ITEM 1.
BUSINESS
Our Business
Overview
We are a biotechnology company involved in research and development of medical devices for cell expansion and maintenance.
We intend to focus our efforts over the next twelve months primarily on the development of our cell expansion technology. These efforts will consist of entering into collaborative research agreements with well-known, established research organizations to utilize our CCG-E45 Culture Chamber product to enhance their cell production efforts. In conjunction with these research activities, our engineers will be developing alternative culture chamber configurations to optimize specific cell categories. Under these collaborative agreements, we will provide our CCG-E45 Incubators and Culture Chambers, and onsite training and oversight. Our collaboration partners will provide staffing, space and the cell types being tested.
Our initial collaborative research agreement was signed on September 9, 2010 with the Fred Hutchison Cancer Research Center in Seattle, Washington.
Our Device Division
Cell Expansion and Maintenance
We have purchased a cell expansion technology that was intended as a complementary addition to our therapeutic portfolio. One of the principle advantages of this technology is superior control of oxygenation of cells, achieved by the separation of oxygen and nutrient-supply into dedicated bundles of hollow semi-permeable fibers. Stem cells, islet cells and other cells are significantly influenced by oxygen. This technology has demonstrated superior oxygenation by allowing cells to expand and completely fill the bioreactor with viable cells. A three-dimensional bioreactor chamber with a volume of 17 ml, for example, has been shown to grow over 10 billion hybridoma cells. In contrast, more traditional methods of cell expansion using roller bottles or spinner flasks produce significantly fewer viable cells, while using more raw materials. In addition, the cells can grow in a three-dimensional network, thereby emulating some of the characteristics of cell growth in solid organs. Prior to our acquisition of this technology, our bioreactor had already proven successful in growing, expanding and extending the life of 14 different cell lines, including embryonic stem cells.
One possible application of our technology is in the expansion of umbilical cord blood-derived stem cells. There are current therapies that could be augmented by having access to more positive matched stem cells. The number of stem cells that can be collected from one individual’s cord blood can only be used to treat a child or a small adult by a single administration, even though the therapy might require repeated injections. Once a person reaches a certain weight, there are not enough stem cells from a single individual’s cord blood for a therapeutic intervention. As an example, leukemia patients would fall in this category, where cord blood transplants could positively impact developing treatments by having more viable cells available. If we are able to expand matching stem cells from a single donor, we may have a breakthrough for multiple therapeutic interventions from a single source.
Another potential application of our technology is in the treatment of multiple myeloma. Widespread use of stem cell treatments for multiple myeloma patients has not been possible to date, because the stem cells required for these interventions must be immunologically identical or at least similar enough to avoid
- 2 -
adverse complications. Therapy with autologous cells is often not an option because the patient’s bone marrow contains tumor cells, and beneficial stem cells from a donor (allogeneic stem cells) are not available in significant numbers. We believe our technology may provide sufficient quantities of patient-matched stem cells to be generated for therapeutic interventions.
As stated previously, our cell expansion device is believed to emulate the three-dimensional growth of cells in human solid organs, and for that reason we have discussed its use as an artificial pancreas for islet cells to reside in and produce insulin with physicians in diabetes research institutions. These applications would be a therapeutic advancement to treat diabetes, one of the world’s most pervasive, debilitating and growing diseases.
Our Business Model
Our current business model focuses on the demonstration and development of our bioreactor technology in collaboration with independent research organizations to confirm the device’s efficacy in a wide range of applications and uses to support external research, to become an integral part of the process of bringing research to market, and then in the ultimate production of end-use therapies and products. We intend to position our technology as a more efficient and cost effective means of expanding a wide range of cell types, which has the ability to accelerate research into a broad range of therapies.
We believe this model offers the shortest pathway to begin generating revenues. We believe our technologies and the following strategies will make this possible:
Focus on Synergistic Technologies
We plan on only developing and commercializing discoveries with market demand that have undergone research with positive outcomes. Our current product platform was chosen because it may offer a wide range of possible commercial and therapeutic applications, either individually or in combination with other product candidates, either those that we develop in-house or acquire, or those of other companies. We believe this approach may afford us the opportunity to quickly advance our research and broaden our intellectual property portfolio, while mitigating risks and costs of early stage clinical development.
Collaboration
We intend to continue to seek collaborations with biotechnology, pharmaceutical and research organizations that would enhance the development and speed to market of our product candidates. We are seeking potential product candidates from other companies that may not yet have shown to be viable therapeutics, but which may do so in combination with one or more of our technologies.
We also intend to collaborate with nonprofit research organizations in applying for State and Federal research grants to help fund the development of specific configurations and applications of our bioreactor technology.
Patents, Proprietary Rights and Licenses
We believe that protection and defense of our intellectual property is critical to our business. Our know-how may also provide a significant competitive advantage, and we may continue to develop and protect our proprietary know-how. We may also from time to time seek to acquire licenses to important externally developed technologies.
We also rely upon trade-secret protection for our confidential and proprietary information and take active measures to control access to that information.
- 3 -
Our policy is to require our employees, consultants and significant scientific collaborators and sponsored researchers to execute confidentiality agreements upon the commencement of an employment or consulting relationship. These agreements generally provide that all confidential information developed or made known to the individual by us during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances. In the case of employees and consultants, the agreements generally provide that all inventions conceived by the individual in the course of rendering services to us shall be our exclusive property.
The patent positions of biotechnology companies, including our company, are exposed to the same uncertainties to which all patents are confronted and thus may involve all of the corresponding complex and evolving legal and factual questions. The coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Consequently, we do not know whether any future applications will result in the issuance of patents, or if any existing or future patents will provide significant protection or commercial advantage, or will be circumvented by others. Since patent applications are secret until the applications are published (usually eighteen months after the earliest effective filing date), and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each pending patent applications or that we were the first to file patent applications for such inventions. There can be no assurance that patents will issue from future patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid.
In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost, even if the eventual outcome is favorable to us. There can be no assurance that our patents, if issued, would be held valid by a court of competent jurisdiction.
A number of biotechnology and other companies, universities and research institutions have filed patent applications or have been issued patents relating to cell expansion and maintenance and other technologies potentially relevant to or required by our expected products. We cannot predict which, if any, of such applications will issue as patents or the claims that might be allowed.
If third party patents or patent applications contain claims infringed by our technology and such claims or claims in issued patents are ultimately determined to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop or obtain alternative non-infringing technology at a reasonable cost, we may not be able to develop certain products commercially. There can be no assurance that we will not be obliged to defend our company in court against allegations of infringement of third party patents. Patent litigation is very expensive and could consume substantial resources and create significant uncertainties. An adverse outcome in such a suit could subject us to significant liabilities to third parties, require us to seek licenses from third parties, or require us to cease using such technology.
Research and Development
During the years ended December 31, 2013 and 2012, we incurred no direct research and development costs. We generally compensate our researchers through the issuance of stock options. We did not grant any stock options to our researchers during 2013 and 2012 but expect to do so during 2014. As these stock options vest, the related expense will be recorded as stock compensation expense.
During 2013, we did not have any employees and our consultants were primarily focused on developing modifications to our technology, and establishing collaboration agreements with research laboratories.
- 4 -
Over the next twelve months, we intend to focus our efforts in expanding our proof-of-concept collaborations around the cell expansion and maintenance technology, allowing us to bring these products to market and generate revenues for our company.
Once we have completed products ready for commercialization, we will evaluate our various sales and marketing alternatives, including the licensing of our technology to other companies, manufacturing and direct sales or entering into marketing collaborations.
Competition
It is expected that our cell expansion and maintenance products will have to compete with a variety of existing products and procedures. In addition, new products and methods for cell expansion are continuously being developed and/or refined.
There are a wide range of methods currently being used in cell growth and expansion. These methods include the standard two-dimensional culture plate or vessel, roller bottles and T flasks. There are also a wide range of more refined methods that include spinners, culture bags, plates suspended in culture, and closed system bioreactors. Traditionally, the culture plate, culture bags, spinner flasks and T flasks have been used for cell expansion because of their low cost, ease of use and visible nature. The challenge to these current methods though, is their low aeration, frequent need for cleaning and sterilization, and large footprint.
We believe that our primary competition will come from other companies that have developed or are in the process of developing and marketing closed system bioreactors. Our technology uses our patented dual fiber method which allows the inner fiber set to carry nutrients and the outer fiber set to supply oxygen. Other methods include single fiber bioreactors (FiberCell Systems, Inc. and McGowan Institute of Regenerative Medicine), permeable membrane style bioreactors (Synthecon, Inc.), perfusion bioreactors (AmProtein Corporation) and wave bioreactors (GE Healthcare). Each of these differing technologies is looking at ways to create rapid, yet viable, cellular expansion. We believe that our technology and know-how has the opportunity to excel in this fledgling market because of its distinctive blend of attributes.
Government Regulation
Our research and development activities and the future manufacturing and marketing of our products are, and will continue to be, subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service Act, as amended, the regulations promulgated thereunder, and other Federal and State statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, export, record keeping, approval, marketing, advertising and promotion of our potential products. Product development and approval within this regulatory framework takes a number of years and involves significant uncertainty, combined with the expenditure of substantial resources. In addition, the federal, state, and other jurisdictions have restrictions on the use of fetal tissue.
FDA Manufacturing Requirements
Among the conditions for product licensure is the requirement that the prospective manufacturer’s quality control and manufacturing procedures conform to the FDA’s current good manufacturing practice (cGMP) requirements. Even after product licensure approval, the manufacturer must comply with cGMP on a continuing basis, and what constitutes cGMP may change as the state of the art of manufacturing
- 5 -
changes. Domestic manufacturing facilities are subject to regular FDA inspections for cGMP compliance, which are normally held at least every two years. Foreign manufacturing facilities are subject to periodic FDA inspections or inspections by the foreign regulatory authorities with reciprocal inspection agreements with the FDA. Domestic manufacturing facilities may also be subject to inspection by foreign authorities. Upon commercialization of our products, we intend to contract with fully compliant and competent providers of these critical services.
Other Regulations
In addition to safety regulations enforced by the FDA, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act and other present and potential future foreign, Federal, State and local regulations.
Employees
We currently have no full time employees and are relying on contractors and unpaid management to continue development of our bioreactor technology and to seek financing to enable the continuation of operations. At this time, all key contractors and management are compensated entirely through the grants of our stock and stock options.
Where You Can Find More Information
You may read and copy all or any portion of this Annual Report or any other information that we file at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings, including this Annual Report, are also available to you on the SEC’s website at www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of significant risks. You should carefully consider the following risks and uncertainties in addition to other information in this Annual Report in evaluating our company. Our business, operating results and financial condition could be seriously harmed due to any of these risks. The risks described below are not all of the risks facing our company. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations. You may lose all or part of your investment due to any of these risks.
Our financial situation is precarious and, based on currently estimated operating expenses, our existing capital resources will not be sufficient to fund our operations beyond the next three months.
We have incurred significant operating losses and negative cash flows from operations since inception. We have not achieved profitability and may not be able to realize sufficient revenues to achieve or sustain profitability in the future. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts and for general and administrative expenses and other working capital requirements. We have relied on proceeds from the sale of certain excess lab equipment, proceeds from equity offerings and convertible promissory notes, as well as the issuance of common stock to fund our operations. If we exhaust our cash reserves and are unable to realize adequate financing, we may be unable to meet operating obligations and be required to initiate bankruptcy proceedings. Our existing capital resources may not be sufficient to fund our operations beyond the next three months.
- 6 -
We have not been able to raise significant amounts of cash from either equity or debt financings. Our consultants and contractors have agreed to continue work for the company in exchange for the issuance of unrestricted common stock and common stock options.
We intend to pursue opportunities to obtain additional financing through equity and debt financings, corporate alliances, research grants and collaborative research arrangements. However, the source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our research and development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us to delay, scale back or eliminate some or all of our research and product development programs and/or our capital expenditures or to license our potential products or technologies to third parties.
Our independent registered public accounting firm’s report states that there is a substantial doubt that we will be able to continue as a going concern.
Our independent registered public accounting firm, MartinelliMick PLLC, state in their audit report attached to our audited consolidated financial statements for the year ended December 31, 2013, that, since we have sustained operating losses since inception, have limited cash resources, have not generated any revenues to-date, these factors raise substantial doubt about our ability to continue as a going concern. There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our stockholders could lose their entire investment in our Company.
We may need but fail to obtain partners to support our development efforts and to commercialize our technology.
We are relying on potential collaboration arrangements with outside research organizations to help us to develop and commercialize our cell expansion and maintenance technology. We are providing our incubators and bioreactors along with our oversight to certain research organizations to assist with further development. There is no certainty that these organizations will continue these collaborations or that the results of these arrangements will prove successful. If any of our collaborators terminates their relationship with us or we fail to perform our obligations in a timely manner, the development or commercialization of our technology and potential products may be adversely affected.
If we are not able to continue these collaborations, or to enter into new arrangements, we will be required to slow down or discontinue our development efforts due to a lack of resources.
We may not be awarded any State or federal research grants.
We will apply for State and Federal grants to help pay for the development of specific uses for our bioreactor technology. Certain of these grants may require that the application be submitted through a nonprofit research organization.
We have a history of operating losses, and we may fail to obtain revenues or become profitable.
We expect to continue to incur substantial operating losses in the future in order to conduct our research and development activities, and, if those activities are successful, to fund production and other expenses. These expenses include the cost of acquiring necessary technology, product testing, acquiring regulatory approvals, establishing production, marketing, sales and distribution programs and administrative expenses. We have not earned any revenues from sales of any product. We expect that any revenues we may earn in the foreseeable future will be derived from the sale of consumable bioreactors, cooperative agreements, research grants, investments and interest on invested capital, assuming that we are successful
- 7 -
in raising capital. We currently have no bioreactor product sales or current research grants, and we may not obtain any such grants in the future or receive any revenues from product sales.
If we are unable to protect our trade secrets, know-how and proprietary rights, our business, financial condition and results of operations will be harmed.
We own certain cell expansion and maintenance technology and the know-how to modify these products to meet specific cell expansion requirements. Patent protection for derivative products such as those we propose to develop is highly uncertain and involves complex and continually evolving factual and legal questions.
The governmental authorities that consider patent applications can deny or significantly reduce the patent coverage requested in an application before or after issuing the patent. Consequently, we do not know whether any of our future applications, should they be required for any derivative products, will result in the issuance of patents, if any existing or future patents will provide sufficient protection or significant commercial advantage or if others will circumvent these patents.
Patents may not be issued from our future patent applications or, if issued, may not be of commercial benefit to us. In addition, such patents may not afford us adequate protection from competing products. Third parties may challenge our patents or governmental authorities may declare them invalid or reduce their scope. In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in proceedings to determine priority of invention. Even if a patent issues, a court could decide that the patent was issued invalidly. European Patent Office and third parties may oppose our issued European patents during the relevant opposition period. These proceedings and oppositions could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us, and the outcome might not be favorable to us.
If we learn of third parties who may be infringing our patent rights, we may need to initiate legal proceedings to enforce our patent rights. These proceedings may entail significant costs, we may not have the resources to initiate or continue such proceedings, and these third parties may have significantly greater financial resources than us. We may not prevail in these proceedings.
Proprietary trade secrets and unpatented know-how are also important to our research and development activities. We cannot be certain that others will not independently develop the same or similar technologies on their own or gain access to our trade secrets or disclose such technology or that we will be able to meaningfully protect our trade secrets and unpatented know-how. We require our employees, consultants, and significant scientific collaborators and sponsored researchers to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. These agreements may, however, fail to provide meaningful protection or adequate remedies for us in the event of unauthorized use, transfer or disclosure of such information or technology.
If we are unable to obtain necessary licenses to third-party patents and other rights, we may not be able to commercially develop our expected products.
A number of pharmaceutical, biotechnology and other companies, universities and research institutions have filed patent applications or have received patents relating to cell expansion and maintenance and other technologies potentially relevant to or necessary for our expected future products. We cannot predict which, if any, of the applications for patents on derivative products will issue as patents, and there may be existing patents of which we are currently unaware which the commercialization of our product candidates would infringe. If third party patents or patent applications contain valid claims that our technology infringes upon their technology, we may be prevented from commercializing that technology unless the third party is willing to grant a license to us. We may be unable to obtain licenses to the relevant patents at a reasonable cost, if at all, and may also be unable to develop or obtain alternative non-
- 8 -
infringing technology. If we are unable to obtain such licenses or develop non-infringing technology at a reasonable cost, our revenue opportunities could be materially reduced if our collaborations reveal that derivative products are needed to generate a sustainable market share. Also, any infringement lawsuits commenced against us may result in significant costs, divert our management’s attention and result in an award against us for substantial damages.
We are aware of intellectual property rights held by third parties that potentially relate to products or technologies that are similar to our technology and which we are currently commercializing. We currently believe that the commercialization of our products as currently planned will not infringe these third party rights, or, alternatively, that we will be able to obtain necessary licenses or otherwise use alternate non-infringing technology. However, third parties may nonetheless bring suit against us claiming infringement. If we are unable to prove that our technology does not infringe their patents, or if we are unable to obtain necessary licenses or otherwise use alternative non-infringing technology, we may not be able to commercialize any products.
We compete with companies that have significant advantages over us.
