debt. In accordance with the Long Agreement, $499,728 of the assigned debt was authorized to be converted into 9,994,550 pre-reverse stock split common shares and $1,230,000 of the assigned debt into 12,300,000 shares of the Preferred Series A stock of the Company, with such shares to be issued to James MacKay as MKG’s designee. Mr. MacKay is the principal of MKG and is Chairman of the Board of the Company. All remaining portions of the assigned debt, classified on the balance sheet as notes payable and not converted (e.g., $270,273), were retained by MKG and are entitled to be converted at a later time. The preferred shares were deemed to be issued during 2007 and the common shares authorized to be converted were considered to be issuable as of December 31, 2007. Each share of voting preferred stock entitles the holder thereto to two (2) votes.
On January 17, 2008, the Company issued 9,994,550 shares of common stock and 12,300,000 shares of voting preferred stock of the Company to Mr. MacKay to consummate the conversion of the Converted Debt.
As a result of the issuance of common stock and voting preferred stock pursuant to the conversion of Converted Debt, Mr. MacKay became the holder of shares of the Company’s capital stock entitling him to approximately 51.96% of all of the votes entitled to be cast by stockholders of the Company on a fully-diluted basis (i.e., counting all outstanding options and warrants on an as-exercised basis).
The MKG Master License
On July 27, 2007, the Company signed a master license agreement (the “Agreement”) with MKG. Pursuant to the Agreement, the Company granted to MKG an exclusive (even to the Company), sub licensable, royalty-bearing, worldwide license to make, have made, use, import, offer for sale, and sell devices, sensors and other products or services incorporating the Company’s patented and unpatented breast cancer detection technology, including, but not limited to, the BDS device, the Biofield Breast Cancer Proliferation Detection System, the Breast Cancer Diagnostic Device, and the Biofield Breast Examination or BBESM (collectively, the “Technology”). The Company also granted MKG, on a worldwide basis, the Exclusive Distribution, Manufacturing, Development, Clinical, and research and development rights (as those terms are defined in the Agreement) with regard to the Technology. Under the Agreement, MKG assumes from the Company the sole responsibility and expense to market, manufacture, further develop (clinically and technically), and otherwise commercialize the Technology. MKG further assumes from the Company the sole responsibility and expense to secure additional regulatory approvals and to conduct additional clinical trials and research and development.
In return for the exclusive worldwide license, MKG will pay the Company royalties based on gross receipts received by MKG and its affiliates in connection with the Technology. MKG must pay minimum royalties. In addition to royalties, MKG will pay the Company licensing fees based upon certain milestones. The term of the Agreement is 10 years with automatic renewals for additional 10-year terms unless terminated by one of the parties pursuant to the terms of the Agreement.

 

F-18


 

NOTE 4 — INVENTORIES
Inventories at December 31, 2008 and 2007 consisted of the following:
                 
    2008     2007  
 
Components and supplies
  $     $ 37,749  
Finished goods
          437,669  
 
           
 
          475,418  
Less: Reserve for potential losses
          (475,418 )
 
           
 
  $     $  
 
           
During 2007 eleven devices, which had been fully reserved, were sold.
NOTE 5 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2008 and 2007 consisted of the following:
                 
    2008     2007  
 
Furniture and Office equipment
  $ 61,686     $ 61,686  
Plant and production equipment
    144,308       141,308  
 
           
 
    205,994       205,994  
Less: Accumulated depreciation
    200,783       199,393  
 
           
 
  $ 5,211     $ 6,601  
 
           
Depreciation expenses in 2008, 2007 and for the period from inception through December 31, 2008, were $1,390, $816 and $2,762,596, respectively.
NOTE 6 — PATENT AND PATENT APPLICATION COSTS
In December 2005, during the Company’s annual review of the carrying values of patents and trademarks, management determined that, due to increased uncertainty in obtaining FDA’s approval to sell the Company’s device in the United States, the recoverability of the carrying values of Patents and Trade Marks was in doubt. Management was unable to determine and project future undiscounted cash flows for these assets with reasonable accuracy due to the uncertainties. Consequently, the Company recorded an impairment charge of $194,268 for the full carrying value of these assets as a component of operating expenses in the statement of operations as a separate line item.
Three was no amortization expense for patents for the years ended December 31, 2008 and 2007. Amortization expense from inception through December 31, 2008, was $486,860.
NOTE 7 — ACCRUED EXPENSES
Accrued expenses at December 31, 2008 and 2007 consisted of the following:
                 
