Our strategy is to understand the relationship between proteins and human diseases in order to develop the next generation of molecular diagnostic products. Through our proprietary technologies, we believe we are positioned to identify important disease genes, the proteins they produce, and the biological pathways in which they are involved to better understand the underlying molecular basis for the cause of human disease. We believe that identifying these genes, proteins and pathways will enable us to develop novel molecular diagnostic products. Our business strategy includes the following key elements:
In furtherance of our strategy, we are advancing our pre-clinical pipeline of therapeutics and related biomarkers, into the clinic or to other stages that are consistent with the program objectives, developing, acquiring and/or in-licensing and advancing therapeutics, leveraging our know-how and expertise in drug and biomarker development, and working with providers, payers and others to accelerate uptake and adoption of our diagnostic tests in clinical care with the goal of improving cost and clinical outcomes. We are seeking partners for the production, marketing and selling of our products, and may seek to work with these partners to assist us in obtaining FDA approval of our products.
Breast cancer is the second leading cause of cancer deaths in women and results in 40,000 deaths with over $7 billion spent on breast cancer diagnosis annually. An important factor in surviving cancer is early detection and treatment. According to the American Cancer Society Surveillance Research, when breast cancer is confined to the breast, the five-year survival rate for early stages is close to 100%. Due to the limitations of the current diagnostic techniques of mammograms and self-examination, the presence of breast cancer is often missed or tests are inconclusive. The limitations and lack of accuracy of the current diagnostic tests highlight the need for a test that can detect the presence of breast cancer much earlier and more accurately.
Our operations require a variety of raw materials, such as biological, chemical and biochemical materials, and other supplies, some of which are occasionally found to be in short supply. In particular, for our research and product development activities, we need access to human tissue and blood samples from diseased and healthy individuals, other biological materials, and related clinical and other information, which may be in limited supply. We may not be able to obtain or maintain access to these materials and information on acceptable terms in the future, or may not be able to obtain needed consents from individuals providing tissue, blood, or other samples. In addition, government regulation in the U.S. and foreign countries could result in restricted access to, or use of, human tissue or blood samples or other biological materials.
In addition, several key components of our diagnostic products and a test kit used in our clinical laboratory testing services come from, or are manufactured for us by, a single supplier or a limited number of suppliers. We acquire some of these and other key components on a purchase-order basis, meaning that the supplier is not required to supply us with specified quantities over any set period of time or set aside part of its inventory for our forecasted requirements. We have not arranged for alternative supply sources for some of these components should suppliers become unable to meet our demand or become unwilling to do so on terms that are acceptable to us.
We do not currently have manufacturing capabilities and do not have any plans to manufacture any products in the near future. We are exploring opportunities to produce and manufacture our diagnostic tests through collaborative agreements and strategic alliances. Exploitation of these opportunities will depend on the availability of further capital, qualified personnel, sufficient production resources and our ability to establish relationships with parties that have existing manufacturing and distribution capabilities.
Our research and development efforts are focused on the identification and validation of proteins that are associated with cancer, neurodegenerative diseases and neuromuscular diseases. In conducting these activities, we are using proprietary proteomics discovery platforms to develop protein-based diagnostic products and to identify and validate novel diagnostic targets. Through our research, we have been able to demonstrate that a particular protein can be used as a biological point of intervention for a diagnostic product designed to affect a particular disease or medical condition. In addition, our proteomics research has demonstrated that a particular protein can be used as a marker for diagnosing a disease, or for predicting disease prognosis or responsiveness to therapeutic intervention. These proteins may ultimately lead to the development of therapeutic products and also may lead to the development of diagnostic products, whether or not they result in effective diagnostic products.
Before a protein is used as a therapeutic target or diagnostic marker, we conduct extensive validation studies involving additional complementary testing or analysis performed to confirm its biological relevance and potential medical utility. Our discovery platform uses proprietary methodologies, trade secrets and accepted technologies that have been optimized and validated for reproducible discovery and analysis of disease specific protein biomarkers in clinically relevant patient samples. Following sample preparation, a quantitative 2D gel electrophoresis system is used for the separation of proteins. The gels are stained, digitally scanned and the digital images are analyzed with unprecedented reproducibility and sensitivity for quantitative differences of protein biomarkers in disease vs. control patient samples. These differences are evaluated using advanced biostatisticalbio-statistical analysis to generate statistical models for the disease and control sample groups. This statistical model is then applied to new patient samples and used to predict their diagnosis. Biomarkers of interest can be removed from the 2D gel matrix and analyzed by fingerprinting and amino acid sequence analysis on a liquid chromatograph -– tandem mass spectrometer. This information is then cross-referenced on a worldwide database and the results are combined with results from additional protein chemistry analysis to identify the specific protein biomarkers.
In the area of neurodegenerative diseases and breast cancer, we have completed research and clinical validation studies involving over 2,000 patient samples. We use biostatisticalbio-statistical analysis to monitor panels of biomarkers for diagnostic sensitivity and specificity for disease, normal and disease controls. By testing patient body fluids and tissues, including blood serum (for breast cancer and neurodegenerative diseases), and bone marrow aspirates (for leukemia patients), we have discovered unique protein biomarker patterns that cover a broad range of diseases, including: (i) cancer, such as breast, bladder, stomach, and esophageal cancer, and leukemia, and (ii) neurodegenerative diseases, such as Alzheimer’s, Parkinson’s and Lou Gehrig’s (ALS)ALS diseases.
Our rights and the rights of our collaborators to any diagnostic products developed under these agreements, our obligations and the obligations of our collaborators to further develop and commercialize these diagnostic products, and corresponding economic arrangements vary under the different agreements. However, we generally do not control the amount and timing of resources to be devoted by our collaborators to activities under the agreements. These research and development programs may never result in any diagnostic product candidates or lead to any commercialized diagnostic products, and may not generate any revenue for us.
Our collaborators are generally required to use commercially reasonable efforts to develop a diagnostic product, and the term of each agreement with these collaborators continues for as long as any royalties are payable to us under the agreement. The obligation to pay royalties generally coincides with the life of the underlying patents. In addition, these agreements generally may be terminated upon the mutual consent of the parties or by either party upon an uncured material breach by the other party.
