The accompanying
notes are an integral part of the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
1.
|
|
Nature of our Business, Development Stage Company and Continuance of Operations
|
These unaudited condensed consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
applicable to a going concern which contemplated the realization of assets and the satisfaction of liabilities and commitments
in the normal course of business. Since inception, the Company has incurred substantial losses and there is substantial doubt that
the Company will generate sufficient revenues in the foreseeable future to meet its operating cash requirements. Accordingly, the
Company’s ability to continue operations depends on its success in obtaining additional capital in an amount sufficient to
meet its cash needs. This raises substantial doubt about its ability to continue as a going concern. These financial statements
do not include any adjustments that might result from this uncertainty.
Our independent registered public
accounting firm has included an explanatory paragraph in its report on the financial statements for the year ended October 31,
2012 which raises substantial doubt about our ability to continue as a going concern.
Micro Imaging Technology, Inc.
(the “Company”), a California corporation, is a holding company whose operations are conducted through its Nevada subsidiary,
Micro Imaging Technology (“MIT”). As of July 31, 2013, the Company owned eighty point seven percent (80.7%) of the
issued and outstanding stock of MIT.
The losses incurred to date which
are applicable to the minority stockholders of the Company’s consolidated subsidiary, MIT, exceed the value of the equity
held by the minority stockholders. Such losses have been allocated to the Company as the majority stockholder and are included
in the net loss and accumulated deficit in the condensed consolidated financial statements for the nine months ended July 31, 2013.
Any future profits reported by our subsidiary will be allocated to the Company until the minority’s share of losses previously
absorbed by the Company have been recovered.
In 1997, the Company began marketing
a small, point-of-use water treatment product aimed at the high purity segment of commercial and industrial water treatment markets.
In February 2000, the Company formed Electropure EDI, Inc. (EDI), a wholly-owned Nevada subsidiary, through which all manufacturing
and sales of its proprietary water treatment products were then conducted. In October 2005, the Company sold the assets of the
EDI subsidiary and discontinued operations.
The Company acquired, in October
1997, an exclusive license to the patent and intellectual property rights involving laser light scattering techniques to be utilized
in the detection and monitoring of toxicants in drinking water. In February 2000, the Company formed Micro Imaging Technology (MIT),
a majority-owned Nevada subsidiary, to conduct research and development based upon advancements developed and patented from the
licensed technology. The technology being developed is a non-biologically based system utilizing both proprietary hardware and
software to rapidly (near real time) determine the specific specie of an unknown microbe present in a fluid with a high degree
of statistical probability (“MIT system”). It will analyze a sample presented to it and compare its characteristics
to a library of known microbe characteristics on file. At present, it is the Company’s only operation.
Effective with the sale of its
EDI operation in October 2005, the Company’s planned principal operation, the further development and marketing of its remaining
technology, has not produced any significant revenue and, as such, the Company, beginning with the fiscal year starting November
1, 2005, is considered a development stage enterprise.
The accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments which management believes
are necessary for a fair presentation of the Company’s financial position at July 31, 2013 and results of operations for
the periods presented.
Certain information and footnote
disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Results of operations for the
periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated
financial statements should be read in conjunction with our audited financial statements and footnotes as of and for the year ended
October 31, 2012, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 29, 2013.
Changes in Capitalization and
Reverse Stock Split
On February 8, 2013, the Company
effectively amended its Articles of Incorporation and decreased the authorized number of shares of Common Stock from 2.5 billion
to 25 million shares. At the same time, the Company underwent a five hundred-for-one (500:1) reverse stock split of its Common
Stock and Redeemable Convertible Preferred Stock. For purposes of this Quarterly Report, all issuances of common stock and options
or warrants to purchase common stock, if any, are reflected retroactively in post-reverse split amounts. As of July 31, 2013, the
reverse split effected by the Company resulted in a reduction in capital stock and an increase in additional paid-in capital in
the amount of $24,677,786.
Reclassification of Prior Year
Presentation
Certain prior year amounts have
been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results
of operations.
