UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-49620
(Commission file number)
COBALIS CORP.
-------------
(Exact name of small business issuer as specified in its charter)
Nevada 91-1868007
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2445 McCabe Way, Suite 150, Irvine, California 92614
(Address of principal executive offices)
(949) 757-0001
--------------
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No []
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 23, 2004 - 23,040,415
shares of common stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
COBALIS CORP.
Index
Page
Number
PART I. FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Consolidated Balance Sheet as of September 30, 2004 (unaudited) 2
Consolidated Statements of Operations for the
three and six months ended September 30, 2004 and 2003 (unaudited) 3
Consolidated Statements of Stockholders' Deficit for the
six months ended September 30, 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the
six months ended September 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
EXPLANATORY NOTE
Cobalis Corp. is filing this amendment to its quarterly report on Form 10-QSB
for the quarter ended September 30, 2004 to reflect the restatement of certain
previously reported information. The Form 10Q-SB was initially filed on November
24, 2004 prior to the completion of the review of our independent registered
public accounting firm. Portions of Part I, Item 1 "Financial Statements" and
Part I, Item 2 "Management's Discussion and Analysis or Plan of Operations", and
Part II, Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds",
have been amended to reflect this restatement. The remaining information in this
amended Form 10-QSB has not been updated to reflect any changes in information
that may have occurred subsequent to the date of the reporting period which this
Form 10-QSB relates. Additional information relating to the restatement is
contained in Note 11 of the notes to the Consolidated Financial Statements.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COBALIS CORP. AND SUBSIDIARY
(FORMERLY BIOGENTECH CORP.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
September 30,
2004
-----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,164
Prepaid expenses and other current assets 1,508
Inventory 5,903
---------------
TOTAL CURRENT ASSETS 38,575
DEBT ISSUE COSTS 53,940
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $58,475 53,583
WEBSITE DEVELOPMENT COSTS, net of accumulated amortization of $29,588 5,019
PATENTS, net of accumulated amortization of $197,918 707,397
DEPOSIT 40,000
---------------
TOTAL ASSETS $ 898,514
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 406,782
Accrued expenses 950,019
Due to related parties 1,596,789
Warrant liability 197,057
Convertible note payable, net of discount of $0 600,000
---------------
TOTAL CURRENT LIABILITIES 3,750,647
CONVERTIBLE PREFERRED STOCK (dividends on arrears of $75,000) 885,000
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIT
Common stock; $0.001 par value; 50,000,000 shares
authorized; 22,710,657 shares issued and outstanding 22,711
Additional paid-in capital 8,753,788
Deficit accumulated during the development stage (12,513,632)
---------------
TOTAL STOCKHOLDERS' DEFICIT (3,737,133)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 898,514
===============
See accompanying notes to the consolidated financial statements.
3
COBALIS CORP. AND SUBSIDIARY
(FORMERLY BIOGENTECH CORP.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 21,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2000 (INCEPTION) TO
2004 2003 2004 2003 SEPTEMBER 30, 2004
------------ ------------ ------------ ----------- ----------------
(as restated) (as restated)
NET SALES $ 120 $ 1,476 $ 479 $ 3,163 $ 5,634
COST OF SALES 1,810 39 2,930 478 31,772
------------ ------------ ------------ ----------- ----------------
GROSS PROFIT (LOSS) (1,690) 1,437 (2,451) 2,685 (26,138)
------------ ------------ ------------ ----------- ----------------
OPERATING EXPENSES:
Professional fees 730,501 91,798 943,460 190,321 2,896,554
Salary and wages 47,391 145,733 122,895 385,420 1,824,589
Rent expense 35,458 31,094 67,644 51,823 350,903
Marketing and promotions 10,895 9,278 11,793 192,354 410,587
Depreciation and amortization 20,973 27,075 41,947 54,151 389,390
Impairment expense - - - - 2,331,522
Other operating expenses 57,920 107,005 136,623 207,166 827,810
------------ ------------ ------------ ----------- ----------------
TOTAL OPERATING EXPENSES 903,138 411,983 1,324,362 1,081,235 9,031,355
------------ ------------ ------------ ----------- ----------------
LOSS FROM OPERATIONS (904,828) (410,546) (1,326,813) (1,078,550) (9,057,493)
OTHER INCOME (EXPENSE)
Interest expense and financing costs (826,219) (48,569) (1,027,588) (55,518) (2,725,561)
Change in fair value of warrant liability (125,397) - (54,919) - 154,422
------------ ------------ ------------ ----------- ----------------
TOTAL OTHER INCOME (EXPENSE) (951,616) (48,569) (1,082,507) (55,518) (2,571,139)
------------ ------------ ------------ ----------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,856,444) (459,115) (2,409,320) (1,134,068) (11,628,632)
PROVISION FOR INCOME TAXES - - - - -
------------ ------------ ------------ ----------- ----------------
NET LOSS (1,856,444) (459,115) (2,409,320) (1,134,068) (11,628,632)
PREFERRED STOCK DIVIDENDS 18,750 885,000 37,500 885,000 960,000
------------ ------------ ------------ ----------- ----------------
NET LOSS ATTRIBUTED TO COMMON STOCKHOLDERS $(1,875,194) $(1,344,115) $(2,446,820) $(2,019,068) $ (12,588,632)
============ ============ ============ =========== ================
NET LOSS PER SHARE:
BASIC AND DILUTED $ (0.09) $ (0.06) $ (0.11) $ (0.10) $ (0.68)
============ ============ ============ =========== ================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 21,814,842 20,842,273 21,529,330 20,327,134 18,600,074
============ ============ ============ =========== ================
See accompanying notes to the consolidated financial statements.
