UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

 

For the quarterly period ended January 31, 2013.

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

 

For the transition period from ________ to ________.

 

Commission file number 000-28761

 

CARDIOGENICS HOLDINGS INC.

(Exact name of registrant as specified in its Charter)

 

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

 

6295 Northam Drive, Unit 8

Mississauga, Ontario L4V 1WB

(Address of Principal Executive Offices)

 

(905) 673-8501

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes þ No 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 or the Exchange Act. (Check one):

 

	Large Accelerated filer	o	Accelerated Filer	o
	Non-Accelerated Filer	¨	Smaller Reporting Company	þ

(Do not check if a smaller reporting company)

 

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

 

Yes o No þ

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes þ   No o

 

 

As of March 15, 2013 the Registrant had the following number of shares of its capital stock outstanding: 32,499,239 shares of Common Stock and 1 share of Series 1 Preferred Voting Stock, par value $0.0001, representing 13 exchangeable shares of the Registrant’s subsidiary, CardioGenics ExchangeCo Inc., which are exchangeable into 24,176,927 shares of the Registrant’s Common Stock.

 

CARDIOGENICS HOLDINGS INC.

 

FORM 10-Q

 

For the Quarter Ended January 31, 2013

 

INDEX

 

	Page
Part I. Financial Information	1
Item 1: Financial Statements (Unaudited)	1
Condensed Consolidated Balance Sheets at January 31, 2013 (Unaudited) and October 31, 2012	1
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months ended January 31, 2013 and 2012 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013	2
Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the Three Months ended January 31, 2013 and 2012 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013	3
Condensed Consolidated Statement of Changes in Deficiency (Unaudited) for the Three Months ended January 31, 2013 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013	4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months ended January 31, 2013 and 2012 and Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3: Quantitative and Qualitative Disclosures About Market Risk	16
Item 4: Controls and Procedures	16

 

Part II. Other Information	17
Item 1: Legal Proceedings	17
Item 1A: Risk Factors	18
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3: Defaults Upon Senior Securities	18
Item 4: Mine Safety Disclosures	18
Item 5: Other Information	18
Item 6: Exhibits	18
Signatures	19

 

 

EX-31.1: CERTIFICATION

EX-31.2: CERTIFICATION

EX-32.1: CERTIFICATION

 

  

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

  

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

---

 

		January 31,				October 31,
		2013				2012
Assets		(Unaudited)				(Note 2)
Current Assets
Cash and Cash Equivalents		$	179,632			$	27,009
Accounts Receivable			258				437
Deposits and Prepaid Expenses			51,510				51,422
Refundable Taxes Receivable			8,401				45,207
Government Grants and Investment Tax Credits Receivable			20,054				80,080
			259,855				204,155
Long-Term Assets
Property and Equipment, net			64,460				67,827
Patents, net			122,734				110.031
			187,194				177,858
Total Assets		$	447,049			$	382,013
Liabilities and Deficiency
Current Liabilities
Accounts Payable and Accrued Expenses		$	826,835			$	786,135
Funds Held in Trust for Redemption of Class B Common Shares			4				4
Due to Shareholders			300,712				100,000
Current Portion of Capital Lease Obligation			1,123				2,627
Notes Payable, net of debt discount			▬				▬
Derivative Liability on Notes Payable			50,000				▬
Total Liabilities			1,178,674				888,766
Commitments and Contingencies
Deficiency
Preferred stock; par value $.0001 per share,
50,000,000 shares authorized, none issued			▬				▬
Common stock; par value $.00001 per share;
150,000,000 shares authorized,
32,499,239 and 32,499,239 common shares and
24,176,927 and 24,176,927 exchangeable shares issued and
outstanding as at January 31, 2013 and October 31, 2012, respectively			543				543
Additional paid-in capital			42,036,498				42,036,498
Deficit accumulated during development stage			(42,271,030	)			(42,039,223	)
Accumulated other comprehensive loss			(158,212	)			(166,637	)
Total Deficiency Attributable to CardioGenics Holdings Inc.			(392,201	)			(168,819	)
Non-controlling interest			(339,424	)			(337,934	)
Total Deficiency			(731,625	)			(506,753	)
Total liabilities and deficiency		$	447,049			$	382,013

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (unaudited)

