CONSOLIDATED FINANCIAL STATEMENTS December 31, 2010 and 2009

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS December 31, 2010 and 2009

2 INDEPENDENT AUDITOR S REPORT To the Shareholders of Verisante Technology, Inc.: We have audited the accompanying consolidated financial statements of Verisante Technology, Inc., which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of operations and comprehensive income, shareholders equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Verisante Technology, Inc. as at December 31, 2010 and 2009, and its financial performance and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Fernandez Young LLP Certified General Accountants Vancouver, Canada April 28, 2011 Grosvenor Building, 800 West Georgia Street, Suite 1010, Vancouver, BC, V6E 4H1, Canada phone: fax:

3 3 Verisante Technology Inc. (Formerly T-Ray Science Inc.) Consolidated Balance Sheets As at December 31, 2010 and 2009 (Expressed in Canadian dollars unless otherwise stated) $ $ ASSETS Current Cash 452, ,560 Amounts receivable 10,067 12,973 Prepaid expenses 12, Sales taxes receivable 65,736 21,382 Government grants receivable 16, ,814 Inventory (note 3) 33,285 50, ,790 1,177,734 Intangible assets (note 4) 922, ,254 Office facilities and equipment (note 5) 14,704 11,937 Total Assets 1,526,828 1,430,925 LIABILITIES Current Accounts payable and accrued liabilities 157,468 89,460 Total Liabilities 157,468 89,460 Stockholders Equity Share capital (Note 6) 3,956,817 3,134,334 Contributed surplus 522, ,096 Warrants 585, ,420 Deficit (3,694,987) (2,210,385) Total Stockholders Equity 1,369,360 1,341,465 Total Liabilities and Stockholders Equity 1,526,828 1,430,925 Commitments and contingent liabilities (note 13) Subsequent events (note 14) On behalf of the Board: Thomas Braun Thomas Braun Karen Boodram Karen Boodram The accompanying notes are an integral part of these consolidated financial statements

4 4 Verisante Technology Inc. (Formerly T-Ray Science Inc.) Consolidated Statements of Operations and Comprehensive Income For the Years Ended December 31, 2010 and 2009 (Expressed in Canadian dollars unless otherwise stated) $ $ Revenue 11,409 30,459 Cost of goods sold (8,640) (7,280) Contribution 2,769 23,179 Expenses Research and development 214, ,447 General and administrative 1,084, ,393 Amortization 103,564 23,381 Stock based compensation 209, ,452 Royalty payments 33,296 Patent maintenance costs 4,448 2,610 Regulatory and trustee fees 33,092 57,987 Interest expense 360 3,707 1,650,163 1,149,273 Loss from operations (1,647,394) (1,126,094) Other income (expenses) Government grants 160, ,222 Foreign exchange gain (loss) 2,774 (3,890) Net loss and comprehensive loss for the year (1,484,602) (861,762) Basic and diluted loss per share (0.04) (0.03) Weighted average number of shares outstanding 34,545,709 24,960,341 The accompanying notes are an integral part of these consolidated financial statements

5 5 Verisante Technology Inc. (Formerly T-Ray Science Inc.) Consolidated Statements of Cash Flows For the Years Ended December 31, 2010 and 2009 (Expressed in Canadian dollars unless otherwise stated) Cash flows used in operating activities $ $ Net loss for the year (1,484,602) (861,762) Non-cash expenses: Amortization 103,564 23,381 Stock based compensation 209, ,452 Common stock issued for services 3,750 Changes in operating assets and liabilities: Amounts receivable 54 (12,973) Prepaid expenses (8,909) (431) Sales taxes receivable (44,354) (6,438) Government grants receivable 203,581 (201,953) Inventory 17,289 (28,667) Accounts payable and accrued liabilities 68,008 49,911 Net Cash Used in Operating Activities (932,458) (734,480) Cash flows used in investing activities Intangible assets (447,607) (193,527) Office facilities and equipment (12,316) (5,174) Net Cash Used in Investing Activities (459,923) (198,701) Cash flows provided by financing activities Proceeds from shares subscribed 1,024,610 1,964,500 Proceeds from the exercise of options 14,500 Proceeds from the exercise of agent warrants 2,400 Share issuance costs (52,312) (272,296) Net Cash Provided by Financing Activities 972,298 1,709,104 (Decrease) Increase In Cash (420,283) 775,923 Cash Beginning of Year 872,560 96,637 Cash End of Year 452, ,560 Supplemental Disclosures Interest paid 360 Income tax paid 3,674 Non-cash Investing and Financing Activities: Common stock issued for services 3,750 Warrants issued for intangible assets 327,488 Warrants issued for finders fees 16,285 The accompanying notes are an integral part of these consolidated financial statements