It is expected that our products will face competition from a variety of potentially similar products and procedures. Several larger and or better funded companies currently offer a number of cell expansion products and methods that are competitive to ours. We believe that our products, when and if successfully demonstrated in actual use, will compete with these products principally on the basis of improved and extended efficacy and safety and provide significant economic benefit to the health care research and development projects that require cell expansion by reducing laboratory labor, demand on laboratory equipment, and the attendant floor space required. We believe that our most significant competitors will be fully integrated pharmaceutical companies and more established biotechnology companies. Smaller companies may also be significant competitors, particularly through collaborative arrangements with large pharmaceutical or biotechnology companies. Many of these competitors have significant products approved or in development that could be competitive with our products.
If we develop products that receive regulatory approval, we would then have to compete for market acceptance and market share. For certain of our products, an important success factor will be the timing of market introduction of competitive products. This is a function of the relative speed with which we and our competitors can develop products, complete the testing and approval processes, and supply commercial quantities of a product to market.
We are dependent on the services of key consultants and contractors.
We are highly dependent on former members of our scientific and engineering staff that have agreed to continue working as contractors until we are able to obtain additional funding. Although we have entered into contractor agreements with some of these individuals and will pay them through the issuance of unrestricted common stock options subject to certain vesting requirements, they may terminate their agreements at any time. In addition, our operations are dependent upon our ability to attract and retain additional qualified scientific and management personnel. We may not be able to attract and retain the personnel we need on acceptable terms given the competition for experienced personnel among pharmaceutical, biotechnology and health care companies, universities and research institutions, and our current financial condition.
Our activities involve hazardous materials; improper handling of these materials by our employees, contractors or agents could expose us to significant legal and financial penalties.
Our research and development activities involve the controlled use of hazardous chemicals. Their use subjects us to environmental and safety laws and regulations such as those governing laboratory
- 9 -
procedures. Compliance with current or future laws and regulations may be expensive and the cost of compliance could adversely affect us.
Although we believe that our safety procedures for using, handling, storing and disposing of hazardous and potentially hazardous materials comply with the standards prescribed by Washington and Federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident or of any violation of these or future laws and regulations, state or federal authorities could curtail our use of these materials; we could be liable for any civil damages that result, the cost of which could be substantial; and we could be subjected to substantial fines or penalties. In addition, any failure by us to control the use, disposal, removal or storage, or to adequately restrict the discharge, or to assist in the cleanup of hazardous chemicals or hazardous, infectious or toxic substances could subject us to significant liability. Any such liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations. Moreover, an accident could damage our research and manufacturing facilities and operations and result in serious adverse effects on our business.
We have been subject to legal proceedings.
Since our inception we have been the subject of certain lawsuits and other legal proceedings. While these legal matters have all been settled or dismissed, we expended virtually all of our resources in defending ourselves.
There is no certainty that new legal issues may not arise, or, if they do, that we will have the resources available to defend ourselves.
We are dependent upon third-party suppliers for raw materials needed for the manufacture of our products. If any of these third parties fail or are unable to perform in a timely manner, our ability to manufacture and deliver will be compromised.
In order to produce our bioreactors, we require certain raw materials used in our manufacturing process. These items must be manufactured and supplied to us in sufficient quantities and in compliance with Good Manufacturing Practices, or GMP. To meet these requirements, we will need to enter into supply agreements with firms that manufacture these components to GMP standards. Our requirements for these items are expected to increase if and when we transition to the manufacture of commercial quantities of our products.
We have limited liquidity and capital resources and may not obtain the significant capital resources we will need to sustain our research and development efforts.
We have limited liquidity and capital resources and must obtain substantial additional capital to support our research and development programs, for acquisition of technology and intellectual property rights and, to the extent we decide to undertake these activities ourselves, establishment of production capabilities, maintaining and enforcing our intellectually property portfolio, establishment of marketing and sales capabilities and distribution channels, and general administrative expenses. If we do not obtain the necessary capital resources, we may have to delay, reduce or eliminate some or all of our research and development programs or license our technology or any potential products to third parties rather than commercialize them ourselves. We intend to pursue our needed capital resources through equity and debt financings, corporate alliances, grants and collaborative research arrangements. We may fail to obtain the necessary capital resources from any such sources when needed or on terms acceptable to us. Our ability to complete successfully any such arrangements will depend upon market conditions and, more specifically, on continued progress in our research and development efforts.
- 10 -
Our stock price will likely be highly volatile, which may negatively affect our ability to obtain additional financing in the future.
The market price of our stock is likely to be highly volatile due to the risks and uncertainties described in this risk factors section, as well as other factors, including:
l
potential lawsuits;
l
our ability to develop and successfully demonstrate our technology;
l
our ability to patent or obtain licenses to necessary technology for derivative products, should such become necessary;
l
competition in our industry;
l
price and volume fluctuations in the stock market at large that are unrelated to our operating performance; and
l
Our failure to meet market expectations.
As a result of this volatility, an investment in our stock is subject to substantial risk. Furthermore, the volatility of our stock price could negatively impact our ability to raise capital in the future.
ITEM 2.
ITEM 2.
PROPERTY
We are on a month-to-month lease located at 14205 SE 36th Street, Suite 100, Bellevue, WA, 98006.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Market for our Common Stock
Our shares of common stock are quoted for trading on the OTC Bulletin Board under the symbol “CCYG”. The following table sets forth the high and low trading prices of our shares of common stock on the OTCBB for the periods indicated. The source of the information is the OTCBB. The market quotations provided reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
Quarter Ended
High Bid
Low Bid
March 31, 2012
$0.025
$0.025
June 30, 2012
$0.012
$0.012
September 30, 2012
$0.010
$0.010
December 31, 2012
$0.014
$0.014
March 31, 2013
$0.014
$0.014
June 30, 2013
$0.013
$0.013
- 11 -
September 30, 2013
$0.010
$0.010
December 31, 2013
$0.010
$0.010
On April 11, 2014, the closing sales price of our shares of common stock on the OTCBB was $0.0085 per share.
Holders of Our Common Stock
As of the date of this report, we have 154 stockholders of record.
Dividends
There are no restrictions in our Articles of Incorporation or Bylaws that restrict us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
(a)
we would not be able to pay our debts as they become due in the usual course of business; or
(b)
our total assets would be less than the sum of our total liabilities, plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution.
We have not declared any dividends. We do not plan to declare any dividends in the foreseeable future.
Equity Compensation Plans
The table set forth below presents information relating to our equity compensation plans as of the date of this Annual Report:
Plan Category
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding column (a))
Equity Compensation Plans Approved by Security Holders(1)
53,839,230
$0.051
38,530,000
Equity Compensation Plans Not Approved by Security Holders
-
-
-
(1)
During the years ended December 31, 2013 and 2012, we granted no options.
Note: See Note 5 to the Consolidated Financial Statements for complete information on the assumptions used in the valuation of our common stock warrants and stock options.
- 12 -
Outstanding Equity Awards to Our Officers at Fiscal Year-End
Name and Principal Position
Number of Securities Underlying Unexercised options that are exercisable (#) (b)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercisable Options (#) (c)
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d)
Option Exercise Price
($) (e)
Option Expiration Date
($) (f)
Number of Shares of Stock that have not Vested (#) (g)
Market Value of Shares of Stock that have not Vested
($) (h)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) (i)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested
($) (j)
John M. Fluke, Jr., Principal Executive Officer
150,000
8,000,000
4,200,000
6,600,000
6,000,000
-
-
-
-
-
-
-
-
-
-
1.50
0.07
0.035
0.018
0.0113
3/30/17
5/19/14
1/12/15
8/24/15
10/31/16
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Randy Lieber, Principal Accounting Officer
3,000,000
4,200,000
6,000,000
-
-
-
-
-
-
0.07
0.035
0.0113
5/19/14
1/12/15
10/31/16
-
-
-
-
-
-
-
-
-
-
-
-
Douglas Cerretti,
President
1,000,000
1,250,000
4,000,000
-
-
-
-
1,250,000 (1)
-
0.07
0.02
0.0113
5/19/14
7/22/15
10/31/16
-
-
-
-
-
-
-
-
-
-
17,500
-
(1)
The remaining options for 1,250,000 shares of common stock vest upon the achievement of certain milestones, which include the execution of targeted collaboration agreements and the receipt of customer purchase orders.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our plan of operations, results of operations and financial condition should be read in conjunction with our audited financial statements for the years ended December 31, 2013 and 2012, and the section of this Annual Report entitled “Description of Business”.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in the section entitled “Description of Business - Risk Factors”.
- 13 -
Plan of Operations
Our operations over the next 12 months will be limited by the amount of resources we are able to raise, and the willingness of our contractors and consultants to work for stock and stock option compensation. Accordingly, we have developed an Interim Operating Plan that may allow us to complete certain limited research and development activities while we attempt to raise adequate funding to restart our business.
Our plan of operations under our Interim Operating Plan for the next 12 months is to:
(a)
perform the work specified by our Interim Operating Plan under the executed contracts with our scientists and manufacturing consultants.
(b)
apply for State and Federal research grants to develop specific configurations and applications of the bioreactor device.