For the Three Months Ended January 31, 2013 and 2012 and

Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013 

---

 

										Cumulative
										From
										November 20,
										1997
										(Date of
		For the three months Ended								Inception) to
		January 31,								January 31,
		2013				2012				2013
Revenue		$	▬			$	1,136			$	10,173
Operating Expenses
Depreciation and Amortization of Property and Equipment			3,524				4,555				223,268
Amortization of Patent Application Costs			1,734				1,300				21,027
Write-off of Patent Application Costs			▬				▬				239,530
General and Administrative			112,732				174,163				8,529,763
Write-off of Goodwill			▬				▬				12,780,214
Research and Product Development, Net
of Investment Tax Credits			103,444				156,044				4,253,777
Cost of Settlement of Lawsuit			▬				▬				1,753,800
Total operating expenses			221,434				336,062				27,801,379
Operating Loss			(221,434	)			(334,926	)			(27,791,206	)
Other Expenses
Interest Expense and Bank Charges, Net			3,824				3,471				2,162,132
Loss on Change in Value of Derivative Liability			▬				▬				12,421,023
Loss (Gain) on Foreign Exchange Transactions			8,039				(21,364	)			198,382
Total other expenses			11,863				(17,893	)			14,781,537
Loss from Continuing Operations			(233,297	)			(317,033	)			(42,572,743	)
Discontinued Operations
Gain on Sale of Subsidiary			▬				▬				90,051
Loss from Discontinued Operations			▬				▬				(127,762	)
Consolidated Net Loss			(233,297	)			(317,033	)			(42,610,454	)
Net Loss attributable to non-controlling interest			(1,490	)			(2,063	)			(339,424	)
Net Loss attributable to CardioGenics Holdings Inc.		$	(231,807	)		$	(314,970	)		$	(42,271,030	)
Basic and Fully Diluted Net Loss per Common
Share attributable to CardioGenics Holdings Inc. Shareholders		$	(0.00	)		$	(0.01	)
Weighted-average shares of Common Stock outstanding			56,676,166				55,626,166

 

 

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Loss (unaudited)

For the Three Months Ended January 31, 2013 and 2012 and

Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013

---

 

 

										Cumulative From November 20, 1997 (Date of Inception) to
		For the three months ended								January 31,
		January 31								2013
		2013				2012
Net loss		$	(231,807	)		$	(314,070	)		$	(42,271,030	)
Other comprehensive income (loss), currency translation adjustments			8,425				(9,555	)			(158,212	)
Comprehensive loss		$	(223,282	)		$	(323,525	)		$	(42,429,242	)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

CarioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Changes in Deficiency (unaudited)

For the three months ended January 31, 2013 and

Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013 

---

 

 

														Deficit Accumulated During				Accumulated
										Additional				the				Other
		Common Stock								Paid-in				Development				Comprehensive				Noncontrolling				Total
		Shares				Amount				Capital				Stage				Loss				Interest				Deficiency
Balance November 1, 2012			56,676,166			$	543			$	42,036,498			$	(42,039,223	)		$	(166,637	)		$	(337,934	)		$	(506,753	)
Net loss attributable to noncontrolling interest																							(1,490	)			(1,490	)
Comprehensive income, currency translation
adjustments																			8,425								8,425
Net loss															(231,807	)											(231,807	)
Balance at January 31, 2013			56,676,166			$	543			$	42,036,498			$	(42,271,030	)		$	(158,212	)		$	(339,424	)		$	(731,625	)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (unaudited)

Three Months Ended January 31, 2013 and 2012 and

Cumulative from November 20, 1997 (Date of Inception) to January 31, 2013

---

 

 

