3-Apr-2007 Annual Report ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. The following is a discussion and analysis of our plan of operation for the next year ended December 31, 2006, and the factors that could affect our future financial condition and plan of operation. This discussion and analysis should be read in conjunction with our financial statements and the notes thereto included elsewhere in this annual report. Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise. Please see our "Note on Forward Looking Statements" and "Risk Factors" for a list of our risk factors. -------------------------------------------------------------------------------- Plan of Operations We are engaged in the business of the development of BioLED Technology, combining microfluidics and polymer Light Emitting Diodes (pLED) for use in future Point-of-Care diagnostic devices. On May 22, 2006, we entered into a joint development agreement with Molecular Vision Limited to acquire the exclusive rights to develop and commercialize the BioLED Technology in the medical fields of diabetes management, cardiac diseases, sexually transmitted diseases and substances of abuse. Under the Joint Development Agreement, Molecular Vision Limited will continue to use reasonable endeavours to conduct research projects to further advance and develop the BioLED Technology. In exchange for the research and development activities carried out by Molecular Vision Limited, we will pay Molecular Vision Limited the amount of £3,450,000 over the next 3 years as well as 30% of all gross revenue that we will receive from any future sale/license of the developed Point-of-Care testing devices. On February 13, 2007 we entered into a Development Agreement with Molecular Vision Ltd.. This agreement replaces the Development Agreement entered into on May 22, 2006. The replacement agreement extends terms for payments and amends various other terms. The replacement agreement also re-prices the exercise price of 2,000,000 options granted to Molecular Vision Ltd. from $2.00 to $0.50. Over the next twelve months, we plan to continue our cooperation with Molecular Vision Limited to pursue our primary objective of developing the first generic prototype of the BioLED Technology platform. We intend to first focus on the development of light sources, filters and detectors for fluorescence detection. We also intend to develop microfluidics and microchips for blood handling and fine tuning integration of microchips for fluorescence detection. At the same time, we also intend to work with Molecular Vision Limited to begin setting up the prototype Point-of-Care testing device for diabetes management. In this regard, we plan to begin evaluation and selection of chemiluminescence assay. We also plan to fabricate our first Point-of-Care device and hopefully by the summer of 2007 we will be able to conduct our first chemiluminescence based albumin and creatinine detection with urine samples. When we are ready to begin regulatory activities, we may begin the process by determining exactly what we need to do and who we need to contact, for submitting all relevant files to the Food and Drug Administration (FDA) for approval. We have not generated any revenues and our operating activities have resulted in a loss of $2,480,288 for the year ended December 31, 2006. This negative cash flow is attributable to our operation expenses, including but not limited to, research and development expense and the payment of our audit fees and legal fees. We anticipate that our operating expenses will increase as we intend to conduct detailed development of our first prototype Point-of-Care diagnostic device and work towards its completion. We estimate our expenses in the next twelve months will be approximately $3,600,000, generally falling in two major categories: research and development costs and general and administrative expenses. Research and Development Costs For the next twelve months, we estimate that our research and development costs will be approximately $2,500,000. We will make payments to Molecular Vision Limited as required under the Development Agreement for Molecular Vision Limited to carry out the research and development projects we have outlined for the next twelve months. General and Administrative Expenses For the next twelve months, we estimate that our general and administrative expenses will be approximately $1,100,000. These expenses will include approximately $720,000 on consulting, stock-based compensation and investor relations, approximately $200,000 on office supplies, office rent, travel and accommodations and $180,000 on professional fees, which consist primarily of accounting, auditing fees for the year-end audit and legal fees for securities advice, directors liability insurance and cost of fundraising. We do not expect to generate any revenues in the next twelve months. Our future products will likely not be ready for sale for at least 1 year, if at all. -------------------------------------------------------------------------------- Results of Operations We have earned no revenue since our inception. We are still in the development stage and do not anticipate earning any revenues until such time as we can establish an alliance with targeted companies to market or distribute the results of our research projects. However, we have been successful in attracting potential investors and shareholders through various private placements. This has allowed our company to meet all of our overhead obligations as well as maintaining our continuous pursuit to complete our product research and development. During 2006 we sold 317,334 common shares in a private placement @ $0.75 per share for proceeds of $238,000. We incurred operating expenses in the amount of $2,480,288 for the year ended December 31, 2006, compared with expenses of $14,154,145 the same period from the previous year. The operating expenses of $2,480,288 incurred during the year ended December 31, 2006 included, $72,000 for rent and management fees, $1,277,780 for research and development, $102,593 for office expenses, travel, bank charges (net of interest income), transfer agents, and foreign exchange, $100,000 for public relations, $206,731 for appraisals, accounting, auditing and legal fees, $191,511 for consultations, and $529,673 for stock-based compensation. Financial Condition and Liquidity We had cash on hand of $4,552 as at December 31, 2006, compared with $1,741,998 as at December 31, 2005. We had a working capital deficit of $185,025 at December 31, 2006, compared to a working capital surplus of $1,533,889 as at December 31, 2005. Our present cash reserves of $4,552 are not sufficient to meet our cash requirements for the next six months. We will have to raise additional funds from the private placement of our securities to meet our budgeted operating expenses of $3,600,000 for the next twelve months. If we are successful on completing an equity financing, existing shareholders will experience a dilution of their interest in our company. In the event we are not successful in obtaining such financing when necessary, we may not be able to proceed with implementation of all our proposed projects in our business plan. Off-Balance Sheet Arrangements We have 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 is material to stockholders. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain.