Item 1. Business.
Business Development
References to our “Company,” “our,” “we,” “us” and words of similar import refer to GeNOsys, Inc. (“GeNOsys”), a Utah corporation, formerly known as “The Autoline Group, Inc.”, and our wholly-owned subsidiary, GeNOsys, Inc., a Nevada corporation (“GeNOsys Nevada”), as applicable. Our current operations are conducted through GeNOsys.
GeNOsys, Inc. (“GeNOsys Nevada”) was incorporated under the laws of the State of Nevada on June 30, 2005. The Company was organized for the purpose of developing and commercializing a method to produce medical grade nitric oxide gas on demand at a significantly reduced price.
On August 18, 2005, GeNOsys Nevada entered into a Merger Agreement with The Autoline Group, Inc. (“Autoline”), a Utah corporation incorporated June 29, 2001, and publicly traded on the over-the-counter bulletin board market (“OTCBB”), whereby the shareholders exchanged 100 percent of their equity interest on a 1 for 1 basis for comparable equity securities of Autoline. The legal capital structure of the business combination has GeNOsys Nevada being the wholly owned subsidiary of Autoline. As the business combination is accounted for as a reverse merger, GeNOsys Nevada is deemed to be the acquirer of Autoline. Upon the closing of the Merger Agreement, the name of the Company was changed to “GeNOsys, Inc.” (“GeNOsys”), and the Company’s trading symbol on the OTCBB changed to “GNYS.”
Description of the Business
We are a medical research and development company specializing in pharmaceutical, bio-technical and medical gas generating systems. The primary gas our systems will generate is medical grade nitric oxide, along with other various combinations of beneficial medical gases suitable for the treatment of human conditions and diseases. The gases also have other potential uses, such as the treatment of animals by veterinarians and the sterilization of equipment and devices.
Non-medical grade nitric oxide gas is produced and sold commercially by major gas companies as a specialty gas mixture and calibration gas. Nitrogen dioxide is present in all nitric oxide gas currently produced. Its presence limits the size of the dose of nitric oxide gas that can be administered for prospective uses in both humans and animals.
We have developed a proprietary compound formulation that will be utilized to produce medical grade nitric oxide gas in our desktop and portable generators. Management believes that with the further refinement of our proprietary formulation, we can make or filter medical grade nitric oxide gas with minimal amounts of nitrogen dioxide, and that this process can produce medical grade nitric oxide gas in ample quantities for any current or prospective use and at a price substantially less than that of all currently available technologies.
Our current generator models are capable of delivering sufficient quantities of nitric oxide gas for individual laboratory desktop use. We are continuing to further develop our generators and our proprietary compound formulation for high production quantities and consistency. The product must have a known shelf life and be available in various configurations to produce known concentrations and volumes of gas. Packaging is another critical developmental process that we are addressing. Management plans to rely on outside contractors to achieve these objectives.
We estimate that non-clinical laboratory sales could take place earlier than United States Food and Drug Administration (“FDA”) approval. Management anticipates that selling our desktop generator earlier into the market as laboratory equipment will pave the way for sales of our medical generators and proprietary tablets and compounds, but expected financial contributions from non-medical generator and tablet sales will not be sufficient to fund the substantial costs of the FDA approval process for human medical uses. We expect that contributions from laboratory sales will be able to cover all or part of our manufacturing and set-up costs and contribute to our overall profitability in due time, but believe that we will also require additional funding, which we are currently working to secure.
All human medical uses of nitric oxide gas require FDA approval prior to initiating sales in the United States, and the approval of similar international agencies in their respective countries. Approval can be a long and expensive process, with no assurance that any such approval can or will ever be obtained. Management hopes to reduce the time for regulatory approval by certain strategic approaches that are proprietary.
Our objectives are to establish GeNOsys (generated nitric oxide systems) as the premier nitric oxide generating pharmaceutical company and to:
·
manufacture and sell medical grade nitric oxide generators and tablets and compounds for use in the relief of human diseases;
·
offer value added services such as custom generators adapted for the treatment of various diseases;
·
hire staff both currently identified and unidentified to implement our business model; and
·
obtain FDA approval of our generating systems.
Principal Products or Services and Their Markets
Our principal products are our patented nitric oxide gas generators and our proprietary nitric oxide producing tablet medium. It is our objective to be the significant supplier of medical grade nitric oxide gas to end users in both the domestic and international markets.
We will target the treatment of tuberculosis (“TB”) as our initial market. There are a number of factors which entered into this decision.
·
TB has high visibility and priority with the World Health Organization (“WHO”) and other international organizations
·
New drugs are needed to combat the growing worldwide health threat TB presents, particularly multi-drug resistant TB (“MDR-TB”) and extensively drug-resistant TB (“XDR-TB”).
·
Data obtained from treatment of TB can be utilized in a submission to the FDA for approval
·
TB patients often are concurrently infected with other diseases. Treating TB patients will provide valuable data on the effectiveness of nitric oxide for additional applications
The 2010 market for all anti-TB drugs is projected by The Global Alliance for TB Drug Development (“The TB Alliance”) to be between $612 million and $670 million with the potential market for a new anti-TB drug estimated to be between $316 million and $345 million. The TB market provides a number of significant advantages as the initial target market. WHO and The TB Alliance have made the development of a new anti-TB drug one of their highest priorities in order to halt the world health threat posed by TB, particularly MDR-TB and XDR-TB
The current treatment regimen adopted by The TB Alliance and WHO is the directly observed treatment, short-course (“DOTS”). Utilizing this treatment method, patients are brought into hospitals and clinics for two weeks, during which time medical personnel directly observe the patient taking the prescribed medications. To incentivize patients to enter the DOTS treatment program, they are paid while at the clinic or hospital and, upon leaving, are provided additional money and food. However, DOTS is cumbersome and labor intensive, particularly because currently available anti-TB drugs require a minimum treatment of 6 months. Many patients experience unpleasant side effects which are common with patients on antibiotic regiments, such as digestive problems and diarrhea, and adherence with the relatively long course of treatment is poor. Such non-adherence commonly leads to treatment failure and the development of drug resistance.
Recognizing the limitations and problems of the DOTS program, WHO and The TB Alliance will incentivize and make available funding to organizations which can develop new anti-TB drugs, particularly new drugs that offer at least one of these three improvements over DOTS:.
1.
Shorten the total duration of effective treatment and/or significantly reduce the total number of doses needed to be taken under DOTS supervision.
2.
Improve the treatment of MDR-TB, which cannot be treated with current anti-TB drugs, and/or
3.
Provide a more effective treatment of latent TB infection, which is essential for eliminating TB.
It is the belief of management that our nitric oxide treatment method meets all three of the above criteria.
While TB will be the initial market targeted for the aforementioned reasons, nitric oxide is not a single indication or single market drug. Nitric oxide has antifungal, antiviral and antibacterial properties, and recently many research laboratories have begun research and development programs where nitric oxide gas is an integral part of the development of new drugs. To date, research and subsequent treatment regimens have been held hostage by the high cost of cylinder medical grade nitric oxide gas. We believe that the availability of on-site and on-demand production of our low cost medical grade nitric oxide gas will lead to greater use of the gas in treatment of both common and lethal diseases
Our business plan includes a multi-track process of FDA and ISO 13485:2003 approvals. Clinical trials will be conducted under protocols which conform to FDA requirements and the data generated from those trials will then be used in our multi-track process of submitting and obtaining such FDA and ISO 13485:2003 approvals
Our patented GeNOsys Nitric Oxide System is unique in its ability to produce medical grade nitric oxide gas on site and on demand. The compressed cylinder gas method currently used to administer nitric oxide gas is expensive, charged at the rate of $138 per hour, up to a maximum of $12,000 per month per patient. The compressed gas cylinders are heavy, hard to transport and store, and dangerous. In addition, once used, they must be stored prior to being shipped back to the vendor to be re-filled. Freight and storage costs are burdensome. The most significant problem, however, is the cost currently charged in the US for medical grade nitric oxide gas. Research using this medical gas that has potential to treat a wide range of diseases has been limited.
In order to encourage research and to shorten the time line to positive cash flow, we plan to initiate sales of nitric oxide generators into research laboratories. We believe that less stringent regulatory demands on researchers make this an attractive method of gaining access to the research community. As sales increase in the laboratory market,
new uses for the gas generator will be identified as well as new applications and dose ranges for other diseases that may be unknown at this time. This new knowledge can be used to our advantage in customizing and updating generators for the new markets identified.
Distribution Methods of the Products or Services
In the United States, the FDA restricts sales of drugs that do not meet their approval. Our strategy will be to use the data generated from TB clinical trials to obtain FDA approval. Clinical trials have not yet begun and there can be no assurance that permission to conduct such trials will be granted. Should we be successful in obtaining FDA approval, we will choose as our distribution channel appropriate distributors who have complimentary lines of products. Because of the nature of the FDA approval process, there can be no assurance as to the actual timing or success of the product commercialization.
As a market strategy we intend to involve key potential users of our products during clinical trials. Early innovators will be sought to use our products in trials. The early innovators are the best word of mouth advertisers in the medical community. We intend to secure the services of several key individuals who may be specifically helpful in advancing our sales and marketing opportunities.
Management anticipates that the non-medical laboratory use of the generator will stimulate customer contacts and create interest within the nitric oxide market in our products by demonstration and use. Management plans to engage a distributor to handle our marketing and distribution when appropriate.
Competitive Business Conditions
We are entering the medical device and therapy business. Many of our competitors are larger and have more funding than we do. Further, taking a pharmaceutical product or medical device or application to market requires significant resources and time. Patents held on our generators, coupled with lower production costs of medical grade nitric oxide gas, may inhibit competitors from entry into the market.
Regardless, we expect that all of our products under development will face intense competition from existing and future products marketed by large companies, including our generators and our proprietary compound formulation of tablets and compounds utilized to produce medical grade nitric oxide gas. Nitric oxide is currently sold commercially by most major gas companies as a specialty gas mixture and calibration gas. Most of these gases are not medical use gases. The major competitors in this industry are Praxair (Union Carbide), Airgas, Air Liquide (Liquid Air), AGA (Europe), British Oxygen and Mattheson Gas.