6 6 Verisante Technology Inc. (Formerly T-Ray Science Inc.) Consolidated Statement of Shareholders Equity For the Years Ended December 31, 2010 and 2009 (Expressed in Canadian dollars unless otherwise stated) Total Share Capital Contributed Shareholders Shares Amount Surplus Warrants Deficit Equity $ $ $ $ $ Balance, December 31, ,577,500 1,409, ,144 7,700 (1,348,623) 189,671 Shares issued for cash 10,331,250 1,964,500 1,964,500 Share issuance costs (272,296) (272,296) Options exercised 145,000 14,500 14,500 Warrants exercised 12,000 2,400 2,400 FMV adjustment on exercise of options and warrants 15,580 (14,500) (1,280) Stock based compensation 206,452 98, ,452 Net loss for the year (861,762) (861,762) Balance, December 31, ,065,750 3,134, , ,420 (2,210,385) 1,341,465 Units issued for cash 4,770, , ,080 1,024,610 Share issuance costs (68,797) 16,285 (52,512) Shares issued for services 21,594 3,750 3,750 Warrants issued pursuant to Licensing Agreement (Note 4) 327, ,488 Stock based compensation 209, ,161 Net loss for the year (1,484,602) (1,484,602) Balance, December 31, ,858,299 3,956, , ,273 (3,694,987) 1,369,360 The accompanying notes are an integral part of these consolidated financial statements

7 7 1 Nature of operations Verisante Technology, Inc. (formerly T-Ray Science, Inc.) (the Company, Verisante ) is a medical device company committed to commercializating innovative systems for the early detection of cancer. The Company was incorporated as T-Ray Science, Inc. in March 2006 to bring together a team of high level academic researchers, medical device industry experts and corporate finance professionals to execute a targeted product strategy focused on the early detection of cancer. Since inception, the Company has been developing a skin cancer detector based on Terahertz technology out of the University of Waterloo. In connection with the R&D on a skin cancer device, the Company built a catalogue of Terahertz chips to be used as sources and detectors within a spectrometer. The Company began selling some of these chips to Universities and other research institutions in In July 2010, the company entered into a licensing agreement with the BC Cancer Agency to commercialize a skin cancer detector based on Raman Spectroscopy. The device, called the Verisante Aura can be used in the early detection of all forms of skin cancer, including basal cell and squamous cell carcinoma and melanoma. The Verisante Core device is based on the same platform technology as the Aura and can be used in the early detection of lung, cervical, gastrointestinal and colo-rectal cancers. As a result of the Company s commitment to commercializing the technology licensed from the BC Cancer Agency, management proposed to change the Company s name to reflect this shift in focus. Effective January 17, 2011, the Company changed its name from T-Ray Science, Inc. to Verisante Technology, Inc. and all Waterloo operations, including research and chip sales, were wound down by the end of January 2011 in order to shift resources to the commercialization of the Verisante Aura and Verisante Core devices. 2 Summary of significant accounting policies The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements: Accounting principles The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ) as prescribed by The Canadian Institute of Chartered Accountants ( CICA ). Basis of consolidation The consolidated financial statements include the accounts of Verisante Technology, Inc., an Ontario corporation, and its direct subsidiary, T-Ray Science Inc., a Delaware corporation. Variable interest entities The CICA issued Accounting Guideline 15, Consolidation of Variable Interest Entities, to provide accounting guidance related to variable interest entities ( VIE ). A VIE is an entity in which equity investors do not have the characteristics of a controlling financial interest or there is not sufficient equity at risk for the entity to finance its activities without additional subordinates financial support. When a VIE is determined to exist, the guidance requires the VIE to be consolidated by the primary beneficiary. The Company has determined that it does not have a primary beneficiary interest in a VIE. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires 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 consolidated financial statements and the reported amount of revenues and expenses for the years then ended. Significant areas requiring the use of management estimates relate to the investment tax credits recoverable, the determination of long-lived impairment of assets, the valuation allowance for future income tax assets, the fair value for stock based compensation and transactions, and determining whether contingent assets or liabilities exist. Due to the inherent uncertainty involved with making such estimates, actual results reported in future years could differ from these estimates. Changes in estimates are made prospectively. The Company uses the Black-Scholes option pricing model to calculate the fair value of stock based compensation and share purchase warrants issued in a private placement of units. The Company uses historical data to determine volatility in accordance with Black-Scholes modeling, however the future volatility is inherently uncertain and the model has its limitations. While these estimates can have a material impact on stock based compensation and hence results of operations, there is no impact on the Company s financial condition. Foreign currency translation These financial statements are presented in Canadian dollars unless otherwise stated. Transactions recorded in United States dollars have been translated into Canadian dollars using the Temporal Method as follows: i) monetary items at the rate prevailing at the balance sheet date; ii) non-monetary items at the historical exchange rate; iii) revenue and expense at the average rate in effect during the applicable accounting period. Gains or losses arising on translation are included in the results of operations.

