ITEM 1.
BUSINESS
History
Vitro Diagnostics, Inc. (“Vitro”, "we" or the "Company") was incorporated under the laws of the State of Nevada on February 3, 1986. From November 1990 to July 31, 2000, the Company was engaged in the development, manufacture and distribution of purified human antigens and the development of therapeutic products and related technologies. In August 2000, the Company sold the assets used in the manufacture and sale of purified antigens for diagnostic applications. Since 2000, the Company has developed its stem cell technology, expanded its patent portfolio and proprietary technology and cell lines for applications in stem cell research, cancer and diabetes. Our operations are currently focused on development, manufacturing and distribution of stem cell products and related tools for use in research, drug discovery and clinical trials. We are presently expanding our offerings to include products and services for use in clinical studies of the therapeutic benefits of stem cell transplantation and/or activation.
Our common stock is currently traded over the counter and quoted on the OTC.QB of the OTC Markets Group, Inc. under the ticker symbol "VODG." Because the Company is no longer involved in the manufacture of diagnostic products, we operate under the assumed trade name “Vitro Biopharma”, which is registered by the Company as a trademark in the state of Colorado. The legal name of the Company is Vitro Diagnostics, Inc, doing business as (dba) Vitro Biopharma. We maintain a website at www.vitrobiopharma.com.
Narrative Description of Business
Our current focus is the development and commercialization of products derived from our stem cell research. We presently develop, manufacture and market products for use in research and related applications that do not require approval of the United States Food and Drug Administration ("FDA") prior to market introduction. We have previously developed products and product candidates for treatment of infertility.
The Company’s stem cell technology includes cell lines, supporting products and methods for generation and differentiation of stem cells into products with application to treatment of numerous diseases such as heart disease, stroke, Parkinson’s and Alzheimer’s disease. While the Company’s technology represents a platform with broad application to several medical markets, the present business model focuses on the commercialization of products targeting niche markets in research and drug development that do not require FDA pre-market approval. The Company launched its initial product line in 2009 and we are continuing to implement our business plan that includes expanding our product lines, addition of services and clinical products to gain profitable operations and earnings growth. Our 2014 operations included additional revenue from analytical services and consultation related to clinical trials of stem cell activation in Europe, completion of drug discovery and development products for use in the development of new drugs including those used for treatment of osteoporosis. We also expanded our cell line and media products for research by adding several new cancer-associated fibroblast (CAF) cell lines. Total revenues in 2014 increased 275% compared to 2013. We also established proprietary methods and products that are now patent
pending for clinical applications of novel methods to activate stem cells within the body to achieve therapeutic benefits especially for the treatment of neurological conditions.
The predominant focus of operations during the fiscal year ended October 31, 2014, which we refer to in this report as 2014, was to expand our technology and products into the translation to therapeutic products and services while continuing to also expand our stem cell research products. These products are classified as Type I Medical Devices meaning that all usage is non-therapeutic and therefore do not require FDA pre-market approval. Thus, access to our primary market is not dependent on FDA pre-market approval. This is also a significant market segment that is growing rapidly especially as stem cell research shows promise in the treatment of diseases and conditions that were previously under-treated or untreatable and prior restrictions on federal support of stem cell research by the US government have been reduced.
During 2014, we expanded our product offerings considerably, by adding new cell lines and media formulations to our Product Catalog. Our products were expanded to include media for use in the growth and expansion of equine and canine stem cells, neural stem cells/media and we also added CAFs derived from lung and pancreatic cancers. Our products for stem cell research now include diverse cell lines and growth/differentiation media including several types of adult stem cells, primary fibroblast and CAF cell lines together with various terminally differentiated cell types derived from our stem cells.
In collaboration with Dr. Josef Smarda and Neuromics, Inc. we continued to realize increased revenues. Through a network of European clinics, Dr. Smarda provides services to treat various conditions including autism (ASD), autoimmune conditions and other diseases through personalized protocols involving balancing macro/micro issues related to deficiencies or infectious agents followed by more detailed biomarker profiling and treatment with agents know to activate stem cells within the body. Vitro Biopharma provides assistance with biomarker profiling and agents that activate endogenous stem cells for therapeutic benefit. Stem cells are activated by stimulation of specific biological signaling pathways resulting in migration, proliferation and reprogramming of stem cells that reside in the body, but are usually inactive. Activated stem cells may have therapeutic value based on numerous pre-clinical studies and our clinical trials in Europe are designed to test this hypothesis. This operation is now being expanded through a new media platform to offer ASD testing and treatments through stem cell activation to a much wider market. We anticipate additional revenue from this initiative in 2015.
Additional developments of 2014 included the development of cell based assays for use in various applications including drug discovery and development, development and refinement of clinical trials as well as the assessment of stem cells for diagnostic applications and stem cell transplants. An initial target is the discovery of new drugs for treatment of osteoporosis, which is a global disease affecting a substantial component of the elderly population. Approximately 50% of postmenopausal women and a significant portion of men over 50 years old have osteoporosis. As the population ages, osteoporosis is expected to grow. Several pharmaceutical treatments have significant side-effects, including increased fracture risk. There is thus a need for improved treatments that grow bone, rather than reduce re-adsorption of bone as several current medications act. Our cell based assays consist of stem cell-derived osteoblasts for use in osteoporosis drug discovery and stem cell functional assays for analysis of stem cell function and determination of activation agents.
Stem activation agents that activate hematopoietic stem cells have been used to treat complications of chemotherapy for several years. However, during 2014 there were several advances in the understanding of the activation processes affecting other adult stem cells and the Company has also developed proprietary technology and products targeting stem cell activation. We have used our cell-based assays of stem cell activation to support the development of new clinical trials in the US focusing on the therapeutic benefits of molecular activation of adult stem cells residing within the human brain. The Company has published on its website a detailed review of current research including new findings of stem cell activation agents within blood and pre-clinical research identifying biological signaling pathways that activate brain stem cells (Blog dated June 6, 2014) Also, there is growing evidence for therapeutic benefit of adult stem cell transplants, including beneficial effects in skeletal muscular conditions such as osteoarthritis. However, since stem cell transplants include numerous obstacles and are quite expensive to develop and implement, activation of endogenous stem cells for therapeutic benefit has numerous competitive advantages. Our development of this initiative during 2014 has focused on several key elements: a) Establishment of collaborations with several MDs specialized in neurology, psychiatry, laser surgery and general practice to participate in our trials, b) Building patent protection of our technology and materials related to stem cell activation for treatment of neurological conditions through new filings with the USPTO, c) Seeking regulatory approval of our initial trials encompassing both safety and efficacy. Since no new drugs are involved, we anticipate beginning these clinical trials in early 2015. d) We are working with a well-known neurological research institute to establish research and clinical collaborations together with funding and sponsorship opportunities.
In summary, during 2014, we achieved:
·
Nearly 4-fold revenue growth due to addition of CRO services and support of European clinical studies.
·
Development of cell-based assay systems to further expand CRO capabilities & revenues.
·
Advances in the establishment of US clinical trials using activation of brain stem cells to treat concussion, TBI, stroke and Alzheimer’s disease.
·
Product expansion to support cancer drug discovery together with additional cell lines and media tools to support adult stem cell research and clinical development.
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Expanded staff, management team and capital equipment to drive 2015 growth.
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Receipt of Frost & Sullivan Technology Innovation Leadership Award for Best Practices in Stem Cell Tools and Technology.
Stem Cell Products for Research and Drug Development.
Based upon a desire to produce an infinite supply of human cells for various medical applications, the Company had previously developed technology for the immortalization of cells based upon genetic engineering. This earlier research led to the discovery, characterization and development of methods to maintain proliferation and to induce differentiation of stem cells.
The Company’s stem cell technology focuses on adult stem cells that are derived from human tissues without the necessity of the sacrifice of embryos as is usually needed to generate embryonic stem cells. New advances have shown that stem cells with properties comparable to embryonic stem cells
including differentiation into any cell type may be derived from adult cells. So-called induced pluripotent stem cells (iPS) may obviate the need for embryonic stem cells in the future and also eliminate the ethical controversy surrounding use of embryonic stem cells. The scientists who developed this technology received the Nobel Prize for Physiology or Medicine in 2012. Also, additional recent developments suggest that pluripotency may be induced within stem cells residing within the body through use of the appropriate activation agents.
A thorough understanding of embryonic stem cell properties is critical to advancement of stem cell research. However, from a practical perspective, embryonic stem cell therapies have revealed safety issues associated with transplantation of embryonic stem cells including tumor formation and other problems that resulted in the withdrawal of a major US company’s FDA- application for the use of human embryonic stem cells for treatment of spinal cord injury. On the other hand, adult stem cell therapies have been FDA-approved for the past 50 years for the treatment of blood disorders including leukemia, lymphoma and other blood cell cancers as well as autoimmune disorders. These treatments originally relied on hematopoietic stem cells derived from bone marrow but now more commonly utilize hematopoietic stem cells derived from umbilical cord blood, since these cells are more readily matched to the recipient with regard to immunological compatibility. The Company is presently focused on mesenchymal stem cells that are a type of adult stem cell that is also located in bone marrow and known to have important roles in the function of hematopoietic stem cells. Numerous studies have demonstrated a low incidence of safety issues or adverse effect of transplantation of this type of stem cell while showing efficacy in the treatment of a variety of disorders.
During 2009, Vitro introduced into commercial distribution specialized products to support stem cell research and drug development based on mesenchymal stem cells. This new product line called, “Tools for Stem Cell and Drug Development™” features novel products to support research involving mesenchymal stem cells (MSCs), induced pluripotent stem cells (iPS) and cancer research that specifically utilizes stem cells that preferentially migrate to cancer cells and facilitate their destruction. This initial product line included stem cells and related products to facilitate studies of transplantation into animals, migration to certain targets and differentiation into specific cell types. Our initial products included mesenchymal stem cells that were derived from human umbilical cord blood. We also provide fluorescent labeled stem cells, using a variety of specific labels to enhance utility for various applications in stem cell research. We also provide cell culture media optimized to support growth of our stem cell products. Cell culture media is a complex solution of salts and nutrients designed to support growth and differentiation of living human cells; each type of cell requires specific components within the media to optimize its growth. Our initial formulations have now been expanded considerably to offer various options for the growth and differentiation of mesenchymal stem cells. Some of our stem cell culture media products are specifically intended for use in clinical trial studies of human stem cells.
Stem cell therapy has the potential to revolutionize treatment of many difficult-to-treat diseases. A global effort by various scientists and businesses are rapidly developing modern stem cell therapies through targeted R&D, clinical trials and regulatory studies with the goal of obtaining regulatory marketing approval for clinical use. Vitro now provides needed stem cell and drug development tools to support critical applications of adult stem cell technology to develop these advanced new treatments. Vitro’s new tools provide vital components to advance stem cell research and drug development. These products are classified as Type I Medical Devices meaning that all usage is non-therapeutic and therefore these products do not require FDA pre-market approval. During 2014 the Company added products for use in clinical studies and plans additional advances in stem cell technology for clinical applications during 2015.
We recently added cancer-associated fibroblasts (CAFs) to our research products. One of our existing products was used in a discovery of a new type of CAFs present in pancreatic cancer tumors, called pancreatic stellate cells. There is evidence that these cells interact with the immune system to block immune responses to cancer cells. As such, there is considerable global interest in expanding this discovery possibly yielding new diagnostic and therapeutic approaches to pancreatic cancer, a particularly aggressive form of cancer with low survivability. It is apparent that cell-based assays based on quantitative kinetic analysis may be beneficial to the pancreatic cancer research.