Going Concern
The accompanying financial statements
have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and
liabilities and commitments in the normal course of business. The accompanying financial statements do not reflect any adjustments
that might result if the Company is unable to continue as a going concern. The Company has not generated revenue, and has negative
cash flows from operations, which raise substantial doubt about the Company’s ability to continue as a going concern. The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among
other things, additional cash infusion. The Company has obtained funds from several stockholders and believes this funding will
continue. Management believes the existing stockholders will provide the additional cash needed to meet the Company’s obligations
as they become due, and will allow the development of its core business.
|
3.
|
|
Concentration
of
Credit
Risk
and
Other
Risks
and
Uncertainties
|
Accounts Payable – Trade
As of July 31, 2013, the amount
due to a former consultant to the Company, $112,000, represented 36% of the total amount due for accounts payable to non-affiliates.
As of July 31, 2013, the Company owes its current independent accounting firm $31,500, which represents 10% of the total amount
due for accounts payable. An additional 21% of accounts payable, or $64,517, is due legal counsel in the Alpine MIT Partners litigation
in Texas.
Litigation and Claims
On May 16, 2012, Alpine MIT
Partners, LLC (Plaintiffs) filed a civil action against the Company and its Chairman and Chief Executive Officer, Jeffrey G. Nunez,
(collectively, the Company), in the Texas District Court, Travis County. Plaintiffs alleged breach of contract and civil conspiracy,
as well as tortious interference with contractual relations and prospective business relations. The lawsuit alleges that the Company
breached certain provisions of a March 7, 2012 Securities Purchase Agreement the Company executed with the Plaintiff to sell up to $2.0 million of 7% Senior Secured five-year Convertible Debentures convertible into shares of common
stock at a conversion rate of $.003 per share. The purchase and sale of the first $1.0 million Debenture was scheduled to close
on or before April 6, 2012 and was subject to, among other things, Alpine closing the necessary equity funding to consummate
the transactions. No money was ever received by the Company from Alpine.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The lawsuit also suggests that
the Company’s Chairman and Chief Executive Officer, Jeffrey G. Nunez, has a history of regulatory and securities law violations.
The Company’s Board of Directors has researched the matter and understands that in January 2004, Mr. Nunez was requested
by the NASD to appear and provide testimony pursuant to NASD Rule 8210. Mr. Nunez did not appear, but agreed not to associate in
any capacity, in the future, with NASD member firms. The Company’s Board of Directors believes this to be of no consequence
with respect to Mr. Nunez’ qualifications to serve as a board member and chief executive officer of the Company.
The Company argued that the
lawsuit was improperly filed in Texas and that the Texas court had no jurisdiction over the Company in this matter. At a hearing
on March 7, 2013, the court upheld the Company’s position and dismissed the case against the Company. In August, 2013, Alpine
filed an amended Complaint against Jeffrey Nunez in the Texas case alleging tortuous interference and conspiracy to terminate the
March 7, 2012 Securities Purchase Agreement. Mr. Nunez believes that the allegations of the lawsuit against him have no merit and
intends to vigorously defend the matter.
On January 10, 2013, the Company
learned that Plaintiffs had filed a lien against the Company’s patents on May 8, 2012 with the California Secretary of State
under the Uniform Commercial Code. On or about January 29, 2013, the Company filed suit against Alpine MIT Partners, LLC in the
Orange County, California Superior Court alleging, among other claims, that the UCC filing is unauthorized. The lawsuit also names
the managing director and managing member of Alpine as Defendants and alleges that they made false promises, intentional misrepresentations
and breached the contract which is the subject of the Texas suit. The Company is seeking damages of $1.6 million.
In accordance with accounting
standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence
of a loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and the amount of
a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its financial statements not to
be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but
the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
Because litigation outcomes are
inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by
management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies
that could be material to any one of its financial statements are not probable, but are reasonably possible, or are probable, but
cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of
possible loss or a statement that such loss is not reasonably estimable. Since the lawsuit filed against the Company in Texas has
been dismissed, no loss contingency has been accrued.
Antidilution Liability
The Company has recorded a $65,401
liability to allow for the possible dilutive impact of equity issuances that alter or effect conversion or exchange rates existing
on the various dates of conversion or exercise of securities having adjustable conversion rates.