										Cumulative from
										November 20, 1997
		Three Months Ended								(Date of Inception)
		January 31								To January 31,
		2013				2012				2013
Cash flows from operating activities
Consolidated Net Loss for the Period		$	(233,297	)		$	(317,033	)		$	(42,610,454	)
Adjustments to reconcile consolidated net loss for the period to
net cash used in operating activities
Depreciation and Amortization of Property and Equipment			3,524				4,555				223,268
Amortization of Patent Application Costs			1,734				1,300				21,027
Write-off of Patent Application Costs			▬				▬				239,530
Amortization of Deferred Consulting Contract Costs			▬				▬				163,750
Write-off of Goodwill			▬				▬				12,780,214
Amortization of Deferred Debt Issuance Costs			▬				▬				511,035
Loss on Extinguishment of Debt			▬				▬				275,676
Loss on Change in Value of Derivative Liability			▬				▬				12,421,023
Interest Accrued and Foreign Exchange Loss
on Debt			▬				▬				922,539
Unrealized Foreign Currency Exchange Gains			▬				▬				25,094
Beneficial Conversion Charge included in
Interest Expense			▬				▬				452,109
Common Stock and Warrants issued on Settlement
of Lawsuit			▬				▬				1,653,800
Common Stock Issued as Employee or
Officer/Director Compensation			▬				▬				2,508,282
Common Stock Issued for Services Rendered			▬				▬				2,726,262
Stock Options Issued for Services Rendered			▬				▬				192,238
Stock Options Issued to Directors and
Committee Chairman			▬				▬				54,582
Changes in Operating Assets and Liabilities,
Net of Acquisition
Accounts Receivable			179				5,255				(258	)
Deposits and Prepaid Expenses			(88	)			26				(50,721	)
Refundable Taxes Receivable			36,806				26,661				(7,537	)
Government Grants and Investment Tax Credits Receivable			60,026				▬				8
Accounts Payable and Accrued Expenses			40,700				(17,591	)			58,923
Advances			▬				▬				131
Cash used in operating activities			(90,416	)			(296,827	)			(7,439,479	)
Cash flows from investing activities
Cash Acquired from Acquisition			▬				▬				195,885
Purchase of Property and Equipment			(157	)			(3,892	)			(223,647	)
Patent Application Costs			(12,704	)			(609	)			(331,478	)
Cash used in investing activities			(12,861	)			(4,501	)			(359,240	)
Cash flows from financing activities
Due to Shareholders			200,712				▬				300,712
Loan Payable			50,000				▬				50,000
(Repayment) of Capital Lease Obligations			(1,504	)			(6,935	)			(42,794	)
Due to Director			▬				▬				725,330
Issue of Debentures			▬				▬				1,378,305
Issue of Common Shares on Exercise of Stock options			▬				▬				2,781
Issue of Common Shares on Exercise of Warrants			▬				▬				45,652
Issue of Common Shares for Cash			▬				▬				5,886,669
Refund of Share Subscription			▬				▬				(15,000	)
Redemption of 10% Senior Convertible Debentures			▬				▬				(394,972	)
Cash provided by (used in) financing activities			249,208				(6,935	)			7,936,683
Effect of foreign exchange on cash and cash equivalents			6,692				9,554				41,668
Cash and Cash Equivalents
Increase (decrease) in cash and cash equivalents
during the period			152,623				(298,709	)			179,632
Beginning of Period			27,009				669,202				▬
End of Period		$	179,632			$	370,493			$	179,632

See notes to condensed consolidated financial statements.

  

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

 

 

1.

Nature of Business

 

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

 

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

 

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

 

2.

Basis of Presentation

 

In the opinion of management, the unaudited condensed interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the condensed interim consolidated financial position of CardioGenics Holdings Inc. and its subsidiaries under generally accepted accounting principles in the United States (“US GAAP”) as of January 31, 2013, their results of operations for the three months ended January 31 2013 and 2012, and the period from November 20, 1997 (date of inception) to January 31, 2013, changes in deficiency for the three months ended January 31, 2013 and cash flows for the three months ended January 31 2013 and 2012, and the period from November 20, 1997 (date of inception) to January 31, 2013. CardioGenics Holdings Inc. and its subsidiaries are referred to together herein as the “Company”. Pursuant to rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these consolidated financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the audited consolidated financial statements of the Company as of October 31, 2012 and 2011 (the “Audited Financial Statements”) included in the Company’s Form 10-K that was previously filed with the SEC on January 29, 2013 and from which the October 31, 2012 consolidated balance sheet was derived.

 

The results of the Company’s operations for the three months ended January 31, 2013 are not necessarily indicative of the results of operations to be expected for the full year ending October 31, 2013.