On January 23, 2009, we entered into a definitive Collaboration and Exclusive License agreement with Transgenomic, Inc. Under the agreement, we granted Transgenomic exclusive rights in the United States and certain other countries to our proprietary test kits or systems for performing neurodegenerative diagnostic tests. In return, we were entitled to receive an up-front license execution fee, certain milestone fees, including fees payable in cash and fees payable in shares of Transgenomic common stock, and royalties based upon net sales of the Company’s tests, test kits or systems by Transgenomic.10
On February 2, 2010, we delivered notice of termination of the agreement to Transgenomic due in part to the failure by Transgenomic to complete the first commercial sale of a licensed product within 12 months of the date the Agreement was executed, and due in part to the commission of material breaches of the agreement by Transgenomic, including a breach of the confidentiality provisions of the agreement. We did not incur any early termination penalties in connection with our decision to terminate the Agreement.
Clinical Validation Trials
We completed a 200 patient prospective Phase I clinical validation trial of our NuroPro® diagnostic test for Alzheimer’s disease and Parkinson’s disease during 2009. As with the previous studies using retrospective patient samples, we used our existing proprietary and patent-pending technologies to analyze the samples by monitoring existing and seeking new additional NuroPro® protein biomarkers for the blood tests for the early detection of these neurodegenerative diseases. We received and analyzed 36 AD, 62 PD, and 70 controls from and age and gender matched control samples that showed greater than expected sensitivity and specificity. We obtained our blood serum samples from patients in Greece and in Arizona utilizing rigid sample collection protocols. We completed the analysis in our CLIA-certified lab.laboratory. The consistency in the sample results from both the US and Greece samples indicated how robust this test is in diverse populations. We obtained better than expected results for our Parkinson’s disease tests and are engaged in numerous validation studies for Alzheimer'sAlzheimer’s disease and similar neurological disorders. We intend to bring these diagnostic tests to market during 2010.2011.
We also completed a 300 patient Phase I and II clinical validation trial of blood serum samples using Power3'sour NuroPro® diagnostic screening test during 2009 in collaboration with the Cleo Roberts Center of Clinical Research of the Banner Sun Health Research Institute under the direction of Dr. Marwan N. Sabbagh, director of the Banner Sun Health Research Institute and a national leader in Alzheimer’s disease. For Phase I, Sun Health provided us with 100 clinically confirmed samples of Alzheimer’s disease and age and gender matched control samples. For Phase II, Sun Health provided us with 25 samples clinically confirmed samples of Alzheimer’s disease, Alzheimer’s disease-like controls, and age and gender matched control samples. We have run these samples in the lab and are currently engaged in image and statistical analysis.
During 2010,2011, we intend to begin commercializing and monetizing our research, intellectual property and diagnostic tests. We will also be continuing and expanding our collaboration and clinical validation trials for NuroPro® with physician scientists Dr. Marwan Sabbagh of the Sun Health Research Institute and Dr. Stanley H. Appel of the Methodist Neurological Institute.
Publications and Presentations
We are actively publishing and presenting the results of our proteomics research in major scientific journals and international scientific meetings. These publications and presentations provide validation of our reputation as a leader in diagnostic science. Examples of some of the recent publications and presentations that we have made are as follows:
| ·● | Dr. Ira L. Goldknopf, our President and Chief Scientific Officer, published an invited editorial in the February 2008 issue of the peer reviewed scientific journal Expert Review of Proteomics. The editorial, entitled “Blood Based Proteomics for Personalized Medicine, Examples from Neurodegenerative Disease,” outlined how proteins in the blood serum can tell us what disease pathways and mechanisms are active in patients. |
| ·● | We co-authored an article regarding the discovery of protein biomarkers for esophageal malignancies in the International Journal of Cancer in 2008. The article, titled “Alterations in Barrett’s-related adenocarcinomas: A proteomic approach,” was authored by Dr. Wael El-Rifai, MD, PhD, Professor of Surgery, Medicine and Cancer Biology and Director of Surgical Oncology Research at Vanderbilt University Medical Center, Nashville, Tennessee. Dr. El Rifai stated that through the use of our leading edge proteomic discovery platform, twenty-three biomarkers were identified that have not been described before in this lethal malignancy. |
| ·● | Dr. Goldknopf presented our results with Neurodegenerative diseases and drug resistance in leukemia at the Cambridge Healthtech Biomarker Discovery Summit in Philadelphia, Pennsylvania on October 1, 2008. |
| ·● | Dr. Goldknopf and co-authors Dr. Katerina Markopoulou, academic partner at the University of Thessaly in Greece, Dr. Bruce Chase, Dr. Stanly H. Appel and Dr. Marwan Sabbagh presented the overall results of NuroPro® blood tests, from discovery through clinical validation of blood protein biomarkers and tests for Parkinson’s disease, ALS, and Alzheimer’s disease, to the Alzheimer’s Association’s International Congress of Alzheimer’s Disease (ICAD) in Vienna, Austria in July 2009. |
| ·● | Dr. Goldknopf was the keynote speaker and served as a member of the Scientific Advisory Board of BIT Life Sciences’ 2nd Annual International Congress and Expo of Molecular Diagnostics (ICEMD-2009) in Beijing, China in November 2009. Along with his keynote address, “Principles of Omic Medicine Applied to Early Detection and Differential Diagnosis of Breast Cancer and Neurodegenerative Diseases,” Dr. Goldknopf chaired the session on “Biomarkers and Diagnostics in Personalized Medicine.” |
| ● | In July 2010, Lourdes R. Bosquez, MD, Dr. Goldknopf and Marwan Sabbagh, MD, presented four abstracts at the annual meeting of the International Congress of Alzheimer’s Disease in Honolulu, Hawaii. The presentations covered results from protein biomarker discovery, drug response, test development, and ongoing clinical validation trials of the NuroPro® AD biomarkers and blood test for Alzheimer’s disease. |
Sales and Marketing
We currently have no sales or marketing employees. However, we intend to establish a small sales force during 20102011 to promote our diagnostic tests. This sales team will market our diagnostic tests in a variety of ways, such as placing calls to specialists who work in the particular medical fields that would be benefited by our diagnostic tests. We also intend to add resources to focus on both the provider and payer markets specifically in managed care contracting and reimbursement.
Customers and Reimbursement
Our target customers consist of future commercialization partners, hospitals, laboratories and medical clinics that perform diagnostic testing. Our future revenue will be highly dependent on our clinical laboratory tests being approved for reimbursement by Medicare and third-party payors. We accept assignment for Medicare patients as payment in full on covered tests. Reimbursement from third-party insurance companies varies widely, even from a single payor in a given geographic area and population. Insurance companies often follow the lead of Medicare in determining whether a clinical laboratory test is covered and reimbursable. Reimbursement rates are generally higher for non-government payors. There can be no assurance that third-party payors will approve for reimbursement or continue to reimburse any of our clinical laboratory tests or the use of diagnostic products sold by us in the future.