8 8 2 Summary of significant accounting policies (continued) Financial instruments Effective January 1, 2007, all financial instruments have been classified into one of the following five categories: held-for-trading assets or liabilities, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Held-for-trading financial instruments are measured at fair value and all gains and losses are included in net income in the period in which they arise. Available-for-sale financial instruments are measured at fair value with revaluation gains and losses included in accumulated other comprehensive income until the instruments are derecognized or impaired. Loans and receivables, investments, held-to-maturity and other financial liabilities are measured at amortized cost using the effective interest method. The Company s financial instruments were classified as follows: Cash and cash equivalents: Amounts receivable: Accounts payable and accrued liabilities: Held-for-trading Transaction costs are expensed as incurred for all financial instruments. Financial risk management Loans and receivables Other financial liabilities The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework. Management approves and monitors the risk management processes. Financial instruments by their nature are exposed to a variety of risks including credit risk, liquidity risk and market risk. Credit risk i) Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation; ii) Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities; and iii) Market risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risk. The Company s only significant exposure to credit risk is on its bank accounts. Bank accounts are with high credit quality financial institutions. Liquidity risk The Company ensures that there is sufficient capital in order to meet short-term business requirements, after taking into account the Company s holdings of cash. The Company s cash is invested in business accounts which are available on demand. Market risk The Company is exposed is interest rate risk. The Company s bank account earns interest income at variable rates. The fair value of its portfolio is relatively unaffected by changes in short-term interest rates. The Company s future interest income is exposed to changes in short term rates. Management does not consider this risk material. Currency risk The majority of the Company s cash and cash equivalents were held in Canada in Canadian dollars. The Company s significant operations were carried out in Canada. The Company was not exposed to significant interest, currency or credit risks arising from the financial instruments. The fair value of these financial instruments approximated carrying value due to their short-term maturity or capacity of prompt liquidation. Cash and cash equivalents Cash and cash equivalents includes cash on hand and demand deposits. Research and development Research and development costs are expensed when incurred until such time that research and testing has been completed. When commercial prototypes are developed for sale and demonstration these development costs are capitalized, if significant. The Company currently expenses acquired technology fully in the period incurred until such time as proven sales or feasible uses for the technology can be demonstrated. Revenue Revenue is derived from the sale of CHIPs, spectrometers and other tools related to the use of the CHIPs and spectrometers. Revenue is recognized at the time the goods are shipped.