 

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

 

The Company has incurred operating losses and has experienced negative cash flows from operations since inception. The Company has an accumulated deficit at January 31, 2013 of approximately $42.3 million. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The Company has funded its activities to date almost exclusively from debt and equity financings. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

 

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

 

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

 

	3.	Summary of Significant Accounting Policies.
		Recent Accounting Pronouncements

  

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under International Financial Reporting Standards (IFRS). The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company will implement the provisions of ASU 2011-11 as of November 1, 2013.

 

In February 2013, the FASB the issued guidance requiring disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance is effective prospectively for the Company for annual and interim periods beginning January 1, 2013. The Company believes that the impact of this standard will not have a material impact on its consolidated financial statements.

 

Derivative Instruments

 

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

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

 

 

 

4.

Income Taxes

 

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

 

The Company has incurred losses in Canada since inception, which have generated net operating loss carryforwards for income tax purposes. The net operating loss carryforwards arising from Canadian sources as of January 31, 2013 approximated $6,533,000 (2012 - $6,025,000) which will expire from 2014 through 2032. All fiscal years as originally filed have been assessed. Claims relating to research and development credits are open for review for the fiscal years ended October 2012, 2011, 2010, 2009, 2008 and 2007 and July 2009.

 

As of January 31, 2013, the Company had net operating loss carryforwards from US sources of approximately $40,763,000 available to reduce future Federal taxable income which will expire from 2019 through 2032. Returns for the years 2008 through 2012 are yet to be filed.

 

For the three months ended January 31, 2013 and 2012, the Company’s effective tax rate differs from the statutory rate principally due to the net operating losses for which no benefit was recorded.

 

 

 

5.

Due to Shareholders

 

During the three months ended January 31, 2013, two shareholder/directors advanced $200,000 to the Company. The amount due to shareholders is due on demand and carries interest at 10% per annum. No interest has been accrued to date.

 

6.

Notes Payable

 

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

 

A summary of the Notes at January 31, 2013 is as follows:

		January 31, 2013				October 31, 2012
Convertible Notes Payable,  interest at 5% per annum to maturity at November 19, 2014		$	50,000			$	-
Debt Discount - value attributable to conversion feature attached to notes, net of accumulated amortization of $0			(50,000	)			-
Total			-				-
Less: Current portion			-				-
Total Long-term portion		$	-			$	-

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

 

 

As described in further detail in Note 7, “Derivative Liabilities”, the Company determines the fair value of the embedded derivatives and records them as a discount to the Notes and as a derivative liability. Upon conversion of the Notes to Common Stock, any remaining unamortized discount is charged to financing expense.

 

7.

Derivative Liabilities

 

Convertible notes- embedded conversion features

 

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

 

The Company determines the fair value of the embedded derivatives and records them as a discount to the Notes and a derivative liability. The Company has recognized a derivative liability of $50,000 at January 31, 2013. Accordingly, changes in the fair value of the embedded derivative are immediately recognized in earnings and classified as a gain or loss on the embedded derivative financial instrument in the accompanying statements of operations. There was no change in the fair value for the three months ended January 31, 2013.

 

The Company estimated the fair value of the embedded derivatives using a Black Scholes model with the following assumptions: conversion price $0.12 per share according to the agreements; risk free interest rate of 1.76%; expected life of 1 year; expected dividend of zero; a volatility factor of 124%, as of as of January 31, 2013. The expected lives of the instruments are equal to the contractual term of the conversion option. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related conversion option. The dividend yield represents anticipated cash dividends to be paid over the expected life of the conversion option.

  

8.

Fair Value Measurements

 

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

 

·

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

  

·

Level 2: Inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals.

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

 

 

·

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.

 

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of January 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Quoted Prices in

Total Increase (Reduction)

Active Markets for

Significant Other

Significant

in Fair Value

Balance Sheet

Identical Assets or

Observable Inputs

Unobservable

January 31, 2013

Recorded at

Location

Liabilities (Level 1)

(Level 2)

Inputs (Level 3)

Total

January 31, 2013

Liabilities:

Derivative liability - on Notes Payable

$

-

$

-

$

50,000

$

50,000

$

-

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liability, or derivative liabilities related to the senior secured convertible notes and warrants, for the period ended January 31, 2013.

 

Balance at beginning of year		$	-
Additions to derivative instruments			50,000
Change in fair value of derivative liabilities			-
Balance at end of period		$	50,000

 

9.