(c)
support the beta testing of our bioreactor product as specified in our agreements with independent research laboratories to maximize the possibility that such labs will adopt our bioreactor technology to satisfy their cell expansion needs.
(d)
continue small scale manufacturing of our cell expansion culture chambers, as needed, to maintain an adequate supply of bioreactors for the academic and institutional research organizations with which we have beta testing collaboration agreements.
(e)
locate and occupy new office, lab and manufacturing space if required to execute our Interim Operating Plan.
Over the next 12 months we anticipate that we will require an aggregate of $300,000 in cash and stock-based compensation to cover expenses and debt service, including certain accounts payable, as follows:
(a)
$30,000 for facility and equipment related expenses;
(b)
$25,000 for debt service;
(c)
$60,000 for pre-clinical work, quality assurance, manufacturing of biologic material, academic collaborations and further research collaborations;
(d)
$60,000 for design and device manufacturing;
(e)
$75,000 for legal expenses related to general corporate matters, accounting expenses related to quarterly reviews and annual audits;
(f)
$50,000 for salaries and consulting.
During the next 12 months, we anticipate that we will generate minimal, if any, non-recurring engineering (NRE) service revenue and revenue from the sale and licensing of our incubator and bioreactor device technology. We had no cash and cash equivalents and a working capital deficit of $342,311 at December 31, 2013. We presently do not have sufficient cash to fund our operations, and have curtailed substantially all activities, other than those called for by the execution of our Interim Operating Plan.
During the period covered by our Interim Operating Plan, we expect to fund our operations through a combination of issuances of stock, including issuances of stock and stock options registered pursuant to an S-8 registration statement, as payment in-kind to our independent contractors, consultants and other service providers, and the issuance of convertible loans from current stockholders and other investors. However, there is no certainty that we will be able to obtain these loans on commercially reasonable
- 14 -
terms or when needed, or that they will be sufficient to meet our cash requirements. Accordingly, we anticipate that we will require additional financing to enable us to pay our planned expenses and debt service for the next 12 months and pursue our plan of operations.
At this time, we cannot accurately estimate a date of transition from operating under our Interim Operating Plan to a state in which our operations will be funded by a combination of equity funding and cash provided from bioreactor and incubator sales. Further, there is no assurance that our research, product and device demonstration program will result in significant revenues, or that we will obtain the cash necessary to fund the Interim Operating Plan.
Subsequent to the 12 month period following the date of this Annual Report, we will be required to obtain additional financing in order to continue to pursue our business plan. We cannot accurately predict the amount of additional capital that will be required, nor the extent to which this will consist of equity or debt financing.
We cannot provide investors with any assurance that we will be able to raise sufficient funding from the issuance of promissory notes or the sale of our common stock to fund our business plan going forward. In the absence of such financing, our business plan will fail.
Results of Operations
The following table sets forth selected financial information relating to our company for the periods indicated:
We have been funding our operations primarily by way of private placements of shares of our common stock and the issuance of convertible promissory notes. We will require additional capital to meet our immediate and long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. In 2012 we recognized a substantial gain from the extinguishment of certain of our debt, which resulted in net income for the year.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues
We have had no operating revenues since our inception on January 4, 2005, to December 31, 2013. We anticipate that we will not generate any significant revenues for so long as we are a development stage company.
General and Administrative Expenses
Our general and administrative expenses in the year ended December 31, 2013 decreased to $62,453 from $74,778 in 2012, primarily as a result of a decrease in rent and related operating costs.
- 15 -
Professional Fees
In the year ended December 31, 2013, we incurred professional fees of $61,696, compared to $57,882 in 2012. Professional fees consist primarily of outside accounting and auditing fees, and legal fees related to general administrative matters.
Other Income (Expense), net
In the year ended December 31, 2013, other expense was $39,889 and consisted of interest and finance charges, whereas other income of $718,487 in 2012 was related to the settlement of several outstanding notes and accounts payable, offset by interest and finance charges.
Net Income (Loss)
As a result of the above, we had a net loss of $164,038 for the year ended December 31, 2013, compared to net income in the amount of $585,827 for the year ended December 31, 2012.
Liquidity and Capital Resources
As of December 31, 2013, we had no cash and a working capital deficit of $342,311. Our planned expenditures over the next twelve months are expected to amount to approximately $300,000 and will exceed our cash reserves and working capital. We presently do not have sufficient cash to fund our operations and have curtailed many of our activities. We will require additional financing in order to pursue our plan of operations for the next twelve months. There can be no assurance that we will obtain any additional financing in the amounts required or on terms favorable to us. If we are unable to obtain additional financing, we may have to reduce or abandon our business activities and plan of operations.
We believe that commercial debt financing will not be an alternative for funding, as we do not have tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of convertible loans and/or equity financing from the sale of our common stock. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from any of these sources to fund our plan of operations going forward. In the absence of such financing, our business plan will fail. Even if we are successful in obtaining financing, there is no assurance that we will obtain the funding necessary to pursue our business plan. If we do not continue to obtain additional financing going forward, we will be forced to abandon our plan of operations.
Cash Used in Operating Activities
Cash used in operating activities in the year ended December 31, 2013, was $62,658, compared to $78,372 in the year ended December 31, 2012. Cash used for operating activities in 2013 and 2012 was primarily limited to debt service, directors and officers insurance, month-to-month facility lease, and outside accounting services.
Cash Provided by Investing Activities
In the year ended December 31, 2013, investing activities provided no cash, compared to providing cash of $1,985 in the year ended December 31, 2012. Cash was primarily provided by selling excess equipment to help fund our operations during 2012.
- 16 -
Cash Provided By Financing Activities
We have funded our business to date primarily from sales of our common stock and the issuance of convertible debt. In the year ended December 31, 2013, financing activities provided cash in the amount of $62,658, compared to providing cash in the amount of $76,387 in the year ended December 31, 2012.
Going Concern
As shown in the accompanying financial statements, we have incurred significant losses since inception and have not generated any revenues to date. The future of our company is dependent upon our ability to obtain sufficient financing and upon achieving future profitable operations. These factors, among others, raise substantial doubt about our company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Future Financings
We anticipate continuing to rely on sales of our common stock, advances and convertible loans from our stockholders, and the issuance of stock options to our contractors to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our business plan.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Material Commitments
During the first quarter of 2012, we entered into negotiations with our previous landlord whereby we settled the entire amount of principal and interest on an outstanding promissory note for a final payment of $75,000. As a result of this settlement, we recorded a gain of $180,955 on the extinguishment of the debt to our landlord.
Critical Accounting Policies
Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
Use of Estimates
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis and include certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
- 17 -
Income Taxes
We follow the provisions of FASB ASC 740, “Income Taxes”, under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The provisions of ASC 740 also require the recognition of future tax benefits such as net operating loss carry-forwards, to the extent that the realization of such benefits is more likely than not. To the extent that it is more likely than not that such benefits will not be received, we record a valuation allowance against the related deferred tax asset.
The Company has not filed income tax returns, since management believes no taxes are owed. If the Company does file an income tax return in the future, management believes that no penalties will be assessed, since there will be no tax liability. The Internal Revenue Service (IRS) usually only assess penalties when taxes are owed. The Company may not be able to claim the entire net operating losses disclosed above due to not filing tax returns in prior years. Since the Company has not filed income tax returns, all tax years since the Company’s inception remain open to investigation by the IRS.
Intangible Assets
Our intangible assets primarily consist of patents and intellectual property, which are carried at the purchase price and/or the legal cost to obtain them less accumulated amortization. Patents and licenses are being amortized over their estimated useful lives, which range from seven to seventeen years. Annually these assets are reviewed for recoverability to determine if the carrying amount on the balance sheet is appropriate.
Research and Development Costs
Research and development costs are expensed as incurred. The cost of intellectual property purchased from others that is immediately marketable or that has an alternative future use is capitalized and amortized as intangible assets. Capitalized costs are amortized using the straight-line method over the estimated economic life of the related asset. We periodically review our capitalized intangible assets to assess recoverability based on the projected undiscounted cash flows from operations, and impairments are recognized in operating results when a permanent diminution in value occurs.
Stock-Based Compensation
We account for our stock option plan primarily under the recognition and measurement principles of FASB ASC 718, “Compensation - Stock Compensation” Accordingly, compensation cost has been recognized using the fair value method and expected term accrual requirements as prescribed in ASC 718. We recorded no stock-based compensation expense during the year ended December 31, 2013.
Recent Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This amendment requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss or a tax credit carryforward, unless certain conditions exist. This guidance is effective prospectively for annual reporting periods (and the interim periods within) beginning after December 15, 2013. Early adoption and retrospective application are permitted. We expect to adopt ASU 2013-11 effective January 1, 2014 and do not expect this adoption to have a material impact on our financial condition, results of operations or cash flows.