Research is currently being done by numerous pharmaceutical companies, colleges and universities on various treatments utilizing nitric oxide gas. Over 80,000 articles have been published on various nitric oxide experiments and another 4,000 to 5,000 are being published yearly. It is anticipated that the findings of these studies will increase the current competition for medical uses of nitric oxide.
Sources and Availability of Raw Materials and Names of Principal Suppliers
The chemical substances that make up our proprietary compound formulation of tablets and compounds that will be utilized to produce nitric oxide gas in our generators are common substances that are available from a number of sources.
Dependence on One or a Few Major Customers
Our products have not received FDA approval to be marketed and we have not started production. We therefore do not have any sales. However, we do not anticipate that we will be dependent upon one or a few major customers for our success or for the sale of our products. We believe the markets for nitric oxide gas are wide and varied and will continue to grow. If our technology is successful in producing low cost nitric oxide gas for non-medical uses and for the treatment of human diseases and maladies as outlined above, management believes that the use of nitric oxide gas will increase substantially.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts
We have succeeded in obtaining the following rights with respect to our products:
·
Nitric Oxide Gas Generator, Canadian Patent Application, Serial Number 2,413,834, Filed December 10, 2002;
·
Nitric Oxide Gas Generator, U. S. Patent Application, Serial No. 10/733,805, Filed December 10, 2003; Allowed, January 29, 2007;
·
Medical Gas Generator, U. S. Design Application, Serial No. 29/204,287, Filed April 27, 2004; and
·
Medical Gas Generator, Canadian Design Registration, Patent No. 104685, Issued November 23, 2004;
Management intends to continue filing patent applications or other applications that may protect our proprietary formulation of tablets and compounds that will be utilized to produce nitric oxide gas in our generators as the need arises. Following further development of our generators and proprietary compound formulation, we anticipate filing additional patent applications in the United States, Canada and other foreign countries, as appropriate.
Need for Governmental Approval of Principal Products or Services
One of our corporate strategies will be to produce nitric oxide gas for use in the treatment of human diseases and maladies. Those applications will require FDA approval, which approval process may be expected to take many years; approval is never assured, and the process is very time consuming and costly. We do not presently have the funds available for these purposes, and no assurance can be given that we will be able to secure the required funding for these planned applications of our products. We have not yet started the FDA approval process.
The following is a brief summary of applicable governmental regulations to which we may be subject in our planned business operations that relate to the use of our products in the treatment of humans.
Regulation by governmental authorities in the United States and other countries is a significant factor affecting the timing required for the commercialization of our generators and our nitric oxide tablet product. Human use of either will require regulatory approval by governmental agencies prior to commercialization. Various laws and regulations govern or influence the research and development, manufacturing, safety, labeling, storage, record keeping and marketing of our products. The lengthy process of seeking and obtaining these approvals, and the subsequent compliance with applicable laws and regulations require the expenditure of substantial resources. Any failure to obtain or maintain, or any delay in obtaining or maintaining, regulatory approvals could materially adversely affect our business. Our policy will be to conduct our research and development activities in compliance with current FDA guidelines, and with comparable guidelines in other countries where we may be conducting clinical trials or other developmental activities.
Clinical testing, manufacturing and marketing of human pharmaceutical products requires prior approval from the FDA and comparable agencies in foreign countries. This process can be both lengthy and costly and the results are uncertain. The FDA has established mandatory procedures and safety and efficacy standards that apply to the testing, manufacture and marketing of such products in the United States. In the United States, these procedures include pre-clinical studies, request for designation, FDA registration, the filing of an Investigational New Drug Application (“IND”) or equivalent, human clinical trials and approval of a New Drug Application (“NDA”). The results of pre-clinical testing, which include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product and its formulations, must be submitted to the FDA as part of an IND that must be reviewed before clinical testing can begin. Clinical trials generally involve a three-phase process:
·
Phase I trials are conducted in volunteers or patients to determine the early side effect profile and, perhaps, the pattern of drug absorption, distribution and metabolism;
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Phase II trials are conducted in groups of patients with a specific disease in order to determine appropriate
doses and dose regimens, expand evidence of the safety profile and, perhaps, determine preliminary efficacy; and;
·
Phase III trials are large scale, comparative trials that are conducted on patients with a target disease in order to generate enough data to provide the statistical proof of efficacy and safety required by national regulatory agencies.
The results of the preclinical and clinical testing are then submitted to the FDA in the form of an NDA for approval to commence commercial sales. The FDA may, in responding to an NDA, grant marketing approval, request additional information or deny the approval if it determines that the NDA does not provide an adequate basis for approval. Among the conditions for an NDA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform, on an ongoing basis with current Good Manufacturing Practices (“cGMP”). In complying with cGMP, we must continue to expend time, money and effort in the areas of production and quality control to ensure full compliance, or we must engage the services of outside contractors who are well versed in compliance with these requirements. Following approval of the NDA, we are subject to periodic inspections by the FDA. Any determination by the FDA of manufacturing deficiencies could materially adversely affect our business.
It is not presently anticipated that we will be manufacturing our generators or our nitric oxide tablet; we intend to develop our products through testing and then to contract the manufacture, sale and/or license of those products.
European countries generally follow the same regulatory approval procedures. The European Union has established a unified filing system administered by the Committee for Proprietary Medicinal Products (“CPMP”) designed to reduce the administrative burden of processing applications for pharmaceutical products derived from new technologies. Following CPMP review and approval, marketing applications are submitted to member countries for final approval and pricing approval, as appropriate. In addition to obtaining regulatory approval of products, it is generally necessary to obtain regulatory approval of the facility in which the product will be manufactured. The approval process for medical devices in Europe is similar but is administered by private certification organizations known as Notified Bodies, which are accredited by each member state of the European Union. The receipt of regulatory approvals often takes a number of years, involves the expenditure of substantial resources and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. On occasion, regulatory authorities may require larger or additional studies, leading to unanticipated delay or expense. There can be no assurance that any approval will be granted to us, and, even if granted, such approval may be withdrawn if compliance with regulatory standards is not maintained. In addition, the regulatory approval processes for products in the U.S.,
European countries and other countries around the world is undergoing or may undergo changes, and we cannot predict what effect any changes in the regulatory approval process may have on our business.
In addition to the foregoing, our present and future business may be subject to various laws and regulations relating to safe working conditions, clinical, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research, as well as national restrictions on technology transfer, and import, export and customs regulations and similar laws and regulations in foreign countries.
Research and Development
We have not commenced planned principal operations. The development of our business plan and our Plan of Operation will require substantial expenditures for research and development of our products, including our generator and our proprietary tablet and compound formulation for production of nitric oxide gas. See the Part II, Item 7, below, specifically, the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” It is estimated that our predecessors expensed approximately $900,000 in research and development of the patent and patent applications that we acquired under the merger with GeNOsys Nevada.
Cost and Effects of Compliance with Environmental Laws
We do not anticipate any material expense for compliance with environmental laws in connection with our
planned or contemplated business operations, as our plan is to use contractors well versed in dealing with the applicable hazards associated with producing and packaging nitric oxide gas and other pharmaceuticals. See the Part II, Item 7, below, specifically, the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Number of Employees
We currently have five employees and will consider our employment needs as business developments require. We anticipate filling most of our needs for services, other than core employees, through contract organizations and outside agreements with suppliers of services in the industries of our planned business operations as may be required.
Item 1A.
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide information under this item.
Item 2.
Item 2. Properties.
Our executive offices are located at 280 W. Riverpark Drive, Provo, Utah 84604. We lease approximately 2,600 square feet at a lease price of $4,850 per month. The lease agreement provides for increases of 2.5% on each anniversary date of the agreement term. At November 2009, the monthly building lease is $5,110 per month with an additional $1,800 per month due for common area maintenance for a monthly total of $6,910. Our lease is for a period of five years, commencing in November, 2006. In addition, our original facility space, located at 5063 Riverpark Way, Provo, Utah 84604 is being utilized for our research and development. It is a month-to-month lease with a monthly payment of $1,600.
Our current office space will not be adequate to meet the needs of our expected growth. We will need to acquire additional office and/or laboratory facilities in the future to facilitate additional personnel and enable us to execute our business plan.
Item 3.
Item 3. Legal Proceedings.
We are not a party to any pending legal proceeding and, to the knowledge of management no federal, state or local governmental agency is presently contemplating any proceeding against us. No director, executive officer or affiliate of ours, or owner of record of beneficially more than five percent of our common stock, is a party adverse to us or has a material interest adverse to us in any proceeding.
Litigation to enforce our patents, to protect our proprietary information, or to defend us against alleged infringement of the rights of others may occur. Such litigation would be costly, could divert our resources from other planned activities, and could have a material adverse effect on our results of operations and financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No annual meeting or special shareholder meeting was held during the fiscal year ended November 30, 2009 and no matters were submitted for vote by shareholders.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the “OTC Bulletin Board” of the Financial Industry Regulatory Authority (“FINRA”) under the symbol “GNYS.” The following table sets forth the high and low bid information of our common stock for the periods indicated. The price information contained in the table was obtained from Google Finance. Note that the over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions, and that the quotations may not necessarily represent actual transactions in the common stock. Resales of “restricted securities” may have an adverse effect on the market for our common stock, and all principal stockholders of shares of our common stock have presently satisfied the holding period requirements of Rule 144 of the Securities and Exchange Commission. See the heading “Rule 144” below and Part III, Item 12.
STOCK QUOTATIONS (BID) *
* The future sale of our presently outstanding “restricted securities” (common stock) by present members of management and others may have an adverse effect on any market in the shares of our common stock. See the heading “Rule 144” below and Part III, Item 12.
Holders of Record
At February 26, 2010, there were approximately 203 holders of record of our common stock. The number of holders of record was calculated by reference to our stock transfer agent’s books.