While our initial products target research use, we are also expanding our offerings to include products with clinical application. We now have select MSC-Gro™ products with clinical application and these have been strengthened through further product development yielding improved products. It is especially important that cell culture media products do not contain human or animal serum and are chemically defined to minimize potential contamination of cultured cells that are subsequently administered to patients to test for clinical benefit. This, serum-free, chemically defined media is classified as a medical device and requires much less time and money to achieve FDA approval than new drugs or biologics. Approval of a medical device typically requires less than one year and only laboratory testing while drugs and biologics can require 8-10 years, extensive clinical trial testing and cost $ billions to gain approval, which is not guaranteed. We are also developing cellular products targeting therapeutic veterinary applications. Furthermore, through our interactions with local and expanding network of physicians, we are exploring additional clinical applications of our products and technology.
During the two fiscal years ended October 31, 2014 and 2013, the Company spent $182,631 and $119,724, respectively, for research and development.
Marketing and Distribution. To capture niche markets in stem cell research and drug development involves implementation of a multi-faceted marketing and sales initiative including various approaches such as: a strong internet & social media marketing program, direct sales to end-users, identification and interaction with medical decision makers, selective use of distributors and in certain cases, market generation efforts. During 2014, the Company gained visibility and sales of its products through an expanded product line, featuring several new media products and stem cell lines. A majority of the 2014 revenue was derived through our partnership with Neuromics, Inc.
The market for our products is global in nature, comprising numerous foreign markets that are more advanced than US markets due to the less restrictive governmental regulations on stem cell research and clinical applications. Our marketing plan is directly integrated with new product development to
ensure a steady stream of new innovative products & services perceived to be needed by our target markets. We are also transitioning from strictly research products to clinical products that considerably expand our available markets by including clinical applications of stem cell technology, although these markets are characterized by considerable competition. Our clinical products include: 1) An equine MSC cell line with application to treatment of skeletal muscular conditions such as tendonitis, ligament injury, osteoarthritis and accelerated bone fracture healing, etc, 2) Testing and therapies related to endogenous stem cell activation, 3) Diagnostic testing of stem cell activation and determination of stem cell functional status, 4) Cell-based assays for discovery of novel stem cell activation agents and new drugs for the treatment of osteoporosis.
The Company has focused its limited resources on product development, manufacturing and continual expansion of its product offerings while simultaneously developing marketing and distribution based on collaboration with distribution partners together with direct sales. Management made advances in 2014 in the establishment of partnerships to assist with product distribution, as described above. We consider this strategic approach appropriate especially for targeting research markets for stem cell media. Modern marketing of stem cell products requires numerous skills & resources; there are several life science firms committed to these specialized capabilities. During 2014, we expanded our product offerings and development into the area of drug discovery and development, as described above. Management believes such markets afford expanded growth opportunities to the Company.
Patents and Other Intellectual Property Protection
The Company has applied for and has obtained or is in the process of obtaining patents and other protection for its intellectual property in order to protect its investments. The United States Patent and Trademark Office, or USPTO, issued the Company's first patent on November 23, 1999 (US Patent No. 5,990,288). This invention was entitled "Methods for Purifying FSH" and details methods to manufacture highly purified FSH from various sources
The Company was granted another patent by the USPTO (No. 6,458,593 B1) in 2002 entitled, "Immortalized Cell Lines and Methods of Making the Same." This patent provides protection to the Company's technology related to immortalization of pituitary cells by genetic engineering. This technology has potential application to the commercial production of FSH and other human pituitary hormones through immortalization of the cells of the pituitary gland that normally produce these hormones. The technology related to FSH purification and generation is no longer a focus of the Company’s operations and we have allowed these patents to lapse. We do not believe these actions diminish our abilities to proceed in the development of our business plan that is currently focused on stem cell products, technology and the translation to clinical applications.
In May, 2009 the Company was awarded United States Patent number 7,527,971 entitled, “Generation and Differentiation of Adult Stem Cells.” The patent provides protection to a specific cell line derived from human pancreatic tissues that gives rise to structures comparable to the Islets of Langerhans (beta islets). These islets also synthesize and secrete insulin in response to elevated glucose levels, as do beta islets contained within pancreatic tissue. Vitro has also developed a process for the commercial production its cell line-derived islets. Furthermore, the Company previously obtained regulatory approval for an animal protocol to determine reversal of Type I diabetes, a critical step in the demonstration of efficacy. Thus, this patent affords an exclusive
proprietary position to the Company for a new cellular therapy to treat Type I diabetes. We are presently pursuing suitable partners for out-license opportunities.
During January 2009 & January 2010, the Company also filed provisional patent applications with the USPTO concerning use of its stem cell technology in cancer treatments, “MATERIALS AND METHODS USEFUL TO RESEARCH AND TREAT CANCER.” The Company has developed cell lines and compositions with potential application to the targeted eradication of cancer stem cells which may occur without significant side-effects. This application has now lapsed, but the Company may elect to advance development of this technology at a later point in time, with adequate resources. We do not believe that our prior patent applications will limit our ability to gain future patent protection.
During December 2009 the Company filed a new United States patent application entitled “POU5-F1 EXPRESSION IN HUMAN MESENCHYMAL STEM CELLS”, based on the development of new technology related to generation of human induced pluripotent stem cells (iPS). IPS technology allows the use of reprogrammed adult cells to achieve properties of embryonic stem cells including the ability to differentiate into any type of cell in the body. IPS technology is subject to intense research because it may allow generation of stem cells with the primary properties of embryonic stem cells without sacrifice or use of embryos, thus avoiding ethical and religious controversies surrounding the use of embryonic stem cells.
Human iPS technology was originally reported in 2007 and evolved from increased understanding of the function of genetic factors controlling cellular fate and specific genes involved in the determination of “stemness”, i.e., those genes whose expression result in classic stem cell properties. The original methods of iPS generation involved genetic engineering of human fibroblast (skin) cells to express elevated levels of four key genes. Vitro’s new technology involves elevated expression of a single gene called POU5-F1, which is considered a master regulatory element or gatekeeper of pluripotentiality. Such cells may be used to eventually generate iPS without use of genetic engineering, which is a key goal necessary for clinical application of iPS technology.
The Company recently filed an additional international patent application entitled: “INDUCED PLURIPOTENT STEM CELLS AND RELATED METHODS.” The application extends prior applications and describes a method for the generation of iPS cells from adult stem cells that completely avoids introduction of foreign DNA or RNA by using environmental factors only to induce pluripotency in adult stem cells. This technology arose from the company’s demonstration that over-expression of just a single gene is required to induce pluripotent properties if adult stem cells are reprogrammed instead of somatic cells such as skin fibroblasts. This finding has also been independently confirmed by other research groups. From this discovery and the well-known, complex regulatory systems affecting expression of this gene, Vitro scientists determined methods for the inducing pluripotency through use of appropriate environmental factors. The Company believes that such technology has significant application to the field of regenerative medicine. Thus, the new patent allows generation of personalized, autologous stem cells from adult stem cells such as those present in bone marrow, blood and adipose tissue, etc that may differentiate into any cell type. Such autologous stem cells may be used as substitutes for embryonic stem cells even though the cells are derived from adult stem cells. During 2012, this international application was converted to a regular application that was submitted to the USPTO. During the first fiscal quarter of 2014, the Company abandoned its application but does not believe that this action will diminish its immediate
revenue generation capabilities or impede additional patent filings related to its iPSC technology. Also, the Company filed a new patent application during 2014, (described below) with the USPTO that represents, in part, new technology to induce pluripotency within stem cells located in the body.
In 2012, the Company filed a new application with the USPTO entitled, “METHODS TO CULTURE MESENCHYMAL STEM CELLS AND RELATED MATERIALS” seeking patent protection for the Company’s proprietary technology related to generation and expansion of mesenchymal stem cell lines. This includes various methods for generation of MSC lines for therapeutic applications including both human and animal-derived cell lines. The Company plans to further expand this patent filing to protect its novel technology related to therapeutic products based on mesenchymal stem cells. This application was allowed to lapse in 2014, since the Company is now seeking a new composition of matter based patent on a particular stem cell line that was generated by its research and development activities. Upon advice from counsel, the Company believes that the evolving patent application is the most appropriate approach to gaining necessary IP to support the Company’s business development.
During 2014, the Company filed a new application with the USPTO entitled, “Treatment of Neurological Conditions through Activation of Neural Stem Cells”. This new application is intended to protect the Company’s emerging technology and products related to activation of endogenous stem cells located within the brain to treat neurological conditions such as traumatic brain injury, concussion, dementia, stroke and Alzheimer’s disease. This is an early stage application, and based on available resources, the Company plans to continue diligent reduction to practice and other conditions necessary to establish significant patent protection for its technology, materials and procedures related to this field. Management considers the potential market size for these treatments as significant and that there are substantial unmet needs with regard to advanced treatments of the targeted conditions.
There can be no assurance that the Company will succeed in obtaining any patent protection from its pending applications or that its issued patents would withstand legal challenges.
The Company's technology related to the production of cell culture media is protected as trade secret. Other new technology developed during 2014 including our cell-based assays for osteoporosis and stem cell activation drugs is also currently protected as trade secret
The Company has established trademark claims to its VITROPIN™ product informally by publication. This trademark is thus a common law mark that may be challenged by the owners of similar, established and registered marks that existed prior to initial publication by the Company, but no such challenge has occurred since original publication in 2000. The Company also has the following trademarks registered in the State of Colorado: "Vitro Biopharma", "VITROCELL" and "Harnessing the Power of Cells" and “EquaCell”; these registrations expire or expired on 7/2/2012, 11/25/2013, 11/25/2013 and 3/26/17 respectively. The Company has also established a common law mark for the phrase, “Tools for Stem Cell and Drug Development™, and MSC-Gro™.” The Company may elect to formally protect some or all of these marks through registration with the USPTO in the future. However, we do not believe the absence of formal trademark protection will adversely affect our business. The registered domain names owned by the company include vitrodiag.com, vitrobiopharma.com, etc and common derivatives thereof.
Some of the limitations of intellectual property protection are:
·
No assurance can be given that any patent will be issued or that the scope of any patent protection will exclude competitors or that any patent, if issued, will be held valid if subsequently challenged.
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When we apply for registration of trademarks and registered domain names in an effort to protect them, we cannot be sure of the nature or extent of the protection afforded, since trademark registration does not assure any enforceable rights under many circumstances and there exists significant uncertainty surrounding legal protections of domain names.
·
There can be no assurance that any steps the Company takes in this regard will be adequate to deter misappropriation of its proprietary rights or independent third parties developing functionally equivalent products. Despite precautions, unauthorized parties may attempt to engineer, reverse engineer, copy, or obtain and use the Company’s products or other information.
·
Although management believes that the Company’s products do not infringe on the intellectual property rights of others, there can be no assurance that an infringement claim will not be asserted in the future. The prosecution or defense of any intellectual property litigation can be extremely expensive and would place a material burden upon the Company’s’ working capital.
Regulatory Approval
Drugs used to treat human infertility require registration with, and approval from, appropriate government authorities prior to sale. In the United States, the U.S. Food and Drug Administration, or FDA, oversees approval of such products. Since the FDA has previously approved FSH, the Company has determined that the appropriate means to gain VITROPIN™ approval is a type of abbreviated version of a new drug application. The process of FDA approval can be time consuming and require considerable capital resources. The Company has no plans to make such application in the foreseeable future.