Stock-Based Compensation

 

Stock-based employee compensation related to stock options for the three months ended January 31, 2013 and 2012 amounted to $-0-.

 

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

						Weighted
						Average
						Exercise
		Options				Price
Outstanding – October 31, 2011			30,000			$	0.90
Granted			▬				▬
Forfeited/Expired			▬				▬
Exercised			▬				▬
Outstanding – October 31, 2012			30,000			$	0.90
Granted			▬				▬
Forfeited/Expired			▬				▬
Exercised			▬				▬
Outstanding – January 31, 2013			30,000			$	0.90

 

 

  

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

  

Options typically vest immediately at the date of grant. As such, the Company does not have any unvested options or unrecognized compensation expense at January 31, 2013.

 

10.

Warrants

 

Outstanding warrants are as follows:

 

		January 31, 2013				October 31, 2012
Issued to consultant August 1, 2009, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.90 per common share up to and including July 31, 2017			287,085				287,085
Issued to Flow Capital Advisors Inc. on settlement of lawsuit in August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.30 per common share up to and including August 23, 2016			250,000				250,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including August 23, 2016			250,000				250,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016			500,000				500,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $1.00 per common share up to and including August 23, 2016			500,000				500,000
Issued to Flow Capital Advisors Inc. on settlement of lawsuit August 2011, entitling the holder to purchase 1 common share in the Company at an exercise price of $0.75 per common share up to and including August 23, 2016			500,000				500,000
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.10 per common share up to and including March 20, 2013			1,500,000				1,500,000
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.34 per common share up to and including March 20, 2013			1,500,000				1,500,000
Issued to consultants in September 2011 entitling the holders to purchase 1 common share in the Company at an exercise price of $0.50 per common share up to and including March 20, 2013			1,000,000				1,000,000
Total Warrants outstanding			6,287,085				6,287,085

 

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

  

10.

Issuance of Common Stock

 

On January 17, 2013, the Company’s Articles of Incorporation were amended to increase the total number of common and preferred shares authorized for issuance from 65,000,000 shares to 150,000,000 shares and 5,000,000 shares to 50,000,000, respectively, par value $0.00001 per share.

 

During the three months ended January 31, 2013, the Company issued no common shares.

 

12.

Net Loss per Share

 

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

 

		Three Months Ended January 31,
		2013				2012
Weighted-average shares - basic			56,676,166				55,626,166
Effect of dilutive securities			▬				▬
Weighted-average shares - diluted			56,676,166				55,626,166

 

Basic earnings per share “EPS” and diluted EPS for the three months ended January 31, 2013 and 2012 have been computed by dividing the net loss available to common stockholders for each respective period by the weighted-average shares outstanding during that period. All outstanding options, warrants and shares to be issued upon the exercise of the outstanding options and warrants representing 6,317,085 and 9,834,969 incremental shares respectively have been excluded from the three months ended January 31, 2013 and 2012 computation of diluted EPS as they are antidilutive given the net losses generated.

 

13.

Commitments and Contingencies

 

Lawsuits

On April 22, 2009, the Company was served with a statement of claim from a former employee claiming compensation for wrongful dismissal and ancillary causes of action including payment of monies in realization of his investment in the Company, with an aggregate claim of $514,000. The Company considers all the claims to be without any merit, has already delivered a statement of defense and intends to vigorously defend the action. If the matter eventually proceeds to trial, the Company does not expect to be found liable on any ground or for any cause of action.

 

14.

Supplemental Disclosure of Cash Flow Information

 

		For the Three Months Ended
		January 31,
		2013				2012
Cash paid during the year for:
Interest		$	3,364			$	2,200
Income taxes		$	▬			$	▬

 

 

CardioGenics Holdings Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (unaudited)

January 31, 2013 and 2012

---

  

15.

Subsequent Event

 

In February 2013, the shareholders loans were exchanged on a dollar for dollar basis for convertible debenture units. Each unit includes a debenture having a term of three years, bearing interest at 10%, and a warrant having a term of three years.The debentures are convertible at any time into common shares of the Company’s stock at a price of $0.25 per share. The warrants entitle the holder to purchase an equal number of common shares of the Company’s stock at a price of $0.25 per share exercisable at any time during the term of the warrant.