Dividend Policy
To date, we have not paid dividends on our common stock. The payment of dividends on our common stock, if any, is at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements and financial condition, and other relevant factors. See Item 7 - “Management’s Discussion and Analysis or Financial Condition and Results of Operations.” We do not intend to declare any dividends in the foreseeable future, but instead intend to retain all earnings, if any, for use in our operations.
Securities Authorized for Issuance under Equity Compensation Plans
The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of November 30, 2009.
2007 Stock Option Plan
On March 23, 2007, the GeNOsys, Inc. 2007 Stock Option Plan (“Stock Option Plan”) was approved by our Board of Directors and became effective on that date, subject to the Stock Option Plan being approved by our stockholders at the annual meeting. The Stock Plan was approved by a vote of stockholders at the Annual Meeting held June 27, 2007. The Stock Plan provides that 3,000,000 shares of our authorized but unissued common stock be reserved pursuant to the terms and conditions of the plan. The Stock Plan allows the Board of Directors, under the direction of the Compensation Committee, to make broad-based grants of stock options, any of which may or may not require the satisfaction of performance objectives, to employees, consultants and non-employee directors.
The Plan became effective upon the date of shareholder approval and shall continue in effect for a term of ten (10) years, unless terminated. The maximum aggregate number of shares of common stock that may be sold under the Plan is 3,000,000 shares. The term of each option and its exercise price shall be stated in an option agreement; provided that the term does not exceed ten (10) years from the date of grant. The plan provides that a grant of a stock option to an employee shall have an exercise price no less than the fair market value of a share of common stock on the date on which the option is granted. As a condition of the grant, vesting or exercise of an option granted under the Plan, the participant shall be required to satisfy any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the grant, vesting or exercise of the option or the issuance of shares.
The Plan is to be administered by our Compensation Committee, if any, or by our Board of Directors if there is no Compensation Committee. Until a Compensation Committee is formed, our Board of Directors will administer the Plan. The Board may establish a Compensation Committee and from time to time increase the size of that Compensation Committee and appoint additional members, remove members (with or without cause) and appoint new members in substitution, fill vacancies and/or remove all members of the committee. The Compensation Committee may be composed of employee/director(s), non-employee/director(s) and/or major stockholder(s) of the company who are not a director.
Non-statutory stock options may be granted to employees, directors and consultants who have the capacity to contribute to the success of the company. Incentive stock options may be granted only to employees, provided that employees of affiliates shall not be eligible to receive incentive stock options.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
From December 2007 through November 2009, the Company issued $455,570 of convertible notes payable to officers and directors for funds provided to the Company. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued.
On January 31, 2008, the Board of Directors consented to the issuance of 11,535 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $8,536 ($0.74 per share).
On or about November 30, 2008, we completed the private sale of 423,639 shares of our common stock at a price of $0.50 per share for aggregate net proceeds of $205,949.
On September 16, 2008, the Board of Directors consented to the issuance of 150,000 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $67,500 ($0.45 per share).
On December 31, 2008, our Board of Directors approved the issuance of 1,000,000 shares of our common stock to Smith Consulting Services, Inc. (“SCS”) for services rendered. The closing price of the stock on December 31, 2008, was $0.20 per share, resulting in a $200,000 non-cash charge, which was recorded in the first quarter of 2009.
On March 6, 2009, our Board of Directors approved the issuance of 200,000 shares of our common stock in a private placement. Net proceeds of $20,000 were received from this private placement transaction.
We issued these securities to persons who were either “accredited investors,” or “sophisticated investors,” who, by reason of education, business acumen, experience or other factors, were fully capable of evaluating the risks and merits of an investment in our Company; and each had prior access to all material information about us. We believe that the offer and sale of these securities was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the Securities and Exchange Commission. Section 18 of the Securities Act preempts state registration requirements for sales to “accredited investors.”
Use of Proceeds of Registered Securities
There have been no sales of registered securities by us.
Purchases of Equity Securities by Us and Affiliated Purchasers
From December 2007 through November 2009 the Company has issued convertible notes payable to officers and a director for funds provided to the Company. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued. If converted as of March 1, 2010, the notes would be convertible at approximately $0.06 per share. At November 30, 2009 and 2008, the total of these convertible notes was $455,570 and $57,500, respectively. The Company has agreed to satisfy its obligations owing to one of the directors, John W.R. Miller, for $385,000 of funds he advanced to the Company by exchanging the $385,000, plus interest owed to Mr. Miller, for the issuance of shares of stock to third parties for the cancellation of an equal amount of obligations owed by Mr. Miller. Mr. Miller will receive no compensation in connection with this transaction.
Mr. Miller’s obligations to third parties resulted from him personally borrowing funds from such third parties with an agreement to convert such personal notes into shares of the stock held by him. Each note is past due and payable in full. The notes total $385,000 and bear interest at the rate of 5% per annum. Each note is convertible into shares of Company stock held by Mr. Miller at the average rate of $0.15 per share.
Item 6.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide information under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and notes included in this report as Part II, Item 8.
Overview
We are in the development stage and have incurred cumulative net losses since inception. We incurred negative cash flows from operating activities of $358,433 and $510,622 for the years ended November 30, 2009, and 2008, respectively. Our products are in the development stage and are subject to regulatory approval by the FDA. We have not yet begun the FDA approval process Although we are confident that the products under development will be successfully tested and commercialized, there can be no assurance that such approvals will be received.
Our ability to carry out our plan depends entirely upon our ability to obtain additional substantial equity, debt financing or licensing agreements and royalties. We cannot assure you that we will receive this financing. If we do not receive such funding, we will not be able to proceed with our intended business plans. In 2008 we made a private placement of 423,639 shares of our common stock, which sale generated net proceeds of $205,949. In November 2009, we made a private placement of 200,000 shares of our common stock at a price of $0.10 per share for net proceeds of $20,000.
During 2008 and 2009 we issued convertible promissory notes to officers of the Company for funds received. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued. The following table summarizes the funds received during the years ended November 30, 2009 and 2008, and the number of shares that would be issued had all the notes been converted at November 30, 2009, which conversion would have been at the closing price on November 30, 2009, or a rate of $0.10 per share:
Shares to be Issued
Face Amount of
at a November 30,
Notes Issued
2009 Conversion
Notes issued for year ended November 30, 2008
$ 57,500
575,000
Notes issued for year ended November 30, 2009
398,070
3,980,700
Total
$ 455,570
4,555,700
Substantial additional funds will still be required if we are to reach our goals that are outlined above. We currently have no arrangements or understandings that will assure that we can successfully raise any additional funds that may be required.
Our accountants have expressed substantial doubt about our ability to continue as a going concern as a result of our history of losses. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to successfully complete the development and commercialization of our products and, once in the marketplace, to generate sufficient revenues to achieve positive cash flow and profitability.
Financial Position
The table below presents a summary of our consolidated balance sheets at November 30, 2009, and 2008.
We had $28,115 in cash as of November 30, 2009. This is an increase of $23,747 from November 30, 2008. We had a working capital deficit of $1,304,303 at November 30, 2008, as compared to working capital deficit of $394,885 at November 30, 2008. This increase in the working capital deficit was largely due to the operating loss for the fiscal year, coupled with capital expenditures and the lack of significant new funding.
Contractual Obligations
The Company leases office space under a five-year non-cancelable operating lease that commenced on November 1, 2006. The following summarizes future minimum lease payments under the operating lease at November 30, 2009:
Year Ending Minimum
November 30, Lease Payments
2010 $ 62,805
2011 58,888
$ 121,693
The Company issued convertible promissory notes to officers of the Company for funds received. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued. The following table summarizes the convertible notes issued during the years ended November 30, 2009 and 2008:
Face Amount of
Notes Issued
Notes issued for year ended November 30, 2008
$ 57,500
Notes issued for year ended November 30, 2009
398,070
Total
$ 455,570
Results of Operations
Year Ended November 30, 2009, Compared to Year Ended November 30, 2008
During the years ended November 30, 2009, and 2008, we had no revenue or related cost of sales. The selected financial information below shows only the components comprising total operating expenses and the resultant net loss for each reporting period.
Year Ended November 30, 2009
Year Ended November 30, 2008
Increase (Decrease)
Research and Development (excludes $105,922 and $131,662 of non-cash stock compensation expense in 2009 and 2008)
$585,197
$ 511,824
$73,373
General and Administrative (excludes $152,424 and $189,464 of non-cash stock compensation expense in 2009 and 2008)
549,326
433,882
115,444
Stock-based compensation expense
258,346
321,126
(62,780)
Total operating expenses
1,392,869
1,266,832
126,037
Net loss
$(1,404,366)
$(1,264,545)
$(278,091)
Research and development expenses (“R&D”) for the year ended November 30, 2009 were $585,197, which excludes $105,922 of stock-based compensation expense. R&D expenses for the year ended November 30, 2008, were $511,824, which excludes $131,662 of stock-based compensation expense. The expense level in 2009 increased by $73,373 compared to 2008 expense level. Of the increase in 2009, $46,918 is from higher consulting fees and $18,961 from increased travel expenses, with smaller variances in a number of expense categories comprising the remaining $7,495 increase. It is anticipated that R&D expenses will increase in 2010 as test projects are initiated and the development work required for commercialization escalates.
General and administrative expenses for the year ended November 30, 2009, were $549,326, excluding $152,424 of stock-based compensation expense, compared to $433,882, excluding $189,464 in stock-based compensation charges, for the year ended November 30, 2008, for an increase of $115,444. The 2009 increase results from a $191,096 increase in consultant expenses, offset in part by reductions in a number of other expense accounts. The increase in consulting fees results from the $200,000 non-cash charge taken for the issuance of stock for services.
The raising of additional funds, hiring of additional personnel, travel expenses, office rental, and other administrative expenses are all expected to increase throughout 2010.
No interest income was earned for the year ended November 30, 2009. Interest income of $2,387 was realized for the year ended November 30, 2008, from interest earned on invested funds. There were no funds invested during 2009. Interest expense of $11,396 was recognized in the year ended November 30, 2009, which represents interest accrued on funds loaned to the Company by its officers and directors. There was no interest expense recorded in the year ended November 30, 2008.
The net loss for the year ended November 30, 2009, was $1,404,366. This compares to a net loss realized for the year ended November 30, 2008, of $1,264,545. We expect the net loss in 2010 to approximate the 2009 loss as additional consultants, personnel and resources are utilized to complete the testing, regulatory approval and commercialization of our products will offset the expected revenue from initial sales of our products.
Liquidity and Capital Resources
To date, we have financed our operations principally through private placements of equity securities. We used net cash for operating activities of $358,433 in the year ended November 30, 2009. This is a $152,189 reduction from the $510,622 used in the year ended November 30, 2008. As of November 30, 2009, our working capital was $(1,304,303), and our current liabilities were $1,347,096.
Our working capital requirements for the foreseeable future will vary based on a number of factors, including the costs to complete development work, the cost of bringing products to commercial viability, the timing of the market launches, and the level of sales. As of November 30, 2009, we had accounts payable and accrued liabilities totaling $1,347,096. We need to raise additional funds immediately in order to execute our business plan. There can be no assurance that additional funding will be available to us or that if funding is available that it will be under favorable terms. If we are unsuccessful in raising additional funds we may be required to substantially reduce or eliminate certain areas of our product development activities, limit our operations significantly or cease operations entirely.
Critical Accounting Policies
Revenue Recognition
Pursuant to Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” we will recognize revenue when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured.
Product revenues will be recognized when persuasive evidence of an arrangement exists, risk of loss and title has transferred to our customers, the fee is fixed or determinable and collection is probable. Rights of return for manufactured product are dependent upon the agreement.
Long-Lived Assets
We regularly evaluate whether events or circumstances have occurred that indicate the carrying value of our long-lived assets may not be recoverable. When factors indicate the asset may not be recoverable, we compare the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists. If the expected future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset. An evaluation of our intangible assets was conducted utilizing the two step impairment analysis. No impairments were indicated or recorded during the years ended November 30, 2009 and 2008.
Capitalization of Patent Costs
We have elected to capitalize patent costs and will amortize them over the shorter of the life of the patent or the number of years for which it is estimated that economic benefit will be derived.
Stock Based Compensation
On March 23, 2007, the GeNOsys, Inc. 2007 Stock Option Plan (“Stock Option Plan”) was approved by our Board of Directors and became effective on that date, subject to the Stock Option Plan being approved by the stockholders at the annual meeting. On June 27, 2007, our stockholders approved the Stock Option Plan. The Stock Option Plan provides that 3,000,000 shares of our authorized but unissued common stock be reserved pursuant to the terms and conditions of the Stock Option Plan. The Stock Option Plan allows us, under the direction of the Compensation Committee, to make broad-based grants of stock options, any of which may or may not require the satisfaction of performance objectives, to employees and non-employee directors. The purpose of these stock option grants is to attract and retain talented employees and further align employee and stockholder interests. The Stock Option Plan provides an essential component of the total compensation package offered to employees, reflecting the importance that we place on motivating and rewarding superior results with long-term, performance-based incentives. In March, June and November 2007, our Board of Directors approved the grant of an aggregate of 1,200,000 stock option grants to certain employees and directors, resulting in non-cash charges of $632,058. In December 2007, our Board of Directors granted one of our officers an option to purchase 600,000 shares of common stock, resulting in a non-cash charge of $271,598. In December 2008, our directors approved the grant of 900,000 stock option grants to certain employees and director, resulting in a non-cash charge of $151,900. These non-cash charges are being expensed ratably over the vesting periods of the individual agreements. The total non-cash charge expense for the years ended November 30, 2009 and 2008 relating to these stock option grants was $258,346 and $321,126, respectively.
Recent Accounting Pronouncements
On July 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) officially became the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. Going forward, only one level of authoritative GAAP will exist. All other accounting literature will be considered non-authoritative. The Codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included in the Codification is relevant SEC guidance organized using the same topical structure in separate sections within the Codification. The Codification was effective for interim and annual reports ending after September 15, 2009. We adopted the Codification during the fourth quarter of fiscal 2009. The impact on our financial statements is limited to disclosures. All references to authoritative accounting literature will now be referenced in accordance with the Codification.
ASC Topic 820 (Formerly FAS 157) - In September 2006, the FASB issued ASC Topic 820, “Fair Value Measurements”. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of the statement will change current practice. ASC Topic 820 is effective December 1, 2008, except for nonfinancial assets and liabilities, which are effective December 1, 2009. We adopted ASC Topic 820 on December 1, 2007 for financial assets and liabilities carried at fair value on a recurring basis, with no material impact on our consolidated financial statements. We are currently determining what impact the application of ASC Topic 820 on December 1, 2009 for non-recurring non-financial assets and liabilities that are recognized or disclosed at fair value will have on our financial statements.
ASC Topic 805 [Formerly FAS 141(R)] - In December 2007, the FASB issued ASC Topic 805, “Business Combination” , which replaces FAS No. 141. ASC Topic 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired entity and the goodwill acquired. ASC Topic 805 also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. ASC Topic 805 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC Topic 805 will have an impact on accounting for business combination once adopted, but the effect is dependent upon acquisitions at that time.
ASC Topic 810 (Formerly FAS 160) - In December 2007, the FASB issued ASC Topic 810 “Non-controlling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51”, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Topic also establishes reporting requirements that provide sufficient disclosure that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. ASC Topic 810 is effective for fiscal years beginning after December 15, 2008. We are not presently in discussions regarding, nor are we contemplating, a business combination, but should we engage in a business combination in the future, the adoption of ASC Topic 810 will have an impact on that combination.
ASC Topic 855 (Formerly SFAS 165) - In May 2009, the FASB issued ASC Topic 855, Subsequent Events. ASC Topic 855 establishes standards of accounting for the disclosure of events that occur after the balance sheet date but before financial statements are issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained. An entity is to apply the requirements to interim or annual financial periods ending after June 15, 2009. We adopted the provisions of ASC Topic 855 for the quarter ended August 31, 2009.
ASC Topic 860 (Formerly SFAS 166) - In June 2009, the FASB issued ASC Topic 860, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140. ASC Topic 860 requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller
retains some risk to the assets. The statement eliminates the concept of a qualifying special-purpose entity, changes the requirements for the de-recognition of financial assets, and calls upon sellers of the assets to make additional disclosures about them. ASC Topic 860 is effective occurring on or after November 15, 2009. We do not expect the adoption of ASC Topic 860 will have a material impact on our financial statements.
ASC Topic 810 (Formerly SFAS 167) - In June 2009, the FASB issued ASC Topic 810, Amendments to FASB Interpretation No. 46(R). ASC Topic 810 amends Interpretation No. 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. ASC Topic 810 is effective for an entity’s first fiscal period that begins after November 15, 2009. We do not expect the adoption of ASC Topic 810 will have a material impact on our financial statements.
ASC Topic 105 (Formerly SFAS 168) - In June 2009, the FASB issued ASC Topic 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. ASC Topic 105 establishes a new hierarchy of GAAP sources for non-governmental entities under the FASB Accounting Standards Codification and will supersede all accounting standards in U.S. GAAP, aside from those issued by the Securities Exchange Commission. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of ASC Topic 105 will have a material impact on our financial statements.
We have reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operation, financial position or cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on our current or future earnings or operations.
Off-Balance Sheet Arrangements
We lease office space under a five-year non-cancelable operating lease that commenced on November 1, 2006. Future minimum lease payments under the operating lease at November 30, 2009 are $121,693.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Item 8.
Item 8. Financial Statements and Supplementary Data
GeNOsys, Inc.
(A Development Stage Company)
Report of Independent Registered Public Accounting Firm
and Consolidated Financial Statements
November 30, 2009
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of November 30, 2009 and 2008
Consolidated Statements of Operations for the years ended November 30, 2009 and 2008 and for the period of the development stage (June 30, 2005) through November 30, 2009
Consolidated Statements of Stockholders' Equity and (Deficit) for the period of development stage (June 30, 2005) through November 30, 2009
24 - 25
Consolidated Statements of Cash Flows for the years ended November 30, 2009 and 2008 and for the period of the development stage (June 30, 2005) through November 30, 2009
Notes to Consolidated Financial Statements
27 - 36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
GeNOsys, Inc. (A Development Stage Company)
We have audited the accompanying consolidated balance sheets of GeNOsys, Inc. as of November 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended November 30, 2009 and 2008 and for the period of the development stage (June 30, 2005) through November 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal controls over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GeNOsys, Inc., (a development stage company), as of November 30, 2009 and 2008, and the results of their operations and their cash flows for the periods ended November 30, 2009 and 2008, and for the period of development stage (June 30, 2005) through November 30, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring losses from operations since its inception. The Company has not established operations with consistent revenue streams. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Mantyla McReynolds, LLC
Mantyla McReynolds, LLC
Salt Lake City, Utah
March 1, 2010
GENOSYS, INC.
(A Development Stage Company)
Consolidated Balance Sheets
See Accompanying Notes to Financial Statements.
GENOSYS, INC.
(A Development Stage Company)
Consolidated Statements of Operations
See Accompanying Notes to Financial Statements.