9 9 2 Summary of significant accounting policies (continued) Government Grants The Company is entitled to Canadian grants on qualifying expenses. Income credits are recognized when the Company has made the qualifying expenditures and filed the necessary documents claiming assistance to preapproved limits and for pre-approved purposes. The assistance is accounted for separately and distinct from the expenses, such as research and development or general and administrative expenditures, to facilitate reporting requirements of the grant programs. The Company is active in applying for grants in Canada through the National Science and Engineering Council ( NSERC ) and the Industrial Research Assistance Program ( IRAP ), a program offered by the National Research Council. Inventory Raw materials are recorded at the lower of cost, determined on a specific item basis, and net realizable value. Work-in-process, which includes inventory stored at a stage preceding final assembly and packaging, and finished goods are recorded at the lower of cost, determined on a standard cost basis which approximates average cost, and net realizable value. Inventory used in the building of goods for testing and development are expensed as research and development. Office facilities and equipment Office facilities and equipment are recorded at cost. Amortization is provided on the straight-line method over the estimated useful lives of the equipment and office facilities at rates ranging from two to three years. Intangible assets Intangible assets are stated at cost less accumulated amortization and are comprised of licenses, patents and acquired technology. They are described as follows: Acquired technology consists of the cost of filing patents for in-house developed technology. Licenses include licenses or agreements that the Company has negotiated with third parties upon use of third parties technology. Patents comprise trademarks, internally developed patents, as well as individual patents or portfolios of patents acquired from third parties. Costs capitalized and subsequently amortized include all costs necessary to acquire intellectual property, such as patents and trademarks, as well as legal defense costs arising out of the assertion of any Company-owned patents. The Company currently amortizes acquired technology fully in the period incurred until such time as proven sales or feasible uses for the technology can be demonstrated. The Company expects the number of uses and applications for acquired technology to grow as research using terahertz technology continues and expands and industrial trials for its counterfeit pill detector are completed. The Company defers and amortizes third party licensing as these are arms length transactions with defined terms. Intangible assets are amortized as follows: Acquired technology: Licenses: Patents: Impairment of long-lived assets Straight-line over 2 to 5 years except for acquired in-process research and development costs which is expensed immediately as research and development Straight-line over the life of the license (ranging 5 to 17 years) Straight-line over 17 years or over estimated useful life The Company periodically reviews the useful lives and the carrying values of its long-lived assets. The Company reviews its longlived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is les than its carrying amount, it is considered to be impaired. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair market value, which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. Equity instruments Non-monetary consideration - Agent s warrants, stock and unit options, and other equity instruments issued as purchase consideration in non-monetary transactions are recorded at fair value determined by management using the Black-Scholes option pricing model. The fair value of the shares issued is based on the trading price of those shares on the Toronto Venture Exchange (TSX.V to December 2007) on the date of the agreement to issue shares as determined by the Board of Directors. Proceeds from unit placements are allocated between shares and warrants issued according to their relative fair value using the residual method.

10 10 2 Summary of significant accounting policies (continued) Future income taxes The Company accounts for income taxes using the liability method of tax allocation. Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income when a change in tax rates is substantively enacted. Future income tax assets are evaluated periodically and if realization is not considered more likely than not, a valuation allowance is provided. Share issuance costs Costs directly identifiable with the raising of share capital financing are charged against share capital. Indirect share issuance costs such as legal and printing are charged to operations. Direct share issuance costs incurred in advance of share subscriptions are recorded as deferred financing costs. If the related share subscriptions are not completed the deferred costs are charged to operations. Stock based compensation The Company s Stock Option Plan provides for granting of stock options to directors, officers, employees and consultants. The Company uses the fair value method for valuing stock option grants as determined by the Black-Scholes option pricing model. Compensation costs attributable to share options granted are measured at fair value at the grant date and are expensed over vesting periods with a corresponding increase to contributed surplus. Upon exercise of the stock options, consideration paid by the option holder together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. Stock based compensation also includes the issuance of performance based shares. During 2008, the Company agreed to issue shares to employees upon the successful issuance of a patent. These performance based shares are valued at fair market value at the time the agreement was entered into and amortized into income over the expected time management estimates it will take for a patent to be issued. The nature of the patent application and underlying technology can vary the expected time it takes for a patent to be issued. Loss per share Basic loss per share is calculated using the weighted average number of shares issued and outstanding during the year. Diluted loss per share is calculated using the treasury stock method. No shares were added to the weighted average number of shares outstanding during the years ended December 31, 2010 and 2009 for the dilutive effect of employee stock options and warrants as they were all anti-dilutive. Comparative figures Certain of the prior years comparative figures have been reclassified to conform to the current year s presentation. Accounting policy changes In June 2009, the CICA issued amendments to CICA Handbook Section 3862, Financial Instruments Disclosures, and 1506, Accounting Changes. Section 3862 amendments include enhanced disclosures related to the fair value of financial instruments and the liquidity risk associated with financial instruments. The amendments are effective for annual financial statements for fiscal years ending after September 30, Section 1506 was amended to exclude from its scope changes in accounting policies upon the complete replacement of an entity s primary basis of accounting. The amendments are effective for annual and interim financial statements relating to fiscal years beginning on or after July 1, The adoption of these amendments had no material impact on the Company s consolidated financial statements. Future Accounting Changes International Financial Reporting Standards IFRS In February 2008, the Accounting Standards Board ( AcSB ) announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada's own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, As a result, the Company will publish its first consolidated financial statements, prepared in accordance with IFRS, for the quarter ending March 31, The Company will also provide comparative data on an IFRS basis, including an opening balance sheet as at January 1, The Company's first annual IFRS financial statements as of December 31, 2011 will require the restatement for comparative purposes of amounts for the year ended December 31, Business Combinations In January 2009, the Canadian Accounting Standards Board issued the following new Handbook sections: 1582 Business Combinations, 1601 Consolidations, and 1602 Non-Controlling Interest. These standards are effective January 01, As the Company had not had business combination since its inception till December 31, 2010, the Company assessed that there is no major impact from the adoption of these standards on its consolidated financial statements.