- 18 -
In February 2013, the FASB issued ASU No. 2013-02, which amends ASC Topic 220, Comprehensive Income and requires that entities present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements. The standard requires that entities present either on the face of the income statement or as a separate note to the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income. If a component is not required to be reclassified to net income in its entirety, entities are required to cross reference to the related footnote for additional information. For public companies, the standard is effective for fiscal years and interim periods beginning after December 15, 2012. We adopted ASU 2013-02 on January 1, 2013 and this adoption did not have a material impact on our financial results or disclosures.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS
We have filed as part of this Annual Report our audited financial statements as of and for the years ended December 31, 2013 and 2012, and the related notes to these financial statements. These financial statements are set forth in this Annual Report beginning on page below, and are incorporated by reference in this Item 8.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes or disagreements with our accountants on accounting and financial disclosure during the two previous fiscal years.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this annual report on Form 10-K, an evaluation was carried out by CellCyte Genetics Corporation’s management, with the participation of the Principal Executive Officer and Principal Accounting Officer, of the effectiveness of CellCyte Genetics Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Principal Executive Officer and the Principal Accounting Officer, to allow timely decisions regarding required disclosures.
During the evaluation of disclosure controls and procedures as of December 31, 2013, management identified material weaknesses in internal control over financial reporting, which management considers an integral component of disclosure controls and procedures. Material weaknesses identified include the lack of any segregation of duties, lack of appropriate accounting policies and management’s assessment of internal control over financial reporting. As a result of the material weaknesses identified, management concluded that CellCyte Genetics Corporation’s disclosure controls and procedures were not effective.
Notwithstanding the existence of these material weaknesses, CellCyte Genetics Corporation believes that the consolidated financial statements in this annual report on Form 10-K fairly present, in all material respects, CellCyte Genetics Corporation’s financial condition as of December 31, 2013 and 2012, and results of its operations and cash flows for the years ended December 31, 2013 and 2012, in conformity with United States generally accepted accounting principles (GAAP).
- 19 -
Management’s Report on Internal Control Over Financial Reporting
Management of CellCyte Genetics Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. CellCyte Genetics Corporation’s internal control over financial reporting is a process, under the supervision of the Principal Executive Officer and the Principal Accounting Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the company’s financial statements for external purposes in accordance with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the company’s assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
CellCyte Genetics Corporation’s management conducted an assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified material weaknesses in internal control over financial reporting.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of CellCyte Genetics Corporation’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified are disclosed below.
Ineffective Oversight of Financial Reporting. CellCyte Genetics Corporation has not provided an appropriate level of oversight of the financial reporting process and has not appropriately monitored the Company’s system of internal control. The Company’s monitoring of management’s assessment of internal control over financial reporting did not result in appropriate actions taken by management to remedy the deficiencies in the process to assess internal control over financial reporting. The Company no longer has an independent audit committee overseeing the financial reporting process.
Lack of Appropriate Accounting Policies, Procedures, and Personnel. Management of CellCyte Genetics Corporation has not established with appropriate rigor the accounting policies, procedures, and documentation of significant judgments and estimates made by management in the preparation of the financial statements, including accounting policies related to accounting for asset impairments. In addition, management has not appropriately assessed the risk to reliable financial reporting related to the effects of unfilled key financial reporting position(s).
- 20 -
As a result of the material weaknesses in internal control over financial reporting described above, CellCyte Genetics Corporation’s management has concluded that, as of December 31, 2013, CellCyte Genetics Corporation’s internal control over financial reporting was not effective based on the criteria in Internal Control - Integrated Framework issued by the COSO.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged the Company’s independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) under the Exchange Act) during the year ended December 31, 2013 that may materially affect, or is reasonably likely to materially affect, our internal control over financial reporting. We have previously disclosed the suspension of a significant portion of the Company’s operations, and the appointment of the Audit Committee Chairman, previously an independent director, as the Interim Principal Executive Officer.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable.
__________
- 21 -
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE GOVERNANCE
Our directors and executive officers and their respective ages as of the end of the fiscal year covered by this Annual Report are as follows:
Name and
Municipality of Residence
Age
Current Office with
CellCyte Genetics Corporation
Director or Officer Since
Randy A. Lieber
Issaquah, Washington, USA
Principal Accounting Officer and a director
November 24, 2008
John M. Fluke, Jr.
Bellevue, Washington, U.S.A.
Interim Principal Executive Officer and a director
June 1, 2007
Dr. Douglas P. Cerretti, PhD
Shoreline, Washington, U.S.A.
President
July 24, 2010
The following is a description of the business background of the directors and executive officers of our company:
John M. Fluke, Jr. - Interim Principal Executive Officer and a director
Mr. Fluke, age 71, is the Chairman of Fluke Capital Management, LP; the Fluke family's investment and trust management company. He founded the company in 1976. Mr. Fluke graduated from the University of Washington in 1964, with a Bachelor of Science Degree in Electrical Engineering, and received his Master's Degree in Electrical Engineering from Stanford University in 1966.
Mr. Fluke joined his father's firm, John Fluke Mfg. Co., in 1966 as a design engineer and held various engineering and general management positions. He was elected to the board of that company in 1976, appointed Chief Executive Officer in 1983 and Chairman from 1984. He served as CEO through 1987, Chairman through 1990 and a director of the Fluke Corp. through July 1998 when the company was acquired by Danaher Corporation.
Mr. Fluke currently serves on the Boards of two emerging - or re-emerging - companies: Metron Systems, Inc. (maker of precision laser scanning systems for use in quality assurance in manufacturing) and MaestroSoft, Inc. (maker of charitable event management software). Over the last three decades many of Mr. Fluke's governance positions with smaller companies have required direct and frequent interaction with management to balance the achievement (or maintenance) of cash flow positive performance without deviating from best governance practices.
Mr. Fluke is a director of PACCAR Inc. (since 1984), where he also serves as audit committee financial expert and chairman of the Nominating and Governance Committee. He also currently serves as a director of Tully's Coffee Company (since 2005) and chairs its audit committee. Mr. Fluke is a former director and chairman of the audit committee for PRIMUS International (2003 to 2006) and American Seafoods Group (2003 to 2006) where he served on the audit committee. He has also served on the boards and audit committees of Peoples National Bank (1984 to 1993) and US Bank of Washington (1993 to 1997).
Mr. Fluke is a past Chairman of the Greater Seattle Chamber of Commerce (1993) and continues to serve on its board and is a past Chairman of the Washington State China Relations Council (1985 to 1987). He concurrently served as a national board member of the American Electronics Association and the National
- 22 -
Association of Manufacturers as well as the Executive Committees of both trade organizations (1985 to 1990).
Mr. Fluke served as a member of the University of Washington's Engineering Visiting Committee (1982 - 2005), the University of Washington Foster School of Business Advisory Board (since 1987), the University of Washington Applied Physics Laboratory Advisory Board (since 1992) and the Pacific Museum of Flight (since 1988). He also is past Chairman of the board of Junior Achievement of Washington and was a member of the board of the Washington Policy Center. Mr. Fluke previously served on the Stanford University Engineering Advisory Council (1985 to 1989). He is a trustee-emeritus of the University of Puget Sound (1984-2002), a past trustee of St. Thomas School of Medina, WA (1988 to 1995) and served on the Washington State Higher Education Coordinating Board (1987 to 2000) and the Washington Business Roundtable and its Education Committee (1984 to 2001).
Mr. Fluke is a past President of PONCHO (1993), Seattle's oldest fund-raising auction for the arts, a past President of the Seattle Council of the Boy Scouts of America (1984 to 1985) and a former member of the boards of the Seattle Symphony Orchestra (1981 to 1990), the 5th Avenue Theater Association (1985 to 1990) and the Nature Conservancy (1997 to 2001).
Randy A. Lieber - Principal Accounting Officer and a director
Mr. Lieber, age 57, is a senior financial professional with more than 30 years of experience working with both public and private companies. He is also the Chief Financial Officer of Blink Interactive, Inc., a user experience, research and design firm based in Seattle, WA.
Mr. Lieber started his professional career at Coopers & Lybrand/PricewaterhouseCoopers (PwC) where he spent 14 years working with a wide range of companies including software, semi-conductor, bio-technology and Internet companies. While at PwC, he was involved in more than 10 initial and follow-on public offerings, financial reporting to the Securities and Exchange Commission (SEC), and provided buy-side consulting and due diligence on mergers and acquisitions.
Subsequent to his tenure at PwC, Mr. Lieber was the Director of Finance at a $500 million international public company, Chief Financial Officer of an internet startup company, and more recently, as the Chief Financial Officer of Ascentium Corporation, a technology and marketing consulting firm. He joined Ascentium shortly after it was founded in 2001 and was instrumental in helping it to grow to annual revenues of $75 Million with offices in seven cities, including London. He was responsible for all finance, accounting, human resources, and facilities.