Our stem cell products including cell lines, their derivatives and media for stem cell growth and differentiation are Class I Medical Devices and do not require FDA-pre-market approval. However, we are expanding our stem cell media product line to include media for clinical applications. In the US, these products require the filing and approval of Form 510K with the FDA. This filing provides evidence for substantial equivalence of the medical device with a previously approved device manufactured by another firm. The Company has previously filed several 510K requests and gained approval of diagnostic devices. Also, we must register with the FDA as a Class II Medical Device manufacturer and are then subject to GMP inspections by the agency. Such inspections require compliance with cGMP (current good manufacturing) guidelines that stipulate control of traceable manufacturing procedures, including independence of manufacturing and quality control as well as several other provisions. The Company has operated to the cGMP standard previously and been subject to cGMP inspections by the FDA. The Company intends to comply with all regulations necessary to reach this standard.
Stem cell therapy is subject to complex regulatory rules by the US FDA. However, at this point the Company does not manufacture products for stem cell transplantation in humans. The Company does intend to seek regulatory approval for clinical trials involving activation of endogenous stem cells for therapeutic benefit during 2015. However, since this proof-of-principal trial will involve use of existing approved and now generic medications, we intend to seek regulatory approval through an Institutional Review Board. This process involves submission of various documents and their review by the IRB. The Company has previously obtained IRB approval for prior research involving human subjects. We plan to seek approval for some of our veterinary products during 2015 and are now targeting off-shore markets.
Competition and Competitive Advantages
Products to support stem cell research are also produced and marketed by other companies with substantially greater resources than the Company. Present suppliers of human stem cells and related products include In-Vitrogen/Life Technologies, Inc., Millipore, Stem Cell Technologies and several other firms. Most of these firms have long-standing histories and significant financial resources. Studies completed during 2010 by the Company of our MSC-Gro™ Brand of stem cell media have provided results showing performance advantages of MSC-Gro™ compared to major competitors including In-Vitrogen, Lonza and Stem Cell Technologies, Inc. Several other independent third parties have also provided corroborating evidence showing performance advantages of the Company’s MSC-Gro™ Brand of stem cell media in a variety of applications extending the commercial utility of these products.
We believe our products for use in stem cell and cancer research have competitive features unlike other marketed products. We may be one of a few commercial sources of fluorescent-labeled stem cells. As we develop additional media products, we anticipate comparable competitive advantages since these formulations are based upon the original MSC-Gro™ formulation. We further intend to patent additional products that we may develop providing exclusive use of such products to the Company and its licensees.
Employees
The Company presently has two full time employees, the Company's President & CEO together with a recent Masters Degree recipient in Molecular Toxicology. The President has overall responsibility for day-to-day operations while our other employee executes laboratory procedures. We also had an additional part-time employee during 2014 and may hire additional employees as may be needed.
The Company also utilizes the services of other consultants and advisors to supplement the resources of its employees from time to time. These include scientific and laboratory personnel, accountants, auditors and attorneys. Some of these positions, especially those of a technical nature, may be converted to employment if and when the Company's business requires and resources permit.
ITEM 1B
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
DESCRIPTION OF PROPERTY
The Company owns no real property. During 2008 the Company moved into an expanded facility located at 4621 Technology Drive, Golden, Colorado, which is owned by a company controlled by the wife of the Company’s President & CEO. The Company leases 1200 square feet and has access to common areas. The lease began July 1, 2008 and had a five-year term. Effective July 1, 2013, the lease was renewed for an additional five-year term ending in July 2018.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
There are currently no legal matters or other regulatory proceedings pending or, to the knowledge of our management, threatened that involve the Company or its property or any of the principal shareholders, officers or directors in their capacities as such.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following information sets forth the high and low bid price for the Company's common stock for each quarter within the last two fiscal years. The Company's common stock is traded over-the-counter and quoted on the OTC.QB. The following information was obtained from Yahoo.com. The prices set forth below do not include retail mark-ups, mark-downs or commissions, and may not represent prices at which actual transactions occurred.
Fiscal Quarter Ended
High
Low
January 31
$0.07
$0.04
April 30
$0.14
$0.06
July 31
$0.25
$0.06
October 31
$0.20
$0.05
January 31
$0.08
$0.02
April 30
$0.15
$0.02
July 31
$0.09
$0.02
October 31
$0.08
$0.04
Rules Restricting Trading Activity in our Stock
The Company's common stock is presently classified as a "penny stock" under existing securities laws since the stock is not listed on a national securities exchange and trades below $5 per share and since the Company does not meet the minimum financial requirements established by these rules. Since our stock is characterized as a penny stock, our stock is subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. The broker or dealer proposing to effect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.
Holders of our Common Stock
As of February 12, 2015 the Company had approximately 1,927 shareholders of record, not including persons who hold their shares in "street name".
Dividends
The Company has paid no dividends since inception and it is not anticipated that any will be paid in the foreseeable future. The payment of dividends in the future is dependent on the generation of revenue and profit, and the discretion of the Board of Directors based upon such matters as the Company's capital needs and costs of obtaining capital from outside sources.
Recent Sales of Unregistered Securities
None, except as previously reported.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We have set forth below certain selected financial data. The information has been derived from the financial statements, financial information and notes thereto included elsewhere in this report.
Statement of Operations Data:
Year Ended Oct.,
31, 2014
Year Ended Oct.,
31, 2013
Total revenues
$ 142,737
$ 38,018
Operating expenses
$ 290,759
$ 174,269
Net loss
$ (246,527)
$ (211,204)
Basic and diluted loss per common share
$ (0.01)
$ (0.01)
Shares used in computing basic and diluted loss per share
19,881,321
19,589,439
Balance Sheet Data:
Oct. 31, 2014
Oct. 31, 2013
Working capital deficit
$ (2,218,863)
$ (1,976,497)
Total assets
$ 105,582
$ 76,174
Total liabilities
$ 2,265,588
$ 2,009,653
Shareholder’s deficit
$ (2,160,006)
$ (1,933,479)
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Introduction
The following discussion and analysis summarizes the financial condition of the Company at fiscal year-end October 31, 2014, and compares that to its financial condition at October 31, 2013. It also analyzes our results of operations for the year ended October 31, 2014 and compares those results to the year ended October 31, 2013. This discussion and analysis should be read in conjunction with our financial statements and notes appearing elsewhere in this report. The discussion should also be read with the cautionary statements and risk factors appearing at the end of this section.
Overview
During 2014, the Company built on progress made during 2013 by gaining increased revenue from our stem cell-based products while also beginning its transition into therapeutic applications of its technology, products and expertise that was a previously reported goal for 2014 operations. While there were gains in product sales, services targeting clinical applications of stem cells were an important contribution to the increased revenues by the Company in 2014. Stem cell technology shows promise of treatment of several diseases, especially degenerative conditions. Regenerative medicine applications of stem cells continue to gain support for safety and efficacy, the key characteristics of viable stem cell-based therapies. Stem cell transplantation including various adult stem cells is evolving into a viable approach to treatment of several diseases and injuries, while embryonic stem cells are being used less and less due to safety concerns. It is currently thought that stem cells terminally differentiate to replace lost cells in degenerative conditions. There is also growing evidence indicating that stem cells secrete biologically active materials supporting or restoring the functionality of existing cells in the body.
During 2014, there were additional research advances indicating that another method besides stem cell transplants may be effective in achieving stem cell therapy and performance enhancement. It had been known for some time that hematopoietic stem cells could be stimulated to proliferate and differentiate into different types of blood cells. This activation was also demonstrated for other types of stem cells, including adult stem cells being developed and manufactured by the Company both in research conducted by the Company and by other researchers as well. Thus, the Company was involved in this new approach to stem cell therapy and has plans to further this development in 2015. Please see Section I, Business Narrative, for additional information about our current operations.
Liquidity and Capital Resources
At fiscal year-end October 31, 2014, the Company had a working capital deficit of $2,218,863, consisting of current assets of $46,725 and current liabilities of $2,265,588. The working capital deficit at October 31, 2013 increased $242,366 from fiscal year end October 31, 2013. Current assets increased by $13,569, from year-end 2013 to 2014 while total assets increased $29,408 during that time, the former from increased accounts receivable and the latter from capital equipment acquisition. Liabilities increased $255,935 at October 31, 2014 compared to October 31, 2013 due to operating expenses in excess of revenues. The working capital and shareholder deficits are primarily due to accrued officer salaries and working capital advances owed to the President and CEO, with combined totals of $2,123,810 and $1,913,732 at October 31, 2014 and 2013, respectively. The debt owed by the Company to its President accounts for nearly all of the current shareholders’ deficit of $2,160,006 at October 31, 2014.
The Company remains dependent on receipt of additional cash to continue its business plan. The report of the independent accountant that audited the Company's financial statements for the year ended October 31, 2014 includes a qualification that the Company may not continue as a going concern. In that event, the Company might be liquidated and its assets sold to satisfy any claims of creditors. See Note A to the financial statements attached to this report for a more complete description of this contingency.
During the fiscal year ended October 31, 2014 the Company's financing activities provided $123,211 to support operations. During that time, the Company's operations used $119,978 of cash compared to $107,535 of cash used during the twelve months ended October 31, 2013. The use of cash during 2014 reflects a cash requirement of about $10,000 per month for operations while the cash raised from financing activities was primarily from product revenues, and cash advances provided by its president. While most R&D necessary for the manufacture of the current line of products has been performed previously, the Company focused its efforts on marketing and expansion of its product lines in fiscal year 2014.
The Company had outstanding credit cards and lines of credit totaling $38,923 with $2,178 in available credit at October 31, 2014. The Company must continue to service debt and the President personally guarantees most of the Company debt.
Total product sales increased 171%, from $34,868 in 2013 to $94,582 in 2014 and the total revenues from products and services increased 275% from $38,018 to $142,737 in 2014. Our newly added bioanalytical service sector (Professional services income) grew rapidly in 2014 by 1429% from $3,150 in 2013 to $48,155 in 2014. We anticipate additional revenue growth in 2015 from various revenue sources. First, we expect additional revenue growth of our service sector through our existing business partnership with Dr. Smarda and Neuromics, Inc. now operating in Europe. We also have additional opportunities to expand service revenues in the US during 2015 and intend to pursue these opportunities as fully as possible. These services are intended to support stem cell clinical trials & drug discovery/development by providing specialized biomarker analysis and related activities such as cell-based assay services. We also anticipate growth in product sales due to our expanded cell line availability, including for
example, newly added CAF cell lines and our equine MSC cell line that is now in advanced pre-clinical stages of development. Our cell culture media, known as MSC-Gro™, is evolving towards clinical application as well. Also, during 2014, the Company developed proprietary technology related to activation of stem cells within the brain for the treatment of various neurological conditions. We anticipate entry into human clinical trials during 2015, should the Company achieve regulatory approval. This event could also generate revenue for the Company during 2015 through clinical testing services in support of this clinical trial. Additional discussion of the Company’s plans for revenue generation during 2015 is contained in Part I, Item 1, Business narrative.
The Company is also pursuing other approaches to increase its capital resources such as investment, further out-licensing of its intellectual property, sale of assets or other transactions that may be appropriate.
Results of Operations
During the year ended October 31, 2014, the Company realized a net loss of $(246,527), or ($0.01) per share, with $94,582 in revenue from products and an additional $48,155 in revenue from services for total revenue of $142,737. The net loss in 2014 was $35,323 more than the net loss of $(211,204), or $(0.01) per share in 2013. The increased loss during 2014 as compared to 2013 was primarily due to increased operating and interest expenses that were offset by increased net revenue. Research and development expenses increased by $62,907 and selling, general and administrative expenses increased by $53,583 in 2014. Product sales increased 171% during 2014 and total gross revenue increased by 275% as the Company continued commercialization of its stem cell-based products and services. As noted elsewhere, the Company is expanding into other markets related to clinical applications of stem cell technology. The majority of the increased operating expenses were related to new product & services development viewed by management as key components necessary to support additional revenue growth. Additional detail regarding specific operational achievements during 2014 is presented elsewhere in this report (Part I. Item 1: Business narrative).