Accrued Payroll, Payroll Taxes
and Benefits
From April 2010 through March
2012, payments made to two employees were recorded as reductions in accrued and unpaid payroll. In April 2012, the Company reclassified
such payments as net payroll payments; calculated and recorded the employer and employee taxes that should have been withheld on
such payment. Federal and state payroll tax returns have been filed for the last three quarters of 2010, all of 2011 and the first
quarter of 2012. Estimated penalties and interest on the late filings and payments, in the sum of $27,446, have been accrued as
of July 31, 2013. On September 20, 2012, the Internal Revenue Service filed a Notice of Federal Tax Lien against the Company assessing
$58,858 for unpaid taxes, penalties and interest. A Notice of Tax Lien was also filed by the State of California on November 9,
2012 in the amount of $8,206, including penalty and interest. The Company has been in contact with the respective tax authorities
in an effort to negotiate a payment arrangement for the taxes due.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Accrued Payroll and Benefits consist
of the above payroll taxes and salaries, wages, and vacation benefits earned by employees, but not disbursed as of July 31, 2013
and includes payroll earned, but unpaid to various employees between January 16, 2013 and July 31, 2013. Accrued Payroll also includes
the above estimated penalties and interest due on such unpaid payroll taxes. Liability for vacation benefits is accrued when earned
monthly and reduced when taken. At the end of each fiscal period, the balance in the accrued vacation benefits liability account
is adjusted to reflect current pay rates. Annual leave earned but not taken is considered an unfunded liability since this leave
will be funded from future appropriations when it is actually taken by employees.
Inventory is stated at the lower
of cost or market and comprised entirely of finished goods. Cost is determined on a first-in, first-out (FIFO) basis. The Company’s
management monitors inventory for excess and obsolete items and makes necessary valuation corrections when such adjustments are
required.
|
5.
|
|
Property and Equipment
|
Property and equipment are recorded
at cost and are depreciated using the straight-line method over an expected useful life of 3 or 5 years. Effective October 31,
2011, the Company reclassified and capitalized as machinery and equipment eight of its MIT 1000 Systems that it had carried as
finished goods valued at $75,788. A revised model of the systems has been designed and the Company will utilize these eight first
generation models as laboratory testing equipment. Commencing November 1, 2011, these systems are being depreciated over an expected
useful life of 3 years.
The production tooling for the
Company’s revised MIT 1000 has been capitalized and the $14,000 cost is being amortized over an estimated useful life of
3 years.
Expenditures for normal maintenance
and repairs are charged to operations. The cost and related accumulated depreciation of assets are removed from the accounts upon
retirement or other disposition, and the resulting profit or loss is reflected in the Statement of Operations. Renewals and betterments
that materially extend the life of the assets are capitalized.
|
6.
|
|
Summary of Significant Accounting Policies
|
The accounting policies followed
are as set forth in Note 1 of the Notes to Financial Statements in the Company’s 2011 Annual Report on Form 10-K. The Company
has not experienced any material change in its critical accounting policies since November 1, 2011. The Company’s discussion
and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts
of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates, which are based upon historical
experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. The Company considers the following accounting policies to be most critical
in their potential effect on its financial position or results of operations.
New Accounting Pronouncements
The following accounting standards updates were recently
issued and have not yet been adopted by us. These standards are currently under review to determine their impact on our consolidated
financial position, results of operations, or cash flows. There were various other updates recently issued which represented technical
corrections to the accounting literature or application to specific industries. None of the other updates are expected to a have
a material impact on our consolidated financial position, results of operations or cash flows.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On January 31, 2013, the FASB
issued Accounting Standards Update [ASU] 2013-01, entitled
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.
The guidance in ASU 2013-01 amends the requirements in the FASB
Accounting Standards Codification
[FASB ASC] Topic 210,
entitled
Balance Sheet.
The ASU 2013-01 amendments to FASB ASC 210 clarify that ordinary trade receivables and receivables
in general are
not
within the scope of ASU 2011-11, entitled
Disclosure about Offsetting Assets and Liabilities,
where
that ASU amended the guidance in FASB ASC 210. As those disclosures now are modified with the ASU 2013-01 amendments, the FASB
ASC 210 balance sheet offsetting disclosures now clearly are applicable only where reporting entities are involved with bifurcated
embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and lending transactions that
either are offset using the FASB ASC 210 or 815 requirements, or that are subject to enforceable master netting arrangements or
similar agreements. A
SU 2013-01 is effective for annual reporting periods beginning on or after January
1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on
our financial statements.