Mr. Lieber has BS degree in accounting from Central Washington University and became a CPA in Alaska in 1987 and in California in 1996.
Douglas Pat Cerretti, PhD - President
Dr. Cerretti, age 63, is a biopharmaceutical research scientist with experience in drug development in inflammation and cancer. From 1984 to 2002, he served with Immunex, and, after Immunex’ acquisition in 2002, with Amgen in positions ranging from Staff Scientist through Scientific Director. Dr. Cerretti retired from Amgen in 2007. He is the author or co-author of more than 100 scientific publications and has over 40 issued US Patents to his name.
Dr. Cerretti has worked with our Company since October 2009, initially as our Chief Science Officer and Director of Business Development, where he helped formulate our scientific and business strategies. He has also worked as a senior scientific consultant through DPC BioPharma Consulting of Seattle, Washington since 2008, formulating a business plan and scientific strategies for a potential stem cell product. From 2002 through 2007, Dr. Cerretti served as Scientific Director and Senior Research
- 23 -
Scientist, Department of Cancer Biology for Amgen Corporation. From 1984 through 2002, he served as a Senior Research Scientist for Immunex Corporation within their departments of Vascular and Molecular Biology.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our Bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the Board.
Significant Employees
As of the date of this Annual Report, we had no paid employees. The management team has agreed to remain involved with no guarantee of payment for these services. In addition, certain members of our scientific and operations staff have agreed to remain on as contractors. These members will be compensated through the issuance of the company’s unrestricted common stock and stock options.
Family Relationships
None of the directors, officers or the significant employees of our company are related to one another.
Conflicts of Interest
We do not have any procedures in place to address conflicts of interest that may arise between our business and our directors’ other business activities. We are not aware of any existing conflicts between us and our directors’ other business activities.
Audit Committee
The sole member of our current Audit Committee is Mr. Fluke.
Our Board of Directors has determined that Mr. Fluke qualifies as a “financial expert”. None of our executive officers are “independent” according to the standards for independence prescribed by the American, NASDAQ or NYSE Stock Exchanges.
Involvement in Certain Legal Proceedings
None of our directors, executive officers, significant employees or control persons has been involved in any of the events prescribed by Item 401(f) of Regulation S-K during the past ten years, including:
1.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3.
being 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
- 24 -
4.
being 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.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based upon these forms, our officers, directors and ten percent stockholders were in compliance during the fiscal year ended December 31, 2013.
Code of Ethics
We have adopted a Code of Ethics applicable to our directors, officers and employees.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the compensation paid to our Principal Executive and Accounting Officers. No other executive officer earned more than $100,000 in 2013 or 2012 (the “Named Executive Officers”). During 2013 there was no compensation provided. Compensation for stock grants reflect the estimated fair value of our common stock on the date of issuance, while the compensation for stock option awards is calculated using the Black-Scholes model, using the assumptions discussed in the notes to our financial statements, and recognized over the vesting period.
Summary Compensation Table
Name and Principal Position
Year
Salary
($)
Bonus
($)
Stock Awards
($)
Option Awards ($)
Non-Equity Incentive Plan Compensation
($)
Non-qualified Deferred Compensation Earnings
($)
All Other Compen-sation
($)
Total
($)
John M. Fluke, Jr., Principal Executive Officer
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Randy Lieber, Principal Accounting Officer
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Douglas P. Cerretti, President
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 25 -
Stock Options
John M. Fluke, Jr. became our Interim Principal Executive Officer during 2008. During 2013 and 2012, Mr. Fluke received no stock options.
Randy A. Lieber became our Principal Accounting Officer during 2008. During 2013 and 2012, Mr. Lieber received no stock options.
Dr. Douglas P. Cerretti became our President during 2010. During 2013 and 2012, Dr. Cerretti received no stock options.
Stock Option Plans
In connection with the CellCyte acquisition, on March 30, 2007, our Board of Directors adopted a 2007 Stock Option/Restricted Stock Plan (the “2007 Plan”). The following summary of the 2007 Plan is not complete and is qualified in its entirety by reference to the 2007 Plan, a copy of which has been filed with the SEC.
The purpose of the 2007 Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants and to promote the success of our company’s business. The number of shares approved for issuance under the 2007 Plan was 5,450,000 shares, of which 710,000 have been granted and are outstanding as of December 31, 2013. If an award under the 2007 Plan should expire or become unexercisable for any reason and without having been exercised in full, or surrendered pursuant to an option exchange program, then the shares that were subject to such expiration or unexercised award shall again become available for future grant under the 2007 Plan. The 2007 Plan is administered by our company’s Board of Directors or a committee appointed by the Board. The term of the 2007 Plan is ten years from the date of its adoption by the Board.
On January 24, 2009, our Board of Directors approved the 2009 Stock Incentive Plan for Employees and Consultants (“the 2009 Plan”), the purpose of which is to provide our employees and consultants with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of our company, and to facilitate attracting and retaining exceptional employees and consultants.
Under the 2009 Plan, as amended, we have reserved and registered 86,000,000 shares of our common stock to be used as compensation to employees and contractors for services rendered. As of December 31, 2013, we had issued 18,409,636 shares of our common stock and had outstanding stock option grants for 52,210,000 shares of our common stock.
See Note 5 to our Consolidated Financial Statements for additional information regarding the total number of equity awards outstanding, and the significant assumptions used in their valuation.
Director Compensation
We pay our directors for their services as directors in restricted stock grants and/or options for unrestricted common stock. The following table sets forth information about compensation paid to our directors in 2013:
- 26 -
Director Compensation Table
Name
Fees Earned or Paid in Cash
($)
Stock Awards
($)
Option Awards
($)
Non-Equity Incentive Plan Compen-sation
($)
Non-qualified Deferred Compen-sation Earnings
($)
All Other
Compen-sation
($)
Total
($)
John M. Fluke, Jr.
-
-
-
-
-
-
-
Randy A. Lieber
-
-
-
-
-
-
-
During 2013, Mr. Fluke and Mr. Lieber were not compensated for their Board representation.
Compensation for stock option awards is calculated using the Black-Scholes model, using the assumptions discussed in the notes to our financial statements, and recognized over the vesting period. See Note 5 to our Consolidated Financial Statements for more complete information on the assumptions used in valuing our stock compensation.
Long-Term Incentive Plans
We do not have any long-term incentive plans, pension plans, or similar compensatory plans for our directors or executive officers.
Potential Payments Upon Termination or Change-in-Control
Information with respect to any payouts upon the termination of a Named Executive Officer or a change-in-control of our company is set forth below under “Employment Agreements”.
Employment Agreements
We do not currently have any employment agreements with executive officers.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock held by him, except as otherwise indicated. As of April 14, 2014, there are 82,329,481 shares of common stock issued and outstanding.
Name and Address of Beneficial Owner
Shares(1)
Percent
Named Executive Officers and Directors(2)
Randy A. Lieber
Principal Accounting Officer and a director
24,840,430(4)
14.01%
John M. Fluke, Jr.
Interim Principal Executive Officer and a director
67,064,252(3)
37.84%
Dr. Douglas P. Cerretti, Ph.D.
President
12,225,576(5)
6.90%
- 27 -
Directors and Executive Officers as a Group (3 Persons)
104,130,258
58.75%
Beneficial Owners of in Excess of 5% (other than Executive Officers and Directors)
Gary A. Reys
Stockholder
18,625,000
10.51%
Dr. Ronald W. Berninger, Ph.D.
Stockholder
18,625,000
10.51%
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on April 14, 2014. As of April 14, 2014, there were 82,329,481 shares issued and outstanding. In addition, stockholders listed above hold 48,050,000 options to purchase common stock that are included in the beneficial ownership calculation.
(2)
The address of the executive officers and directors is 14205 SE 36th Street, Suite 100, Bellevue, Washington, U.S.A., 98006.
(3)
Includes vested options to acquire up to 25,950,000 shares of our common stock at exercise prices of $0.0113 to $1.50 per share, and 40,376,263 shares of common stock that would be issued upon conversion of a promissory note and accrued interest.
(4)
Includes vested options to acquire up to 14,200,000 shares of our common stock at exercise prices of $0.0113 to $0.07 per share, and 2,163,345 shares of common stock that would be issued upon conversion of a promissory note and accrued interest.
(5)
Includes vested options to acquire up to 6,250,000 shares of our common stock at exercise prices of $0.0113 to $0.07 per share, and a warrant to purchase up to 150,000 shares of our common stock at an exercise price of $0.035 per share, and 5,825,576 shares of common stock that would be issued upon conversion of a promissory note and accrued interest.
Changes in Control
We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our company.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Except as disclosed below, there are no transactions, since the beginning of our company’s last fiscal year, or any currently proposed transactions, in which our company was or is to be a participant where the amount involved exceeds the lesser of $120,000 or one percent of the average of our company’s total assets at year-end for the last two completed fiscal years and in which any “related person” had or will have a direct or indirect material interest. “Related party” includes
(a)
any of our directors or officers;
(b)
any person proposed as a nominee for election as a director;
(c)
any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock; or
- 28 -
(d)
any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of any of the foregoing persons who has the same house as any of such person.