Total operating expenses were $290,759 and $174,269 for the years ended October 31, 2014 and 2013, respectively, representing a year-over-year increase of $116,490, or 67%. We anticipate that achievement of the operational goals of 2015 will involve expense increases necessary for equipment and personnel to execute our expansion plans.
Research and development (R&D) expenses increased by $62,907 during fiscal year 2014 compared to fiscal year 2013. While the R&D necessary for launch of its initial products was completed previously, the Company continues its development of existing and new products including cell culture media formulations, cell lines and cells derived from MSCs. During 2014 our operations grew to include services and products for use in the expansion of the Company’s products, technology and expertise into clinical applications. Bioanalytical capabilities were expanded with regard to biomarker serum profiling and in the development of several new cell-based assays. This required additional capital equipment and the Company also added a full-time laboratory position during 2014. We also added new cancer-associated fibroblasts from
lung, colorectal and pancreatic tumors, together with various media products that expand our product offerings. Our equine MSC cell line was also subject to additional pre-clinical development and we anticipate clinical studies of this product beginning in 2015. (See Part I, Item 1 for more details regarding our business plan.)
RISK FACTORS
This 10-K Annual Report, including Management's Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors including those discussed below.
The Company is wholly dependent on the efforts and expertise of its principal employee to further its business plan, and the loss of his service for any reason would have a material adverse effect on the Company and its business and may require a suspension of operations.
Achievement of the objectives described in this report depends critically upon Dr. James Musick, who has contributed substantially to the development of the products and technology presently owned by the Company. At present, the Company has an employment contract with Dr. Musick. However, the Company does not maintain "key man" life insurance on his life. Loss of his services would adversely impact the efforts to commercialize of the Company's products.
We are required to formally assess our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such assessment could result in a loss of investor confidence in our financial reports and have a material adverse effect on the price of our common stock. 
The Sarbanes-Oxley Act of 2002 (SOX), which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of SOX, the SEC and major stock exchanges have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards that are likely to increase our general and administrative costs, and we expect these to continue to increase in the future. In particular, we are required to include the management report on internal control as part of this and future annual reports pursuant to Section 404 of SOX. We have evaluated our internal control systems in order (i) to allow management to report on those controls, as required by these laws, rules and regulations, (ii) to provide reasonable assurance that our public disclosure will be accurate, complete, and timely, and (iii) to comply with the other provisions of Section 404 of SOX. Future compliance with SOX 404 may require additional expenditures of human resources and capital, and could adversely impact our operations. Furthermore, there is no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements relating to internal controls and all other provisions of Section 404 in a timely fashion or achieve adequate compliance with these requirements or other requirements of SOX, we might become subject to sanctions or investigation by regulatory authorities such as the SEC or FINRA. Any such action may materially adversely affect our reputation, financial condition and the value of our securities, including our common stock. We expect that SOX and these other laws, rules and regulations will increase legal and financial compliance costs and will make our corporate governance activities more difficult, time-consuming and costly. We also expect that these requirements will make it more difficult and expensive for us to obtain director and officer liability insurance.
Current economic conditions in the global economy generally, including ongoing disruptions in the debt and equity capital markets, may adversely affect our business and results of operations, and our ability to obtain financing.
The global economy is currently undergoing numerous challenges, and the future economic environment may continue to be less favorable than that of past years. We are unable to predict the likely duration and severity of the current disruptions in debt and equity capital markets and adverse economic conditions in the United States and other countries, which may continue to have an adverse effect on our business and results of operations, in part because we are dependent upon customer behavior and the impact on consumer spending that the continued market disruption may have.
The global stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings materially less attractive, and in certain cases have resulted in the unavailability of certain types of financing. This volatility and illiquidity has negatively affected a broad range of mortgage and asset-backed and other fixed income securities. As a result, the market for fixed income securities has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased defaults. Global equity markets have also been experiencing heightened volatility and turmoil, with issuers exposed to the credit markets particularly affected. These factors and the continuing market disruption have an adverse effect on us, in part because we, like many companies, from time to time may need to raise capital in debt and equity capital markets including in the asset-backed securities markets.
In addition, continued uncertainty in the stock and credit markets may negatively affect our ability to access additional short-term and long-term financing, including future securitization transactions, on reasonable terms or at all, which would negatively impact our liquidity and financial condition. In addition, if one or more of the financial institutions that support our future credit facilities fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under the credit facilities. These disruptions in the financial markets also may adversely affect our credit rating and the market value of our Common Stock. If the current pressures on credit continue or worsen, we may not be able to refinance, if necessary, our outstanding debt when due, which could have a material adverse effect on our business. While we believe we will have adequate sources of liquidity to meet our anticipated requirements for working capital, contractual commitments and capital expenditures for approximately the following 6 to 12 months based on curtailed operating plans, (of which there can be no assurance), or if our operating results worsen significantly, or our cash flow or capital resources prove inadequate, we could face liquidity problems that could materially and adversely affect our results of operations and financial condition.
We cannot predict our future capital needs and we may not be able to secure additional financing.
Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no assurance that we can raise additional financing on a timely basis or on favorable terms. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.
Significant increases in interest rates could adversely affect our operations and our ability to raise additional capital.
While we have not depended upon outside financing, we have significantly depended upon advances from our President to fund operations. These advances accrue interest at an annual rate of 10%. Significant increases in interest rates could affect the Company’s ability to secure future advances as well as have adverse effects upon interest expenses of possible future advances.
Future financings may result in dilution to our shareholders and restrictions on its business operations.
If we raise additional funds by issuing equity or convertible debt securities, further dilution to our shareholders could occur. Additionally, we may grant registration rights to investors purchasing equity or debt securities. Debt financing, if available, may involve pledging some or all of our assets and may contain restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain necessary additional capital, we may be unable to execute our business strategy, which would have a material adverse effect on our business, financial condition and results of operations.
We have incurred losses since inception and may never achieve profitability.
We are subject to many of the risks common to developing enterprises, including undercapitalization, cash shortages, limitations with respect to financial and other resources, and insufficient revenue to be self-sustaining. There is no assurance that we will ever attain profitability.
We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.
We expect that the expansion of our business will place a significant strain on our limited managerial, operational, and financial resources. We will be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with
experience in the pharmaceutical industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We will need substantial additional capital in order to attract and retain critical management. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. We currently are required to limit the engagement of critical management to part-time due to limited resources and there is no assurance that we will be successful in raising the necessary additional financial resources to employ them, and other key employees, on a full time basis. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results could be materially adversely affected.
If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval in the United States or elsewhere, we will be unable to commercialize these products.
To receive regulatory approval for the commercial sale of our product candidates that we may develop or out-license, we must conduct, at our own expense, adequate and well controlled clinical trials to demonstrate efficacy and safety in humans. Clinical testing is expensive, takes many years and has an uncertain outcome. Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing. Our failure to adequately demonstrate the efficacy and safety of any product candidate that we may develop or out-license would prevent receipt of regulatory approval of that product candidate.
Our assumptions concerning the regulatory approval pathway for our diagnostic products may prove to be incorrect.
Our business plan makes certain assumptions concerning the regulatory approval pathway for our planned diagnostic and therapeutic products. While such assumptions are based on the guidance of regulatory consultants, there is no assurance the FDA will agree with our conclusions, which could result in a longer, more costly process than we are currently anticipating.
Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.
Delays in the commencement or completion of clinical testing could significantly affect our product development costs. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in
other clinical trial programs for the same indication as our product candidates or may not be eligible to participate in or may be required to withdraw from a clinical trial as a result of changing standards of care. The commencement and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:
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reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
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obtaining regulatory approval to commence a clinical trial;
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obtaining institutional review board approval to conduct a clinical trial at a prospective site;
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recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and
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retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.
In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities, due to a number of factors, including:
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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
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inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
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unforeseen safety issues or any determination that a trial presents unacceptable health risks; or
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lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.
Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.
Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.
Even if U.S. regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product’s indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of these restrictions or requirements could adversely affect our potential product revenues. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as current Good Manufacturing Practices, or “CGMPs”, a regulatory agency may:
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issue warning letters or untitled letters;
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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
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impose other civil or criminal penalties;
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suspend regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve pending applications or supplements to approved applications filed by us;
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impose restrictions on operations, including costly new manufacturing requirements; or
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seize or detain products or require a product recall.
Our commercialization efforts will be greatly dependent upon our ability to demonstrate product efficacy in clinical trials. Pharmacies and other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our products, without compelling supporting data. While we believe that our products will be effective for our planned indications, there is no assurance that this will be proven in clinical trials. The failure to demonstrate efficacy in our clinical trials, or a delay or failure to complete our clinical trials, would have a material adverse effect on our business, prospects, financial condition and operating results.
Our failure to convince medical practitioners to use our technologies will limit our revenue and profitability.
If we, or our commercialization partners, fail to convince medical practitioners to prescribe products using our technologies, we will not be able to sell our products or license our technologies in sufficient volume for our business to become profitable. We will need to make leading
physicians aware of the benefits of products using our technologies through published papers, presentations at scientific conferences and favorable results from our clinical studies. Our failure to be successful in these efforts would make it difficult for us to convince medical practitioners to prescribe products using our technologies for their patients. Failure to convince medical practitioners to prescribe our products will damage our commercialization efforts and would have a material adverse effect on our business, prospects, financial condition and operating results.
If we are unsuccessful in establishing strategic licensing arrangement with strategic industry partners, our efforts to develop our products will be more costly and involve significant delays.
Our product development plan relies upon our ability to join with strategic industry partners in licensing arrangements. This approach would allow us to utilize the resources and scientific talent of our strategic licensing partners. However, if we are not successful in establishing these relationships, we will be required to bear the cost of commercializing our technology, both financial and human resources, alone. As a result, we would expect that our future capital requirements would be significantly increased than presently projected, and the time to market materially delayed.
We may not be able to market or generate sales of our products to the extent anticipated.
Assuming that we are successful in receiving regulatory clearances to market any of our products, our ability to successfully penetrate the market and generate sales of those products may be limited by a number of factors, including the following:
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Certain of our competitors in the field have already received regulatory approvals for and have begun marketing similar products, which may result in greater physician awareness of their products as compared to ours.
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Information from our competitors or the academic community indicating that current products or new products are more effective than our products could, if and when it is generated, impede our market penetration or decrease our existing market share.
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Physicians may be reluctant to switch from existing treatment methods, including traditional therapy agents, to our products.
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The price for our products, as well as pricing decisions by our competitors, may have an effect on our revenues.
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Our revenues may diminish if third-party payors, including private health coverage insurers and health maintenance organizations, do not provide adequate coverage or reimbursement for our products.
If any of our future marketed products were to experience problems related to their efficacy, safety, or otherwise, or if new, more effective treatments were to be introduced, our revenues from such marketed products could decrease.
Our revenues from marketed products could significantly decline if any of our current or future marketed products become the subject of problems, including those related to, among others:
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efficacy or safety concerns with the products, even if not justified;
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unexpected side-effects;
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regulatory proceedings subjecting the products to potential recall;
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publicity affecting doctor prescription or patient use of the product;
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pressure from competitive products; or
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introduction of more effective treatments.
If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our products, then our products and technologies may be rendered less competitive.
We will face significant competition from industry participants that are pursuing similar products and technologies that we are pursuing and are developing pharmaceutical products that are competitive with our planned products and potential products. Nearly all of our industry competitors have greater capital resources, larger overall research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Rapid technological development, as well as new scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy like we are developing may limit the product's market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.
If the manufacturers upon whom we rely fail to produce our product candidates in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development
and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.