Some of the greatest challenges associated with proteomic testing are the complicated pricing and reimbursement structures of the major payers and the out-dated Clinical Laboratory Fee Schedule codes often used by private and public payers. Neither of these systems reflects the complexity or the value of the development and delivery of genetic and pharmacogenetic tests. Current practice is to “stack” applicable Current Procedural Terminology codes in an attempt to reflect the actual laboratory procedures. New and unfamiliar tests, especially when accompanied by code stacking, may trigger review by the payer and denials of payment which must then be appealed on a case-by-case basis. When compounded by the number of payers in the United States healthcare system, attaining reasonable, value-based reimbursement for our tests remains a challenge.
Coverage of new diagnostic tests is further hindered by the fact that most insurers do not have a process for evaluating new tests. Major payers such as Blue Cross and Blue Shield have instituted or subscribe to technical review boards to evaluate new technologies and diagnostics. While positive reviews of new tests and technologies are valuable, they are rare and often viewed as a recommendation only and do not necessarily constitute immediate approval of a technology by members of that particular system.
ManyIn addition, many health plans and employers are beginning to view biomarker testing as an important next step in managing healthcare costs. Despite this, there is an ongoing requirement to develop the data that support these tests and an educational process for providers, patients, and payers required for the adoption of these tests into clinical practice and payment plans. We are working directly with thought leaders, leading academic institutions, physicians, hospitals, payers, professional associations, healthcare coalitions, information technology companies and other healthcare constituents to set the stage for market introduction and adoption of these tests.
We are continually evaluateseeking opportunities that may provide us with, among other things, therapeutic assets, promising biomarkers preferably with intellectual property protections,protection, new technologies, and key personnel or capabilities that could augment these efforts. From time to time, we may pursue acquisitions which we believe will meet these or other pre-clinical and clinical program goals.
In FebruaryOn September 7, 2010, we entered into a definitive merger agreement to acquire StemTroniX,an Agreement and Plan of Merger (the “Merger Agreement”) with Rozetta-Cell Life Sciences, Inc., a Texas corporation. StemTroniX is a medical biotechnology company that is committedNevada corporation (“Rozetta-Cell”), pursuant to improvingwhich Rozetta-Cell will merge with and into us, the livesseparate corporate existence of individuals by using autologous adult stem cell technology to repair tissue damage in patients. Autologous adult stem cell therapy isRozetta-Cell will cease, and we will continue as the process of using an individual’s blood to purify their stem cells and re-introduce them into that individual for the purpose of repairing and regenerating damaged tissue. StemTroniX provides a system to augment this process.surviving company.
Subject to the terms and conditions of the merger agreement,Merger Agreement, which has been approved by the boards of directors of both us and StemTroniX,Rozetta-Cell, if the merger is completed, each outstanding share of StemTroniXRozetta-Cell common stock will be converted into the right to receive fourteen and sixth-tenths (14.60)10 shares of our common stock, subject to certain adjustments as provided in the merger agreement.Merger Agreement.
The merger agreementMerger Agreement contains customary representations and warranties by us and StemTroniX,Rozetta-Cell, covenants by StemTroniXRozetta-Cell to conduct its business in the ordinary course until the merger is completed,consummated, and covenants by StemTroniXRozetta-Cell to not take certain actions during such period. StemTroniXuntil the merger is consummated. Rozetta-Cell has also agreed to not solicit proposals relating to business combination transactions with other parties or enter into discussions concerning any proposals for business combination transactions with other parties.
Consummation of the merger is subject to certain customary conditions, including, among others, the approval of the merger by the shareholders of StemTroniX,Rozetta-Cell, the approval of the issuance of shares of our common stock in connection with the merger by our shareholders, the approval of an amendment to our certification of incorporation by our shareholders to increase the number of shares of common stock authorized for issuance to that number of shares necessary to ensure that an adequate number of shares is available for issuance to the shareholders of StemTroniX,Rozetta-Cell, the receipt of any required governmental approvals and expiration of applicable waiting periods, the accuracy of the representations and warranties byof us and StemTroniXRozetta-Cell (generally subject to a material adverse effect standard), and material compliance by us and StemTroniXRozetta-Cell with ourtheir respective obligations under the Merger Agreement.
The Merger Agreement contains certain termination rights of us and Rozetta-Cell, including the right to terminate the Merger Agreement if the merger agreement.is not completed by December 31, 2010.
On December 31, 2010, we entered into a First Amendment and Waiver to Agreement and Plan of Merger with Rozetta-Cell (the “Amendment”) which amends the Merger Agreement. Under the terms of the Amendment, we and Rozetta-Cell agreed to extend the outside date by which the merger must close to June 30, 2011 and require the conversion of all issued and outstanding shares of our Series B preferred stock into shares of our common stock by the holders thereof subsequent to approval of the merger by our shareholders, but prior to completion of the merger.
Intellectual Property and Proprietary Rights
Our ability to compete depends, in part, on our ability to protect our proprietary discoveries and technologies through obtaining and enforcing intellectual property rights, including patent rights, copyrights, our trade secrets and other intellectual property rights, and operating without infringing the intellectual property rights of others. Our diagnostic products are based on complex, rapidly developing technologies. Some of these technologies are covered by patents owned by others and used by us under license. We are protecting our proprietary rights by a combination of patent applications, trade secret and trademark protection, and protective provisions such as confidentiality agreements with our employees, consultants, vendors, collaborators, advisors, customers and other third parties.
We are currently seeking patent protection for proteins, diagnostic markers, technologies, methods, processes and other inventions which we believe are patentable and where we believe our interests would be best served by seeking patent protection. We have filed 15 patent applications in the United States, including three for breast cancer, 11 for neurodegenerative disease and one for drug resistance. We have also licensed rights to several issued patents. Through our internal research programs and collaborative programs, we anticipate that we will further develop an increasing portfolio of intellectual property. We may use this intellectual property in our internal product development programs or may license this intellectual property to collaborators, customers, or others for some combination of license fees, milestone payments, and royalty payments. We expect to continue seeking patent protection for these types of inventions by pursuing patent applications already filed and applying for patent protection for inventions that we make in the future, in all cases subject to an ongoing case-by-case assessment of the potential value of those inventions consistent with our business and scientific goals.