GENOSYS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
From Inception of the Development Stage (June 30, 2005) through November 30, 2009
Additional
Paid-in
Accumulated
Shares
Amount
Capital
Deficit
Total
Balance at June 30, 2005
2,556,500
$
2,557
$
26,243
$
(77,924)
$
(49,124)
Issued common stock for cash at $0.001
33,231,456
33,231
(29,908)
-
3,323
Issued stock for patents at $0.001
2,968,544
2,969
(2,672)
-
Issued stock for consulting agreement at $0.001
3,800,000
3,800
(3,420)
-
Shares canceled
(1,302,500)
(1,303)
1,303
-
-
Issued stock for cash at $0.60 per share
3,964,031
3,964
2,374,418
-
2,378,382
Stock promotion costs
-
-
(110,100)
-
(110,100)
Net loss for the period ended November 30, 2005
-
-
-
(200,399)
(200,399)
Balance at November 30, 2005
45,218,031
45,218
2,255,864
(278,323)
2,022,759
Issued stock for services at $0.60 per share
450,000
269,550
-
270,000
Net loss for the period ended November 30, 2006
-
-
-
(1,178,901)
(1,178,901)
Balance at November 30, 2006
45,668,031
45,668
2,525,414
(1,457,224)
1,113,858
Issued stock for cash at $0.70 per share
213,569
149,286
-
149,500
Non-cash compensation charges related to stock option grants
-
-
138,740
-
138,740
Net loss for the period ended November 30, 2007
-
-
-
(968,454)
(968,454)
Balance at November 30, 2007
45,881,600
45,882
2,813,440
(2,425,678)
433,644
Issued stock for cash at $0.50 per share
423,639
205,526
-
205,949
Stock issued for services
161,535
75,874
-
76,036
Non-cash compensation charges related to stock option grants
-
-
321,126
-
321,126
Net loss for the period ended November 30, 2008
-
-
-
(1,264,545)
(1,264,545)
Balance at November 30, 2008
46,466,774
46,467
3,415,965
(3,690,222)
(227,790)
Issued stock for cash at $0.10 per share
200,000
19,800
-
20,000
Stock issued for services
1,000,000
1,000
199,000
-
200,000
Non-cash compensation charges related to stock option grants
-
-
258,346
-
258,346
Net loss for the period ended November 30, 2009
-
-
-
(1,404,366)
(1,404,366)
Balance at November 30, 2009
47,666,774
$
47,667
$
3,893,111
$
(5,094,588)
$
(1,153,810)
See Accompanying Notes to Financial Statements
GENOSYS, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flow
See Accompanying Notes to Financial Statements.
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
GeNOsys, Inc. (Company) was founded June 30, 2005 under the laws of the State of Nevada. On August 19, 2005, the Company merged with The Autoline Group, Inc., a Utah corporation, which operated as an automotive dealership until September 12, 2005, when the dealership was discontinued. Upon completion of the merger the name of Autoline was changed to GeNOsys, Inc. The Company was organized to engage in the business of producing a portable medical gas generator.
The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 915. It has yet to commence full-scale operations and it continues to develop its planned principle operations.
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements of the Company include the accounts of GeNOsys, Inc. and its subsidiary, GeNOsys, Inc., a Nevada corporation (GeNOsys Nevada). All significant intercompany transactions have been eliminated. The following summarizes the more significant of such policies:
Income Taxes
The Company applies the provisions of Statement of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 740 Income Taxes. The Standard requires an asset and liability approach for financial accounting and reporting for income taxes, and the recognition of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. See Note 3.
The Company elected to classify income tax penalties and interest as general and administrative and interest expenses, respectively.
Net Loss Per Common Share
Basic loss per common share is based on the weighted-average number of shares outstanding. Diluted income or loss per share is computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period using the treasury stock method. The Company had 1,326,661 vested options exercisable and notes payable convertible into 2,578,996 shares of common stock at November 30, 2009, but due to the net loss they were not included in the calculation of the net loss per common share as their inclusion would be antidilutive.
Revenue Recognition
Pursuant to Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” we will recognize revenue when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or service has been rendered, (3) the price is fixed or determinable, and (4) collectability is reasonably assured.
Research and Development Costs
Research and development costs are expensed in the period they are incurred in accordance with ASC Topic 730 Research and Development.
Inventory
Inventories are stated at the lower of cost or market value based upon the First-In First-Out (FIFO) inventory method. The Company’s inventory consists of parts for development of the Company’s nitric oxide generators.
Property, Plant and Equipment
Fixed assets are stated at cost. Expenditure for minor repairs, maintenance, and replacement parts which do not increase the useful lives of the assets are charged to expense as incurred. All major additions and improvements are capitalized. Depreciation is computed using the straight-line method. The lives over which the fixed assets are depreciated range from 3 to 7 years.
Long-Lived Assets
We regularly evaluate whether events or circumstances have occurred that indicate the carrying value of our long-lived assets may not be recoverable. When factors indicate the asset may not be recoverable, we compare the related undiscounted future net cash flows to the carrying value of the asset to determine if impairment exists. If the expected future net cash flows are less than the carrying value, an impairment charge is recognized based on the fair value of the asset. An evaluation of our intangible assets was conducted utilizing the two step impairment analysis. No impairments were indicated or recorded during the years ended November 30, 2009 and 2008.
Capitalization of Patent Costs
The Company has elected to capitalize patent costs and will amortize them over the shorter of the life of the patent or the number of years from which it is estimated that economic benefit will be derived.
Stock Based Compensation
In December 2004, the Financial Accounting Standard Board (“FASB”) issued ASC Topic 718, “Share-Based Payments, a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”, which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their financial statements. The Company adopted this standard effective December 1, 2006, and elected the modified-prospective transition method. Under the modified-prospective transition method, awards that are granted, modified, repurchased or canceled after the date of adoption should be measured and accounted for in accordance with ASC 718. The Company had no options outstanding prior to the issuance of ASC Topic 718.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers cash on deposit in the bank to be cash. The Company had $28,115 in cash on November 30, 2009.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts 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.
Fair Value of Financial Instruments
All cash and cash equivalents, accounts payable, and accrued liabilities are carried at approximate fair market value.
Recent Accounting Pronouncements
In July 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”) officially became the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. Going forward, only one level of authoritative GAAP will exist. All other accounting literature will be considered non-authoritative. The Codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included in the Codification is relevant SEC guidance organized using the same topical structure in
separate sections within the Codification. The Codification was effective for interim and annual reports ending after September 15, 2009. The Company adopted the Codification during the fourth quarter of fiscal 2009. The impact on its financial statements is limited to disclosures. All references to authoritative accounting literature will now be referenced in accordance with the Codification.
ASC Topic 820 (Formerly FAS 157) - In September 2006, the FASB issued ASC Topic 820, “Fair Value Measurements”. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of the statement will change current practice. ASC Topic 820 was effective December 1, 2008, except for nonfinancial assets and liabilities, which was effective December 1, 2009. The Company adopted ASC Topic 820 on December 1, 2007 for financial assets and liabilities carried at fair value on a recurring basis, with no material impact on its consolidated financial statements. The Company is currently determining what impact the application of ASC Topic 820 on December 1, 2009 for non-recurring non-financial assets and liabilities that are recognized or disclosed at fair value will have on its financial statements.
ASC Topic 805 [Formerly FAS 141(R)] - In December 2007, the FASB issued ASC Topic 805, “Business Combination” , which replaces FAS No. 141. ASC Topic 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired entity and the goodwill acquired. ASC Topic 805 also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. ASC Topic 805 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC Topic 805 will have an impact on accounting for business combination once adopted, but the effect is dependent upon acquisitions at that time.
ASC Topic 810 (Formerly FAS 160) - In December 2007, the FASB issued ASC Topic 810 “Non-controlling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51”, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosure that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. ASC Topic 810 is effective for fiscal years beginning after December 15, 2008. The Company does not feel the adoption of ASC Topic 810 will have an impact on its financial statements.
ASC Topic 855 (Formerly SFAS 165) - In May 2009, the FASB issued ASC Topic 855, Subsequent Events. ASC Topic 855 establishes standards of accounting for the disclosure of events that occur after the balance sheet date but before financial statements are issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained. An entity is to apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company adopted the provisions of ASC Topic 855 for the quarter ended August 31, 2009. See Note 12.
ASC Topic 860 (Formerly SFAS 166) - In June 2009, the FASB issued ASC Topic 860, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140. ASC Topic 860 requires entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets. The statement eliminates the concept of a qualifying special-purpose entity, changes the requirements for the de-recognition of financial assets, and calls upon sellers of the assets to make additional disclosures about them. ASC Topic 860 is effective occurring on or after November 15, 2009. The Company does not expect the adoption of ASC Topic 860 will have a material impact on its financial statements.
ASC Topic 810 (Formerly SFAS 167) - In June 2009, the FASB issued ASC Topic 810, Amendments to FASB Interpretation No. 46(R). ASC Topic 810 amends Interpretation No. 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. ASC Topic 810 is effective for an entity’s first fiscal period that begins after November 15,
2009. The Company does not expect the adoption of ASC Topic 810 will have a material impact on its financial statements.
ASC Topic 105 (Formerly SFAS 168) - In June 2009, the FASB issued ASC Topic 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. ASC Topic 105 establishes a new hierarchy of GAAP sources for non-governmental entities under the FASB Accounting Standards Codification and will supersede all accounting standards in U.S. GAAP, aside from those issued by the Securities Exchange Commission. ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC Topic 105 did not have a material impact on its financial statements.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position or cash flows. Based on that review, it believes that none of these pronouncements will have a significant effect on their current or future earnings or operations.
NOTE 2 GOING CONCERN
The Company has accumulated losses since inception and has not yet been able to generate profits from operations. Operating capital has been raised through the sale of common stock or through loans from shareholders. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management plans include further development and production of portable medical gas generators. Management is seeking additional funding through the capital markets. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 INCOME TAXES
The provision for income taxes consists of the following:
Current Taxes
$
$
$
$
The Company has available net operating losses of approximately $4,065,563 which can be utilized to offset future earnings of the Company. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The valuation allowance increased by $280,189 from $736,082 as of November 30, 2009.
The Company has the following carryforwards available at November 30, 2009:
Operating Losses
Expires
Amount
8,508
17,418
27,514
25,982
200,280
1,181,408
814,568
855,422
934,463
Total
4,065,563
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset at November 30, 2009 are summarized below.