We do not yet have agreements established regarding commercial supply of any product candidates. There is no assurance that we will be successful in negotiating an agreement on commercially reasonable terms. There is no assurance that our commercialization partner will approve of our manufacturer. Any problems or delays we experience in preparing for commercial-scale manufacturing of any product candidate may impair our ability to manufacture commercial quantities, which would adversely affect our business. For example, our manufacturers will need to produce specific batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.
The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed. If our manufacturers were to encounter any of these difficulties, our ability to provide product to commercialization partners or product candidates to patients in our clinical trials would be jeopardized. In addition, all manufacturers of our product candidates must comply with CGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these CGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.
The use of any of our potential products in clinical trials and the sale of any approved products exposes us to liability claims.
The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may
not protect us from liability or the costs of product liability litigation. Although we intend to obtain product liability insurance that we believe is adequate, we are subject to the risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.
If other companies claim that we infringe on their intellectual property rights, we may be subject to costly and time-consuming litigation and delays in product introduction.
Our processes and potential products may conflict with patents that have been or may be granted to competitors, academic institutions or others. As the biotechnology and pharmaceutical industries expand and more patents are filed and issued, the risk increases that our product candidates may give rise to a declaration of interference by the U.S. Patent and Trademark Office, to administrative proceedings in foreign patent offices or to claims of patent infringement by other companies, institutions or individuals. These entities or persons could bring legal proceedings against us seeking substantial damages or seeking to enjoin us from testing, manufacturing or marketing our products. If any of these actions were successful, we may also be required to cease the infringing activity or obtain the requisite licenses or rights to use the technology that may not be available to us on acceptable terms, if at all. Any litigation, regardless of the outcome, could be extremely costly to us.
Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection.
Our commercial success will depend in part on maintaining patent protection and trade secret protection for our products, as well as successfully defending these patents against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnology patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.
The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
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our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
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our licensors might not have been the first to file patent applications for these inventions;
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others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies;
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it is possible that none of the pending patent applications licensed to us will result in issued patents;
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the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties;
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we may not develop additional proprietary technologies that are patentable; or
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patents of others may have an adverse effect on our business.
In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible we may not have the financial resources to pursue infringement actions on a timely basis if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.
In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our drug candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.
We may also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect
trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
If our licensors or we fail to obtain or maintain patent protection or trade secret protection for our products, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.
If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.
Our ability to develop, manufacture, market and sell our products depends upon our ability to avoid infringing the proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:
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infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business;
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substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent;
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a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do;
·
if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and
·
re-designing our processes so they do not infringe, which may not be possible or could require substantial funds and time.
The public trading market for our Common Stock is subject to the “penny stock” rules.
Our Common Stock is currently quoted on the OTC.QB of the OTC Market Group, Inc. This is a more limited trading market than the Nasdaq Capital Market, and timely, accurate quotations of the price of our Common Stock may not always be available. You may expect trading volume to be low in such a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.
Our Common Stock is subject to the requirements of Rule 15g.9, promulgated under the Securities Exchange Act as long as the price of our Common Stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on Nasdaq that has a market price of less than $5.00 per share. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the Subscriber and receive the Subscriber’s written agreement to the transaction. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
Over-the-counter stocks are subject to risks of high volatility and price fluctuation.
The OTC market for securities has experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our Company's industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our Common Stock and make it more difficult for investors in this offering to sell their shares.
Investors may also find it difficult to obtain accurate information and quotations as to the price of our Common Stock.
Our stock price is volatile and as a result, investors could lose all or part of their investment. The value of an investment could decline due to the impact of any of the following factors upon the market price of our Common Stock:
·
failure to meet sales and marketing goals or operating budget
·
failure to achieve development goals
·
failure to obtain regulatory approvals
·
concerns regarding insufficient financial resources
·
inability to create an active trading market for our Common Stock
·
decline in demand for our Common Stock
·
operating results failing to meet the expectations of securities analysts or investors in any quarter
·
downward revisions in securities analysts' estimates or changes in general market conditions
·
investor perception of our Company's industry or prospects
·
general economic trends
In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our Common Stock. As a result, investors may be unable to resell their shares at or above the Offering price.
We do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on any shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time. If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
If the Company were to dissolve or wind-up, holders of our Common Stock may not receive a liquidation distribution.
If we were to wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we would owe to our creditors. If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock, should a public market develop in the future.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide financial reports or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are filed as part of this report:
1.
Report of Independent Registered Public Accounting Firm - Schumacher & Associates, Inc.
2.
Balance Sheets at October 31, 2014 and 2013.
3.
Statements of Operations for the years ended October 31, 2014 and 2013.
4.
Statement of Changes in Shareholders’ Deficit for the period
November 1, 2012 through October 31, 2014.
5.
Statements of Cash Flows for the Years Ended October 31, 2014 and 2013.
6.
Notes to Financial Statements.
Report of Independent Registered Public Accounting Firm
Board of Directors
Vitro Diagnostics, Inc.
We have audited the accompanying balance sheets of Vitro Diagnostics, Inc., as of October 31, 2014 and 2013, and the related statements of operations, shareholders’ (deficit), and cash flows for the two years ended October 31, 2014 and 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitro Diagnostics, Inc. as of October 31, 2014 and 2013, and the results of its operations and cash flows for the two years ended October 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note A, the Company has suffered significant losses since inception and has working capital and shareholders’ deficits at October 31, 2014, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
SCHUMACHER & ASSOCIATES, INC.
Denver, Colorado
February 10, 2015
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements
VITRO DIAGNOSTICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE A: NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
The Company was incorporated under the laws of Nevada on February 3, 1986. From November of 1990 through July 31, 2000, the Company was engaged in the development, manufacturing and distribution of purified human antigens (“Diagnostics”) that were derived primarily from human tissues. The Company also developed cell technology including immortalization of certain cells that allowed entry into other markets besides diagnostics. However, during the 1990’s, the Company’s sales were solely attributable to the sales of purified human antigens for diagnostic applications.
Following the sale of its Diagnostics operations in August of 2000, the Company began devoting all efforts to its cellular generation technology which evolved from a focus on induction of cellular immortalization to technology related to stem cells. Stem cell technology has potentially broad application to many medical areas, including drug discovery and development together with numerous therapeutic applications to diseases involving cellular degeneration, injury or to the treatment of cancer. The Company launched a series of products targeting basic research in stem cell technology in 2009. These “Tools for Stem Cell and Drug Discovery™” offer researchers basic tools needed to advance stem cell technology including stem cells and their derivatives, media for growth and differentiation of stem cells and advanced tools for measurement of stem cell quality, potency and response to toxic agents. The Company has been granted patents for its proprietary technology related to the immortalization of human cells and subsequently expanded this technology to include patented and patent-pending technology involving generation of stem cells with potential application to a variety of commercial opportunities including the treatment of degenerative diseases and drug discovery.
The Company also owns patented technology related to treatment of human infertility. The Company also owns patented technology that provides protection to a specific cell line derived from human pancreatic tissues that gives rise to structures comparable to the Islets of Langerhans (beta islets). These islets also synthesize and secrete insulin in response to elevated glucose levels, as do beta islets contained within pancreatic tissue. Vitro has also developed a process for the commercial production of its cell line-derived islets. Furthermore, the Company previously obtained regulatory approval for an animal protocol to determine reversal of Type I diabetes, a critical step in the demonstration of efficacy. This patent affords an exclusive proprietary position to the Company for a new cellular therapy to treat Type I diabetes.
The Company is currently focused on revenue generation from its stem cell-based research products and to expanded opportunities for revenue generation in drug discovery and development together with select opportunities in regenerative medicine.
Basis of Presentation - Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has suffered significant losses since inception and has working capital and shareholders’ deficits of $(2,218,863) and $(2,160,006), respectively, at October 31, 2014, which raise substantial doubt about its ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and generate revenues and profits from operations.
The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has financed its operations primarily through cash advances from the Company’s president, as well as through various private placements of equity securities. Since the year ended October 31, 2012, the President has advanced the Company a total of $255,132 for working capital on an “as needed” basis, including $141,100 during the year ended October 31, 2014. There is no assurance that these advances will continue in the future.
The Company has various initiatives underway to increase revenue generation through diversified offerings of products and services related to its stem cell technology and analytical capabilities. The goal of these initiatives is to achieve profitable operations as quickly as possible. Also, management has ongoing discussions with potential financial partners who have expressed interest in funding the Company and we intend to pursue these discussions to the full extent possible. Various strategic alliances that are ongoing and under development, are also critical aspects of management’s overall growth and development strategy.
There is no assurance that these initiatives will yield sufficient capital to maintain the Company’s operations. In such an event, management intends to pursue various strategic alternatives.
Summary of Significant Accounting Policies
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable consists of amounts due from customers. The Company considers accounts more than 30 days old to be past due. The Company uses the allowance method for recognizing bad debts. When an account is deemed uncollectible, it is written off against the allowance. The Company generally does not require collateral for its accounts receivable. At October 31, 2014 and 2013, accounts receivable are net of allowances of $2,500 and $-0-, respectively.
Inventory
Inventories, consisting of raw materials and finished goods, are stated at the lower of cost (using the specific identification method) or market. Finished goods inventories include certain allocations of labor and overhead. At October 31, 2014 and 2013, finished goods included approximately $5,915 and $9,800, respectively, of labor and overhead allocations. Inventories consisted of the following:
October 31, 2014
October 31, 2013
Raw materials
$ 12,702
$ 9,735
Finished goods
9,628
15,489
$ 22,330
$ 25,224
Shipping and freight costs
All freight costs associated with the receiving of goods and materials are expensed during the period in which it is received. For the years ended October 31, 2014 and 2013, $6,291 and $4,600, respectively, are included in research and development costs in the accompanying statements of operations. Shipping costs for products shipped to customers is generally charged to the customer at invoicing and are considered a component of the sale transaction. For the years ended October 31, 2014 and 2013, $1,464 and $1,579, respectively, are included in product sales in the accompanying statements of operations.
Research and development
The Company’s operations are predominantly in research and development (“R&D”). These costs are expensed as incurred and are primarily comprised of costs for: salaries, overhead and occupancy, contract services and other outside costs, quality assurance and analytical testing. As the Company’s operations include manufacturing and R&D, we report cost of goods sold, including estimates of labor, materials and overhead allocations to the production of specific products manufactured for sale.
Property, equipment and depreciation
Property and equipment, generally consisting of laboratory equipment and office equipment and furniture, are stated at cost and are depreciated over the assets’ estimated useful lives ranging from three to seven years using the straight-line method. Depreciation expense totaled $14,468 and $12,101 for the years ended October 31, 2014 and 2013, respectively.
Upon retirement or disposition of equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized.
Patents, deferred costs and amortization
Patents consist of costs incurred to acquire issued patents. Amortization commences once a patent is granted. Costs incurred to acquire patents that have not been issued are reported as deferred costs. If a patent application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires.
The Company amortizes patents over a period of ten years. Amortization expense totaled $3,196 and $3,197 for the years ended October 31, 2014 and 2013, respectively.
Estimated future amortization expense for each of the next five fiscal years is as follows:
Year ended October 31,
$
3,198
3,198
3,198
3,198
1,988
$
14,780
At October 31, 2014, the Company had one patent as follows:
Generation and differentiation of adult stem cell lines
$
31,975
(This patent is for a proprietary stem cell line with potential application to treatment of diabetes in both animals and humans.)
Less accumulated amortization
(17,195)
$
14,780
The Company has incurred costs relating to the filing of a United States patent application entitled “POU5-F1 Expression in Human Mesenchymal Stem Cells” and the development of new technology related to generation of human induced pluripotent stem cells (iPS). These costs totaled $10,549 and $10,459 at October 31, 2014 and 2013, respectively. The Company has determined that further pursuit of this patent application has no economic value given its current operating plans. As such, on October 31, 2014 the entire amount of $10,549 was written off and is included in research and development expenses on the accompanying Statements of Operations.