11 11 3 Inventory Inventory consists of parts needed for the manufacture of the Company s range of T-Lux chips and dual mode spectrometers. 4 Intangible assets Intangible assets are comprised of the following: 2010 Cost Accumulated Amortization Net Book Value $ $ $ Acquired technology 955,088 (85,277) 869,811 Licenses 76,880 (24,357) 52,523 1,031,968 (109,634) 922, Cost Accumulated Amortization Net Book Value $ $ $ Acquired technology 179,994 (3,280) 176,714 Licenses 76,880 (12,340) 64, ,874 (15,620) 241,254 Licensing Agreement MIT and RWTH Aachen In 2008 the Company entered into a Licensing Agreement with the Massachusetts Institute of Technology (MIT) and a Licensing Agreement with RWTH Aachen University. Both technologies were related to the field of Terahertz. In addition, the Company has two sublicenses on the MIT Licensing Agreement. There were no sales derived from the sublicenses agreements, nor royalties paid. The Company remains current with terms of the MIT License; however considers the RWTH Aachen License abandoned, due to the acquisition of technology from the BC Cancer Agency in The Company anticipates it is unlikely to realize any profits from those technologies. Licensing Agreement Effective July 14, 2010, the Company entered into a Licensing Agreement with the BC Cancer Agency ( BCCA ). Under the terms of the Agreement, the Company gains an exclusive worldwide right to use and sublicense BCCA s patented skin cancer detection technology; and to manufacture, distribute and sell products based on the licensed technology. The term of the agreement is the later of 20 years from the effective date or the expiry of the last patent licensed under the agreement. In return, the Company will pay BCCA an initial licensing fee of $70,000, of which 50% is due upon signing (paid) and 50% is due on January 1, 2011, pay a royalty of 6% on revenue and 50% of sublicensing revenue ( Earned Royalties ), issue 1,655,000 share purchase warrants (issued), and an annual license maintenance fee. The Company must also reimburse BCCA in the amount of $50,009, representing costs incurred on the technology by BCCA, which is due on January 1, 2011.During the first three years of the agreement, the Company must pay a minimum annual royalty equal to the greater of $60,000 or the Earned Royalties. After the first three years of the agreement, the Company must pay a minimum annual royalty equal to the greater of $120,000 or the Earned Royalties. The initial licensing fee and the royalties are non-refundable. The Company must also pay development milestone payments of $120,000 upon first jurisdictional regulatory approval for sale, $20,000 upon first sale or lease including research use only, and $120,000 upon first jurisdictional regulatory approval for sale in second clinical application. Pursuant to the Agreement, the Company issued 1,655,000 share purchase warrants on July 14, 2010 with a fair value of $295,101. The warrants have a term of five years and an exercise price of $0.25 per share. First Amendment to the Licensing Agreement On September 30, 2010, the Company entered into a First Amendment to the Licensing Agreement with the BCCA (the Amendment ). Pursuant to the Amendment, the Company must issue an additional 200,000 share purchase warrants to BCCA (issued). Each warrant will be exercisable at a price of $0.17 per share for a period of 5 years. In addition, the minimum annual royalty was amended to equal the greater of $80,000 or the Earned Royalties during the first three years of the agreement, and to equal the greater of $160,000 or the Earned Royalties after the first three years. In addition to the original milestone payments, the Company must also pay $120,000 upon first jurisdictional regulatory approval for sale in third clinical application. Pursuant to the Amendment, the Company issued 200,000 share purchase warrants on November 16, 2010 with a fair value of $32,387. The warrants have a term of five years and an exercise price of $0.18 per share.