4
COBALIS CORP. AND SUBSIDIARY
(FORMERLY BIOGENTECH CORP.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM NOVEMBER 21, 2000 (INCEPTION) TO JUNE 30, 2004
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
COMMON STOCK PAID-IN DEFERRED DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL COMPENSATION STAGE (DEFICIT)
--------- --------- ----------- ----------- ---------- -----------
Balance at inception (November 21, 2000) - $ - $ - $ - $ - $ -
Issuance of founder's shares in exchange
for property and equipment 16,300,000 16,300 - - - 16,300
Issuance of common stock for cash - November 2000 @ $1.00 30,000 30 29,970 - - 30,000
Issuance of common stock for cash - December 2000 @ $1.00 15,000 15 14,985 - - 15,000
Issuance of common stock for cash - February 2001 @ $1.00 12,000 12 11,988 - - 12,000
Issuance of common stock for cash - March 2001 @ $1.00 125,000 125 124,875 - - 125,000
Issuance of common stock for services - March 2001 @ 1.00 $10,000 10 9,990 - - 10,000
Contributed capital - - 62,681 - - 62,681
Net loss for the period from inception -
(November 21, 2000) to March 31, 2001 - - - - (223,416) (223,416)
--------- --------- ----------- ----------- ---------- -----------
Balance at March 31, 2001, as restated 16,492,000 16,492 254,489 - (223,416) 47,565
Issuance of common stock for cash - April 2001 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for telephone equipment -
April 2001 @ $1.00 6,750 7 6,743 - - 6,750
Issuance of common stock for cash - May 2001 @ $1.00 11,000 11 10,989 - - 11,000
Issuance of common stock for website development -
May 2001 @ $1.00 17,000 17 16,983 - - 17,000
Issuance of common stock for legal services -
May 2001 @ $1.00 1,000 1 999 - - 1,000
Issuance of common stock for cash - June 2001 @ $1.00 23,500 24 23,476 - - 23,500
Issuance of common stock for cash - July 2001 @ $1.00 20,000 20 19,980 - - 20,000
Issuance of common stock for cash - August 2001 @ $1.00 25,000 25 24,975 - - 25,000
Issuance of common stock for services, related party -
September 2001 @ $1.00 65,858 66 65,792 - - 65,858
Issuance of common stock for cash - September 2001 @ $1.00 15,000 15 14,985 - - 15,000
Issuance of common stock for services -
September 2001 @ $1.00 11,000 11 10,989 - - 11,000
Issuance of stock options for services - September 2001 - - 32,000 - - 32,000
Issuance of common stock for cash - October 2001 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - December 2001 @ $1.00 30,000 30 29,970 - - 30,000
Issuance of common stock for services -
December 31, 2001 @ $1.00 33,000 33 32,967 - - 33,000
Issuance of common stock for services, related party -
December 2001 @ $1.00 117,500 118 117,382 - - 117,500
Issuance of common stock for prepaid advertising -
December 2001 @ $1.00 15,600 15 15,585 - - 15,600
Issuance of common stock for property and equipment -
January 2002 @ $3.00 1,000 1 2,999 - - 3,000
Issuance of common stock for services, related party -
January 2002 @ $1.00 33,000 33 32,967 - - 33,000
Issuance of common stock for cash - February 2002 @ $2.00 20,000 20 39,980 - - 40,000
Issuance of common stock for cash - March 2002 @ $2.00 12,500 12 24,988 - - 25,000
Contributed capital - - 211,269 - - 211,269
Deferred compensation - - - (60,108) - (60,108)
Net loss - - - - (1,144,249)(1,144,249)
--------- --------- ---------- ---------- --------- ----------
Balance at March 31, 2002, as restated 16,965,708 16,966 1,005,492 (60,108) (1,367,665) (405,315)
Issuance of common stock for services - April 2002 @ $2.00 3,000 3 5,997 - - 6,000
Issuance of common stock for cash - April 2002 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for cash - April 2002 @ $2.00 17,500 17 34,983 - - 35,000
Issuance of common stock for cash - May 2002 @ $1.00 10,000 10 9,990 - - 10,000
Issuance of common stock for cash - May 2002 @ $2.00 16,000 16 31,984 - - 32,000
Issuance of stock options for services - May 2002 - - 350,000 - - 350,000
Contributed capital - bonus expense - - 50,000 - - 50,000
Issuance of common stock for cash - June 2002 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - June 2002 @ $2.00 5,000 5 9,995 - - 10,000
Issuance of common stock for cash - July 2002 @ $1.00 5,000 5 4,995 - - 5,000
Issuance of common stock for cash - August 2002 @ $2.00 10,000 10 19,990 - - 20,000
Issuance of common stock for cash - September 2002 @ $.200 10,000 10 19,990 - - 20,000
Issuance of stock options below fair market value -
November 2002 - - 250,000 (250,000) - -
Issuance of common stock for conversion of note -
December 2002 @ $2.00 50,000 50 99,950 - - 100,000
Issuance of common stock for cash - December 2002 @ $2.00 20,000 20 39,980 - - 40,000
Issuance of common stock for services - December 2002 @ $2.0 15,0000 15 29,985 - - 30,000
Issuance of common stock for patents - December 2002 @ $2.00 2,000,000 2,000 1,285,917 - - 1,287,917
Contributed capital 292,718 - - 292,718
Issuance of common stock for exercise of options -
December 2002 574,028 574 574,602 - - 574,602
Deferred compensation 60,108 60,108
Contributed capital 5,000 - - 5,000
Issuance of common stock for services - January 2003 25,000 - - 25,000
Issuance of common stock for cash February 2003 @ $2.00 11,500 12 22,988 - - 23,000
Issuance of common stock for cash March 2003 @ $2.00 5,000 5 9,995 - - 10,000
Deferred compensation 54,000 - 54,000
Net loss - - (2,148,008) (2,148,008)
--------- --------- ----------- ----------- ---------- -----------
Balance at March 31, 2003, as restated 19,732,708 19,733 4,193,962 (196,000) (3,515,673) 502,022
Issuance of common stock for cash April 2003 @ $2.00 70,000 70 139,930 - - 140,000
Issuance of common stock for cash May 2003 @ $2.00 30,000 30 59,970 - - 60,000
Acquisition by Biogentech Corp of ("Togs for Tykes") 1,032,000 1,032 (101,032) - - (100,000)
Issuance of common stock for penalties January 2004 @ $2.00 135,000 135 377,865 - - 378,000
Issuance of common stock for services February 2004 @ $2.00 100,000 100 219,900 - - 220,000
Issuance of common stock for services February 2004 @ $2.00 20,000 20 36,980 - - 37,000
Value of beneficial converstion feature of convertible
debenture issued in September 2003 346,870 - - 346,870
Fair value allocated to warrant liability for detachable
warrants issued with preferred stock (181,849) - - (181,849)
Dividend on preferred stock 885,000 - (885,000) -
Deferred compensation 196,000 - 196,000
Net loss - (5,703,639) (5,703,639)
--------- --------- ----------- ----------- ---------- -----------
Balance at March 31, 2004 21,119,708 21,120 5,977,596 -(10,104,312) (4,105,596)
Issuance of common stock for penalties May 2004 @
#1.85 (unaudited) 170,000 170 314,330 - - 314,500
Issuance of common stock for services June 2004 @
$1.75 (unaudited) 10,000 10 17,490 - - 17,500
Issuance of common stock for conversion of debt
June 2004 @ $1.60 (unaudited) 371,317 371 593,736 - - 594,107
Issuance of common stock for services July 2004 @
$1.35 (unaudited) 7,489 8 10,101 10,109
Issuance of common stock for services July 2004 @
$1.10 (unaudited) 75,000 75 82,425 82,500
Issuance of common stock for services August 2004 @
$0.75 (unaudited) 100,000 100 74,900 75,000
Conversion of debt to common stock September 2004 @
$1.75 (unaudited) 857,143 857 1,499,143 1,500,000
Fair value of warrants issued to consultants (unaudited) 184,067 184,067
-
Net loss (unaudited) (2,409,320)(2,409,320)
--------- --------- ---------- --------- --------- ---------
Balance at September 30, 2004 (unaudited) 22,710,657 $ 22,711 $8,753,788 $ - $(12,513,632) $(3,737,133)
========= ========= ========== ========= ========= ==========
See accompanying notes to the consolidated financial statements.