The Company has also incurred costs relating to the filing of a United States patent application entitled “Methods to Culture Mesenchymal Stem Cells and Related Materials” and the development of new technology related to this patent application. These costs totaled $2,911 and $2,370 at October 31, 2014 and 2013, respectively. The Company has determined that further pursuit of this patent application has no economic value given its current operating plans. As such, on October 31, 2014 the entire amount of $2,911 was written off and is included in research and development expenses on the accompanying Statements of Operations.
In October 2014, Company incurred costs relating to the provisional filing of a new United States patent application entitled “Treatment of Neurological Conditions by Activation of Neural Stem Cells”. These costs totaled $777, and are included as deferred patent costs in the accompanying balance sheet at October 31, 2014.
Impairment and Disposal of Long-Lived Assets
The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. If such assets are considered impaired, the impairment to be recognized is determined as the amount by which the carrying value exceeds the fair value of the assets.
The Company periodically reviews the carrying amount of it long-lived assets for possible impairment. With the exception of the write offs of certain deferred patent costs as discussed above, the Company recorded no asset impairment charges during either of the years ended October 31, 2014 or 2013. A contingency exists with respect to these matters, the ultimate resolution of which cannot presently be determined.
Income taxes
The Company uses the liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Revenue recognition and concentration of revenues
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable, and collectability is reasonably assured.
The Company derives a portion of its revenue from data and analysis services, and is included in Professional services income in the accompanying statement of operations. Any costs associated with this revenue are included in the Company’s operating costs and expenses.
For the year ended October 31, 2014, 54% of the Company’s revenues were attributed to customers of a company controlled by a director. In addition, 24% of revenues were attributed to one other non-related party customer. For the year ended October 31, 2013, 51% of the Company’s revenues were made to customers of a company controlled by this director. Of the remaining 49%, no significant concentrations existed.
Advertising Costs
The Company expenses all advertising costs as they are incurred. Advertising costs were $4,724 and $2,119 for the years ended October 31, 2014 and 2013, respectively.
Consulting Expenses
From time-to-time the Company engages consultants to perform various professional and administrative functions including public relations and corporate marketing. Expenses for consulting services are generally recognized when services are performed and billable by the consultant. In the event an agreement requires payments in which the timing of the payments is not consistent with the performance of services, expense is recognized as either service events occur, or recognized evenly over the period of the consulting agreement where specific services performed under the agreement are not readily identifiable. Consulting agreements in which compensation is contingent upon the successful occurrence of one or more events are only expensed when the contingency has been, or is reasonably assured, to be met.
Fair value of financial instruments
The carrying amounts of cash, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short-term maturity of the instruments. Based on the borrowing
rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term obligations consisting of various capital lease obligations approximates its carrying value.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and cash equivalents, and trade accounts receivable. As of October 31, 2014 and October 31, 2013, the Company had no amounts of cash or cash equivalents in financial institutions in excess of amounts insured by agencies of the U.S. Government.
Net loss per share
The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents. Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents. For each of the years ended October 31, 2014 and 2013, common stock equivalents of 300,000 representing fully vested outstanding stock options, were not included in the diluted per share calculation as all potentially dilutive securities were anti-dilutive due to the net loss in the period.
Stock-based compensation
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 718, “Stock Compensation,” 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 method in accounting for share based payment transactions with employees. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., the vesting period.
Recent accounting standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605-Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This accounting standards update is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of accounting standards update No. 2014-09 on its financial position and results of operations.
In August 2014, FASB issued ASU No. 2014-15 Preparation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under generally accepted accounting principles (“GAAP”), continuation of a
reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU, however, management does not believe that it has met conditions which would subject these financial statements for additional disclosure.
There were various other accounting standards and interpretations issued during 2014 and 2013, none of which are expected to have a material impact on the Company’s financial position, operations, or cash flows
NOTE B: RELATED PARTY TRANSACTIONS
Advances and accrued interest payable to officer
Through October 31, 2014, the Company’s President had advanced the Company a total of $718,114 used for working capital including $141,100 during the year ended October 31, 2014. The advances are uncollateralized, due on demand and accrue interest on the unpaid principal at a rate of 10% per annum. Accrued interest payable on the advances totaled $199,738 and $133,910 at October 31, 2014 and 2013, respectively. The total advances plus accrued interest totaling $917,852 and $710,924 at October 31, 2014 and 2013, respectively, are included as “Advances and accrued interest payable to officer” in the accompanying financial statements.
Employment agreements and accrued compensation
Effective May 1, 2008, the Company entered into an Executive Employment Agreement with its President. The Agreement established annual base salaries of $80,000, $85,000, and $90,000 over the three years of the Agreement, which was to expire on April 30, 2011. On April 27, 2011, the Company’s board of directors ratified a modification to the original agreement establishing an annual base salary of $12,000 per year, effective February 1, 2011 and continuing for three years, expiring February 2, 2014. As of the date of this report, the agreement has expired and the Company is contemplating its options regarding the compensation of the President. The Agreement also provided for incentive compensation based on the achievement of minimum annual product sales and an option to purchase one million shares of the Company’s common stock that includes contingent vesting requirements. As of October 31, 2014, 100,000 of these common stock options were vested, and are exercisable at $0.19 per share and expire in July 2018. These options are further discussed in Note E under the “Stock options granted to officer” caption.
The Company has accrued the salaries of its President due to a lack of working capital. Total accrued salaries and payroll taxes were $1,205,958 and $1,202,808 as of October 31, 2014 and 2013,
respectively. The President’s accrued salaries totaled $1,158,422 and $1,155,422 as of October 31, 2014 and 2013, respectively. His salary is allocated as follows: 70% to research and development and 30% to administration.
In addition, accrued salaries totaling $833 are due a former executive officer from a previous employment agreement.
Total accrued payroll taxes on the above salaries totaled $46,703 and $46,553 at October 31, 2014 and 2013, respectively.
Office lease
On July 1, 2008, the Company entered into a five-year non-cancelable operating lease for a facility located in Golden, Colorado, which expired in June 2013. Effective July 1, 2013, the lease was renewed for an additional five-year term expiring July 2018. The facility has been leased from a company that is owned by the President’s wife.
Minimum future rent payments for the remaining term of the lease are as follows:
Fiscal Year Ending
$ 33,168
33,168
33,168
22,112
Total
$ 121,616
The total rental expense was $26,619 and $26,508 and for the years ended October 31, 2014 and 2013, respectively. At October 31, 2014 and 2013, $26,135 and $26,760, respectively, were unpaid and are included in accounts payable - related parties in the accompanying balance sheets.
Sales and Accounts Receivable
Of the total product sales for the year ended October 31, 2014, $28,528 was made to customers of a company controlled by a director who was elected to the Company’s Board of Directors on February 20. 2013. Of the total product sales for the year ended October 31, 2013, $18,670 was made to customers of a company controlled by this director.
The Company derives a portion of its revenue from data and analysis services, and is included in Professional services income in the accompanying statement of operations. For the year ended October 31, 2014, this revenue totaled $48,155, of which $47,734 of the service income billings were made to customers of a company controlled by a director who was elected to the Company’s Board of Directors on February 20, 2013. For the year ended October 31, 2013 this revenue totaled $3,150, of which $650 of the service income billings were made to customers of a company controlled by this director.
At October 31, 2014 and 2013, $18,993 and $700, respectively, of these sales had not been collected and are included in Accounts receivable, related parties.
In addition, $2,603 of product sales for the year ended October 31, 2014 was made to a company controlled by the President’s wife. For the year ended October 31, 2013, $650 of product sales was made to a company controlled by the President’s wife. At both October 31, 2014 and 2013 all amounts of these sales had been collected.
Other
The President has personally guaranteed all debt instruments of the Company including all credit card debt.
NOTE C: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows for the years ended:
The primary components of temporary differences that give rise to the Company’s net deferred tax assets are as follows:
At October 31, 2014, deferred taxes consisted of a net tax asset of $2,122,340, due to operating loss carry forwards and other temporary differences of $8,746,467, which was fully allowed for in the valuation allowance of $2,122,340. The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery. The changes in the valuation allowance for the years ended October 31, 2014 and 2013 totaled $53,442 and $49,556, respectively. Net operating loss carry forwards will expire in various years through 2034.
The Company is delinquent on filing its federal and state tax returns and may be subject to penalties and interest. A contingency exists with respect to this matter, the ultimate resolution of which may not be presently determined.
The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carry forwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.
NOTE D: LINES OF CREDIT
The Company has a $12,500 line of credit, of which $89 was unused at October 31, 2014. The interest rate on the credit line was 21.90% at October 31, 2014. The credit line is collateralized by the Company’s checking account. Principal and interest payments are due monthly.
At October 31, 2014 the Company also had three credit cards with a combined credit limit of $28,600, of which $2,089 was unused. The interest rates on the credit cards range from 10.24% to 29.4%, with a weighted average rate of 14.99% at October 31, 2014.
NOTE E: CAPITAL LEASE OBLIGATION
In November 2013, the Company entered into a capital lease agreement to acquire certain laboratory equipment. The Company is obligated to make 24 monthly payments of $2,006 plus applicable sales and use taxes through October 2015.
Future maturities of the Company’s capital lease obligations are as follows:
The president of the Company has personally guaranteed the lease obligation.
NOTE F: SHAREHOLDERS’ DEFICIT
Preferred Stock
The Company has authorized 5,000,000 shares of $.001 par value preferred stock, of which none were issued and outstanding at October 31, 2014. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.
Stock options granted to officer
On May 1, 2008, the Company granted a non-qualified stock option to its President to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.19 per share, and expire in 2018. On the grant date, the traded market value of the stock was $0.19 per share. The options vest upon the achievement of certain contingencies. As a result of the patent license agreements in March 2011, a contingency was met resulting in the vesting of 100,000 of these options. None of the other contingencies have been met as of October 31, 2014, and as of that date $170,100 of unamortized stock compensation expense remains for the unvested portion of these options. The weighted average exercise price and weighted average fair value of these options on the grant date were $0.19 and $0.19, respectively.
The fair value of the options was determined to be $189,000, and was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
3.68%
Dividend yield
0.00%
Volatility factor
228.72%
Weighted average expected life
6.5 years
Common Stock Issued for Services
The Company has issued shares of its common stock to certain Directors and members of the Company’s advisory boards. The value of the services is determined by the fair value of the common stock at the time the shares are considered issued. The amounts are capitalized to equity as “services prepaid with common stock” on the Company’s balance sheets until the services are considered earned, at which time they are expensed as stock-based compensation and removed from equity.
On April 1, 2014, the Company’s Board of Directors ratified the issuance of 114,943 shares of the Company’s common stock to Mr. Pete Shuster, Director, as compensation for services for fiscal year ending October 31, 2014. The transaction was valued at $10,000 or $0.087 per share, which was the weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction. A total of $10,000 has been charged to operations as stock compensation expense for the year ended October 31, 2014.
On August 18, 2014, the Company’s Board of Directors ratified the issuance of 53,476 shares of the Company’s common stock to Mr. Jeff Liter, Director, as compensation for services for fiscal year ending October 31, 2014. The transaction was valued at $10,000 or $0.187 per share, which was the weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction. A total of $10,000 has been charged to operations as stock compensation expense for the year ended October 31, 2014.