12 12 4 Intangible assets (continued) Collaborative Research Agreements In connection with the Licensing Agreement, the Company entered into a Collaborative Research Agreement (the CRA ) for a term of one year with the BCCA on September 30, Under the terms of the CRA, the BCCA will assist the Company in the production of several clinical prototypes of the skin cancer detection technology. In return, the Company must pay BCCA $38,137 upon execution of the agreement (paid), $38,137 on January 1, 2011, $38,137(paid) on April 1, 2011, and $38,137 on July 1, On November 29, 2010, the Company entered into an additional Collaborative Research Agreement with the University of British Columbia (the UBC CRA ) for a period of 6 months. Pursuant to the agreement, the Company will fund the statistical analysis of the results of a six year human clinical study in which the Verisante Aura technology was used to image approximately 1,000 suspicious skin lesions at Vancouver General Hospital s Skin Care Centre. In return the Company will fund the $62,500 cost of the analysis. 5 Office facilities and equipment Amortization Period 2010 Cost Accumulated Net Book Value Amortization $ $ $ Computer hardware 3 years 16,578 (11,540) 5,038 Software 2 years 1,179 (718) 461 R&D equipment 3 Years 9,915 (8,266) 1,649 Office furniture 3 Years 8,500 (944) 7,556 36,172 (21,468) 14,704 Amortization Period 2009 Cost Accumulated Net Book Value Amortization $ $ $ Computer hardware 3 years 13,500 (6,537) 6,963 Software 2 years 441 (421) 20 R&D equipment 3 Years 9,915 (4,961) 4,954 6 Share capital Authorized: a. Unlimited number of common shares; b. Unlimited number of Class A preferred shares; c. Unlimited number of Class B preferred shares. Issued: a. During the year ended December 31, 2010: 23,856 (11,919) 11,937 Shares issued for cash On August 12, 2010, the Company completed a private placement of 3,520,955 units ( Units ) at a price of $0.22 per Unit for gross proceeds of $774,610. Each Unit consists of one common share of the Company and one half common share purchase warrant, each full warrant entitling the holder to acquire a common share at a price of $0.30 for a period of 12 months from the date of issuance. Cash proceeds from the private placement of $662,045 and $112,565 were allocated to the common shares and warrants issued in the private placement, respectively, based on their relative fair values at the closing date of the private placement. In addition, the Company paid commissions and finder s fees consisting of $52,512 and 217,676 broker and finders warrants with a fair value of $16,285. Each broker or finder warrant entitles the holder to acquire a common share at price of $0.30 until August 12, 2011.

13 13 6 Share capital (continued) On December 1, 2010, the Company completed a private placement of 1,250,000 units ( Units ) at a price of $0.20 per Unit for gross proceeds of $250,000. Each Unit consists of one common share of the Company and one half common share purchase warrant, each full warrant entitling the holder to acquire a common share at a price of $0.30 for a period of 12 months from the date of issuance. Cash proceeds from the private placement of $225,485 and $24,515 were allocated to the common shares and warrants issued in the private placement, respectively, based on their relative fair values at the closing date of the private placement. Shares issued for services On June 30, 2010, the Company issued 21,594 shares with a fair value of $3,750 in consideration for services rendered by a Director. b. During the year ended December 31, 2009: Shares issued for cash On June 30, 2009, the Company issued 1,102,500 common shares for proceeds of $187,900. On May 21, 2009, the Company issued 20,000 common shares on the exercise of options for proceeds of $2,000; On May 31, 2009, the Company issued 497,750 common shares for proceeds of $79,640. On May 31, 2009, the Company issued 125,000 common shares on the exercise of options for proceeds of $12,500; On July 31, 2009, the Company issued 1,231,000 shares for proceeds of $196,960. On December 7, 2009, the Company issued 7,500,000 shares by way of an initial public offering ( IPO ) for proceeds of $1,500,000. Costs associated with the IPO were $279,677. The Company also issued 800,000 agent warrants exercisable for one common share per warrant at a price of $0.20, expiring December 7, Technology Assignment Agreements On August 1, 2008, the Company entered into Technology Assignment Agreements with members of its research and development group. The agreements call for the issuance of 450,000 shares upon the issuance of patents relating to acquired technology. 7 Initial public offering On December 9, 2009, the Company completed an initial public offering ( IPO ) of 7,500,000 common shares at an offering price of $0.20 per share, for total gross proceeds of $1,500,000. Research Capital Corporation (the Agent ) acted as agent for the IPO. The Agent received a cash commission in the amount of 10% of the gross proceeds of the IPO and was issued 750,000 compensation warrants, with each warrant entitling the holder to acquire one common share of the Company at a price of $0.20 until December 7, The common shares of the Company commenced trading on the TSX Venture Exchange at the open of the market on December 9, 2009 under the symbol THZ.