5
COBALIS CORP. AND SUBSIDIARY
(FORMERLY BIOGENTECH CORP.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM
SIX MONTHS ENDED NOVEMBER 21,
SEPTEMBER 30, SEPTEMBER 30, 2000 (INCEPTION) TO
2004 2003 SEPTEMBER 30, 2004
------------- ---------------- -----------------
(as restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (2,409,320) $ (1,134,068) $ (11,628,632)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 41,947 54,151 394,610
Common stock issued for services 185,109 - 749,467
Common stock issued for penalty 314,500 - 692,500
Change in value of warrant liability 54,919 (48,203) (154,422)
Amortization of debt issue costs 13,942 2,319 29,560
Exercise of stock options for services - - 26,960
Amortization of discounts on notes 492,137 14,347 790,128
Issuance of stock options for services 184,067 - 591,067
Capital contribution - bonus (related party) - - 50,000
Amortization of prepaid advertising - - 15,600
Amortization of deferred compensation - 168,000 250,000
Discount on common stock issued for settlement of debt - - 50,000
Impairment expense - - 2,331,522
Changes in assets and liabilities: -
Prepaid expenses and other assets 10,111 1,793 (1,508)
Inventory - 97 347
Accounts payable 294,827 233,362 815,172
Accrued expenses 287,935 - 1,235,019
Amounts due to related parties 150,841 164,936 1,327,214
------------- ---------------- -----------------
Net cash used in operating activities (378,985) (543,266) (2,435,396)
------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (19,550) (86,007)
Increase in patent costs - - (24,711)
Change in restricted cash - - -
Merger fees and costs - - -
Increase in acquisition deposits - (1,970,000) (2,220,000)
Increase in other deposits - - (40,000)
Increase in capitalized website (3,532) (450) (18,097)
------------- ---------------- -----------------
Net cash used in investing activities (3,532) (1,990,000) (2,388,815)
------------- ---------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Payment on contract - - (161,000)
Proceeds from advances - related party 353,000 525,400 1,184,007
Proceeds from issuance of notes payable - 1,016,500 1,215,000
Proceeds from sale of common stock - 200,000 806,500
Proceeds from sale of preferred stock - 885,000 885,000
Proceeds from convertible debenture - - 600,000
Capital contribution - - 571,668
Payment of debt issue costs - - (83,500)
Payments on advances - related party (15,500) (22,800) (162,300)
------------- ---------------- -----------------
Net cash provided by financing activities 337,500 2,604,100 4,855,375
------------- ---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (45,017) 70,834 31,164
CASH AND CASH EQUIVALENTS, Beginning of period 76,181 2,290 -
------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, End of period $ 31,164 $ 73,124 $ 31,164
============= ================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ - $ - $ -
============= ================ =================
Income taxes paid $ - $ - $ -
============= ================ =================
See accompanying notes to the consolidated financial statements.
6
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared by Cobalis
Corp. (the "Company"), pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes for the year ended March 31,
2004 included in the Company's Annual Report on Form 10-KSB. The results of the
six months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the full year ending March 31, 2005.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred a net loss of $2,409,320 for the six months ended September
30, 2004 and as of September 30, 2004, the Company had a working capital deficit
of $3,712,072 and a stockholder deficit of $3,737,133. In addition, as of
September 30, 2004, the Company has not developed a substantial source of
revenue. These conditions raise substantial doubt as to the Company's ability to
continue as a going concern. These consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company is currently attempting to raise additional debt and equity
financing for operating purposes.
The Company requires substantial capital to pursue its operating strategy, which
includes commercialization of its products, and currently has limited cash for
operations. Until the Company can obtain revenues sufficient to fund working
capital needs and additional research and development costs necessary to obtain
the regulatory approvals for commercialization, the Company will be dependent
upon external sources of financing.
There can be no assurances that sufficient financing will be available on terms
acceptable to the Company, or at all. If the Company is unable to obtain such
financing, the Company will be forced to scale back operations, which could have
an adverse effect on the Company's financial condition and results of
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern.
STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
7
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation. The Company has elected to use the intrinsic value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation issued to employees.
For options granted to employees where the exercise price is less than the fair
value of the stock at the date of grant, the Company recognizes an expense in
accordance with APB 25. For non-employee stock based compensation the Company
recognizes an expense in accordance with SFAS No. 123 and values the equity
securities based on the fair value of the security on the date of grant. For
stock-based awards the value is based on the market value for the stock on the
date of grant and if the stock has restrictions as to transferability a discount
is provided for lack of tradability. Stock option awards are valued using the
Black-Scholes option-pricing model.
The pro forma information regarding the effects on operations that is required
by SFAS 123 and SFAS 148 are not presented since there is no pro forma expense
to be shown for the three months and six months ended September 30, 2004 and
2003.
8
NOTE 2 - LOSS PER SHARE
The Company reports loss per share in accordance with SFAS No. 128, "Earnings
per Share." Basic loss per share is computed by dividing loss available to
common shareholders by the weighted average number of common shares available.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Diluted loss per share has
not been presented since the effect of the assumed exercise of options and
warrants to purchase common shares would have an anti-dilutive effect. There
were 5,594,167 and 1,344,167 common equivalent shares outstanding related to the
options and warrants at September 30, 2004 and 2003, respectively. In addition,
as of September 30, 2004, 716,667 shares of common stock are issuable upon the
conversion of the convertible note payable and convertible preferred stock.
NOTE 3 - PROPERTY AND EQUIPMENT
The cost of property and equipment at September 30, 2004 consisted of the
following:
Furniture and fixtures $ 71,500
Office equipment 40,558
-------------
112,058
Less accumulated depreciation and amortization (58,475)
-------------
$ 53,583
NOTE 4 - DUE TO RELATED PARTIES
Due to related parties at September 30, 2004 consists of the following:
R&R Holdings, Inc. and affiliate a) $ 1,387,830
Chaslav Radovich b) 62,500
Other officers/executives c) 146,459
------------
$ 1,596,789
a) On January 1, 2001, the Company entered into a consulting contract with R&R
Development, Inc. DBA R&R Holdings, Inc. and its affiliate ("R&R") whereby they
would provide managerial consulting services to the Company at the rate of
$125,000 per year and the rate was increased to $135,000 per year. R&R is also
a shareholder of the Company. As of September 30, 2004, the Company had accrued
$276,142 of consulting fees relating to this agreement.
R&R advances the Company cash from time to time. As of September 30, 2004, the
Company owed R&R $840,357 related to these advances. The Company has accrued
interest on these advances at a rate of 10% per annum. Accrued interest at
September 30, 2004 related to these advances totaled $79,184.
In September 2003, R&R advanced the Company an additional amount of $170,000 at
the rate of 10% per annum. These funds were specifically to provide the Company
with additional financing with regard to the InnoFood transaction. Accrued
interest at September 30, 2004 related to this advance was $22,147.
9
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
b) The Company currently owes its Chief Executive Officer $62,500 in past due
compensation. During the three months ended June 30, 2004, the Company's Chief
Executive Officer was issued 107,901 shares of the Company's common stock in
satisfaction of $154,500 of past due compensation plus interest. The Company is
accruing salary to its CEO at an annual rate of $125,000.
c) The Company currently owes other current and former executives a total of
$146,459 in past due compensation.
NOTE 5 - CONVERTIBLE NOTE PAYABLE
In September 2003, the Company sold a $600,000, three-year, 8% convertible note
payable, which is convertible into shares of the Company's common stock at the
initial conversion price of $2.00 per share. This price is subject to adjustment
should the Company issue shares of its common stock at a price less than $1.75
per share. The convertible note payable was sold with detachable three-year
warrants to purchase 90,000 shares of the Company's common stock at $2.88 per
share. The warrant exercise price is also subject to adjustment based on sales
of the Company's common stock below the current fair market value on the
contract date.
The Company also entered into a registration rights agreement whereby the
Company agreed to file a valid registration statement with the Securities and
Exchange Commission to register the shares of common stock underlying the
Convertible Debentures and Debenture Warrants. Pursuant to EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the relative fair value of the warrants has
been recorded as a short-term liability until the Company has obtained an
effective registration statement for these shares. If the Company does not file
such an effective registration statement within 30 days of the closing date, or
October 8, 2003, the Company is subject to penalties as follows: 1% of the
principal amount of the funding for the first 30 day period in which the Company
fails to file such registration statement, and 2% for each 30 day period
thereafter. At September 30, 2004, the Company had not filed such a registration
statement and accordingly is currently subject to a penalty of approximately
$138,000.
Per the terms of the note agreement, in the event of default, the Company is
subject to accrue interest at a default rate of 18% from the date of the
default. In addition, the Company is obligated to remit 125% of the outstanding
note balance upon the acceleration of repayment by the holder. As of September
30, 2004, Company had accrued interest of $114,805 related to this convertible
note payable.
In addition, the Company is required to report a value of the warrant as a fair
value and record the fluctuation to the fair value of the warrant liability to
current operations. During the six months ended September 30, the increase of
the relative fair value of the warrants was $27,736. The relative fair value of
the warrants was $82,371 as of September 30, 2004.
This convertible debenture is presented in the accompanying balance sheet as a
current liability as the Company has not made required interest payment on this
convertible debenture which is an event of default that give the holder the
right to call the convertible debenture.
10
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
A rollforward of the convertible note payable is as follows:
Balance, March 31, 2004 $ 107,863
Conversions into equity -
Amortization of discounts 492,137
-----------------
Balance, September 30, 2004 $ 600,000
=================
During the three months ended September 30, 2004, the Company fully amortized
the debt discount associated with the $600,000 convertible note payable due to
the lawsuit filed by the holder of the convertible note payable. See Note 10.
NOTE 6 - CONVERTIBLE PREFERRED STOCK
In September 2003, the Company sold 1,000 shares of its 7.5% convertible
preferred stock for $1,000,000, less direct issuance costs of $115,000, which
were netted against the proceeds of the offering. The Convertible Preferred
Stock carries voting rights equivalent to the number of shares of common stock
into which it can be converted, and has liquidation preference of $1,000 per
share. The Convertible Preferred Stock is convertible into shares of the
Company's common stock at the initial conversion price of $2.40 per share. This
price is subject to change should the Company issue shares of its common stock
at a price less than $1.75 per share. Included with the Convertible Preferred
Stock were detachable three-year warrants to purchase 104,167 shares of the
Company's common stock at the price of $2.88 per share. The warrant exercise
price is also subject to adjustment based on sales of the Company's common stock
below the current fair market value on the contract date.