On February 21, 2013, the Company’s Board of Directors ratified the issuance of 169,491 shares of the Company’s common stock to Mr. Pete Shuster, Director, as compensation for services for fiscal year ending October 31, 2013. The transaction was valued at $10,000 or $0.059 per share, which was the weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction. A total of $10,000 of stock compensation expenses was charged to operations for the year ended October 31, 2013.
In addition, $1,458 of stock compensation expense was charged to operations for the year ended October 31, 2013 representing services provided by a member of the Company’s Scientific Advisory Board. No such expense was recorded for the year ended October 31, 2014.
Conversion of accounts payable
On May 28, 2013, the Company issued 250,000 shares of common stock, $0.001 par value to a consultant in satisfaction for certain professional accounting services previously performed totaling $15,000. The shares were valued at $0.06 per share, the closing price of the Company’s common stock on the effective date.
Incentive plans
Effective December 2, 2000, the Company’s Board of Directors adopted an Equity Incentive Plan (the “Plan”), which replaced the Company’s 1992 Stock Option Plan. The purpose of the Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers, consultants and directors, and to promote the Company’s business. The Plan authorizes total awards
of up to 1,000,000 shares of the Company's common stock. Awards may take the form of incentive stock options, non-qualified stock options, restricted stock awards, stock bonuses and other stock grants. If an award made under the Plan expires, terminates, is canceled or settled in cash without the issuance of all shares of common stock covered by the award, those shares will be available for future awards under the Plan. Awards may not be transferred, except by will or the laws of descent and distribution. No awards may be granted, and none have been granted, under the Plan after September 30, 2010.
The Plan is administered by the Company's Board of Directors, which may delegate its authority to a committee of the Board of Directors. The Board of Directors has the authority to select individuals to receive awards, to determine the time and type of awards, the number of shares covered by the awards, and the terms and conditions of such awards in accordance with the terms of the Plan. In making such determinations, the Board of Directors may take into account the recipient's current and potential contributions and any other factors the Board of Directors considers relevant. The recipient of an award has no choice regarding the form of a stock award. The Board of Directors is authorized to establish rules and regulations and make all other determinations that may be necessary or advisable for the administration of the Plan. All options granted pursuant to the Plan shall be exercisable at a price not less than the fair market value of the common stock on the date of grant. Unless otherwise specified, the options expire ten years from the date of grant.
At October 31, 2014 a total of 543,500 options had been issued under the Plan, of which 43,500 have expired. The 200,000 options outstanding and vested under the Plan have a weighted average exercise price of $0.08 per share, and a weighted average remaining contractual life of 1.28 years at October 31, 2014. Three hundred thousand outstanding options not yet vested have an exercise price of $0.17 per share, and expire in April 2015. For either the years ended October 31, 2014 and 2013, no compensation expense was recognized for options under the Plan. No additional options may be issued under the Plan.
The following schedule summarizes the changes in the Company’s stock options including non-qualified options and options issued under the 2000 Plan:
NOTE G: CONSULTING AGREEMENTS
On November 1, 2013, the Company signed a consulting agreement with a financial advisory firm to provide consulting services regarding corporate development and evaluation of strategic financing options that may be available to the Company. In consideration for these services, the consultant received $5,000 upon execution of the agreement, and was entitled to an additional $2,500 per month until termination of the agreement. In addition, the consultant would have been entitled to compensation for certain completed strategic transactions dependent upon the terms of the completed transaction. The initial term of the agreement was two months from execution of the agreement, after which the agreement would automatically renew unless terminated by written notice by either party. On April 1, 2014, the Company’s Board of Directors elected to terminate the agreement effective March 31, 2014. For the year ended July 31, 2014 a total of $15,000 had been paid the consultant and is included in selling, general and administrative expenses in the accompanying statement of operations.
On February 7, 2012, the Company’s board of directors ratified the terms of a consulting agreement dated January 24, 2012 with a marketing firm to provide certain public and investor relations services. The agreement had an initial six-month term. It included several phases for which the consultant would be compensated upon completion. The initial phase was completed in fiscal year ended October 31, 2012 for which the consultant received cash compensation of $5,000 and 120,000 shares of the Company’s common stock. Phases II & III includes certain services regarding the Company’s online efforts, including the design and implementation of a more robust Company website, and positioning the Company as a potential investment and supplier of stem cell products within select social media. The consultant was entitled to additional compensation for completion of Phases II & III. In February 2013, it was determined that all phases of the project were complete, and as such the Company issued the consultant 75,000 shares of the Company’s common stock, valued at $6,000, and is included in selling, general and administrative expenses in the accompanying statement of operations for the year ended October 31, 2013.
NOTE H: PATENT LICENSE AGREEMENT
Effective March 30, 2011, the Company entered into a Technology License, License Option and Technical Assistance Agreement with a former officer of the Company, granting him an exclusive license covering two of the Company’s patents: United States Patent Number 5,990,288, Method for Purifying FSH and United States Patent Number 6,458,593 B1, Immortalized Cell Lines and Methods of Making The Same. The patents are related to treatment of infertility and know-how relating to the commercial production and cellular generation of the hormone, follicle-stimulating hormone and related gonadotropin hormones for use in the treatment of infertility in both humans and animals. In addition, the License grants the exclusive option to license a pending patent application for the commercial production of clinical grade gonadotropin hormones and, in addition, the Company’s intellectual property related to generation of crude materials containing gonadotropin hormones from certain cellular sources. The License has an initial term of five years and shall be automatically renewed for additional two year periods until terminated by either party; however, the license can be terminated after two and one-half years if there have been no sales of licensed
products. Since there continues to be opportunities for commercialization, the Company has elected not to terminate this agreement at the present time.
The licensee was previously an executive officer of the Company, and the Company had carried a $200,833 liability for unpaid compensation. The terms of the license agreement required payment of a non-refundable license fee of $10,000, which was paid by a reduction of the unpaid compensation liability. In addition, the license agreement also required the licensee to forgive an additional $190,000 of the unpaid compensation liability. In addition to the license fee and the forgiveness of the unpaid compensation liability, there shall be royalty payments of 3% and 4% of the gross sales of all licensed products sold by or on behalf of Licensee during the first and second years, respectively. Such royalty payment shall be 4.5% of the gross sales of all licensed products during the third year of product sales and shall remain at that level throughout the remaining term of the agreement. As of October 31, 2014, no sales have been made under this agreement.
The parties to this patent license have developed additional business collaborative opportunities involving the Company’s stem cell products, know-how and IP especially related to regenerative medicine applications of modern stem cell technology.
NOTE I: NON-BINDING LETTER OF INTENT
On October 10, 2013, the Company signed a non-binding letter of intent to acquire and merge with Neuromics, Inc, (“Neuromics”) a privately held life-science firm located in Minneapolis, MN. This letter of intent expired on February 1, 2014 and is no longer in effect. The Company and Neuromics, Inc. now operate in close association including distribution of Vitro products by Neuromics as well as joint development of new business opportunities in regenerative medicine. The Company and Neuromics have agreed to defer any further merger discussions until Vitro achieves profitable operations.
Neuromics’ Chief Executive Officer is Mr. Pete Shuster, who has also been a director of Vitro Diagnostics since February 2013. During the year ended October 31, 2014 approximately 54% of Vitro’s total revenues were derived from customers of Neuromics.
NOTE J: SUBSEQUENT EVENTS
The Company has evaluated events subsequent to October 31, 2014 and through the date the financial statements were available to be issued, to assess the need for potential recognition or disclosure in this report. No events were noted that require recognition or disclosure in the financial statements.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our President, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our President concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company’s operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
Our management, with the participation of the President, evaluated the effectiveness of the Company’s internal control over financial reporting as of October 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this evaluation, our management, with the participation of the President, concluded that, as of October 31, 2014, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control.
Specifically, management identified the following control deficiencies. (1) The Company has not properly segregated duties as its President initiates, authorizes, and completes all transactions. The Company has not implemented measures that would prevent the President from overriding the internal control system. The Company does not believe that this control deficiency has resulted in deficient financial reporting because the President is aware of his responsibilities under the SEC’s reporting requirements and personally certifies the financial reports. In addition, the Company
engaged a financial consultant to review financial transactions to determine that they have been properly recorded in the financial statements. (2) The Company has installed accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software. The Company does not think that this control deficiency has resulted in deficient financial reporting because the Company has implemented a series of manual checks and balances to verify that previous reporting periods have not been improperly modified and that no unauthorized entries have been made in the current reporting period.
Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps.
(b) Changes in Internal Control over Financial Reporting. During fiscal year ended October 31, 2014, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following individuals presently serve as officers and directors of the Company:
Name
Age
Position
James R. Musick, Ph.D.
Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Secretary
Pete Shuster
Director
Jeffrey Liter
Director
Directors of the Company serve until the next annual meeting of shareholders and until their successors are elected and qualified. Officers serve at the will of the Board of Directors.
The Company currently has no audit, compensation, nomination or other committee of the Board of Directors and no financial experts on its Board. The entire Board of Directors performs the functions typically performed by an audit committee. There is no “audit committee financial expert” on the Board, as defined by SEC rule. The absence of a financial expert has historically been due to the Company’s inability to attract any additional candidates to its Board due to its limited working capital, but hopes to identify one or more individuals in the future to add to its existing membership.
The following represents a summary of the business history of each of the foregoing individuals for at least the last five years:
JAMES R. MUSICK, Ph.D. was appointed President and Chief Executive Officer of the Company on August 7, 2000 where he served until April 2005. He then resigned those positions to become the Chairman and Chief Operating Officer. On May 19, 2006 he was re-appointed President and Chief Executive Officer. From September 1, 1989 until August 7, 2000, Dr. Musick served as Vice President, Secretary and Chief Operating Officer of the Company. He has also served as a director of the Company since September 1, 1989. Dr. Musick received a Bachelor of Arts in Biological Sciences in 1968 and a doctorate in Biological Sciences in 1975 from Northwestern University in Evanston, Illinois.
PETE SHUSTER received a Bachelor’s Degree in Biology from Lawrence University in Wisconsin during 1981 and performed graduate studies in biochemistry at the University of Minnesota. He was in Sales and Sales Management with Teltech from 1985 to 1994. He was a sales representative at Connect, Inc from 1994 to 1995 where he sold systems integration solutions. He was a Major Account Manager at SDRC from 1995 to 1999 and Senior Account Manager at EAI for sales of Product Visualization Software. From 1996 to 2002, he was the founder and owner of Kingdom2.com, an online reseller of re-manufactured satellite systems. From 2000 to 2002 he was Large Account Sales Director of PTC, a company that sold product data management and CAD software, where he lead teams that sold to heavy equipment manufacturers, including Caterpillar, John Deere and Case. The team achieved sales > $15,000,000 in FY2001.
In 2003, he founded Neuromics, Inc, his present business that is a web-based marketer of reagents to accelerate discovery in Neuroscience, Diabetes/Obesity and Cancer offering products including antibodies, proteins, transfection reagents, stem cell and primary cell lines, cell culture media and apoptosis measurement kits.
JEFF LITER, age 58, presently serves as the Chief Operating Officer of Progenitor Cell Therapy (PCT), a division of NeoStem, a stem cell firm traded on the New York Stock Exchange.
Prior to his position at PCT, Jeff served as managing director of On Point Consulting, a post- acquisition consulting service specialized in the life sciences industry. From January 2010 to September 2011, he was Director of Strategy, Business Development and Licensing for Beckman Coulter where he was responsible for business development of the immunoassay and molecular diagnostics group. From December 2008 to January 2010 he was managing director of On Point Consulting. From October 2006 to November 2008, he was Vice President of Corporate Business Development for ADC Telecommunications, a global leader in telecommunications. He led M&A, minority investments, strategic partnerships, divestitures and business unit strategy development while at ADC. From 1999 to 2006 he held other positions with ADC Telecommunications including Director of Corporate Development. He received a BS from Illinois State University in 1978 and a MBA degree from the University of Minnesota - Carlson School of Management in 1986.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding more than 10% of the Company's common stock are required to report their ownership of the Company's common stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established by rules adopted by the SEC and the Company is required to report in this Annual Statement any failure to file by those deadlines.