    2008     2007  
 
Professional fees
  $ 848,704     $ 132,573  
Due to officers
    985,833        
Due to ex-employees
    117,245       117,245  
Other
    107,041       180,672  
 
           
 
  $ 2,058,823     $ 430,489  
 
           

 

F-19


 

Due to severe cash flow constraints experienced by the Company in 2003, its employees were not paid salaries from April 16, 2003 to October 31, 2003. Five of its six employees then agreed to the deferment of the payment of the salary due to them, payable with 100% interest thereon, until the receipt of the proceeds from new funding. The Company also granted options to acquire 514,227 shares of Common Stock to these employees at an exercise price of $0.33 per share, the closing market price of the Company’s shares of Common Stock on the date of the grant in consideration for the reduction in remuneration accepted by them during the first four months of 2003. On September 11, 2007, the Company agreed to issue its former chief operating officer, John Stephens, 1,000,000 shares of common stock for services rendered. The share price at the close of the market on September 11, 2007 was $0.10. As of December 31, 2008, the unpaid salary and interest thereon, together with unpaid remuneration for subsequent periods, amounting to $117,245 and is recorded as accrued expenses in the financial statements.
NOTE 8 — DUE TO AFFILIATE
As of December 31, 2008 and 2007 the Company had recorded $329,686, for amounts due to affiliates.
The Company, over time, recorded amounts due to Abel Laboratories, which was an affiliate of the Company’s former Chairman, CEO and principal shareholder, Dr. David Long. The amount due to Abel Laboratories is related to various laboratory expenses and, as of December 31, 2008 and 2007, remained constant at $329,686. Interest does not accrue on the amount due, there is no maturity date and the amount is due on demand and does not have any convertible features.
NOTE 9 — ADVANCES FROM STOCKHOLDER
As of December 31, 2008 and 2007, the Company had recorded $2,278,973 and $2,162,703, respectively, for advances from stockholder.
The Company’s operations from 2002 to the March 30, 2006 MKG Acquisition were primarily funded through advances, among other funding vehicles, by its then majority shareholder, chairman, and chief executive officer, Dr. David Long, and his family and affiliates LFCG. As of December 31, 2005, the Company’s overall debt to LFCG was approximately $4,425,853, of which $3,488,816 was recorded as advances from stockholder.
On March 30, 2006, to induce MKG to take control of the Company and to effectuate the transfer to MKG of 51% of the Company’s stock on a fully diluted basis, LFCG agreed to assign MKG approximately $2 million of the total debt owed to it by the Company (the “Assigned Debt”). Under the MKG-LFCG Agreement, the Assigned Debt was to be converted into stock of the Company at a conversion rate commensurate to $0.05 per common share. On April 3, 2006, MKG made a demand on the Company to effectuate the debt conversion.
The advances bear interest at 10% per annum. In 2008 and 2007, the Company accrued $239,220 and $263,418, respectfully, of interest for this account and has record this amount in advances from stockholder. All interest accruing on the advances from stockholder are payable to LFCG and total $289,760. There is no maturity date for the advances from stockholder and only $270,273, which is retained by MKG, is entitled to be converted to stock at a later time. The remaining amount outstanding is still assigned to LFCG.
NOTE 10 — NOTES PAYABLE
Notes Payable
During 2006, the Company issued notes totaling $110,000 for past due obligations. These notes bear interest at 18% through the maximum amount allowed by law. For the year ended December 31, 2008 and 2007, $23,400 and $19,800 of interest, respectively, was recorded in accrued interest. These notes were due at various dates during 2007 and 2008 and are in default. The Company continues to work with the holders of these notes to resolve the defaults.
Notes Payable to Stockholder
As of December 31, 2008 and 2007, the Company had recorded $808,383 and $801,702, respectively, for notes payable to stockholder. In 2002, the Company issued a 10% promissory convertible note in the principal amount of $450,000 to a stockholder. The note, with accrued unpaid interest, has no maturity date and is convertible at the option of the holder into subscriptions of common stock at a rate of $0.40 per share. Interest for 2008 and 2007 totaled $73,489 and $66,808, respectively, and has been added to the note amount.