Since the intrinsic value of the beneficial conversion feature and relative fair
value of the warrants exceeds the proceeds of the convertible preferred stock,
the amount of the discount assigned to the beneficial conversion feature and
warrants is limited to the amount of the proceeds of the convertible preferred
stock. The discount was recorded as a preferred stock dividend at the date of
issuance. The Company recognized $885,000 of preferred dividends related to the
discount.
Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock", the relative fair value
of the warrants, has been recorded as a short-term liability until the Company
has obtained an effective registration statement for these shares.
If the Company does not file such an effective registration statement within 30
days of the closing date, or October 25, 2003, the Company is subject to
penalties as follows: 1% of the value of the shares and the warrants paid by the
purchaser for the first 30 day period in which the Company fails to file such
registration statement, and 2% for each 30 day period thereafter. At September
30, 2004, the Company has not filed such a registration statement and
accordingly is currently subject to a penalty of $230,000.
In addition, the Company is required to report a value of the warrant as a fair
value and record the fluctuation to the fair value of the warrant liability to
current operations. During the six months ended September 30, 2004, the increase
of the relative fair value of the warrants was $27,183. The relative fair value
of the warrants was $59,767 as of September 30, 2004.
As of September 30, 2004, there was $75,000 of dividends in arrears related to
the 1,000 share of convertible preferred stock.
11
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 7 - COMMON STOCK
During the six months ended September 30, 2004 the Company issued common stock
for the following:
o 170,000 shares valued at $314,500 related to a Forbearance Agreement
related to the convertible note payable;
o 192,489 shares valued at $185,109 for consulting services;
o 371,317 shares valued at $594,107 for the conversion of certain
accounts payable and amount payable to related parties and;
o 857,143 shares valued at $1,500,000 for the conversion of notes
payable and accrued interest.
During the three months ended September 30, 2004, the Company issued 3,050,000
warrants to consultants with a weighted average exercise price of $1.74. The
warrants vest over a period ranging from immediately to three years. The fair
value of these warrants amounted to $1,364,037 which is being amortized to
expense over the terms of the consulting agreements. During the three months
ended September 30, 2004, the Company recognized an expense of $184,067 related
to these warrants.
In addition, the Company entered into a consulting agreement and agreed to issue
to the consultant 100,000 share on each of the following dates: August 1, 2004
(included in the 192,489 above), February 1, 2005 and July 31, 2005. The Company
also agreed to issue to this consultant 200,000 warrants with an exercise price
of $1.75 per share on each of the following dates: November 1, 2004, May 1, 2005
and July 31, 2005. At September 30, 2004, the Company has recognized a liability
of $109,241 related to these unissued shares and warrants.
NOTE 8 - RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The Company entered into agreements with Gene Pharmaceuticals, LLC ("GP LLC") to
purchase certain patents and other assets. The Company previously had valued the
patents based on the present value of the minimum contractual obligations using
a 6% discount rate. Per the December 19, 2002 agreement, the Company issued to
GP LLC 2,000,000 shares of the Company's common stock in exchange for the
minimum contractual payments. At this time the Company valued the transaction
based on the deemed current value of the Company's common stock, which resulted
in the Company increasing the carrying value of the patents by $1,658,378. At
the time the Company's stock was not publicly traded so the Company valued its
stock at $2.00 per share which was the most recent price that the Company had
sold shares for cash. After this increase in the value of patents, the patents
carrying value was $3,905,832. At March 31, 2003, the patents were appraised at
$3,850,000 which resulted in the Company writing down the value of the patents
by $55,832.
12
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
The Company has restated its previously issued financial statements to reflect
using a discount rate of 15.5% rather than 6% to value the minimum contractual
obligations and to value the 2,000,000 shares of common stock issued in the
December 19, 2002 transaction at the carrying value of the contractual
obligation that was exchanged for the shares rather than at the deemed current
value of the shares at the date of issuance.
In addition, the Company did not amortize the value of its patents prior to
January 1, 2004. The consolidated financial statements have been restated to
reflect the amortization of the Company's patents over the estimated useful life
of the patents using the straight line method.
The effects of the restatement as of September 30, 2003 and the three and six
months ended September 30, 2003 are as follows:
AS PREVIOUSLY
FILED AS RESTATED
Patents $ 3,850,000 $ 1,125,466
Accumulated amortization of patents $ - $ 235,962
Total Stockholders' equity (deficit) $ 2,761,471 $ (199,025)
Net loss for the three months ended September 30, 2003 $ (437,289) $ (459,115)
Net loss for the six months ended September 30, 2003 $ (1,090,415) $ (1,134,068)
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
(material omitted)
In November 2004, the FASB issued SFAS No. 151, entitled Inventory Costs -- An
Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, entitled Inventory Pricing [June 1953], to clarify the accounting
for "abnormal amounts" of idle facility expense, freight, handling costs, and
wasted material [spoilage]. Before revision by SFAS No. 151, the guidance that
existed in ARB No. 43 stipulated that these type items may be "so abnormal" that
the appropriate accounting treatment would be to expense these costs as incurred
[i.e., these costs would be current-period charges]. SFAS No. 151 requires that
these type items be recognized as current-period charges without regard to
whether the "so abnormal" criterion has been met. Additionally, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of SFAS 151 did not impact the consolidated financial statements.
NOTE 10 - SUBSEQUENT EVENTS
On November 8, 2004, the Gryphon Master Fund, LP filed a lawsuit against the
Company in United States District Court, Northern District of Texas, Dallas
Division. The lawsuit seeks repayment of the $600,000 convertible note payable,
accrued interest on the convertible note payable, penalties for failing to
register the shares underlying the conversion of the convertible note payable,
attorney fees and court costs. As of September 30, 2004, the Company has accrued
$1,257,805 related to this matter.
Subsequent to September 30, 2004, the Company issued 329,758 shares of its
common stock to consultants for services.