Taxable
Temporary
Expected
Deferred Tax
Difference
Tax Rate
Asset (Liability)
Non-current deferred tax asset
Book/Tax depreciation difference
Federal
$ 20,314
15%
$ 3,047
State
20,314
5%
1,016
Book/Tax amortization difference (patent)
Federal
19,843
15%
2,977
State
19,843
5%
Book/Tax accrued liability difference
Federal
256,859
15%
38,529
State
256,859
5%
12,843
Net operating losses
Federal
4,065,563
15%
609,834
State
4,065,563
5%
203,278
Stock Compensation
Federal
718,212
15%
107,732
State
718,212
5%
35,911
Other carryforwards
Federal
15%
State
5%
Preliminary deferred tax asset
1,016,272
Deferred tax asset valuation allowance
(1,016,272)
Total deferred tax asset (liability)
-
The Company is incorporated in and conducts its operations in the State of Utah, which levies a $100 minimum Franchise tax per year. As a result, the Company has a provision of $100 per year to account for this tax.
The effective tax rate for continuing operations differs from the statutory rate [20%] as follows:
Uncertain Tax Positions
The Company has evaluated for uncertain tax positions and determined that any required adjustments would not have a material impact on the Company’s balance sheet, income statement, or statement of cash flows.
The Company has filed income tax returns in the US. All years prior to 2006 are closed by expiration of the statute of limitations. The tax year ended November 30, 2006 will close by expiration of the statute of limitations this year.
The years ended November 30, 2009, 2008, and 2007 are open for examination.
NOTE 4 COMMON STOCK
On June 30, 2005, the Company issued 33,231,456 shares of common stock for cash, at $0.001 per share to the officers of the Company. In addition, the Company issued 2,968,544 shares of common stock at $0.001 per share in exchange for patents and 3,800,000 shares of common stock at $0.001 per share as part of a consulting agreement, of which, 1,302,500 were subsequently canceled. In October and November of 2005, the Company issued 3,964,031 shares of common stock for cash, at $0.60 per share to private investors and incurred stock promotion expenses of $110,100 as part of the issuance.
On January 31, 2006, the Board of Directors consented to the issuance of 450,000 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $270,000 ($0.60 per share).
On or about November 30, 2007, the Company completed the private sale of 213,569 shares of its common stock at a price of $0.70 per share for aggregate gross proceeds of $149,500.
During the year ended November 30, 2008, the Company completed the private sale of 423,639 shares of its common stock at a price of $0.50 per share for aggregate net proceeds of $205,949, net of stock promotion expenses of $9,300.
On January 31, 2008 the Board of Directors consented to the issuance of 11,535 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $8,536 ($0.74 per share).
On September 16, 2008 the Board of Directors consented to the issuance of 150,000 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $67,500 ($0.45 per share).
On December 31, 2008 the Board of Directors consented to the issuance of 1,000,000 shares of restricted common stock in exchange for services provided to the Company. The transaction was valued at $200,000 ($0.20 per share.)
On March 6, 2009 the Board of Directors approved the issuance of 200,000 shares of the Company’s restricted common stock in a private placement to an accredited investor at a price of $0.10 per share for gross proceeds of $20,000.
NOTE 5
INVENTORY
Inventory at November 30, 2009 and 2008 consisted of the following:
November 30, 2009
November 30, 2008
Raw materials
$ 10,807
$ -
Work in process
-
-
Finished goods
-
-
Total inventory
$ 10,807
$ -
NOTE 6 PROPERTY, PLANT & EQUIPMENT
The major classes of property, plant and equipment as of the balance sheet dates are as follows:
Furniture and fixtures
$ 65,309
$ 65,309
Office equipment
35,469
35,469
Lab equipment
85,752
85,752
Leasehold improvements
20,323
20,323
206,853
206,853
Accumulated depreciation
(142,376)
(99,650)
$ 64,477
$ 107,203
Equipment is stated at cost. Depreciation is provided by using the straight-line method over five years. Depreciation expense for the years ended November 30, 2009 and 2008 was $38,392 and $40,860, respectively. Amortization expense related to leasehold improvements for the years ended November 30, 2009 and 2008 was $4,334 and $4,334, respectively. Expenditures for maintenance and repairs are charged to expense as incurred.
NOTE 7 PATENTS
Patents are carried at cost and are amortized over the estimated life from which financial benefit is expected to accrue. Balances as of the balance sheet dates are as follows:
Accumulated
Net Carrying
Patents
Amortization
Amount
As of November 30, 2009
$ 105,859
$ (19,843)
$ 86,016
As of November 30, 2008
$ 69,969
$ (10,077)
$ 59,892
The Company issued 200,000 shares of common stock at $0.001 per share for Technology Rights and 2,768,544 shares of common stock at $0.001 per share for additional rights. (See Note 4.) The Company also capitalized $35,890 in patent costs during the current year. As of November 30, 2009 the patents were valued at $105,859. Amortization expense related to patents for the years ended November 30, 2009 and 2008 was $9,766 and $6,840, respectively. Based upon the current capitalized patent costs, amortization expense is expected to be $12,135 per year for the next seven years.
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company leases office space under a five-year non-cancelable operating lease that commenced on November 1, 2006. The following summarizes future minimum lease payments under the operating lease at November 30, 2009:
Year Ending Minimum
November 30, Lease Payments
2010 $ 62,805
2011 58,888
$ 121,693
The Company also continues to lease its previous office space on a month-to-month basis at a rate of $1,600 per month. The facility is used for research and development purposes.
Total rent expense for the year ended November 30, 2009 and 2008 was $82,934 and $99,025, respectively.
NOTE 9 DISCONTINUED OPERATIONS
On September 12, 2005 the Company discontinued its automotive dealership operation by divesting the ownership of The Autoline Group 2, Inc., a wholly owned subsidiary, to a former officer in exchange for an indemnification agreement.
NOTE 10 RELATED PARTIES
As of November 30, 2009, director and officer of the Company owned 54.4% of the Company’s issued and outstanding stock. This allows for the officers and directors to effectively control the vote on substantially all significant matters with the approval of only a small group of other stockholders.
Accounts Payable - Related Party
As of November 30, 2009 and 2008, officers of the Company were owed $14,327 and $14,414, respectively, for various expenditures they made on behalf of the Company.
Accrued Liabilities - Related Party
At November 30, 2009 and 2008, officers and directors of the Company were owed $429,079 and $192,000, respectively, in unpaid director fees, advisory board fees, and salary.
Loans Payable - Related Party
At November 30, 2009, officers of the Company had advanced $455,570 in funding in the form of notes payable to the Company. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of the Company’s restricted common stock at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued. It is the intent of the Company, should the notes not have been previously converted, to repay these notes upon the closing of a major capital raise.
NOTE 11 STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standard Board (“FASB”) issued ASC Topic 718, “Share-Based Payments, a revision of SFAS No. 123 “Accounting for Stock-Based Compensation”, which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their financial statements. The Company adopted this standard effective December 1, 2006, and elected the modified-prospective transition method. Under the modified-prospective transition method, awards that are granted, modified, repurchased or canceled after the date of adoption should be measured and accounted for in accordance with ASC 718. The Company had no options outstanding prior to the issuance of ASC Topic 718.
On March 23, 2007, the GeNOsys, Inc. 2007 Stock Option Plan (“Stock Plan”) was approved by the Board of Directors and became effective on that date, subject to the Stock Plan being approved by the stockholders at the annual meeting. The Stock Plan provides that 3,000,000 shares of the Company’s authorized but unissued common stock be reserved pursuant to the terms and conditions of the plan. On June 27, 2007, the annual meeting of stockholders was held, at which time the stockholders approved the Stock Plan. The Stock Plan allows the Company, under the direction of the Compensation Committee, to make broad-based grants of stock options, any of which may or may not require the satisfaction of performance objectives, to employees, consultants and non-employee directors. In June and July 2007, the Board of Directors approved stock option grants to purchase 1,100,000 shares of common stock to certain employees, directors and consultants, resulting in a non-cash charge of $574,321. In November and December 2007, the Board of Directors approved addition grants of 700,000 options to an employee and a director, resulting in a non-cash charge of $329,335. In December 2008, our directors approved the grant of 900,000 stock option grants to a certain employee and director, resulting in a non-cash charge of $151,900. The charges are being expensed ratably over the shorter of the vesting period or the requisite service period of the stock option grants.
A summary of the status of the Company’s option plans as of December 1, 2008, and changes during the year ended November 30, 2009, is presented below:
The following table summarizes information about stock options outstanding at November 30, 2009:
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. The use of this valuation model requires the use of accounting judgment and financial estimates, including estimates of the expected term employees will retain their vested warrants before exercising them, the estimated volatility of our stock price, and the number of warrants that will be forfeited prior to the completion of their vesting requirements. Application of alternative assumptions could produce significantly different estimates of the fair value of stock-based compensation and consequently, the related amounts recognized in our statements of operations. The following weighted-average assumptions used for grants: Grants made in June, July and November, 2007: average risk-free interest rate of 5.25%; expected lives of 10 years; expected dividend yield of zero percent; expected volatility of 61.47% to 68.88%. The grant made in December, 2007: risk-free interest rate of 3.89%; expected life of 6.5 years; expected dividend yield of zero percent; expected volatility of 62.75%. The grants made in December, 2008: risk-free interest rate of 3.89; expected life of 6.5 years; expected dividend yield of zero percent; expected volatility of 112.14%. For the year ended November 30, 2009 and 2008, the Company recognized stock based compensation expense of $258,346 and $321,126, respectively. As of November 30, 2009, total stock based compensation related to non-vested awards not yet recognized was $337,342 with a weighted average recognition period of 7.57 years. As of November 30, 2008, total stock based compensation related to non-vested awards not yet recognized was $595,688 with a weighted average recognition period of 8.58 years.
The weighted-weighted average grant-date fair value of options granted during the years ended November 30, 2009 and 2008 was $0.20 and $0.45, respectively.