Based solely upon public reports of ownership filed by such persons and the written representations received by the Company from those persons, all of our officers, directors and 10% owners have satisfied these requirements during its most recent fiscal year except that Mr. Shuster failed to file reports covering six transactions and, Mr. Liter failed to timely file an initial report on Form 3 upon his election to the board of directors.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table summarizes the total compensation of (i) the principal executive officer of the Company; (ii) any person who served as the principal executive officer during the last fiscal year, and (iii) the other individual who served as an executive officer at the end of the last fiscal year (the “Named Officers”):
SUMMARY COMPENSATION TABLE
Name
Year ended
October 31,
Salary
Total
James R. Musick, Chairman
$3,000
(1)$3,000
President, Chief Executive
$12,000(1)
$12,000
Officer, Chief Operating Officer, Chief Financial Officer
$12,000(1)
$12,000
(1)
All of this amount was accrued.
Employment Contracts
The Company was not subject to any employment agreements at October 31, 2014. The most recent employment agreement between the Company and its President, which provided for compensation at the rate of $12,000 per year, expired February 2, 2014. Since its expiration, he has received no compensation.
Compensation of Directors
On April 1, 2014, in consideration of his services as a director, Mr. Pete Schuster was granted a restricted stock award consisting of 114,943 shares of Common Stock. The award was valued at $10,000, or $.087 which was the 20 day volume weighted average price of the Common Stock for the last twenty days preceding the date of the transaction.
On August 18, 2014, in consideration of his services as a director, Mr. Jeffery Liter was granted a restricted stock award consisting of 53,476 shares of Common Stock. The award was valued at $10,000, or $.187, which was the 20 day volume weighted average price of the Common Stock for the last twenty days preceding the date of the transaction.
On February 21, 2013, the Company issued 169,491 shares of the Company’s common stock to Mr. Pete Shuster, Director as compensation to be earned during his service in fiscal year ending October 31, 2013. The transaction was valued at $10,000, or $.059 per share, which was the weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction.
On February 7, 2012, the Company issued of 222,222 shares of the Company’s common stock to Mr. Erik Van Horn, Director (former) as compensation to be earned during his service in fiscal year ending October 31, 2012. The transaction was valued at $10,000, or $.045 per share, which was the
weighted average closing price of the Company’s common stock for the last twenty days preceding the date of the transaction.
Each board member is entitled to be reimbursed for reasonable expenses incurred in attending meetings or other service to the Company.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the amount of our executive officers’ equity-based compensation outstanding at the fiscal year ended October 31, 2014:
Stock Option Plan
The Company adopted an Equity Incentive Plan on October 9, 2000 (the "Plan") for the benefit of key personnel and others providing significant services to the Company. The Plan replaced the 1992 Equity Incentive Plan (the "1992 Plan"). The 1992 Plan will remain effective only so long as options remain outstanding under the 1992 Plan. No new options will be granted under the 1992 Plan, and the only shares that will be issued under the 1992 Plan are those shares underlying currently outstanding options.
The Plan authorizes total awards of up to 1,000,000 shares of the Company's common stock. Awards may take the form of incentive stock options, non-qualified stock options, restricted stock awards, stock bonuses and other stock grants. If an award made under the Plan expires, terminates, is canceled or settled in cash without the issuance of all shares of common stock covered by the award, those shares will be available for future awards under the Plan. Awards may not be transferred except by will or the laws of descent and distribution. No awards may be granted under the Plan after September 30, 2010.
The Plan is administered by the Company's Board of Directors, which may delegate its authority to a committee of the Board of Directors. The Board of Directors has the authority to select individuals to receive awards, to determine the time and type of awards, the number of shares covered by the awards, and the terms and conditions of such awards in accordance with the terms of the Plan. In making such determinations, the Board of Directors may take into account the recipient's current and potential contributions and any other factors the Board of Directors considers relevant. The Board of
Directors is authorized to establish rules and regulations and make all other determinations that may be necessary or advisable for the administration of the Plan.
All options granted pursuant to the Plan shall be exercisable at a price not less than the fair market value of the common stock on the date of grant. Unless otherwise specified, the options expire ten years from the date of grant.
The following table illustrates the number of shares remaining available for issuance under the Plan.
Equity Compensation Plan Information
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 securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
200,000
$0.08
Equity compensation plans not approved by security holders
100,000
$0.19
TOTAL
300,000
$0.12
Compensation plan not approved by security holders included the 1992 Equity Incentive Plan.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of February 12, 2015 based solely on information available to the Company, with respect to the ownership of the Company's common stock by all officers and directors individually, all officers and directors as a group, and all shareholders known to the Company to hold beneficially more than five percent (5%) of the Company's common stock. The percentages in the table assume that any options or warrants owned by the beneficial owner exercisable within 60 days are exercised, but that no other outstanding options or warrants are exercised. At February 12, 2015 the Company had outstanding 19,971,822 shares of common stock, the only class of voting stock outstanding.
The following shareholders have sole voting and investment power with respect to the shares, unless it is indicated otherwise.
Name and Address of Beneficial Owner
Number of Shares
%
Officers and Directors
James R. Musick(1) (2)
4621 Technology Drive,
Golden, Colorado 80403
6,834,105
31.83
Pete Shuster
311,434
15.59
4621 Technology Drive,
Golden, Colorado 80403
Jeffery Liter
53,476
0.27
4621 Technology Drive,
Golden, Colorado 80403
Officers and Directors as a group(1) (2)
(3 individuals)
7,199,015
33.53
___________________
(1)
Includes 1,500,000 options to acquire shares of common stock.
(2)
Includes 2,665,257 shares held by The James R. Musick Trust, of which Mr. Musick is a trustee and beneficiary.
Changes in Control
The Company knows of no arrangement, including the pledge by anyone of any securities of the Company that may result in a change in control.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
In November 2008, the Company sold 226,667 shares of its common stock to the Company's Chairman, James Musick for $8,500, or $.0375 per share.
Between August 2002 and October 2007, the Company's Chairman, James Musick, loaned the Company $168,150 for working capital. This loan and the accrued interest of $35,483 had been represented by a single promissory note in the amount of $203,633 dated October 31, 2007 bearing interest at the rate of 10% per year. The note replaced a previous note. This note was due on October 31, 2008 and was collateralized by the Company's patents regarding purification of FSH. On July 29, 2008, the Board of Directors approved the issuance of 1,238,176 shares of the Company’s common stock in exchange for the notes payable plus accrued interest to an officer not to exceed $225,000. At that time the Note was canceled effective July 29, 2008. The exchange was completed in February 2009. A total of $224,333, representing the balance of the note payable and accrued interest, plus the outstanding balance of other indebtedness to the officer of $5,530 was exchanged for 1,238,176 shares of the Company’s common stock.
During November, 2006, the Company sold 535,714 shares of its common stock to Dr. Musick of the Company for $30,000, or $.056 per share. During August 2006, the Company sold 535,714 shares of its common stock to Dr. Musick for $30,000, or $.056 per share. During May 2006, the Company sold 625,000 additional shares of its common stock to Dr. Musick for $20,000, or $.032 per share. Finally, during February 2006, the Company sold 312,500 shares of its commons stock to Dr. Musick for $20,000, or $.064 per share.
The Company's Board of Directors is of the opinion that the terms of these transactions are no less favorable than could be obtained from an unaffiliated third party.
ITEM 14
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table details the aggregate fees billed to the Company by Schumacher & Associates, Inc., its current accountant, for each of the last two fiscal years:
Audit Fees
$20,750
$19,750
Audit-Related Fees
-
-
Tax Fees
-
-
All Other Fees
-
______-
Total
$20,750
$19,750
The caption "Audit Fees" includes professional services rendered for the audit of the annual consolidated financial statements and review of the quarterly consolidated financial statements.
It is the policy of the Board of Directors, acting as the audit committee to pre-approve all services to be performed by the independent accountants.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following is a list of exhibits filed or incorporated by reference into this Report:
No.
Description
Not applicable.
Not applicable.
3.1.1(1)
Articles of Incorporation of the Company as filed March 31, 1986 with the Nevada Secretary of State.
3.1.2(2)
Certificate of Merger of Domestic and Foreign Corporations as filed December 17, 1986 with the Nevada Secretary of State.
3.1.3(3)
Certificate of Amendment of Articles of Incorporation as filed February 6, 1987 with the Nevada Secretary of State.
3.1.4(2)
Certificate of Amendment of Articles of Incorporation as filed May 18, 1988 with the Nevada Secretary of State.
3.1.5(4)
Amended and Restated Articles of Incorporation of the Company , as filed July 20, 2001 with the Nevada Secretary of State
3.2(3)
Bylaws of the Company.
4.1(3)
Specimen certificate for Common Shares, $.001 par value per share.
Not applicable.
10.1(5)
Equity Incentive Plan dated October 9, 2000
10.2
Promissory note issued by the Company to James R. Musick dated October 31, 2007.
10.3(6)
Executive Employment Agreement between the Company and James R. Musick dated April 1, 2005.
10.4(7)
Common Stock and Warrant Purchase Agreement
10.5(8)
Form of Class A Warrant Agreement
10.6(9)
License Agreement with James T. Posillico, Ph.D.
10.7(10)
Amendment No. 1 to License Agreement with James T. Posillico, Ph.D.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable
Not applicable.
Not applicable.
31.1*
Certification pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32*
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Not applicable.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Schema Document
101.CAL**
XBRL Calculation Linkbase Document
101.LAB**
XBRL Label Linkbase Document
101.PRE**
XBRL Presentation Linkbase Document
101.DEF**
XBRL Definition Linkbase Document
___________________
(1)
Filed as an Exhibit to Form 10-KSB dated October 31, 2000.
(2)
Filed as an Exhibit to Form 10-KSB/A dated July 31, 2000.
(3)
Filed as an Exhibit to Registration Statement on Form SB-2, SEC File No. 33-59230 and incorporated herein by reference.
(4)
Filed as an Exhibit to Form 10-KSB for the year ended October 31, 2001.
(5)
Filed as an Exhibit to the definitive Proxy Statement on Schedule 14/A as filed with the Commission on October 30, 2000 and incorporated herein by reference.
(6)
Filed as Exhibit 10.1 to the Form 8-K dated April 8, 2005 and incorporated herein by reference.
(7)
Filed as Exhibit 10.1 to the Form 8-K dated January 31, 2008.
(8)
Filed as Exhibit 10.2 to the Form 8-K dated January 31, 2008
(9)
Filed as an Exhibit to the Form 8-K dated March 30, 2011.
(10)
Filed as an Exhibit to the Form 8-K/A-1 dated June 27, 2011.
*
Filed herewith
**
Furnished, not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned thereunto duly authorized in Aurora, Colorado on the 12th day of February, 2015
VITRO DIAGNOSTICS, INC.
By:
/s/ James R. Musick
James R. Musick, Chairman
Pursuant to the requirements of the Security Exchange Act of 1934, as amended, this Report has been signed by the following persons in the capacities and on the dates indicated.
Signatures
Title
Date
_/s/ James R. Musick
James R. Musick
President, Chairman of the Board, Chief Executive Officer, Principal Financial and Accounting Officer, Director
February 12, 2015
_/s/ Pete Shuster
Director
_February 12, 2015
Pete Shuster
_/s/ Jeff Liter
Director
February 12, 2015
Jeff Liter