14 14 8 Stock options, warrants outstanding and share based payment commitments The Company has a stock option plan that provides for the issuance of options to its directors, officers and employees. The maximum number of outstanding options must be no more than 6,617,468 options at any point in time. The term of the options must be no longer than 10 years and the directors determine the vesting period. The following table summarizes information about the options at December 31, 2010 and 2009, and the changes for the year then ended: Number of options Weighted average exercise price Number of options Weighted average exercise price $ $ $ $ Options outstanding Beginning of year 2,300, , Granted 3,375, ,400, Exercised (145,000) 0.20 Cancelled / Expired (2,125,000) 0.25 (280,000) 0.14 Options outstanding End of year 3,550, ,300, The following table summarizes information about stock options outstanding and exercisable at December 31, 2010: Exercise Expiry Options Options Weighted average Price date outstanding exercisable remaining contracted life $ (years) 0.20 January 1, , , January 1, , , July 1, , , July 1, ,000 50, August 7, , , January 1, ,000 25, March 2, ,000 93, March 19, , , March 19, , August 8, ,000 93, August 16, ,000 46, August 16, ,000 46, September 16, , October 1, ,000 62, October 1, , ,550,000 1,593, Share purchase warrants Number of warrants Weighted average exercise price Number of warrants Weighted average exercise price $ $ $ $ Warrants outstanding Beginning of year 1,041, , Issued in connection with shares sold 2,603, , Issued in connection with services rendered 165, Issued in connection with License Agreement 1,855, Exercised (12,000) 0.20 Expired (88,333) 0.30 Warrants outstanding End of year 5,411, ,041,

15 15 8 Stock options, warrants outstanding and share based payment commitments (continued) The Company s warrants are exercisable only for common stock. The following table summarizes information about warrants outstanding and exercisable at December 31, 2010: Exercise Expiry Warrants Weighted average Price date outstanding remaining contracted life $ (years) 0.20 July 31, , August 12, ,978, December 1, , December 7, , July 14, ,655, November 16, , ,411, Share based payment commitments During the year ended December 31, 2009, the Company entered into an agreement with certain employees where by the Company agrees to issue 450,000 shares upon the issuance of a patent for certain technologies. These performance based shares are valued at fair market value and amortized into income as stock based compensation over the expected time management estimates it will take for the patent to be issued. The expected time for a patent to be issued varies according to the technology and complexity of the patent application. In 2008, the Company agreed to the following share based payment awards: Total number of shares committed in 2009: 450, $ $ Fair market value of commitment in ,000 Amortized into income during the year 37,500 52,500 Balance remaining to be amortized as at December 31-37,500 9 Income taxes 2010 $ 2009 $ Statutory rates 31% 31% Income tax recovery at statutory rate (460,200) (267,100) Loss of foreign subsidiaries at a lower rate 155 Stock-based compensation 75,000 94,400 Items not deductible for tax purposes Financing costs (20,100) (54,459) Unrecognized future income tax assets 404, ,704 Future income taxes recovered The components of future income taxes are: 2010 $ 2009 $ Non-capital losses carry forwards 2,856,800 1,552,200 Valuation allowance (2,856,800) (1,552,200) Net future tax assets