 

F-20


 

Notes Payable for Private Placements
Over the course of time, the Company sold various private placements in various increments of units of debt and common stock. These notes payable, as of December 31, 2008 and 2007, totaled $1,379,000. Interest accrues at either 12% or 18%, depending upon the date of placement of note, and for 2008 and 2007 totaled $239,220, each, and has been recorded in accrued interest. The notes for these private placements were due on various dates and the Company is currently in default. Until the notes issued under the private placements are repaid, the holders of the notes have the right to participate in any offering by the Company of its equity securities (including convertible debt) by using the notes (and accrued interest thereon) to acquire such equity securities at a 25% discount from the offering price (and if the offering is of convertible debt to acquire such debt at face with a conversion feature at a 25% discount).
NOTE 11 — LINE OF CREDIT
On January 5, 2007 MKG agreed to advance additional funds to the Company under a line of credit. Under the line of credit, monies advanced by MKG would bear 12% simple annual interest. There was no maturity date. MKG had the option to convert the principal and accrued interest into stock at a share price equal to the lesser of: (a) the 70% of the share price at the close of the market as of receipt of funds; or (b) the terms extended by the Company to a funder making a total equity investment of at least US $1 million or in connection with a merger/acquisition or change in control. In 2007, MKG advanced the Company approximately $342,000. The interest accrued for MKG advances in 2008 and 2007 was $23,158 and $19,185, respectively.
NOTE 12 — STOCKHOLDERS’ EQUITY
Treasury Stock
In December 1998, the Company repurchased 2,246,131 shares of Common Stock for $100. In June 2000, the Company repurchased 60,000 shares of Common Stock for $3,000 from an executive who resigned. The Company holds all of these shares in its treasury. There are no changes as of December 31, 2008.
Options Issued for Consulting Fees
The Company issued 1.2 million options based upon the fair value of service render at $47,512 for consulting fees recognized in operating results for the year ended December 31, 2006. These options have an exercise price of $0.04 per share and expire on February 23, 2011. During 2008 and 2007 there were no options issued or exercised.
Shares Due for Interest Accrued on Advances From Stockholder
Interest on certain advances from stockholder are payable in stock subscriptions of common stock. At December 31, 2006, stock subscriptions of common stock have been reserved for issuance in payment of the then accrued interest and the total accrued interest of $25,243 was added to additional paid-in capital and stock subscriptions, pending the issuance of 841,438 shares of common stock.

 

F-21


 

NOTE 13 — INCOME TAXES
The benefit for income taxes from continued operations for the years ended December 31, 2008 and 2007, consist of the following:
                 
    December 31,  
    2008     2007  
 
               
Current:
               
Federal and State
  $     $  
Deferred:
               
Federal and State
    4,286,709       497,980  
 
           
 
    4,286,709       497,980  
Increase in valuation allowance
    (4,286,709 )     (497,980 )
 
           
Benefit for income taxes, net
  $     $  
 
           
The above benefits for 2008 and 2007 were calculated using a federal and State tax estimated rate as noted below:
                 
    December 31,  
    2008     2007  
Statutory federal and State income tax rate
    39.00 %     34.00 %
Valuation allowance
    (39.00 )%     (34.00 )%
 
           
 
               
Effective tax rate
    0.00 %     0.00 %
 
           
The net deferred tax assets and liabilities are comprised of the following:
                 
    2008     2007  
 
Deferred tax assets:
               
Current
  $     $  
 
Net operating loss carry forward
    30,717,241       25,919,923  
Research and development credits
          510,609  
 