We also rely upon unpatented proprietary technology, and in the future may determine in some cases that our interests would be better served by reliance on trade secrets or confidentiality agreements rather than patents or licenses. We may not be able to protect our rights to such unpatented proprietary technology and others may independently develop substantially equivalent technologies. If we are unable to obtain strong proprietary rights to our processes or products after obtaining regulatory clearance, competitors may be able to market competing processes and products.
We require our employees, consultants, advisors and other contractors to enter into agreements that prohibit their use or disclosure of our confidential information and, where applicable, require disclosure and assignment to us of their ideas, developments, discoveries and inventions important to our business. These confidentiality agreements generally have a term that lasts for so long as the collaboration is in effect, plus a specified period afterward and are generally terminable by either party upon a breach of the agreement by the other party and, in some cases, upon written notice. These agreements generally permit us to seek injunctive or other relief in the event of unpermitted use or disclosure of our confidential information.
Any patent applications which we have filed or will file or to which we have licensed or will license rights may not issue, and patents that do issue may not contain commercially valuable claims. In addition, any patents issued to us or our licensors may not afford meaningful protection for our technology or products or may be subsequently circumvented, invalidated or narrowed, or found unenforceable. We may infringe the intellectual property rights of others, and may become involved in expensive intellectual property legal proceedings to determine the scope and validity of our patent rights with respect to others. Our failure to receive patent protection for our diagnostic or therapeutic inventions could diminish the commercial value of these discoveries and could harm our business.
The proteomics industry is rapidly evolving and competition is becoming increasingly intense. The industry is subject to significant change with respect to technology for diagnosis and treatment of disease. Competitors vary in size and in scope and breadth of the products and services they offer. Existing or future biotechnology, biomedical, pharmaceutical and other companies, government entities and universities may create diagnostic tests that accomplish similar functions to our diagnostic tests in ways that are less expensive, receive faster regulatory approval or receive greater market acceptance than our potential products.
We believe that success in the proteomics industry is dependent upon the ability of companies to:
| ·● | identify proteomic biomarkers that will enable the clinical development program with the potential for clinical utility; |
| ·● | establish validated proteomic tests with adequate predictive characteristics; |
| ·● | understand the complexity of the proteomic underpinnings of disease, and the related complexity of identifying and validating proteomic biomarkers.biomarkers; |
| ·● | obtain patent protection for protein biomarkers and their clinical utility; |
| ·● | establish efficacy and safety in a clinical development program; |
| ·● | demonstrate data that supports test adoption and reimbursement; and |
| ·● | gain marketing approval under the CLIA and, later, the FDA and other regulatory agencies. |
| · | educate providers and health care payers on the value of incorporating proteomic testing into their practice; and |
| · | operate within an antiquated reimbursement system that does not reflect either the investment to develop the diagnostic test or the clinical or economic value of the diagnostic test. |
There are several other companies engaged in the research of proteomics and its application to biomarker discovery capabilities, including:
| ·● | Celera Corporation, a company engaged in proteomics, bioinformatics and genomics that identifies and develops drug targets and discover and develop new therapeutics; |
| ·● | Vermillion Inc., a biomarker discovery assay development and characterization company; |
| ·● | BioRad, a seller of biomarker discovery equipment; |
| ·● | Satoris, a developer of cytokines-based plasma biomarkers test for Alzheimer’s disease; |
| ·● | Myriad Genetics, a developer of therapeutic and diagnostic products using genomic and proteomic technologies; and |
| ·● | Provista Life Sciences, a developer of blood serum protein biomarker diagnostic tests for breast cancer and Alzheimer’s disease. |
Some of our current and potential competitors have longer operating histories and significantly greater financial, technical, marketing, administrative and other resources than we do. They may have significantly greater name recognition, established marketing relationships and access to a larger installed base of customers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to design customized products to better address customer needs. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse affect on our business, financial condition and results of operations.
Government Regulation
In the U.S. and in other countries, the development and commercialization of diagnostic products and clinical laboratory testing services are heavily regulated by governmental agencies. These requirements vary from country to country. Currently, the principal marketsmarket for our diagnostic products and services areis the United States. The U.S. and the EU, and the regulatory requirements in those jurisdictionsapplicable to our business are described below.
CLIA and other laboratory licensureOther Laboratory Licensure
Laboratories like ours that perform testing on human specimens for the purpose of providing information for diagnosis, prevention or treatment of disease or assessment of health are subject to the Clinical Laboratory Improvement Amendments of 1988, or CLIA. CLIA is a federal law that regulates clinical laboratory testing performed on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical laboratory testing in the United States. Our laboratory located in the Woodlands, Texas is a CLIA-certified laboratory. Our CLIA certification requires itsthat each clinical laboratory to be inspected every other year in addition to being subject to random CLIA inspections. Our clinical laboratory is also subject to license requirements imposed by the State of Texas. Texas laws establish quality standards for day-to-day operation of the clinical laboratory, including the training and skills required of personnel and quality control. If a CLIA or state inspector finds deficiencies, that finding could lead to the revocation or suspension of, or limitations being placed upon, our CLIA accreditation or Texas license. Any revocation, suspension, or limitation could prevent us from performing all or some of its clinical laboratory testing services and could harm our operating results and financial condition.
Food and Drug Administration
In the U.S., the FDA classifies in vitro diagnostic products as “devices” and the“devices.” The FDA’s Center for Devices and Radiological Health and Center for Biologics Evaluation and Research regulate these products. The diagnostic products that we market do not currently require FDA approval. Our current diagnostic tests take advantage of the “laboratory developed test” exception from FDA review. The FDA maintains that it has authority to regulate the development and use of laboratory developed tests as diagnostic medical devices under the Federal Food, Drug and Cosmetic Act, but to date has decided not to exercise its authority with respect to most laboratory developed tests performed by high complexity CLIA-certified laboratories as a matter of enforcement discretion. Our diagnostic products have not obtained FDA premarket clearance or approval. The FDA regularly considers the application of additional regulatory controls over the use of laboratory developed tests by laboratories such as ours. Further, the FDA has recently been petitioned to exercise regulatory authority over certain laboratory developed tests and to initiate enforcement action against companies that make effectiveness claims about laboratory developed tests that are without sufficient analytical and clinical support. As a result, it is possible that the FDA may look at the sale and use of laboratory developed tests with heightened scrutiny or modify their regulatory approach with respect to laboratory developed tests.
Our diagnostic products have not obtained FDA premarket clearance or approval. If FDA regulation of laboratory developed tests increases or if regulation of the various medical devices used in laboratory-developed testing ensues, it would lead to an increased regulatory burden resulting in additional costs and delays in introducing tests, including genetic tests; thistests. This may hinder us from developing and marketing certain products or services and could harm our operating results and financial condition.
HIPAA and other privacy lawsOther Privacy Laws
The Health Insurance Portability and Accountability Act of 1996 or HIPAA,(“HIPAA”) established for the first time comprehensive United States protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: health plans, healthcare clearing houses, and healthcare providers which conduct certain healthcare transactions electronically. Covered Entities must have in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information. Specifically, Title II of HIPAA, the Administrative Simplification Act, contains four provisions that address the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcare system and the standardization of data content, codes and formats used in healthcare transactions. The privacy regulations protect medical records and other personal health information by limiting their use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimum amount necessary to accomplish an intended purpose. We are currently subject to the HIPAA regulations and maintain an active program designed to address regulatory compliance issues. Penalties for non-compliance with HIPAA include both civil and criminal penalties. Violations could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation.
In addition to the federal privacy regulations, there are a number of state laws regarding the confidentiality of health information that are applicable to clinical laboratories. The penalties for violation of state privacy laws may vary widely and new privacy laws in this area are pending. We believe that we have taken the steps required of us to comply with health information privacy and confidentiality statutes and regulations in all jurisdictions, both state and federal. However, we may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintain compliance, or changes in state or federal laws regarding privacy, could result in civil and/or criminal penalties and could have a material adverse effect on our business.
We are subject to licensing and regulation under federal, state and local laws, such as the Environmental Protection Act and the Toxic Substance Control Act, relating to the handling and disposal of medical specimens and hazardous waste as well as to the safety and health of laboratory employees. Our laboratory facility in The Woodlands, Texas is operated in material compliance with applicable federal and state laws and regulations relating to disposal of all laboratory specimens. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials.
The Federal Occupational Safety and Health Administration (“OSHA”) has established extensive requirements relating to workplace safety for healthcare employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals and transmission of the blood-borne and airborne pathogens.
We believe that we are in material compliance with these and other applicable laws and that the costs of our ongoing compliance will not have a material adverse effect on our business. However, statutes or regulations applicable to our business may be adopted which impose substantial additional costs to assure compliance or otherwise materially adversely affect our operations.
Healthcare Regulation and Reform.
Government regulation and reform of the healthcare industry may also affect the manner in which we conduct our business in the future. There continues to be diverse legislative and regulatory initiatives at both the federal and state levels to affect aspects of the nation’s health care system. Many states have enacted, or are considering, various healthcare reform statutes. These reforms relate to, among other things, managed care practices, prompt pay payment practices, health insurer liability and mandated benefits. Most states have also enacted patient confidentiality laws that prohibit the disclosure of confidential information. As with all areas of legislation, the federal regulations establish minimum standards and preempt conflicting state laws that are less restrictive but will allow state laws that are more restrictive. We expect this trend of increased legislation to continue. We are unable to predict what state reforms will be enacted or how they would affect our business.
Numerous proposals to reform the current healthcare system have been introduced in the U.S. Congress and in various state legislatures. Recently, President Obama and members of Congress passed significant reforms to the U.S. healthcare system. The Obama administration has stated as a top priority its desire to reform the U.S. health care system with the goal of providing affordable, accessible health care for all Americans. Proposals that have been considered include cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, and mandatory health insurance coverage for employees. In addition, some members of Congress have proposed a government health insurance option to compete with private plans and other expanded public healthcare measures. Various healthcare reform proposals have also emerged at the state level. Both the U.S. Senate and House of Representatives have conducted hearings about U.S. healthcare reform. We cannot predict what the effect of any future healthcare reform legislation or regulation will have on us. However, an expansion of the government’s role in the U.S. healthcare industry could have a material adverse affect on our financial condition and results of operations.
Employees
As of April 9, 2010,26, 2011, we had a total of fourthree employees. Of this amount, two were full-time employees and two wereone was a part-time employees.employee. We utilize the services of several full-time and part-time consultants as well as contract research organizations and other outside specialty firms for various services such as clinical trial support, manufacturing and regulatory approval advice. None of our employees are represented by a labor union, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in addition to other information in this report before purchasing our common stock. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our company, our industry and our stock. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occurs, our business may be adversely affected, the trading price of our common stock may decline and you may lose all or part of your investment.
Risks Associated With Our Business
We are an early-stage company with an unproven business model, which makes it difficult for us to evaluate our current business and future prospects.
While we are actively engaged in developing diagnostic tests based on our proteomics research for the treatment cancer and neurodegenerative and neuromuscular diseases and have already developed two such tests, BC-SeraPro™ and NuroPro®, we have generated only a small amount of revenue to date. In addition, since we have only been actively operating in the proteomics industry since 2004, we have very limited historical data with respect to our current and proposed business. As a result of these factors, the revenue and income potential of our business is unproven, and we have only a limited operating history upon which to base an evaluation of our current business and future prospects. Because of our limited operating history and because the discount medical plan industry is rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business.
Before purchasing our common stock, you should consider an investment in our common stock in light of the risks, uncertainties and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets such as ours, including those described herein. We may not be able to successfully address any or all of these risks. Failure to adequately address such risks could cause our business, financial condition and results of operations to suffer.
We have a history of losses and the report of our independent accountants issued in connection with the audit of our financial statements contained a qualification raising a substantial doubt about our ability to continue as a going concern.
We have recognized net losses in each fiscal quarter since our inception and as of December 31, 2009, had an accumulated deficit of approximately $89.5 million. We incurred net losses to common stockholdersshareholders of approximately $19.2$20.3 million for the year ended December 31, 2009, and had an accumulated deficit of approximately $137,000 for$79 million at December 31, 2010. While we generated net income of approximately $10.5 million during the year ended December 31, 2008.2010, this net income resulted primarily from a non-cash derivative gain that we recognized during the year. We incurred a loss from operations of approximately $2.1 million during the year ended December 31, 2010. As a result of these conditions, the report of our independent accountants issued in connection with the audit of our financial statements as of and for our fiscal year ended December 31, 20092010 contained a qualification raising a substantial doubt about our ability to continue as a going concern. We can provide no assurance regarding when, if ever, we will become profitable. As a result, we may continue to generate losses for the foreseeable future.
We will need to raise additional funds in the future to cover our debt obligations, long-term contractual obligations and operating expenses, which funds may not be available or, if available, may not be available on acceptable terms.