NOTE 12 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through March 1, 2010, the date the financial statements were issued, and has concluded that no recognized subsequent events have occurred since the year ended November 30, 2009. The Company does note the following non-recognized transactions occurred subsequent to the year end:
Related Party Transaction
Subsequent to November 30, 2009, the Company has issued convertible notes payable to an officer for funds provided to the Company. The notes were issued January 8, 2009, in the amount of $30,000, February 1, 2009, in the amount of $10,000, and on February 27, 2009, in the amount of $4,200. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued.
From December 2007 through November 2009 the Company has issued convertible notes payable to officers and a director for funds provided to the Company. The notes bear interest at the rate of five percent per annum and, at the election of the holder, may be converted into shares of restricted common stock of the Company at the lower of the market rate on the date notice of conversion is given or 125% of the closing price of the common stock on the date the note was issued. If converted as of March 1, 2010, the notes would be convertible at approximately $0.06 per share. At November 30, 2009 and 2008, the total of these convertible notes was $455,570 and $57,500, respectively. The Company has agreed to satisfy its obligations owing to one of the directors, John W.R. Miller, for $385,000 of funds he advanced to the Company by exchanging the $385,000, plus interest owed to Mr. Miller, for the issuance of shares of stock to third parties for the cancellation of an equal amount of obligations owed by Mr. Miller. Mr. Miller will receive no compensation in connection with this transaction.
Mr. Miller’s obligations to third parties resulted from him personally borrowing funds from such third parties with an agreement to convert such personal notes into shares of the stock held by him. Each note is past due and payable in full. The notes total $385,000 and bear interest at the rate of 5% per annum. Each note is convertible into shares of Company stock held by Mr. Miller at the average rate of $0.15 per share.
Investor Relations Agreement
On February 1, 2010, the board of directors approved engaging a consulting group to manage investor relations. The initial agreement is for a period of four months. The Company issued 360,000 shares of restricted common stock as compensation for the services to be provided under the agreement. The resultant charge of $28,800 will be taken ratably over the term of the agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
We had no disagreements on accounting and financial disclosures with our accounting firm during the reporting periods covered by this Annual Report.
Item 9A(T).
Item 10. Directors, Executive Officers, and Corporate Governance.
Identification of Directors and Executive Officers
The following table sets forth the names of all of our current directors and executive officers. These persons will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.
Name
Positions Held
Date of Election or Designation
Date of Termination or Resignation
John W. R. Miller
Chief Executive Officer
Director
Chairman of the Board
8/18/2005
8/18/2005
6/15/2009
*
*
*
Keith L. Merrell
Chief Financial Officer
3/23/2007
*
and Treasurer
Christie W. Jones
Secretary
8/18/2005
*
John P. Livingstone
Director
3/23/2007
*
Steven D. Minton, M.D.
Chief Medical Officer
Director
3/23/2007
11/15/2008
*
* These persons presently serve in the capacities indicated.
Business Experience
John W. R. Miller. Mr. Miller is our founder and serves as our Chief Executive Officer and Chairman of the Board. Mr. Miller is 58 years old. In 2003, he co-founded Alberta 1017975 with Christie W. Jones, the predecessor to our Technology Rights. From 2001 to 2003, Mr. Miller was self-employed. Mr. Miller was the President and a Co-Founder of Pulmonox Medical Corp., a biotechnology corporation, where he worked from 1990 to 2001. He participated in the FDA approval process for inhaled nitric oxide therapy. Mr. Miller sold his interest in Pulmonox in 2001. Mr. Miller received a B.S. Degree in Education/Business from Brigham Young University in 1972.
Steven D. Minton, M.D. Dr. Minton serves as our Chief Medical Officer and is a Director of our Company. He is 64 years old. Dr. Minton is the Chief of Neonatology at Utah Valley Regional Medical Center and the Intermountain Health Care Urban South Medical Director of Newborn Services. As a practicing physician for 31 years with a specialty and intense interest in the care of the critically ill new born, Dr. Minton’s expert knowledge and the scope of his understanding of the efficacy of the Company’s research, products and devices in unparalleled. Dr. Minton is a widely published and a recognized expert in neonatal care using nitric oxide gas inhalation therapy and has been nationally recognized for his ongoing research. Dr. Minton received a Bachelor of Science degree from the University of Cincinnati and a Doctor of Medicine from the University of Cincinnati School of Medicine.
Keith L. Merrell. Mr. Merrell is our Chief Financial Officer, Treasurer and General Manager. He is 64 years old. He joined our Company in February 2007. Mr. Merrell draws on over 30 years of accounting experience to manage all of our accounting functions and to interface with our independent public accountants. He spent two years in the field of public accounting, and served as Chief Financial Officer or Controller of five companies prior to joining us. His business career also includes extensive experience in management, sales and marketing, consulting, and merger and acquisition work. He served as both Chief Financial Officer and Controller of Specialized Health Products International, Inc., a manufacturer of safety medical devices, from 2000 to 2007, and as Vice President-Western Operations for Michelex, an injection molding company with corporate headquarters in New York, from 1998 to 2000. From 1991 to 1998 he served as Director of Finance for The Duplication Group, planning, implementing, and bringing online the first compact disc manufacturing facility in the intermountain area. He graduated from Arizona State University with a B.S. degree in Accounting.
Christie W. Jones. Ms. Jones is 27 years old. Ms. Jones co-founded Alberta 1017975. In the fall of 2003, she became President of GeNOsys Canada, a biotechnology corporation. Ms. Jones served as Executive Assistant to John W.R. Miller, where her responsibilities included tracking nitric oxide research projects. Ms. Jones studied mathematics at Grant MacEwan Community College in Edmonton, Alberta, Canada.
John P. Livingstone. Dr. Livingstone, a Ph.D. is a director of our Company and is 58 years old. In addition to his practice as a psychologist, Dr. Livingstone has served as an educator, both in Canada and the United States, and is currently a professor at Brigham Young University. Dr. Livingstone has published and been a contributor to a number of books, as well as writing and/or presenting numerous articles and papers. His work has earned him recognition among his peers for his distinguished service. Dr. Livingstone received a B.S. degree in Biology/Chemistry from the University of Alberta in 1974, a Master of Education degree in Guidance and Counseling from the University of Regina, and a Doctor of Education degree in Counseling and Personnel Services from Brigham Young University.
Significant Employees
There are no employees who are not executive officers who are expected to make a significant contribution to our Company’s business.
Family Relationships
There are no family relationships between any director or executive officer.
Involvement in Certain Legal Proceedings
During the past five years, no present or former director, executive officer or person nominated to become a director or an executive officer of our Company:
(1) was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Promoters and control person.
See the heading “Transactions with Related Persons” below.
Compliance with Section 16(a) of the Exchange Act
Our executive officers, directors, and 10% stockholders are required under the Securities Exchange Act of 1934 to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of these reports must also be furnished to us.
Based solely on a review of the copies of reports furnished to us, or written representations that no reports were required, we believe that during the fiscal year ended November 30, 2009, our executive officers, directors and 10% stockholders complied with all filing requirements.
Code of Ethics
We adopted a Code of Ethics for our Chief Executive Officer or our Chief Financial Officer and attached a copy of our Code of Ethics as an exhibit to our Form 10-KSB for the year ended November 30, 2005. See Part III, Item 15.
A copy of our Code of Ethics will be provided, free of charge, upon request to us at the address and telephone number listed on the cover page of this Annual Report.
Corporate Governance
Director Independence
Only one of our directors, John P. Livingstone, presently qualifies as an independent director. None of our other directors presently qualify as independent directors due to the percentage of ownership and/or affiliation with us as an employee or consultant.
Board Meetings and Committees; Annual Meeting Attendance
During the year ended November 30, 2009, eight Board meetings were held. No annual meeting was held during the fiscal year ended November 30, 2009.
Nominating Committee and Corporate Governance Committee
We have not established a nominating and corporate governance committee because, due to our lack of substantial operations and the fact that we only have three directors and executive officers, we believe that our Board of Directors is able to effectively manage the issues normally considered by a nominating and corporate governance committee. Following an increase in our current operations, a further review of this issue will no doubt be necessitated and undertaken by our management.
Audit Committee
Our full Board of Directors currently serves as our Audit Committee. We have not yet established an independent audit committee; we do not believe the lack of an independent audit committee will have any adverse effect on our financial statements, based upon our current business operations. We will continue to assess the point at which an independent audit committee will be necessary in the future.
Compensation Committee
We have not established a compensation committee because, due to our lack of substantial operations and the fact that we only have three directors and executive officers; we believe that we are able to effectively manage the issues normally considered by a compensation committee. Following an increase in our current operations, a further review of this issue will no doubt be necessitated and undertaken by our management.
Shareholder Communications
Although we do not have a formal policy regarding communications with the Board of Directors, stockholders may communicate with our Board of Directors by writing to us at: GeNOsys, Inc., Attention: Investor
Relations, 280 West Riverpark Dr., Suite 300, Provo, UT 84604. Stockholders who would like their submission directed to a particular member of the Board may so specify, and the communications will be forwarded to that director, as appropriate.
Item 11.
Item 11. Executive Compensation.
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Objectives
Our compensation philosophy is to align executive compensation with the interests of stockholders, attract, retain and motivate a highly competent team of executives, and link pay to performance.
Base Salary
Base salaries for our executives depend on the scope of their responsibilities and their performance. Base salary is designed to compensate the executives for services rendered during the year. These salaries are compared to amounts paid to the executive’s peers outside our Company. As we have not yet established a Compensation Committee, salary levels are typically reviewed annually by the Board of Directors performance review process, with increases based on the assessment of the performance of the executive.
Long-term Compensation
The Board of Directors determined that long-term incentive compensation would be in the form of stock options granted. We have a stock option plan implemented which has been approved by the shareholders to provide long-term compensation to directors and employees of the company.
Perquisites
The only material perquisite provided to our executive officers is reimbursement for use of their personal automobile while engaged on company business.