During 2013, our Board members and officers advanced a total of $61,850 to help cover general operating costs. At December 31, 2013, our Company owed $65,900 to a related party for accounting services. The portion of this liability incurred during the year ended December 31, 2013 was $25,375.
Material Contracts
None.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
We engaged MartinelliMick PLLC, Certified Public Accountants, as our independent auditors effective November 1, 2011. The following table provides information relating to the fees we paid to our independent auditors for the periods indicated:
Fiscal Year Ended
December 31, 2013
Fiscal Year Ended
December 31, 2012
Audit Fees
$12,500
$20,000
Audit-related Fees
-
-
Tax Fees
-
-
All other Fees
-
-
Audit fees are the aggregate fees billed by our independent auditors for the audit of our annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.
Audit-related fees are the aggregate fees billed by our independent auditors for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported in the preceding paragraph.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Under our audit committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project based services and routine consultations. In addition, we may also pre-approve particular services on a case-by-case basis. We approved all services that our independent accountants provided to us in the past two fiscal years.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS
- 29 -
*
XBRL Information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.
- 30 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CELLCYTE GENETICS CORPORATION
/s/ John M. Fluke
John M. Fluke, Jr., Interim Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John M. Fluke
April 14, 2014
John M. Fluke, Jr., Director
Date
/s/ Randy Lieber
April 14, 2014
Randy Lieber, Director
Date
- 31 -
CELLCYTE GENETICS CORPORATION
(a Development Stage Company)
Consolidated Financial Statements
December 31, 2013
Index
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
To the Board of Directors and
Stockholders of CellCyte Genetics Corporation
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of CellCyte Genetics Corporation (a Development Stage Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2013 and for the period January 4, 2005 (inception) to December 31, 2013. CellCyte Genetics Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of CellCyte Genetics Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013 and for the period January 4, 2005 (inception) to December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a history of operating losses, has limited cash resources, and its viability is dependent upon its ability to meet future financing requirements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/MartinelliMick PLLC
MartinelliMick PLLC
Spokane, Washington
April 14, 2014
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
CellCyte Genetics Corporation (the “Company”) is in the development stage, as defined by Financial Accounting Standards Board (“FASB”) ASC 915, “Development Stage Entities”, and its efforts are principally devoted to the commercialization of its cell expansion technology. To date, the Company has not generated any sales revenues, has incurred ongoing operating expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception through December 31, 2013, the Company has accumulated losses of $12,685,305.
As shown in the accompanying financial statements, the Company has incurred significant losses since inception and has not generated any revenues to date. In addition, effective July 1, 2008, the Company suspended significantly all of its operations and placed all of its employees on unpaid leave. The future of the Company is dependent upon its ability to obtain sufficient financing and upon achieving future profitable operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Basis of Consolidation
These consolidated financial statements include the accounts of CellCyte Genetics Corporation, a private Washington corporation, since its incorporation on January 4, 2005 and its parent, CellCyte Genetics Corporation, a Nevada corporation, since the reverse acquisition on March 14, 2007. All inter-company balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments and short-term debt instruments with maturities of three months or less from date of purchase to be cash equivalents. The Company had no cash or cash equivalents at December 31, 2013.
Income (Loss) per Share
The Company computes net income (loss) per common share in accordance with FASB ASC 260, “Earnings Per Share”. Net income (loss) per share is based upon the weighted average number of outstanding common shares and the dilutive effect of common share equivalents, such as options and warrants to purchase common stock, convertible preferred stock and convertible notes, if applicable, that are outstanding each year. The Company uses the treasury stock method of calculating dilutive securities.
The following table sets forth the calculation of basic and diluted earnings per share for the years ended December 31, 2013 and 2012. Basic and diluted earnings per share were the same for the year ended
December 31, 2013 as including common stock equivalents in the calculation of diluted earnings per share would have been anti-dilutive.
Fair Value of Financial Instruments
The Company's financial instruments may consist of cash and cash equivalents, prepaid expenses and other deferred charges, accounts payable, accrued expenses and other current liabilities. All instruments are accounted for on an historical cost basis, which, due to the short maturity of these financial instruments, approximates the fair value at the reporting dates of these financial statements.
Intangible Assets
The Company’s intangible assets primarily consist of patents and intellectual property, which are carried at the purchase price and/or the legal cost to obtain them less accumulated amortization. Patents and licenses are being amortized over their estimated useful lives, which range from seven to seventeen years.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has incurred losses of $12,685,305 and used $5,394,365 in cash for operating activities from its inception through December 31, 2013. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to successfully raise additional capital and to develop profitable operations. Management is devoting substantially all of its efforts in raising capital and in developing its products and services and there can be no assurance that the Company's efforts will be successful. Management’s efforts could be further limited by the effects of certain ongoing investigations and litigation. The inability to raise new capital prior to the settling of uncertainties may substantially damage any current plans of continuing operations. The planned principal operations have not commenced and no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
Income Taxes
The Company follows the provisions of FASB ASC 740, “Income Taxes”, under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The provisions of ASC 740 also require the recognition of future tax benefits such as net operating loss carry-forwards, to the extent that the realization of such benefits is more likely than not. To the extent that it is more likely than not that such benefits will not be received, the Company records a valuation allowance against the related deferred tax asset. Also, see Note 7 regarding additional income tax disclosures.
Long-Lived Assets and Intangibles
The Company examines on a periodic basis the carrying value of its tangible and intangible assets to determine whether there are any impairment losses. FASB ASC 360, “Property, Plant and Equipment”, establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations, and requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. The determination of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the assets to the net carrying value of the assets.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are expensed as incurred.
Research and Development Costs
Research and development costs are expensed as incurred. The cost of intellectual property purchased from others that is immediately marketable or that has an alternative future use is capitalized and amortized as intangible assets. Capitalized costs are amortized using the straight-line method over the estimated economic life of the related asset. The Company periodically reviews its capitalized intangible assets to assess recoverability based on the projected undiscounted cash flows from operations, and impairments are recognized in operating results when a permanent diminution in value occurs.
Recent Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 (“ASU 2013-11”), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This amendment requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward or a similar tax loss or a tax credit carryforward, unless certain conditions exist. This guidance is effective prospectively for annual reporting periods (and the interim periods within) beginning after December 15, 2013. Early adoption and retrospective application are permitted. The Company expects to adopt ASU 2013-11 effective January 1, 2014 and does not expect this adoption to have a material impact on its financial condition, results of operations or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, which amends ASC Topic 220, Comprehensive Income and requires that entities present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements. The standard requires that
entities present either on the face of the income statement or as a separate note to the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income. If a component is not required to be reclassified to net income in its entirety, entities are required to cross reference to the related footnote for additional information. For public companies, the standard is effective for fiscal years and interim periods beginning after December 15, 2012. The Company adopted ASU 2013-02 on January 1, 2013 and this adoption did not have a material impact on the Company’s financial results or disclosures.
Stock-Based Compensation
The Company records stock-based compensation in accordance with FASB ASC 718, “Stock Compensation”. ASC 718 requires that the cost resulting from all share-based transactions be recorded in the financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.
The Company has recorded no stock-based compensation expense during the years ended December 31, 2013 and 2012.
Use of Estimates
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
NOTE 3 - INTELLECTUAL PROPERTY AND PROPERTY AND EQUIPMENT
Intellectual Property
In 2005, the Company acquired certain patents and intellectual property from Genespan Corporation relating to its cell expansion and maintenance technology for which it paid $70,002.
The Company amortizes patents (and licenses for the use of patents) over the remaining life of the patents, which ranges from 7 to 17 years.
During the years ended December 31, 2013 and 2012, the Company recognized amortization expense in the amounts of $16,218 and $7,504, respectively, included in general and administrative expense.
Intellectual property was as follows as of December 31, 2013 and 2012:
Property and Equipment
Property and equipment are stated at cost and are being depreciated using the straight-line basis over the assets’ estimated useful lives, which are generally three years for computer equipment, three to five years for office equipment, five to seven years for furniture, and five years for laboratory equipment. Tenant improvements are capitalized and amortized over the shorter of the lease term or their estimated useful life. Depreciation and amortization expense for the years ended December 31, 2013 and 2012 was $0 and $7,009, respectively. During the year ended December 31, 2012, the Company sold or disposed of equipment and supplies with no cost basis and no net book value for total proceeds of $1,985, resulting in a gain on disposal of $1,985.
Property and equipment were as follows as of December 31, 2013 and 2012:
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently rents office and lab space on a month-to-month basis.