13
COBALIS CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NOTE 11 - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The Company has restated its previously reported Consolidated Balance Sheet as
of September 30, 2004, and its Consolidated Statements of Operations for the
three months and six months ended September 30, 2004, Consolidated Statements of
Stockholders' Deficit for the period from November 21, 2000 (inception) to
September 30, 2004 and the Consolidated Statement of Cash Flows for the six
months ended September 30, 2004 for the following:
o issuance of 100,000 shares to a consultant;
o value of shares of common stock and warrants that will be issued to a
consultant per a consulting agreement; and
o amortizing the fair value of warrants issued to consultants during the
three months ended September 30, 2004 over the life of the respective
consulting agreements rather than over the vesting periods of the
respective warrant grants.
The effects of these adjustments resulted in 1) a decrease in the net loss
previously reported of $138,878 for the three and six months ended September 30,
2004; 2) an increase in accrued expenses of $109,241, 3) increase of common
stock of $100; 4) a decrease of additional paid in capital of $248,219; 5) a
decrease of deficit accumulated during development stage of $138,878.
The Company filed its previous Form 10-QSB on November 24, 2004 prior to its
registered public accounting firm completing their review.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF
MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS ARE NOT BASED ON HISTORICAL FACT.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN
COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS,
HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY
IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN
THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
BioGentec Incorporated ("BG"), a private Nevada corporation, was incorporated on
November 21, 2000 according to the laws of Nevada, under the name St Petka, Inc.
On May 4, 2001, St Petka, Inc. formally changed its name to BioGentec
Incorporated. On July 2, 2003, BG was merged into Togs for Tykes Acquisition
Corp. ("TTAC"), a wholly owned subsidiary formed for the purpose of acquiring
BG. TTAC is the wholly owned subsidiary of the registrant, formerly Togs for
Tykes, Inc. and most recently, BioGentech Corp. On July 6, 2004, BioGentech
Corp. changed its name to Cobalis Corp. As allowed under SFAS 141, "Business
Combinations" ("SFAS 141"), we designated a date of convenience of the closing
for accounting purposes as June 30, 2003. Under the terms of the merger
agreement, all of BG's outstanding common stock (19,732,705 shares of $0.001 par
value stock) will be exchanged for 19,732,705 shares newly issued shares of
$0.001 par value stock of Cobalis Corp. common stock. At the date of the
transaction, we had 5,532,000 shares of common stock outstanding of which
4,500,000 will be cancelled as part of the transaction leaving 23,864,708 shares
outstanding.
This transaction was consummated with the filing of the Articles of Merger with
the State of Nevada on July 2, 2003 BG shareholders then effectively controlled
approximately 95% of the issued and outstanding common stock of Cobalis. Since
the shareholders of BG obtained control of Cobalis, according to SFAS 141, this
acquisition has been treated as a recapitalization for accounting purposes, in a
manner similar to reverse acquisition accounting.
15
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with in accordance with accounting principles generally accepted in
the United States of America, which contemplate continuation as a going concern.
We incurred a net loss of $2,409,320 for the six months ended September 30, 2004
and as of September 30, 2004, we had a working capital deficit of $3,712,072 and
a stockholder deficit of $3,737,133. In addition, as of September 30, 2004, we
have not developed a substantial source of revenue. These conditions raise
substantial doubt as to our ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. These consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
We are currently attempting to raise additional debt and equity financing for
operating purposes. We require substantial capital to pursue our operating
strategy, which includes commercialization of our products, and currently has
limited cash for operations. Until we can obtain revenues sufficient to fund
working capital needs and additional research and development costs necessary to
obtain the regulatory approvals for commercialization, we will be dependent upon
external sources of financing.
There can be no assurances that sufficient financing will be available on terms
acceptable to us, or at all. If we are unable to obtain such financing, we will
be forced to scale back operations, which could have an adverse effect on our
financial condition and results of operations.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, accrued expenses,
financing operations, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value 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 most
significant accounting estimates inherent in the preparation of our consolidated
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, primarily valuation of patent costs and stock-based compensation. The
methods, estimates and judgments we use in applying these most critical
accounting policies have a significant impact on the results we report in our
consolidated financial statements.
Patent Cost Valuation. The determination of the fair value of certain acquired
assets and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions. Determining the fair values and useful
lives of intangible assets especially requires the exercise of judgment. While
there are a number of different generally accepted valuation methods to estimate
the value of intangible assets acquired, we primarily use the weighted-average
probability method outlined in SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This method requires significant management
judgment to forecast the future operating results used in the analysis. In
addition, other significant estimates are required such as residual growth rates
and discount factors. The estimates we have used are consistent with the plans
and estimates that we use to manage our business, based on available historical
information and industry averages. The judgments made in determining the
estimated useful lives assigned to each class of assets acquired can also
significantly affect our net operating results.
16
Stock-based Compensation. We record stock-based compensation to outside
consultants at fair market value in general and administrative expense. We do
not record expense relating to stock options granted to employees with an
exercise price greater than or equal to market price at the time of grant. We
report pro-forma net loss and loss per share in accordance with the requirements
of SFAS 123 and 148. This disclosure shows net loss and loss per share as if we
had accounted for our employee stock options under the fair value method of
those statements. Pro-forma information is calculated using the Black-Scholes
pricing method at the date of grant. This option valuation model requires input
of highly subjective assumptions. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of fair value of our employee
stock options.
Estimate of Litigation-based Liability. We are defendant in certain claims and
litigation in the ordinary course of business. We accrue liabilities relating to
these lawsuits on a case-by-case basis. We generally accrue attorney fees and
interest in addition to the liability being sought. Liabilities are adjusted on
a regular basis as new information becomes available. We consult with our
attorneys to determine the viability of an expected outcome. The actual amount
paid to settle a case could differ materially from the amount accrued.
LIQUIDITY AND CAPITAL RESOURCES
We had a cash and cash equivalents of $31,164 at September 30, 2004. We also had
$1,508 in prepaid and other current assets and $5,903 in inventory making our
total current assets at September 30, 2004 equal to $38,575. We also had the
following long term assets: $53,940 in debt issue costs; $53,583 in property and
equipment, net, $5,019 in net website development costs, and $707,397
represented by net value of our patents, $40,000 in deposits. Our total assets
as of September 30, 2004 were $898,514.
Our total current liabilities were $3,750,647 at September 30, 2004, which was
represented by accounts payable of $406,782 and accrued expenses of $950,019,
due to related parties of $1,596,789, warrant liability of $197,057, and
convertible note payable of $600,000. Our liabilities exceeded our assets by
$2,852,133 as of September 30, 2004.