On February 28, 2013, the FASB
issued Accounting Standards Update [ASU] 2013-04, entitled
Obligations Resulting from Joint and Several Liability Arrangements
for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.
The ASU 2013-04 amendments add to the guidance
in FASB
Accounting Standards Codification
[FASB ASC] Topic 405, entitled
Liabilities and require
reporting entities
to measure obligations resulting from certain joint and several liability arrangements where the total amount of the obligation
is fixed as of the reporting date, as the sum of the following:
|
|
●
|
The amount the reporting entity agreed to pay on the basis of its arrangement among
co-obligors.
|
|
|
●
|
Any additional amounts the reporting entity expects to pay on behalf of its co-obligors.
|
While early adoption of the
amended guidance is permitted, for public companies, the guidance is required to be implemented in fiscal years, and interim periods
within those years, beginning after December 15, 2013. The amendments need to be implemented retrospectively to all prior periods
presented for obligations resulting from joint and several liability arrangements that exist at the beginning of the year of adoption.
The adoption of ASU 2013-04 is not expected to have a material effect on the Company’s operating results or financial position.
On April 22, 2013, the FASB
issued Accounting Standards Update [ASU] 2013-07, entitled
Liquidation Basis of Accounting.
With ASU 2013-07, the FASB amends
the guidance in the FASB
Accounting Standards Codification
[FASB ASC] Topic 205, entitled
Presentation of Financial Statements.
The amendments serve to clarify
when
and
how
reporting entities should apply the liquidation basis of accounting.
The guidance is applicable to all reporting entities, whether they are public or private companies or not-for-profit entities.
The guidance also provides principles for the recognition of assets and liabilities and disclosures, as well as related financial
statement presentation requirements. The requirements in ASU 2013-07 are effective for annual reporting periods beginning
after December 15, 2013, and interim reporting periods within those annual periods. Reporting entities are required to apply the
requirements in ASU 2013-07 prospectively from the day that liquidation becomes imminent. Early adoption is permitted. The adoption
of ASU 2013-07 is not expected to have a material effect on the Company’s operating results or financial position.
On July 18, 2013, the FASB issued ASU
2013-11, which provides guidance on financial statement presentation of an unrecognized tax benefit
2
when a net
operating loss (NOL) carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing
this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies
to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction
as of the reporting date. Under the ASU, an entity must present an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax
credit carryforward except when:
|
|
●
|
An NOL carryforward, a similar tax loss, or a tax credit carryforward is not available as of the reporting date under the governing
tax law to settle taxes that would result from the disallowance of the tax position.
|
|
|
●
|
The entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice).
|
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
If either of these conditions
exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the
unrecognized tax benefit with a deferred tax asset.
ASU 2013-11 is effective for
public entities for fiscal years beginning after December 15, 2013, and interim periods within those years. The
adoption of ASU 2013-11 is not expected to have a material effect on the Company’s operating results or financial position.
Earnings Per Share
Basic earnings per share are based
on the weighted average number of shares outstanding for a period. Diluted earnings per share are based upon the weighted average
number of shares and potentially dilutive common shares outstanding. Potential common shares outstanding principally include convertible
notes payable and stock options under our stock plan. Since the Company has incurred losses, the effect of any common
stock equivalent would be anti-dilutive.
Stock Based Compensation
Stock-based compensation costs
for stock options issued to employees is measured at the grant date, based on the fair value of the award using the Black Scholes
Option Pricing Model, and is recognized as an expense over the employee’s requisite service period (generally the vesting
period of the equity grant).
No stock-based compensation was
recognized during the nine months ended July 31, 2013.