Settlements
During the first quarter of 2012, the Company entered into negotiations with its previous landlord whereby it settled the entire amount of principal and interest outstanding on a promissory note for a final payment of $75,000. As a result of this settlement, the Company recorded a gain of $180,955 on the extinguishment of its debt to its landlord.
NOTE 5 - CAPITAL STOCK
Common Stock
The Company has authorized 525,000,000 shares of its common stock, $0.001 par value. The Company had issued and outstanding 82,329,481 shares of its common stock at December 31, 2013 and December 31, 2012, respectively.
During the year ended December 31, 2013, the Company issued no shares of common stock in exchange for services.
Common Stock Warrants
The Company’s common stock purchase warrant activity for the years ended December 31, 2013 and December 31, 2012 is as follows:
Warrants
Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Life
Balance, December 31, 2011
919,230
$
0.06
2.62 years
Warrants issued
-
-
Warrants exercised
-
-
Warrants expired
-
-
Balance, December 31, 2012
919,230
0.06
1.62 years
Warrants issued
-
-
Warrants exercised
-
-
Warrants expired
-
-
Balance, December 31, 2013
919,230
$
0.06
0.62 years
Common Stock Options
Effective March 30, 2007, the Company adopted the 2007 Stock Option/Restricted Stock Plan (the “2007 Plan”). The purpose of the 2007 Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants and to promote the success the Company’s business. The number of shares approved for issuance under the 2007 Plan was 5,450,000 shares, of which 710,000 have been granted and are outstanding as of December 31, 2013. If an award under the 2007 Plan should expire or become unexercisable for any reason and without having been exercised in full or surrendered pursuant to an option exchange program, then the shares that were subject to such expiration or unexercised award shall again become available for future grant under the 2007 Plan. The 2007 Plan is administered by the Company’s Board of Directors or a committee appointed by the Board. The term of the 2007 Plan is ten years from the date of its adoption by the Board.
On January 24, 2009, the Company approved and adopted the 2009 Stock Incentive Plan for Employees and Consultants (the “2009 Plan”). The purpose of the 2009 Plan is to provide employees and consultants of the Company with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of the Company, and to join the interests of employees and consultants with the interests of the stockholders of the Company. The number of shares available for issuance under the 2009 Plan is 86,000,000 shares (as revised on September 1, 2011), and have been registered with the Securities and Exchange Commission pursuant to a Form S-8 Registration Statement.
Compensation for stock option awards is calculated using the Black-Scholes model, using the assumptions discussed in this note, and recognized over the vesting period.
During the year ended December 31, 2013, the Company issued no shares under either of its stock option plans.
The Company’s stock option activity under both the 2007 and 2009 Plans for the years ended December 31, 2013 and 2012 is as follows:
Options
Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Life
Balance, December 31, 2011
53,945,000
$
0.069
3.63 years
Options granted
-
-
Options exercised
-
-
Options cancelled and expired
(775,000)
1.50
Balance, December 31, 2012
53,170,000
0.049
2.68 years
Options granted
-
-
Options exercised
-
-
Options cancelled and expired
(250,000)
0.400
Balance, December 31, 2013
52,920,000
$
0.051
1.68 years
NOTE 6 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2008, two former officers, Gary Reys and Dr. Ronald Berninger, who were also members of the Company’s board of directors, advanced funds in the amount of $26,290 for their legal defense related to certain Company legal matters. During 2009, Dr. Berninger advanced an additional $6,465 for his defense. Under the Company’s Bylaws, the Company is required to provide for the legal defense of its officers and directors.
On March 16, 2014, the outstanding balance to Dr. Berninger was converted into a convertible promissory note bearing interest at 8% with all interest and principal due on March 15, 2019.
During the years ended December 31, 2013 and 2012, the Company incurred accounting expenses of $25,375 and $35,975, respectively, for services of a firm that is owned by one of the Company’s directors. The accounts payable balance owed to this related party at December 31, 2013 was $65,900.
Convertible Promissory Notes
On December 23, 2009, an officer of the Company loaned $25,000 to the Company in exchange for a convertible promissory note and a warrant to purchase 150,000 shares of common stock. The promissory note bears interest at the annual rate of eight percent and all interest and principal is due on December 22, 2014. The fair market value of the warrants of $3,000 was recorded as a discount on the promissory note. During 2013 this officer advanced the Company an additional $18,250 to help fund operating costs. On November 5, 2013, all outstanding amounts to this officer, including accrued interest of $8,177 and an advance of $6,142 included in accrued expenses, were rolled into a new promissory note bearing interest at 8% and convertible into common stock at any time, at the option of the holder, at the exchange rate of
$0.01 per share. The outstanding balance on this convertible promissory note at December 31, 2013 was $56,969, net of unamortized discount of $600.
During the year ended December 31, 2013, a stockholder of the Company advanced a total of $43,600 under a convertible promissory note to help pay for certain operating and debt service costs. On November 5, 2013, all outstanding amounts to this stockholder, including accrued interest of $50,243 were rolled into a new promissory note bearing interest at 8% and convertible into common stock at any time, at the option of the holder, at the exchange rate of $0.01 per share. The outstanding balance on this convertible promissory note at December 31, 2013 was $398,886.
During the year ended December 31, 2013, the Company repaid a second stockholder of the Company a total of $1,887 under a convertible promissory note. On November 5, 2013, all outstanding amounts to this stockholder, including accrued interest of $4,812 and an advance in the amount of $1,137 included in accrued expenses were rolled into a new promissory note bearing interest at 8% and convertible into common stock at any time, at the option of the holder, at the exchange rate of $0.01 per share. The outstanding balance on this convertible promissory note at December 31, 2013 was $21,633.
Stockholder Advances
During the year ended December 31, 2007 a stockholder of the Company paid various outstanding payables on behalf of the Company. As of December 31, 2013 the Company owed this stockholder $107,949. These advances are unsecured, non-interest bearing with no set terms of repayment.
NOTE 7 - INCOME TAXES
Income taxes are calculated in accordance with ASC Topic 740, "Income Taxes" ("ASC 740"), which requires the use of the liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax laws and published guidance with respect to applicability to the Company's operations.
The Company adopted the provisions of ASC 740 related to uncertainty in income taxes in the first quarter of fiscal year 2007. These provisions prescribe a comprehensive model of how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under these provisions, the Company recognizes a tax benefit when a tax position is more-likely-than-not to be sustained upon examination, based solely on its technical merits. The Company measures the recognized tax benefit as the largest amount of tax benefit that has greater than a 50% likelihood of being realized upon the ultimate settlement with a taxing authority. The Company reverses a previously recognized tax benefit if it determines that the tax position no longer meets the more-likely-than-not threshold of being sustained. The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense.
The Company's deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carry forwards.
At December 31, 2013 and 2012 the Company had gross deferred tax assets calculated at an expected rate of 34% of approximately $4,305,000 and $4,249,000, respectively, principally arising from net operating loss carry-forwards and stock compensation for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net
deferred tax asset, a valuation allowance of $4,305,000 and $4,249,000 has been established at December 31, 2013 and 2012, respectively.
For the year ended December 31, 2012, the Company utilized approximately $585,000 of its net operating loss carryforwards to offset net taxable income for the year. This resulted in a reduction of the Company’s gross deferred tax asset and related valuation allowance in the amount of $199,000.
The significant components of the Company’s net deferred tax asset at December 31, 2013 and 2012 are as follows:
Gross deferred tax asset:
Net operating loss carry forwards
$
4,305,000
$ 4,249,000
Gross deferred tax liabilities:
Valuation allowance
(4,305,000)
(4,249,000)
Net deferred tax asset
$
-
$
-
At December 31, 2013 and 2012 the Company has net operating tax loss carry forwards of approximately $12,662,000 and $12,498,000, respectively, which will expire in the years 2025 through 2033. The primary difference between net operating losses for financial statement and income tax purposes are permanent differences related to the accounting for meals and entertainment.
Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our tax provisions. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict.
The Company is currently delinquent on its tax filings. If the Company does file an income tax return in the future, management believes that no penalties will be assessed, since there will be no tax liability. The Internal Revenue Service (IRS) usually only assess penalties when taxes are owed. The Company may not be able to claim the entire net operating losses disclosed above due to not filing tax returns in prior years. Since the Company has not filed income tax returns, all tax years since the Company’s inception remain open to investigation by the IRS.
Note 8 - Fair Value of Financial Instruments
The Company’s financial instruments as defined by ASC 825-10-50 include prepaid expenses, accounts payable, accrued expenses, and notes payable. All instruments are accounted for on a historical cost basis, which due to the short maturity of these financial instruments, approximates fair value at December 31, 2013. The standards under ASC 820 define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1- Observable inputs such as quoted prices in active markets;
Level 2- Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3- Unobservable inputs in which there is little of no market data, which require the reporting entity to develop its own assumptions.
As allowed by current financial reporting standards, the Company has elected not to implement fair value recognition and reporting for all non-financial assets and non-financial liabilities except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis, that is, at least annually.