           
Total deferred tax assets
    30,717,241       26,430,532  
 
               
Less valuation allowance
    (30,717,241 )     (26,430,532 )
 
           
Net deferred income tax asset
  $     $  
 
           
At December 31, 2008, the Company had federal net operating loss carry-forwards totaling approximately $85 million, which will begin expiring in years 2009 through 2027. However, substantially all of the net operating loss carry forwards are not utilizable, as a result of the limitations imposed by Section 382 of the Internal Revenue Code, due to ownership changes in 1992, 1995, 1997, 1999 and 2006. To the extent that these losses and general business credits are utilizable, they may be offset against future U.S. taxable income, if any, during the carry forward period.
NOTE 14 — COMMITMENTS
As of April 1, 2006, the Company moved its corporate headquarters from Alpharetta, Georgia to 1615 Walnut Street, 3rd and 4th Floors, Philadelphia, Pennsylvania. In June 2007, pursuant to a three-year lease, the Company relocated all of its operations to a new office in King of Prussia, Pennsylvania. The monthly rent for the King of Prussia office is approximately $4,000, including utilities.
         
    Rent  
2009
  $ 42,572  
2010
    17,920  
 
     
Total
  $ 102,015  
 
     

 

F-22


 

In light of the Company’s arrangements with a certified medical device manufacturing facility to help co-manage the Company’s U.S. operations, the Company is working to terminate the King of Prussia office lease with the landlord, which sent a default notice on March 10, 2008, and which after applying the security deposit is effectively owed a balance for the Company’s occupancy during April 2008.
Pursuant the Long Agreement, the Company is required to pay LFCG collectively a 1% royalty with respect to net sales of the Company’s products worldwide for three years commencing March 30, 2006.
Pursuant to the March 30, 2006 Consulting Agreement, the Company is required to pay Dr. David Long or his nominees $60,000 per annum in consulting fees for three years commencing March 30, 2006.
The Company is not a party to any pending legal proceeding which is not routine litigation incidental to our business or which involves a claim for damages exceeding 10% of our current assets, nor are we aware of any current proceeding concerning us that a governmental authority may be contemplating.
NOTE 15 — ROYALTY AGREEMENT
As a condition precedent to MKG’s agreement to take control of the Company and as was agreed upon and represented by the Company’s prior management and board, all royalty agreements existing as of March 30, 2006, had either expired or had been terminated or were since terminated.
As part of the Long Agreement, LFCG was given a royalty of 1% of the net sales of the Company’s products worldwide for a three-year period commencing as of March 30, 2006.
The Company entered into a master license agreement with MKG giving MKG an exclusive (even to the Company), sub licensable, royalty-bearing license to make, have made, use, import, offer for sale, and sell devices, sensors, and other products or services incorporating the Company’s technology. In return, MKG agreed to pay the Company royalties based upon a gross receipts step scale. MKG was further subject to a minimum royalty payment requirement. MKG also agreed to pay the Company a licensing fee in accordance with certain milestone requirements. The term of the Master License Agreement is 10 years, with automatic renewals for additional 10-year terms, unless properly terminated in accordance with the terms and conditions of the Agreement.
NOTE 16 — THE COMPANY COMPLETES ITS 1 FOR 10 REVERSE STOCK SPLIT OF ITS COMMON STOCK
On April 2, 2008, the Company filed a preliminary information statement (Schedule PRE 14C) with the SEC, reporting that on March 28, 2008 its board of directors (the “Board”) unanimously adopted a resolution seeking shareholder approval to amend the Company’s Articles of Incorporation to effect an 1 for 10 reverse split of Biofield’s Common Stock (the “Reverse Split”). On March 31, 2008, a stockholder of the Company holding over a majority of the total voting rights for all issued and outstanding shares of common and preferred stock of the Company executed a written consent authorizing the Board to amend the Company’s Articles of Incorporation to effect the Reverse Split at any time prior to March 31, 2009. The Board believed that the proposed Reverse Split would benefit the Company by increasing the per share market price of its common stock, a factor in whether the Common Stock meets investing guidelines for certain institutional investors and investment funds, although there was no assurance that the market price would increase. The SEC had 10 days from the April 2, 2008 filing date to comment on the Information Statement. The Company did not receive any comments on the Information Statement from the SEC within the 10-day period; filed a definitive information statement (Schedule DEF 14C) with the SEC on April 22, 2008; and mailed on April 23, 2008 the definitive information statement to all shareholders of record as of April 1, 2008 (as identified in the certified shareholder list received from the Company’s transfer agent). The Company filed on May 23, 2008 with the Secretary of State for the State of Delaware a Certificate of Amendment to the Certificate of Incorporation in connection with the Reverse Split. NASDAQ OMX, Corporate Data Operations subsequently approved the Reverse Split, advised the Company that the Reverse Split would take effect on June 20, 2008. The Company’s new symbol assigned on that date is BZEC. The Company’s new CUSIP number is 090591 603.