On February 14, 2012, the Board
of Directors adopted the 2012 Employee Benefit Plan which is authorized to grant up to 120,000 shares of common stock or options
to purchase common stock to eligible employees, directors, officers, consultants or advisors. Eligibility and vesting, in the case
of options, is determined by the Board of Directors. Between January 16, 2013 and February 22, 2013, the Company issued 16,000
shares of common stock which vested immediately under the Plan to legal counsel for services rendered and the fair market value
of $1.05 and $1.50 per share. The aggregate value of the shares was $20,400.
The following table summarizes
information about options granted under the Company’s equity compensation plans through July 31, 2013 and otherwise to employees,
directors and consultants of the Company. Generally, options vest on an annual pro rata basis over various periods of time and
are exercisable, upon proper notice, in whole or in part at any time upon vesting. Typically, in the case of an employee, vested
options terminate when an employee leaves the Company. The options granted have contractual lives ranging from two to ten years.
|
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at October 31, 2012
|
|
|
|
5,600
|
|
|
$
|
40.00
|
|
|
|
1.2
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
(1,000
|
)
|
|
|
145.00
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2013
|
|
|
|
4,600
|
|
|
$
|
19.29
|
|
|
|
0.7
|
|
|
$
|
—
|
|
Summary information about the Company’s options
outstanding at July 31, 2013 is set forth in the table below. Options outstanding at July 31, 2013 expire between August 2013 and
January 2016.
Range of
Exercise
Prices
|
|
|
Options
Outstanding
July 31, 2013
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
July 31, 2013
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
$
7.68-$70.00
|
|
|
|
4,400
|
|
|
|
0.7
|
|
|
$
|
13.35
|
|
|
|
4,400
|
|
|
$
|
13.35
|
|
|
|
$150.00
|
|
|
|
200
|
|
|
|
0.1
|
|
|
$
|
150.00
|
|
|
|
200
|
|
|
$
|
150.00
|
|
|
TOTAL:
|
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
4,600
|
|
|
|
|
|
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
As of July 31, 2013, all outstanding
options had fully vested and there was no estimated unrecognized compensation from unvested stock options.
The following table summarizes
the information relating to warrants granted to non-employees as of October 31, 2012 and changes during the nine months ended July
31, 2013:
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at October 31, 2012
|
|
|
146,667
|
|
|
$
|
1.00
|
|
|
|
1.78
|
|
|
$
|
—
|
|
|
Granted
|
|
|
150,000
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,000
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(66,667
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2013
|
|
|
190,000
|
|
|
$
|
0.87
|
|
|
|
2.6
|
|
|
$
|
—
|
|
Summary information about the Company’s warrants
outstanding at July 31, 2013 is set forth in the table below. Warrants outstanding at July 31, 2013 expire between April 2015 and
June 2016.
Range of
Exercise
Prices
|
|
|
Warrants
Outstanding
July 31, 2013
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
Exercisable
July 31, 2013
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
$0.50 - $1.00
|
|
|
|
190,000
|
|
|
|
2.6
|
|
|
$
|
0.87
|
|
|
|
190,000
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
190,000
|
|
|
|
|
|
|
7.
|
|
Convertible Debentures
|
Series 1 Notes
Under the provisions of ASC 815-40-15,
“Derivatives and Hedging-Contracts in Entity’s Own Equity-Scope and Scope Exceptions,” a number of our outstanding
Convertible notes are not considered indexed to our stock, as a result of an anti-dilution protection provision in these notes.
The application of ASC 815-40-15, effective August 1, 2011, resulted in our accounting for these notes as derivative instruments,
and they are recognized as liabilities in our consolidated balance sheets.
Between August 16, 2010 and February
21, 2012, the Company entered into a Securities Purchase Agreement with an unaffiliated lender in connection with the issuance
of eleven (11) separate 8% convertible notes in various principal amounts, aggregating $387,500. As of September 14, 2012, the
lender had converted all of the $387,500 in principal notes, plus $45,000 and $16,200 in principal penalties and accrued interest,
respectively, on such notes and received a total of 663,219 shares of common stock upon the conversions at prices ranging from
$0.20 to $1.95 per share.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On July 18, 2013, the Company
entered into a new Securities Purchase Agreement with the lender in the sum of $42,500 and paid $2,500 out of the proceeds of the
notes to lender for legal fees and expenses related to the referenced agreement. The note matures on April 22, 2014 and is convertible
into shares of common stock at a discount of 39% of the average of the lowest three closing bid prices of the common stock during
the ten trading days prior to the conversion date. The Series I Note contains a provision requiring an adjustment to the conversion
price of the note in the event the Company issues or sells any shares of common stock, or securities convertible into or exercisable
for common stock, at a price per share lower than such conversion price. Accordingly, the Series I Note is accounted for as a derivative
liability, measured at fair value, with changes in fair value recognized as gain or loss for each reporting period thereafter.