16 16 9 Income taxes (continued) As of December 31, 2010, the Company has available non-capital tax losses of approximately $2,879,800 that may be offset against future Canadian taxable income. These losses expire as follows: $ , , , , ,304,600 2,856, Government grants and scientific research and experimental development tax credit Government Grants The ggovernment grants are pre-approved for a specific purpose and specific amount and are earmarked for salaries for certain employees working on projects that have been pre-approved under the grant programs. The Company is required to supply timesheets and project updates in its application for reimbursement of the salaries of the employees based on the hours the employees have worked on the specific project. With respect to assistance received, the Company does not recognize any contingent liability for repayment because the grants are for costs already incurred. Scientific Research and Experimental Development ( SR&ED ) Tax Credit The Company applies for refundable input tax credits on qualifying SR&ED expenditures. The refundable tax credit is recognized with the applicable documents are filed with the tax authorities. The following table summarizes the government grants and SRED tax credits receivable: 2010 $ 2009 $ Industrial Research Assistance Program 16,233 34,819 Natural Sciences and Engineering Research Council of Canada 12,500 SRED tax credit 172,495 Government grants receivable 16, ,814 During the year ended December 31, 2009, the Company filed claims in relation to SR&ED expenditures incurred during 2009 and 2008, and recorded a grant receivable in the amount of $172,495. During the year ended December 31, 2010, the 2009 and 2008 claims were re-assessed and the Company received an additional $57,126 in government assistance. During the year ended December 31, 2010, the Company recorded government grants of $102,892 ( $95,727) and SRED tax credits of $57,126 ( $172,495), included in net loss and comprehensive loss for the year. 11 Related party transactions The Company s transactions are in the normal course of business and are recorded at the exchange amount. Effective April 1, 2010, the Company assumed the full lease for office space previously shared with a company of which the CEO was the related company s former CEO. The Company also paid the CEO $8,500 for furniture and office equipment which the Company had been using without charge since inception.

17 17 12 Management of capital The Company manages its cash, common shares, stock options and warrants as capital. The Company s objectives when managing capital are to safeguard the Company s ability to continue as a going concern in order to pursue the development of its technology and products and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. The Company does not have any externally imposed capital requirements to which it is subject. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue debt, acquire or dispose of assets or adjust the amount of cash and cash equivalents. In order to maximize ongoing exploration efforts, the Company does not pay out dividends. The Company s investment policy is to keep its cash treasury on deposit in an interest bearing Canadian chartered bank account. The Company will require capital resources to carry its research and development plans and operations through its current operating period. 13 Commitments and contingent liabilities On October 1, 2010, the Company entered into a commercial lease agreement for manufacturing space which expires on October 1, Basic rent under the lease agreement is $1,400 per month. The first six months of rent under the agreement is due on March 31, 2011, in which the Company must issue an equivalent amount of shares equal to $1,400 per month, which is to be determined using the share price on the last trading day of each month that the rent is due. The remaining six months shall be paid in cash. As at December 31, 2010, the Company has accrued rent of $4,200 for the months of October, November and December which will be paid through the issuance of 20,531 shares on March 31, On April 1, 2011, the Company replaced the commercial lease agreement for manufacturing space with a 3 year agreement that expanded the leased space. The rent under the agreement is $5, per month, including HST. The Company has the option, after 12 months, to terminate the lease upon 3 months notice. The Company has commitments under long-term lease agreements for office space and manufacturing space, which expire August 31, 2011 and April 1, 2014, respectively. Future minimum annual lease payments are as follows: Office lease $ , , , ,352 Contingent liabilities 230,064 In the ordinary course of business, the Company may be contingently liable for litigation and claims with customers, suppliers and former employees. On an ongoing basis, the Company assesses the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable costs and losses and a determination of the provision required, if any, for these contingencies is made after analysis of each individual issue. The Company has provided for no amount in respect of contingent liabilities in the consolidated financial statements. 14 Subsequent events The following significant events have occurred subsequent to December 31, 2010: On January 13, 2011, the Company changed its name from T-Ray Science, Inc. to Verisante Technology, Inc. On February 1, 2011, the Company completed a private placement of 4,000,000 units ( Units ) at a price of $0.25 per Unit for gross proceeds of $1,000,000. Each Unit consists of one common share of the Company and one common share purchase warrant, each warrant entitling the holder to acquire a common share at a price of $0.30 for a period of 24 months from the date of issuance. In connection with the private placement, the Company paid finder s fees of $69,500. On February 1, 2011, the Company issued 645,000 stock options to Consultants On April 15, 2011, the Company completed a private placement of 12,500,000 units ( April Units ) at a price of $0.40 per Unit for gross proceeds of $5,000,000. Each Unit consists of one common share of the Company and one common share purchase warrant, each warrant entitling the holder to acquire a common share at a price of $0.50 for a period of 24 months from the date of issuance. In connection with the private placement, the Company paid finder s fees of $500,000.