Retirement Benefits
As a development stage company, we have no retirement benefits currently in place. It is the intent of the company to add such benefits at a future date.
Employee agreements
We have not entered into employment contracts with our executive officers and their compensation is determined at the discretion of our board of directors.
Compensation
The following table shows the compensation paid to our principal executive officer, principal financial officer, and our most highly compensated executive officer for the last three fiscal years:
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total
($)
John W.R. Miller, CEO and Director
$120,000 (1)
$120,000 (1)
$120,000
$120,000
$120,000
$120,000
Keith L. Merrell, Chief Financial Officer
$120,000 (1)
$120,000 (1)
$ 69,923 (2)
$135,718
$208,444
$120,000
$255,718
$278,367
Stephen D. Minton, Chief Medical Officer and Director.
$140,000 (1)
$140,000 (1)
$271,598
$208,444
$140,000
$411,598
$208,444
(1)
Only a portion of the 2009 and 2008 salary amounts represented have been paid. All unpaid amounts have been accrued. At November 30, 2009, salaries accrued and unpaid were: Mr. Miller - $130,600; Mr. Merrell - $104,850; and Mr. Minton - $249,992.
(2)
The 2007 salary for Mr. Merrell is a partial year salary, representing payments from his hire date of February 17, 2007, through the end of the fiscal year.
Outstanding Equity Awards
The following table shows outstanding equity awards granted to the above named executive officers as of November 30, 2009:
(1)
Options for 8,333 vest on the 27th day of each month until all options are vested.
(2)
Options for 200,000 vested on December 31, 2008; options for 16,667 vest on the last day of each month beginning December 31, 2009, until all options are vested.
(3)
Options for 30,000 vested on December 27, 2008, and continue vesting at the rate of 30,000 on the 27th day of the last month in each subsequent quarter until all options are vested.
(4)
Options for 200,000 vested on December 3, 2008; options for 200,000 vest on December 3, 2009; options for 200,000 vest on December 3, 2010.
(5)
Options for 50,000 vest on December 31, 2009; options for 50,000 vest on December 31, 2010.
Termination of Employment and Change of Control Agreements
There are no employment contracts, compensatory plans or arrangements, including payments to be received from us with respect to any director or executive officer of ours which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of employment with us, any change in control of our Company, or a change in the person’s responsibilities following a change in control of our Company.
Compensation of Directors
Our outside director is not paid cash compensation but is granted stock options for his service. Employee directors receive no compensation for their board service. The following table provides information on compensation provided each of our directors for the year ended November 30, 2009:
Name
Fees Earned or Paid in Cash
($)
Stock Awards ($)
Option Awards
($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
All Other Compensation ($)
Total
($)
John W.R. Miller
Stephen D. Minton
John P. Livingstone
$16,182 (1)
$16,182
(1)
Mr. Livingstone was granted options to purchase 100,000 shares of stock effective December 31, 2008. The amount reflected in the above table represents the value calculated for the stock grant using the Black-Scholes pricing model.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners
The following table lists the beneficial ownership of our outstanding common stock by our management and each person or group known to us to own beneficially more than 5% of our outstanding common stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Based on these rules, two or more persons may be deemed to be the beneficial owners of the same securities. Except as indicated by footnote, the persons named in the table below have sole voting power and investment power with respect to the shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership is based on 47,866,774 shares of common stock issued as of February 12, 2009, plus any shares which each of the following persons may acquire within 60 days by the exercise of rights, warrants and/or options.
(1)
Includes 21,501,244 shares owned by Mr. Miller, 250,000 shares owned by Mr. Miller’s children, and 120,000 shares held jointly with Christie Jones.
(2)
Includes 2,500,000 shares owned by Dr. Minton and vested options to purchase 740,000 shares of common stock.
(3)
Includes 200,000 shares owned by Mr. Merrell, 20,000 shares owned by Mr. Merrell’s children, and vested options to purchase 511,661 shares of common stock.
(4)
Includes vested options entitling Mr. Livingstone to purchase 100,000 shares of common stock.
(5)
Includes 75,000 shares owned by Ms. Jones. Does not include joint ownership of 120,000 shares held jointly with Mr. Miller. See Note 1.
(6) Shares held by Lincoln Management Group LLC for Amber Johansen, the sole manager of Lincoln Management Group LLC.
Changes in Control
There are no present arrangements or pledges of our securities which may result in a change in control.
Securities Authorized for Issuance under Equity Compensation Plans
The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of November 30, 2009.
2007 Stock Option Plan
On March 23, 2007, the GeNOsys, Inc. 2007 Stock Option Plan (“Stock Option Plan”) was approved by our Board of Directors and became effective on that date, subject to the Stock Option Plan being approved by our stockholders at the annual meeting. The Stock Plan provides that 3,000,000 shares of our authorized but unissued common stock be reserved pursuant to the terms and conditions of the plan. The Stock Plan was approved by a vote of stockholders at the Annual Meeting held June 27, 2007. The Stock Plan allows the Board of Directors, under the direction of the Compensation Committee, to make broad-based grants of stock options, any of which may or may not require the satisfaction of performance objectives, to employees, consultants and non-employee directors.
The Plan became effective upon the date of shareholder approval and shall continue in effect for a term of ten (10) years, unless terminated. The maximum aggregate number of shares of common stock that may be sold under the Plan is 3,000,000 shares. The term of each option and its exercise price shall be stated in an option agreement; provided that the term does not exceed ten (10) years from the date of grant. The plan provides that a grant of a stock option to an employee shall have an exercise price no less than the fair market value of a share of common stock on the date on which the option is granted. As a condition of the grant, vesting or exercise of an option granted under the Plan, the participant shall be required to satisfy any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the grant, vesting or exercise of the option or the issuance of shares.
The Plan is to be administered by our Compensation Committee. Until a Compensation Committee is formed the Board of Directors will administer the Plan. The Board may from time to time increase the size of any Compensation Committee and appoint additional members, remove members (with or without cause) and appoint new members in substitution, fill vacancies and/or remove all members of the committee. The Compensation Committee may be composed of employee/director(s), non-employee/director(s) and/or major stockholder(s) of the company who are not a director.
Non-statutory stock options may be granted to employees, directors and consultants who have the capacity to contribute to the success of the company. Incentive stock options may be granted only to employees, provided that employees of affiliates shall not be eligible to receive incentive stock options.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Directors Independence.
Transactions with Related Persons
There have been no material transactions involving $60,000 or more between us or our subsidiaries and/or our directors, executive officers or five percent stockholders other than compensatory arrangements that are detailed in the Executive Compensation Discussion and Analysis.
Promoters and Certain Control Persons
See the heading “Transactions with Related Persons” above.
Parents of the Smaller Reporting Company
We have no parents.
Director Independence
We believe John P. Livingstone is an independent director as defined under NASD Rule 4200(a)(15).
Item 14.
Item 14. Principal Accountant Fees and Services.
Accountant Fees
The following table presents the aggregate fees billed for each of the last two fiscal years by our principal accountant, Mantyla McReynolds LLP, Certified Public Accountants, in connection with the audit of our financial statements and other professional services rendered by that firm.
Audit fees
$ 23,769
$ 41,111
Audit-related fees
Tax related fees
All other fees
Total Fees
$ 24,517
$ 41,721
Audit fees represent the professional services rendered for the audit of our annual financial statements and the review of our financial statements included in quarterly reports, along with services normally provided by the accountant in connection with statutory and regulatory filings or engagements. Audit-related fees represent professional services rendered for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”
Tax fees represent professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. All other fees represent fees billed for products and services provided by the principal accountant, other than the services reported for the other categories.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Our audit committee makes recommendations to our board of directors regarding the engagement of an auditor. Before the auditor renders audit and non-audit services our board of directors approves the engagement. Our audit committee does not rely on pre-approval policies and procedures.
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PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Exhibit No. Description of Exhibit
3.1
Articles of Incorporation filed as an Exhibit to our Registration Statement on Form 10-SB filed May 14, 2002.
3.2
By-laws filed as and Exhibit to our Registration Statement on Form 10-SB filed May 14, 2002.
3.3
Amendment to the Articles of Incorporation dated September 12, 2005, filed as Exhibit 3.3 of our Form 10-KSB Annual Report for the fiscal year ended November 30, 2005.
3.4
Amendment to the By-Laws dated June 18, 2004, filed as Exhibit 3.4 of our Form 10-KSB Annual Report for the fiscal year ended November 30, 2005.
Code of Ethics filed as Exhibit 14 to our Form 10-KSB Annual Report for the fiscal year ended November 30, 2005.
Subsidiaries, filed as Exhibit 21 of our Form 10-KSB Annual Report for the fiscal year ended November 30, 2005.
Registration statement on Form 10-SB filed May 14, 2002, as amended on September 10, 2002, November 19, 2002 and December 9, 2002*
Annual Report on Form 10KSB for the fiscal year ended November 30, 2005, and filed on March 7, 2006*
Annual Report on Form 10KSB for the fiscal year ended November 30, 2006, and filed on March 15, 2007*
Current Report on Form 8-K dated January 22, 2008, and filed February 12, 2008*
Annual Report on Form 10-KSB for the fiscal year ended November 30, 2007, and filed on February 28, 2008*
Annual Report on Form 10-K for the fiscal year ended November 30, 2008, and filed on March 16, 2009*
* Referenced for additional information.
31.1
Certification of John W. R. Miller under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Keith L. Merrell under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of John W.R. Miller and Keith L. Merrell pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GeNOsys, Inc.
Date: 3/01/2010 By/s/John W. R. Miller
John W. R. Miller, Jr., Director,
Chief Executive Officer and
Chairman of the Board
Date: 3/01/2010 By/s/Keith L. Merrell
Keith L. Merrell
Chief Financial Officer and
Treasurer
Date: 3/01/2010 By/s/John P. Livingstone
John P. Livingstone
Director
Date: 3/01/2010 By/s/Stephen D. Minton, M.D.
Stephen D. Minton, M.D., Director
and Chief Medical Officer