The note was recorded at fair value, using the Binomial valuation model, and a derivative liability of $42,169 was recorded for
the fiscal period ended July 31, 2013. This liability will be revalued each reporting period and gains and losses will be recognized
in the statement of operations under “Other Income (Expense)”.
Pursuant to the terms of the Series I Note, the Company
has instructed its stock transfer agent to reserve 780,000 shares of the Company’s common stock
to
be issued if the notes are converted. Such
shares have been reserved, but are not considered as issued and outstanding.
Fair value of financial
instruments
The accounting standards regarding
fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of
the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash and other current
assets and liabilities to approximate their fair values because of the short period of time between the origination of such instruments
and their expected realization.
The Company has also adopted ASC
820-10 (“Fair Value Measurements”) which defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined
as follows:
|
|
●
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
|
|
|
|
|
|
|
●
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities
in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially
the full term of the financial instruments.
|
|
|
|
|
|
|
●
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
The
carrying amounts of our financial instruments, including cash, accounts payable and accrued expenses approximate fair value because
of their generally short maturities.
The
Company measured the fair value of the Series 1 Note by using the Binomial Valuation model. As of July 31, 2013, the assumptions
used to measure fair value of the liability embedded in our outstanding Series I Note included an exercise price of $0.31 per share,
a common share price of $0.51, a discount rate of 0.014%, and a volatility of 151%.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table sets forth,
by level within the fair value hierarchy, our financial instrument liabilities as of April 30, 2012 (See also Note 7 – Convertible
Debentures – “Series 1 Notes”):
|
|
|
Quoted
Prices in
Active Markets
For Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total
|
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
|
|
Series 1 Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,169
|
|
|
$
|
42,169
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,169
|
|
|
$
|
42,169
|
|
The following table sets forth
a summary of changes in the fair value of our Level 3 financial instrument liability for the fiscal year ended October 31, 2012
and for the nine month period ended July 31, 2013:
|
|
|
Fair Value
Measurements
Using
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance October 31, 2012
|
|
$
|
-
|
|
|
Additions
|
|
|
44,480
|
|
|
Net gain included in earnings
|
|
|
(2,311
|
)
|
|
Settlements
|
|
|
-
|
|
|
Balance July 31, 2013
|
|
$
|
42,169
|
|
Other Convertible Notes
On November 10, 2010, the Company
entered into a convertible note for $64,868 with a stockholder. The Note matured on May 31, 2012 and bears interest at the rate
of ten percent (10%) per annum. The Note is convertible into shares of common stock at a forty two percent (42%) discount to the
average of the lowest three (3) closing bid prices of the common stock during the ten (10) trading days prior to the conversion
date. The note holder may convert any or all of the unpaid principal note prior to the maturity date. The Company calculated the
intrinsic value of the conversion feature to be $46,973 as of the date of issuance of the debentures using the same criteria as
noted above, which amount has been fully amortized as of July 31, 2013. The Company has expensed $17,665 in accrued interest on
the note as of July 31, 2013. If the note had been converted as of July 31, 2013, the Company would have issued a total of 219,297
shares of common stock the value of which would exceed, by $46,973 the principal balance due on the note. The Company is currently
negotiating with the lender to settle or renegotiate the Note.