 

 

 

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

 

Critical Accounting Policies and Estimates

 

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

 

The accounting policies and estimates used as of October 31, 2012, as outlined in our previously filed Form 10-K, have been applied consistently for the three months ended January 31, 2013.

 

Related Party Transactions

 

During the period two shareholder/directors advanced $200,000 to the Company.

 

Off-Balance Sheet arrangements

 

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

 

Results of operations

 

Three months ended January 31, 2013 as compared to three months ended January 31, 2012.

	Three Months
	Ended January 31,
	2013				2012				$ Change
Revenue		$	▬			$	1,136			$	(1,136	)
Operating expenses:
Depreciation and amortization of property and equipment			3,524				4,555				(1,031	)
Amortization of patent application costs			1,734				1,300				434
General and administrative expenses			112,732				174,163				(61,431	)
Research and product development, net of investment tax credits			103,444				156,044				(52,600	)
Total operating expenses			221,434				336,062				(114,628	)
Operating Loss			(221,434	)			(334,926	)			(113,492	)
Other expenses (income):
Interest expense and bank charges, net			3,824				3,471				353
Loss (gain) on foreign exchange transactions			8,039				(21,364	)			29,403
Net loss		$	(233,297	)		$	(317,033	)		$	(83,736	)

 

 

Revenues

 

During the three months ended January 31, 2013 and 2012 we generated revenues 2013 - $0 and 2012 - $1,136 from sales of paramagnetic beads.

 

 

Operating expenses

 

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

 

General and administrative expenses

 

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

 

Research and product development, net of investment tax credits

 

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

 

 

Liquidity and Capital Resources

 

We have not generated significant revenues since inception. We incurred a net loss of approximately $233,000 and a cash flow deficiency from operating activities of approximately $90,000 for the three months ended January 31, 2013. We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern.  We have funded our activities to date almost exclusively from debt and equity financings.  These matters raise substantial doubt about our ability to continue as a going concern.

 

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

  

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

 

Seasonality

 

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

 

Recent Accounting Pronouncements

 

The FASB had issued certain accounting pronouncements as of January 31, 2013 that will become effective in subsequent periods; however, we do not believe that any of those pronouncements would have significantly affected our financial accounting measurements or disclosures had they been in effect during the three months ended January 31, 2013 and 2012 or that they will have a significant effect at the time they become effective.

 

 

Item 3.    Quantitative and Qualitative Disclosure About Market Risk

 

N/A.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2013, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of January 31, 2013.

 

Management’s Report on Internal Control Over Financial Reporting

 

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

 

Our management assessed the effectiveness of our disclosure controls and procedures and internal control over financial reporting for the quarter ended January 31, 2013 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that during the period covered by this report, our disclosure controls and procedures and internal control over financial reporting were not effective. Management has identified the following material weaknesses in our disclosure controls and procedures and internal control over financial reporting:

 

•

lack of documented policies and procedures;

 

•

there is no effective separation of duties, which includes monitoring controls, between the members of management; and,

 

•

lack of resources to account for complex and unusual transactions.

 

Management is currently evaluating what steps, if any, can be taken in order to address these material weaknesses in light of our current management structure.

 

Changes in Internal Control over Financial Reporting

 

During the fiscal quarter ended January 31, 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

On April 22, 2009, CardioGenics was served with a statement of claim in the Province of Ontario, Canada, from a prior contractor claiming compensation for wrongful dismissal and ancillary causes of action including payment of monies in realization of his investment in CardioGenics, with an aggregate claim of $514,000.  The Company considers all the claims to be without any merit, has already delivered a statement of defence and intends to vigorously defend the action.  If the matter eventually proceeds to trial, the Company does not expect to be found liable on any ground or for any cause of action.

 

 

Item 1A. Risk Factors

 

Not Applicable

 

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

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

  

  

SIGNATURES

 

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

 

 

 

	CARDIOGENICS HOLDINGS INC.
Date: March 18, 2013
	By:	/s/ Yahia Gawad
		Name:  Yahia Gawad
		Title:  Chief Executive Officer
Date: March 18, 2013
	By:	/s/ James Essex
		Name:  James Essex
		Title:  Chief Financial Officer

  

  

EXHIBIT INDEX

 

31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1		Section 906 Certification of Chief Executive Officer and Chief Financial Officer