 

F-23


 

On June 20, 2008 the Company executed a 1 for 10 reverse split of its common stock. Immediately prior to the stock split, there were 60 million shares authorized and 55,137,486 shares issued and outstanding. Subsequent to the stock split, there were 60 million shares authorized, 5,513,749 shares issued and outstanding. Preferred shares were not affected by the reverse stock split. Additionally, 19,279,751 shares of common stock were issued post reverse stock split in the third quarter ended September 30, 2008, bring the total common stock outstanding to 24,793,500.
NOTE 17 — SUBSEQUENT EVENTS
On March 4, 2009, the Company issued and sold 3,693,333 shares of common stock, par value $.001, as follows:
                 
Number   Purchaser   Consideration   Price Per Share  
880,000
  Capital Growth Equity Fund I, LLC   $110,000 in cash   $ 0.125  
2,480,000
  Capital Growth Equity Fund I, LLC   conversion of $372,000 of debt   $ 0.15  
333,333
  Capital Growth Financial, LLC   conversion of $50,000 of debt   $ 0.15  
Capital Growth Equity Fund I, LLC and Capital Growth Financial, LLC are “accredited investors” as that term is defined in Rule 501 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), and the issuance of the securities was accomplished without registration under the Securities Act in reliance on the exemptions from the registration requirements of the Securities Act afforded by Section 4(2), including Rule 506 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act.
On February 9, 2009, effective December 11, 2008, the Company entered into a Sale of Shares Agreement (the “Stock Purchase Agreement”) with Valirix, plc, to acquire a minority interest in Valibio, SA and contemporaneously entered into an Exclusive Distribution Agreement (the “Distribution Agreement”) with Valibio, SA which granted Biofield exclusive distribution rights worldwide (excluding Belgium) for ValiRx plc’s Human Papilloma Virus (HPV) diagnostic test for cervical cancer, ValioRx’s Hypergenomics™ and Nucleosomics™ cancer diagnostics products, and any other cancer diagnostic products developed during the term of the Distribution Agreement.
The parties have agreed that, during March 2009, the Company will purchase 10 shares of Valibio (approximately 1.6% of the outstanding shares) for 100,000. Additionally, the Company intends to acquire an additional 53 shares of Valibio (approximately 8.48% of the outstanding shares) for 500,000 on or before September 1, 2009. The Stock Purchase Agreement also provides Biofield with the right to acquire up to an additional 100 shares of Valibio (approximately 16% of the outstanding shares) for a price per share of 9,600 if purchased prior to December 11, 2009, 10,650 if purchased prior to December 11, 2010, and 11,616 if purchased prior to December 11, 2011. The right to purchase up to an additional 100 shares of Valibio expires on December 11, 2011.
The Distribution Agreement has a term of 10 years, with automatic renewal for additional 10 year terms subject to the right of either party to elect not to renew. Valibio has the right to terminate Biofield’s distribution rights in any country in which (a) no sales occur during the 2 yr period that commences on the date any required governmental approval is secured and (b) in any country in which sales decline by more than 50% over the average sales in the 2 preceding years. Valibio also has the right to terminate the Distribution Agreement in certain events including non-payment which continues for 14 days after written notice.

 

F-24