On November 27, 2009, the Company
borrowed $25,000 from an unaffiliated lender. In September 2011, the lender converted $12,500 of the principal and $2,876 in accrued
interest into 17,084 shares of common stock. The Company issued an Amended and Restated Convertible Note for the $12,500 principal
balance of the loan bearing 6% annual interest. The amended note matured on December 31, 2012 and on June 15, 2013, the lender
converted the remaining $12,500 principal plus $1,299 in accrued interest into 23,998 shares of common stock at a conversion rate
of $0.575 per share. Because the original note carried a beneficial conversion feature, the Company amortized a total of $10,507
as the intrinsic value of the note, including $3,202 which was expensed during fiscal 2013.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
At July 31, 2013 and October 31,
2012, without taking into effect any unamortized discounts, convertible debentures consisted of the following:
|
|
|
July 31, 2013
|
|
|
October 31, 2012
|
|
|
|
|
|
|
|
|
|
(Audited)
|
|
|
Series 1 Note, principal and interest at 8% maturing on April 22, 2014
|
|
|
42,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable to stockholder; principal and interest at 10% due on May 31, 2012.
|
|
|
64,868
|
|
|
|
64,868
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable to stockholder; principal and interest at 6% maturing on December 31, 2012.
|
|
|
—
|
|
|
|
12,500
|
|
|
|
|
|
107,368
|
|
|
|
77,368
|
|
|
Less current maturities
|
|
|
107,368
|
|
|
|
77,368
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of Convertible and Series 1 notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
At July 31, 2013 and October 31,
2012, without taking into effect any unamortized discounts, notes payable to an officer and to stockholders consisted of the following:
|
|
|
July 31, 2013
|
|
|
October 31, 2012
|
|
|
|
|
|
|
|
(Audited)
|
|
|
Unsecured, interest-free convertible notes payable to former officer/director of the Company; principal due on payment schedule through May 2014.
|
|
$
|
114,450
|
|
|
$
|
136,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note payable to various stockholders; principal and interest at 6% due between December 9, 2010 and April 20, 2011.
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable to officers and directors of the Company; principal and interest at 6% payable on demand
|
|
|
16,000
|
|
|
|
—
|
|
|
|
|
|
182,450
|
|
|
|
188,950
|
|
|
Less current maturities
|
|
|
182,450
|
|
|
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term portion of notes payable
|
|
$
|
—
|
|
|
$
|
46,950
|
|
Concurrent with his April 13,
2012 resignation as Chairman of the Board of Directors and Chief Executive Officer, the Company agreed to repay a total of $160,000
in principal loans, $24,339 in accrued interest and $13,120 in unpaid fees and expenses due Michael Brennan over a 25-month payment
schedule commencing May 1, 2012. Payments due Mr. Brennan since February 2013, each in the amount of $7,500, have not been made
per the payment schedule. As of July 31,
2013, the principal balance due to Mr. Brennan amounts to $114,450 and, although Mr. Brennan originally waived interest on the note,
the Company has accrued $9,059 in interest on that amount as of July 31, 2013.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
With the exception of the demand
notes due current officers and directors and the overdue payments due to Mr. Brennan, all of the above notes payable were past
due as of July 31, 2013. The Company is currently negotiating with holders of the remaining notes to either extend the maturity
date or convert the notes into shares of common stock.
|
9.
|
|
Employee Retirement Plan
|
Commencing on January 1, 2005,
the Company sponsored a Simple IRA retirement plan which covers substantially all qualified full-time employees. Participation
in the plan is voluntary and employer contributions are determined on an annual basis. Employer contributions would be made at
the rate of three percent (3%) of the employees’ base annual wages. However, the Company made no contributions to the IRA
plan during the nine months ended July 31, 2013 and 2012.
|
10.
|
|
Securities Transactions
|
Common Stock Issued in
Private Placement Transactions
On May 8, 2012, Board member,
Gregg J. Newhuis, entered into a Subscription Agreement, as amended on October 31, 2012, to purchase a total of 1,800,000 shares
of the Company’s common stock at $0.50 per share over a six-month period. Mr. Newhuis also received a one-year option to
purchase up to an additional 266,667 shares of common stock at $1.50 per share in September 2012. This option was cancelled in
October 2012. The Company received the final $100,000 from Mr. Newhuis on November 29, 2012 pursuant to his May 2012 subscription
arrangement. Giving effect to the February 8, 2013 reverse stock split, the Company issued a total of 200,000 shares of common
stock at $0.50 per share for the November 29, 2012 purchase.