We have debt obligations of over $1 million that are currently in default and/or payable on demand. A summary of the material terms of these debt obligations is set forth under Note 9 to our audited financial statements beginning on page F-1 of this report. Our inability to satisfy these obligations upon demand by the lenders thereof may subject us to costly litigation and seriously harm our business, financial condition and results of operations.
We also have significant long-term contractual obligations that we must satisfy over the next several years. We are a party to an employment agreement and consulting agreement with Ira L. Goldknopf and Helen R. Park, respectively, pursuant to which they are currently entitled to receive annualized base salaries of $125,000 and $100,008, respectively. We must also make payments under the operating leaseleases for our office space in The Woodlands, Texas in the aggregate amount of approximately $31,512$99,000 during 2010.2011. A summary of the material terms of these employment agreements and the lease and our financial obligations thereunder is provided herein under “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations.” If we are unable to satisfy these obligations as they become due, our business may be materially and adversely affected.
We may also expect to continue to incur significant operating expenses over the next 12 months as we:
| ·● | the extent to which we enter into licensing arrangements, collaborations or joint ventures; |
| ·● | our progress withengage in research and development;development activities; |
| ·● | the costs and timing of obtainingobtain new patent rights;rights and other intellectual property; |
| ·● | the extent to which we acquire or license other technologies; |
| ·● | regulatory changes and competition and technological developments in the market;settle litigation to which we are currently a party; |
| ·● | comply with regulatory changes; |
| ● | upgrade our operational and financial systems, procedures and controls; and |
| ·● | comply with state and federal laws governing our business operations, comply with Securities and Exchange Commission (“SEC”) reporting requirements and fulfill the other responsibilities that we have as a public company. |
WeFurthermore, we may also experience a material decrease in liquidity due to unforeseen capital requirements or other events and uncertainties.
We believe that our current cash resources will not be sufficient to sustain our current operations for the next 12 months. As a result, we will need to raise additional funds during the next 12 months. We have not made arrangements to obtain additional financing and we can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we cannot raise funds when they are needed or if such funds cannot be obtained on acceptable terms, we may not be able to pay our costs and expenses as they are incurred, create or sell new diagnostic products, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. This may seriously harm our business, financial condition and results of operations.
An unexpected adverse outcome in litigation to which we are currently a party could render us liable for a judgment that we are unable to pay.
We are currently a party to numerous lawsuits. While we do not believe that a material loss is probable with respect to any of the lawsuits, and unexpected finding by a court could result in a judgment against us that we may be unable to pay. We have recently settled some of the litigation to which we were a party during 2010 by issuing shares of our common stock. In the event we are found liable for a monetary amount under any of our remaining lawsuits and are unable to pay the amount of the judgment in cash or shares of our common stock, our business and operations could be materially negatively impacted. A description of the litigation to which we are currently a party is set forth herein under “Item 3. Legal Proceedings.”
Our continuedexpected growth could strain our personnel and infrastructure resources.
We are experiencingexpect to enter a stage of rapid growth in our operations which is placing, and will continue tocould place a significant strain on our management, administrative, operational and financial infrastructure. Our future success will depend in part upon the ability of our management to manage growth effectively. This may require us to hire and train additional personnel to manage our expanding operations. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully manage our growth, we may be unable to execute upon our business plan.
Clinical trials offor our diagnostic product candidates may not be successful.
Potential clinicalClinical trials offor our product candidates may not begin on time, may not be completed on schedule, or at all, or may not be sufficient for registration of the products or result in products that can receive necessary clearances or approvals. Numerous unforeseen events during, or as a result of, clinical testing could delay or prevent commercialization of our or our collaborators’ or licensees’ diagnostic product candidates. Diagnostic product candidates that appear to be promising at early stages of development or early clinical trials may later be found to be unsafe, ineffective, or to have limited medical value. If we are unable to successfully complete clinical trials for diagnostic product candidates, our operating results and financial condition would be harmed.
We may not succeed in developing diagnostic products and even if we succeed in developing diagnostic products, the diagnostic products may never achieve significant commercial market acceptance.
Our success depends on our ability to develop and commercialize diagnostic products. Development of existing product candidates will require significant additional research and development efforts by us or our collaborators or licensees before they can be marketed. For potential diagnostic products, these efforts include extensive clinical testing to confirm the products are safe and effective and may require lengthy regulatory review and clearance or approval by the FDA and comparable agencies in other countries. Furthermore, even if these products are found to be safe and effective and receive necessary regulatory clearances or approvals, they may never be developed into commercial products due to considerations such as inability to obtain needed licenses to intellectual property owned by others, market and competitive conditions, and manufacturing difficulties or cost considerations.
Our ability to successfully commercialize diagnostic products that we may develop, such as tests, kits and devices, will depend on several factors, including:
| ·● | our ability to convince the medical community of the safety and clinical efficacy of our products and their advantages over existing diagnostic products; |
| ·● | our ability to obtain necessary regulatory approval of our diagnostic products; |
| ·● | our ability to further establish business relationships with other diagnostic companies that can assist in the commercialization of these products; |
| ·● | the willingness of physicians and patients to utilize our products; and |
| ·● | the extent to which Medicare and third-party payers provide full or partial reimbursement coverage for our products. |
These factors present obstacles to significant commercial acceptance of our potential diagnostic products and will require a substantial amount of time and financial resources to overcome. If we are unable to overcome these obstacles, we may not generate revenue from our diagnostic products or develop a profitable business.
If we are unable to form and maintain the collaborative relationships that our business strategy requires, our ability to develop products and revenue will suffer.
Our strategy for the discovery, development, clinical testing, manufacturing and/or commercialization of most of our diagnostic product candidates includes entering into collaborations and similar arrangements with other companies. Depending on the nature of the product candidate, our potential collaborators may include pharmaceutical companies, clinical reference laboratories, diagnostic imaging equipment suppliers, or other companies. We have identified some potential new collaborators, but have not yet entered into any collaboration arrangements with them. Although we have expended, and continue to expend, time and money on internal research and development programs, we may be unsuccessful in creating diagnostic product candidates that would enable us to form additional collaborations and alliances and, if applicable, receive milestone and/or royalty payments from collaborators. Other companies may not be interested in entering into these relationships with us, or may not be interested in doing so on terms that we consider acceptable.
Collaborative agreements generally pose the following risks:
| ·● | collaborators may not pursue further development and commercialization of products resulting from collaborations or may elect not to continue or renew research and development programs; |
| ·● | collaborators may delay clinical trials, underfund a clinical trial program, stop a clinical trial or abandon a product, repeat or conduct new clinical trials or require a new formulation of a product for clinical testing; |
| ·● | collaborators could independently develop, or develop with third parties, products that could compete with our future products; |
| ·● | the terms of our agreements with our current or future collaborators may not be favorable to us; |
| ·● | a collaborator with marketing and distribution rights to one or more products may not commit enough resources to the marketing and distribution of our products, limiting our potential revenue from the commercialization of a product; |
| ·● | disputes may arise delaying or terminating the research, development or commercialization of our products, or result in significant litigation or arbitration; and |
| ·● | collaborations may be terminated and,which, if terminated, we would experience increasedresult in us having to contribute additional capital requirements if we elected to pursue further development of the product.product on our own. |
In addition, business combinations or alliances among large pharmaceutical companies could result in a reduced number of potential future collaborators. If business combinations involving our collaborators were to occur, the effect could be to diminish, terminate or cause delays in one or more of our product development programs.
Our future revenue will be negatively affected if third-party payors decide that our products or services are not approved for reimbursement or if healthcare providers do not accept our diagnostic products as clinically useful.
Our future revenue will be highly dependent on our clinical laboratory tests and diagnostic products being approved for reimbursement by Medicare and other government healthcare programs, as well as private insurance companies and managed care organizations, commonly referred to, collectively, as “third-party payors.” Third-party payors may determine that our diagnostic tests and products are not medically necessary or otherwise not approved for reimbursement under standards independently established by these third-party payors, which may take into consideration factors such as the investigational nature of a particular test or product, or whether less expensive alternatives are available. Each third-party payor makes its own decision as to whether a given diagnostic test is medically necessary and worthy of payment. If Medicare or any other third-party payor determines that any one or more of our clinical laboratory tests are not medically necessary or are not otherwise suitable for reimbursement, healthcare providers could be reluctant to prescribe these tests. Similarly, if the use of our diagnostic products is not approved for reimbursement, purchasers of any one or more of these products could decrease or eliminate their orders of these products. Any change by one or more third-party payor with regard to their existing reimbursement practices could impact the tests and products we offer, the revenue received on each of the tests and products we sell and harm our operating results and financial condition.
In addition, the growth and success of sales of our diagnostic products depends on market acceptance by healthcare providers and laboratories of our products as clinically useful and cost-effective. We expect that most of our diagnostic products will use proteomic information to predict predisposition to diseases, disease progression or severity, or responsiveness to treatment. Market acceptance depends on the widespread acceptance and use by healthcare providers of proteomic testing for these purposes. The use of proteomic information by healthcare providers for these purposes is relatively new. Healthcare providers may not want to use our products designed for these purposes. Also, Medicare and other third-party payors are continually looking at the clinical utility of genetic testing and making determinations as to whether to continue reimbursement for certain genetic tests. Either of these events could impact the tests and products we offer, the revenue received on each of the tests and products we sell and harm our operating results and financial condition.
Health care cost containment initiatives by third-party payors to reduce utilization and reimbursement rates may decrease our revenue and profitability.
Our ability to commercialize our products successfully will be affected by the ongoing efforts of governmental and third-party payors to contain or reduce the cost of health care. Third-party payors have increased their efforts to control the cost, utilization and delivery of healthcare services. From time to time, Congress has considered and implemented changes in the Medicare fee schedules in conjunction with budgetary legislation. A five-year moratorium on changes to the Medicare clinical laboratory fee schedule ended on December 31, 2008. The Medicare clinical laboratory rates were increased approximately 4.5% as of January 1, 2009. In the current economic environment, there is no certainty that these rates will remain at these levels for clinical laboratory testing. Reductions in the reimbursement rates of other third-party payors have occurred and may occur in the future. In the past, these reimbursement rate changes have resulted in reduced prices, added costs and decreased test utilization for the clinical laboratory industry and future rate reductions could have a similar impact on the industry. If the payment amount we receive for our clinical laboratory testing services is reduced, it could harm our operating results and financial condition. Also, if clinical laboratories that purchase our diagnostic products receive reduced payment for their testing services, the reduced payments may cause them to seek lower pricing for our diagnostic products, which could, in turn, harm our operating results and financial condition.
Governmental and other third-party payors increasingly are attempting to contain health care costs by:
| · | challenging the prices charged for health care products and services; |
| · | limiting both coverage and the amount of reimbursement for new therapeutic products; |
| · | denying or limiting coverage for products that are approved by the FDA but are considered experimental or investigational by third-party payors; and |
| · | refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA marketing approval. |
In addition, the trend toward managed health care in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reducing demand for our products.
Even if we succeed in bringing any products to the market, they may not be considered cost-effective and third-party reimbursement might not be available or sufficient. If adequate third-party coverage is not available, we may not be able to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. In addition, legislation and regulations affecting the pricing of diagnostic services and testing may change in ways adverse to us before or after any of our proposed products are approved for marketing. While we cannot predict whether any such legislative or regulatory changes will be adopted, the adoption of such changes could make it difficult or impossible to sell our products.
Our development and commercialization of diagnostic products could be harmed if collaborators or licensees fail to perform under their agreements with us or if they terminate those agreements.
We expect to derive revenue from our licensees’ and partners’ product sales under our intellectual property license agreements and other agreements that we have and will enter into. Even if these licensees and partners perform their obligations as required by these agreements, their ability to develop, manufacture and commercialize products successfully is uncertain. Since the royalties payable to us under these agreements will generally depend on our licensees’ and partners’ sales of their products, which are not within our control, their failure in commercializing their products or maintaining or increasing the sales volumes of their products may harm our operating results and financial condition. In addition, certain of these intellectual property license agreements may permit our licensees to pay us an upfront license fee over a period of time during which they have the right to terminate the agreements. In the event that a licensee terminates its license agreement before the upfront license fee is paid in full, we will not be paid any remaining license fee.
Each of our existing collaboration, license and similar agreements with other companies for the development and commercialization of products may be canceled under some circumstances. These agreements generally may be terminated under circumstances including a material breach or default of the agreement, a change in control, or the insolvency or bankruptcy of either party. In addition, the amount and timing of resources to be devoted to research, development, clinical trials, and commercialization activities by our collaborators and licensees are generally not within our control. We expect that collaboration, license, and similar agreements entered into in the future, if any, will have similar terms and limitations. Furthermore, even if these agreements contain commitments regarding these activities, our collaborators or licensees may not perform their obligations as expected. If collaborators or licensees terminate their agreements or otherwise fail to conduct their collaborative or licensed activities in a timely manner, or at all, the development or commercialization of diagnostic products may be delayed or prevented. If we assume responsibility for continuing diagnostic programs on our own after termination of a collaboration, license or similar agreement, we may be required to devote additional resources to product development and commercialization or we may need to cancel some development programs. Any reallocation of additional resources to product development and/or commercialization or cancellation of development programs may harm our operating results and financial condition.