We have financed our operations primarily through cash generated from related
party debt financing and from the private placement sales of equity securities,
as well as issuing a convertible debenture. During the six months ended
September 30, 2004, we received an additional $353,000 from a related party and
issued 371,317 shares of our common stock as payment for certain accounts
payable and past due salaries to certain related parties.
Our cash used in investing activities was $3,532 for the six months ended
September 30, 2004, as compared to $1,990,000 for the same period ended in 2003,
a decrease of $1,986,468. In 2003, we made an acquisition deposit of $1,970,000
related to our InnoFood acquisition.
Our net cash provided by financing activities was $337,500 for the six months
ended September 30, 2004 compared to $2,604,100 for the same period in 2003. The
decrease of $2,266,600 is primarily due to the proceeds received in 2003 from
the sale a preferred stock, convertible debentures and notes payable. There were
no such issuances in 2004.
17
RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
We entered into agreements with Gene Pharmaceuticals, LLC, ("GP LLC") to
purchase certain patents and other assets. We previously had valued the patents
based on the present value of the minimum contractual obligations using a 6%
discount rate. Per the December 19, 2002 agreement, we issued to GP LLC
2,000,000 shares of our common stock in exchange for the minimum contractual
payments. At that time we valued the transaction based on the deemed current
value of our common stock, which resulted in us increasing the carrying value of
the patents by $1,658,378. At the time our stock was not publicly traded so we
valued our stock at $2.00 per share which was the most recent price that we sold
shares for cash. After this increase in the value of patents, the patents
carrying value was $3,905,832. At March 31, 2003, the patents were appraised at
$3,850,000 which resulted in us writing down the value of the patents by
$55,832.
We have restated our previously issued financial statements to reflect using a
discount rate of 15.5% rather than 6% to value the minimum contractual
obligations and to value the 2,000,000 shares of common stock issued in the
December 19, 2002 transaction at the carrying value of the contractual
obligation that was exchanged for the shares rather than at the deemed current
value of the shares at the date of issuance.
In addition, we did not amortize the value of our patents prior to January 1,
2004. The consolidated financial statements have been restated to reflect the
amortization of our patents over the estimated useful life of the patents using
the straight line method.
The effects of the restatement as of September 30, 2003 and the three and six
months ended September 30, 2003 are as follows:
AS PREVIOUSLY
FILED AS RESTATED
Patents $ 3,850,000 $ 1,125,466
Accumulated amortization of patents $ - $ 235,962
Total Stockholders' equity (deficit) $ 2,761,471 $ (199,025)
Net loss for the three months ended September 30, 2003 $ (437,289) $ (459,115)
Net loss for the six months ended September 30, 2003 $ (1,090,415) $ (1,134,068)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES AND COST OF SALES
We had no significant revenues for the three months ended September 30, 2004 and
September 30, 2003 as we are undertaking a Phase III clinical trial in order to
obtain FDA approval of PreHistin (TM) as an over the counter drug. Our net
revenues were $120 less $1,810 for cost of sales for a gross loss of $1,690 for
the three months ended September 30, 2004 as compared net sales of $1,476 less
$39 for cost of sales for a gross profit of $1,437 for the restated three months
ended September 30, 2003.
OPERATING EXPENSES
Our operating expenses for the three months ended September 30, 2004 were
$903,138 compared to $411,983 for the three months ended September 30, 2003. For
both periods, we incurred expenses for two major purposes: i) ongoing
development of our PreHistin (TM) product and related product management and ii)
general management and fund raising efforts. For the three months ended
September 30, 2004, this amount was represented by $20,973 in depreciation and
amortization, $730,501 in professional fees, $47,391 in salary and wages,
$35,458 in rent expense, $10,895 in marketing and promotions, and $57,920 in
other operating expenses, as compared to the three months ended September 30,
2003, where we had $27,075 in depreciation and amortization, $91,798 in
professional fees, $145,733 in salary and wages, $31,094 in rent expense, $9,278
in marketing and promotions, and $107,005 in other operating expenses. Our
operating expenses increased during the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003 principally as a result of
the increase in professional fees.
18
Interest expense and financing costs for the three months ended September 30,
2004 were $826,219 compared to $48,569 for the three months ended September 30,
2003. The significant increase is due to the interest on the convertible note
payable, the demand note payable and the advances from related parties. In
addition, the amortization of debt issue costs and debt discounts and penalties
for not registering shares underlying the conversion of the convertible note
payable and convertible preferred stock. Also, during the three months ended
September 30, 2004, we fully amortized the debt discount associated with the
$600,000 convertible note payable due to the lawsuit filed by the holder of the
convertible note payable.
The change in the fair value in the warrant liability relates to the increase in
the value of the detachable warrants issued in connection with the convertible
note payable and convertible preferred stock. Due to the increase of our stock
price, the fair value of these warrants has increased resulting in the increase
of the warrant liability.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 2003
REVENUES AND COST OF SALES
We had no significant revenues for the six months ended September 30, 2004 and
September 30, 2003 as we are undertaking a Phase III clinical trial in order to
obtain FDA approval of PreHistin (TM) as an over the counter drug. Our net
revenues were $479 less $2,930 for cost of sales for a gross loss of $2,451 for
the six months ended September 30, 2004 as compared net sales of $3,163 less
$478 for cost of sales for a gross profit of $2,685 for the restated six months
ended September 30, 2003.
OPERATING EXPENSES
Our operating expenses for the six months ended September 30, 2004 were
$1,324,362 compared to $1,081,235 for the six months ended September 30, 2003.
For both periods, we incurred expenses for two major purposes: i) ongoing
development of our PreHistin (TM) product and related product management and ii)
general management and fund raising efforts. For the six months ended September
30, 2004, this amount was represented by $41,947 in depreciation and
amortization, $943,460 in professional fees, $122,895 in salary and wages,
$67,644 in rent expense, $11,793 in marketing and promotions, and $136,623 in
other operating expenses, as compared to the six months ended September 30,
2003, where we had $54,151 in depreciation and amortization, $190,321 in
professional fees, $385,420 in salary and wages, $51,823 in rent expense,
$192,354 in marketing and promotions, and $207,166 in other operating expenses.