On April 20, 2012, the Company
granted three-year warrants to purchase 80,000 shares of common stock to a major stockholder as part of a Subscription Agreement
for the purchase of 80,000 shares of common stock at $0.75 per share. The warrants are exercisable at $1.00 per share within one
year of the subscription; $2.50 per share within two years; and at $5.00 per share during the third year of the warrant. On January
11, 2013, the warrant holder exercised his right to purchase one half of the warrants granted and paid $40,000. Giving effect to
the February 8, 2013 reverse stock split, the Company issued 40,000 shares of common stock at $1.00 per share on this transaction.
On January 11, 2013, Victor Hollander,
a Director and the Company’s Chief Financial Officer, purchased 3,333 shares of common stock for proceeds of $5,000, at the
fair market value of $1.50 per share.
On May 21, 2012, the Company
entered into a Subscription Agreement with a major stockholder to purchase a total of 400,000 shares of the Company’s common
stock at $0.50 per share, for a total of $200,000 which the Company received during fiscal 2012. As additional consideration, the
purchaser was granted a one-year option to purchase up to an additional 66,667 shares of common stock at $1.50 per share commencing
on the date the final dollars are invested. On February 6, 2013, this stockholder surrendered his rights to the referenced warrants
in full.
On February 6, 2013, the Company
entered into a Subscription Agreement with a major stockholder to purchase up to $180,000 in shares of common stock at a purchase
price of $0.85 per share over a three month period. Between February 6, 2013 and April 3, 2013, the stockholder purchased a total
of 211,764 shares of common stock and paid $180,000.
Pursuant to an April 1, 2012 consulting
arrangement, the Company agreed to pay Jeffrey Nunez a five percent (5%) transaction fee on all proceeds received by the Company
during the one year term of such agreement. The fee is payable in shares of the Company’s common stock which are to be valued
as the average closing price of the common stock for the five (5) trading days prior to the transaction which triggers the fee.
Between April 20 and October 31, 2012, the Company issued Mr. Nunez a total of 35,512 shares of common stock valued at $53,000
pursuant to the transaction fee arrangement. As of January 31, 2013, an additional $7,000 was due Mr. Nunez under this arrangement
at which time the transaction fee arrangement was terminated by mutual agreement. On April 26, 2013, $6,007 of the transaction
fee due him was credited against a receivable that Mr. Nunez owed the Company and the remaining $993 balance was paid in the form
of 435 and 196 shares of common stock at $1.63 and $1.45 per share, respectively.
MICRO IMAGING TECHNOLOGY, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
On June 4, 2013, a major stockholder
purchased 50,000 shares of common stock at $0.50 per share in a private transaction and received three-year warrants to purchase
an additional 50,000 shares of common stock at $0.50 per share and another 100,000 shares of common stock at $1.00 per share.
On June 28, 2013, the Company
sold 13,333 shares of common stock to a stockholder for proceeds of $10,000, or $0.75 per share.
Common Stock Issued in Cancellation of Debt
On January 16, 2013, the Company
issued its legal counsel a total of 8,000 shares of common stock in payment for $12,000 in legal services rendered for $1.50 per
share.
On February 22, 2013, the Company
issued an additional 8,000 shares of common stock to legal counsel in payment of $8,400 in legal services rendered for $1.05 per
share.
On June 15, 2013, a stockholder
converted a $12,500 principal note, plus $1,299 in accrued interest, into 23,998 shares of common stock at $0.575 per share.
On August 7, 2013, a major stockholder purchased 20,000 shares of common stock for proceeds of $10,000, or $0.50 per share. He received a six-month warrant to purchase an additional 10,000 shares of common stock at $1.00 per share in connection with this transaction.
On August 7, 2013, a member of the Board of Directors loaned the Company $10,000. The loan bears interest at 6% per annum and is payable on demand.
On August
13, 2013, a major stockholder purchased 60,000 shares of common stock for $0.50 per share, for proceeds of $30,000. The Company
also issued a six-month warrant to purchase 30,000 shares of common stock to the purchaser at an exercise price of $1.00 per share.
On September
5, 2013, the Company sold 20,000 shares of common stock to an unaffiliated purchaser for net proceeds of $10,000, or $0.50 per
share.