Our operating expenses increased during the six months ended September 30, 2004
as compared to the six months ended September 30, 2003 principally as a result
of the increase in professional fees.
Interest expense and financing costs for the six months ended September 30, 2004
were $1,027,588 compared to $55,518 for the six months ended September 30, 2003.
The significant increase is due to the interest on the convertible note payable,
the demand note payable and the advances from related parties. In addition, the
amortization of debt issue costs and debt discounts and penalties for not
registering shares underlying the conversion of the convertible note payable and
convertible preferred stock. Also, during the three months ended September 30,
2004, we fully amortized the debt discount associated with the $600,000
convertible note payable due to the lawsuit filed by the holder of the
convertible note payable.
19
The change in the fair value in the warrant liability relates to the increase in
the value of the detachable warrants issued in connection with the convertible
note payable and convertible preferred stock. Due to the increase of our stock
price, the fair value of these warrants has increased resulting in the decrease
of the warrant liability.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.
Over the next 12 months, we plan to continue moving forward with the Phase III
clinical trials of our allergy prevention product, PreHistin (TM), followed
immediately by submission of an application to the FDA for marketing approval of
PreHistin (TM) as an over the counter ("OTC") allergy medication. We hope to
receive approval from the FDA in early 2006, enabling our US marketing launch of
the product for the spring 2006 allergy season.
While continuing with the US FDA approval process, we are working to finalize
the international launch strategy in the primary global markets. Discussions are
progressing with potential joint venture partners for marketing, manufacturing,
regulatory approval and distribution throughout the world, the most advanced of
which are with companies in Australia, Japan and Canada.
In addition to seeking approval from the FDA for the primary indication of
seasonal allergic rhinitis (hay fever) for PreHistin (TM), we plan to conduct
additional studies to validate the viability of approval for supplemental
indications and alternative delivery mechanisms. The tests will be a combination
of clinical trials and laboratory analyses.
We are also actively pursuing the acquisition and development of products that
we hope will enable us to leverage our resources. Areas of focus are OTC
pharmaceutical products and nutritional supplements.
As of September 30, 2004, we had a cash of $31,164. To fully execute our
business plan for the next 12 months, we will need to raise additional funds in
order to complete the Phase III clinical trials, submit the PreHistin (TM)
application to the United States FDA and execute a marketing launch of the
PreHistin (TM) product. We will also need to raise funds to execute studies for
the further development of the PreHistin (TM) product line and to complete the
acquisition of additional products. Along with our investment bankers, we plan
to raise these funds through private and institution or other equity offerings.
We may attempt to secure other loans from lending institutions or other sources.
There is no guarantee that we will be able to raise additional funds through
offerings or other sources. If we are unable to raise funds, our ability to
continue with product development will be hindered.
Other than the research and development related to our PreHistin (TM) product,
we do not plan to engage in any other research and development unless we are
able to raise additional funds. We do not anticipate the purchase of significant
equipment within the next 12 months for our PreHistin (TM) product. We do not
anticipate any significant hiring over the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
20
ITEM 3. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 8, 2004, the Gryphon Master Fund, LP filed a lawsuit against us in
United States District Court, Northern District of Texas, Dallas Division. The
lawsuit seeks repayment of the $600,000 convertible note payable, accrued
interest on the convertible note payable, penalties for failing to register the
shares underlying the conversion of the convertible note payable, attorney fees
and court costs. As of September 30, 2004, we have accrued $1,257,805 related to
this matter.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, we issued the following shares
of our common stock:
o 100,000 shares to Marinko Vekovic for services valued at $75,000
o 75,000 shares to Equity Media Ltd. for services valued at $82,500
o 857,143 shares to James Hammer for the conversion of notes payable and
accrued interest valued at $1,500,000 or $1.75 per shares .
o 3,050,000 warrants to purchase shares of our common stock to
consultants with a weighted average exercise price of $1.74. The
warrants vest over a period ranging from immediately to three years.
The fair value of these warrants amounted to $1,364,037 which is being
amortized to expense over the terms of the consulting agreements.
During the three months ended September 30, 2004, we recognized an
expense of $184,067 related to these warrants. The warrants vesting
periods range from immediately to three years.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We are currently in default on terms of our $600,000 convertible note payable to
Gryphon Master Fund LP, dated September 8, 2003, for failing to register the
shares underlying the conversion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
------------------- ------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
------------------- ------------------------------------------------------------
3.1 Articles of Incorporation (1)
------------------- ------------------------------------------------------------
3.1.1 Certificate of Amendment to Articles of Incorporation (1)
------------------- ------------------------------------------------------------
3.1.2 Certificate of Amendment to Articles of Incorporation (2)
------------------- ------------------------------------------------------------
3.1.3 Certificate of Amendment to Articles of Incorporation (3)
------------------- ------------------------------------------------------------
3.2 Bylaws (1)
------------------- ------------------------------------------------------------
4.1 Convertible Note with Gryphon Master Fund LP (4)
------------------- ------------------------------------------------------------
10.1 Asset Purchase Agreement between BioGentec Inc., (fka St.
Petka, Inc.) and Gene Pharmaceuticals, LLC, (fka Allergy
Limited, LLC,) as amended (4)
------------------- ------------------------------------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer and Chief Financial Officer of the Company (5)
------------------- ------------------------------------------------------------
32.1 Section 906 Certification by Chief Executive Officer and
Chief Financial Officer (5)
------------------- ------------------------------------------------------------
(1) Incorporated by reference to the exhibits to the registrant's
registration statement on Form 10-SB filed on February 8, 2002.
(2) Incorporated by reference to the exhibits to the registrant's
information statement on schedule 14C filed on June 10, 2003.
(3) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K, filed July 8, 2004.
(4) Incorporated by reference to the exhibits to the registrant's annual
report on Form 10-KSB for the fiscal year ended March 31, 2004.
(5) Included herein.
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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.
COBALIS CORP.
December 9, 2004 By: / s/ Chaslav Radovich
---------------------------------------------
Chaslav Radovich
Principal Executive Officer, President,
Treasurer, Secretary, Director