Our competitive position depends on maintaining our intellectual property protection.
Our ability to compete and to achieve and maintain profitability depends, in part, on our ability to protect our proprietary discoveries and technologies through obtaining and enforcing intellectual property rights, including patent rights, copyrights, trade secrets, and trademarks, and operating without infringing the intellectual property rights of others. Our ability to obtain patent protection for the inventions we make, including those relating to novel methods of diagnosing and/or treating diseases, is uncertain. The patentability of these and other types of biotechnology inventions involves complex factual, scientific, and legal questions. As a result, it is difficult to predict whether patents will issue or the breadth of claims that will be allowed in biotechnology patents. This may be particularly true with regard to the patenting of gene sequences, gene functions, genetic variations and methods of diagnosis of disease based on genetic variations. Future changes in policies or laws, or interpretations of these policies or laws, relevant to the patenting of biotechnology inventions could harm our patent position in the U.S. or other countries. Opposition to the protection of these inventions in the U.S. or other countries could result in stricter standards for obtaining or enforcing biotechnology patent rights.
In some instances, patent applications in the U.S. are maintained in secrecy until a patent issues.is issued. In most instances, the content of U.S. and international patent applications is made available to the public approximately eighteen months after the initial filing from which priority is claimed. As a result, we may not be aware that others have filed patent applications for inventions covered by our patent applications and may incorrectly believe that our inventors were the first to make the invention. Accordingly, our patent applications may be preempted or we may have to participate in interference proceedings before the U.S. Patent and Trademark Office.Office (“USPTO”). These proceedings determine the priority of invention and the right to a patent for the claimed invention in the U.S. In addition, disputes may arise in the future with regard to the ownership of rights to any invention developed with collaborators which could result in delays in, or prevent, the development of related products.
We also rely on trade secret protection for our confidential and proprietary information and procedures, including procedures related to sequencing genes and to searching and identifying important regions of genetic information. We protect our trade secrets through recognized practices, including access control, confidentiality and non-use agreements with employees, consultants, collaborators and customers, and other security measures. These confidentiality and non-use agreements may be breached, however, and we may not have adequate remedies for a breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. Accordingly, it is uncertain whether our reliance on trade secret protection will be adequate to safeguard our confidential and proprietary information and procedures.
We may become involved in expensive intellectual property legal proceedings.
There has been substantial litigation and other legal proceedings regarding patents and other intellectual property rights relevant to diagnostic and biotechnology products and services. The intellectual property rights of biotechnology companies, including those held by us, are generally uncertain and involve complex factual, scientific and legal questions. Our success in diagnostic product development, clinical laboratory testing and therapeutic target discovery may depend, in part, on our ability to operate without infringing the intellectual property rights of others and our ability to prevent others from infringing our intellectual property rights. Also, contractual disputes related to existing license rights to patents owned by others may affect our ability to develop, manufacture and sell our products and clinical laboratory testing services.
We may initiate proceedings at the U.S. Patent and Trademark OfficeUSPTO to determine our patent rights with respect to others. Also, we may initiate patent litigation to enforce our patent rights or invalidate patents held by others. These legal actions may similarly be initiated against us by others alleging that we are infringing their rights. The cost to us of any patent litigation or proceedings, even if we are successful, could be substantial, and these legal actions may absorb significant management time. Even if we are successful on the merits in any such proceeding, the cost of these proceedings could harm our operating results and financial condition.
If infringement claims against us are resolved unfavorably to us, we may be enjoined from manufacturing or selling our products or services without a license from a third party, and we may not be able to obtain a license on commercially acceptable terms, or at all. Also, we could become subject to significant liabilities to others if these claims are resolved unfavorably to us.
If we fail to comply with our obligations under license or technology agreements with third parties, we could lose license rights that are critical to our business.
We license intellectual property that is critical to our business and in the future we may enter into additional agreements that provide us with licenses to valuable intellectual property or technology. These licenses impose various royalty payments, milestones, and other obligations on us. If we fail to comply with any of these obligations, the licensor may have the right to terminate the license. Termination by the licensor would cause us to lose valuable rights, the ability to distribute our current products, or inhibit our ability to commercialize future product candidates. Our business would suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms.
We face intense competition in the proteomics, biotechnology and pharmaceutical industries.
The proteomics, biotechnology and pharmaceutical industries are intensely competitive. We have numerous competitors in the United States and elsewhere. Our competitors include major multinational pharmaceutical, biomedical and biotechnology companies, specialized firms and universities and other research institutions. Many of these competitors have greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations than we do. In addition, academic and government institutions have become increasingly aware of the commercial value of their research findings. These institutions are more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to market commercial products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established biotechnology companies. Many of these competitors have significant products that have been approved or are in development and operate large, well-funded research and development programs.
Our competitors may succeed in developing or licensing technologies and products that are more effective or less costly than any we are developing. Our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates before we do. Products resulting from our research and development efforts, even if approved for sale, may not compete successfully with our competitors’ existing products or products under development.
We conduct our clinical laboratory testing business in a heavily regulated industry and changes in regulations or violations of regulations could, directly or indirectly, harm our operating results and financial condition.
The clinical laboratory testing industry is highly regulated and there can be no assurance that the regulatory environment in which we operate will not change significantly and adversely in the future. In particular, there is risk of healthcare reform or other legislative activity in 2009, which2011 that may result in changes in the regulatory or payor environment that may adversely affect our business. Areas of the regulatory environment that may affect our ability to conduct business include, without limitation:
| ·● | federal and state laws applicable to billing and claims payment; |
| ·● | federal and state laboratory anti-mark-up laws; |
| ·● | federal and state anti-kickback laws; |
| ·● | federal and state false claims laws; |
| ·● | federal and state self-referral and financial inducement laws, including the federal physician anti-self-referral law, or the Stark Law; |
| ·● | coverage and reimbursement levels by Medicare and other governmental payors and private insurers; |
| ·● | federal and state laws governing laboratory licensing and testing, including the Clinical Laboratory Improvement Amendments of 1988, or CLIA; |
| ·● | federal and state laws governing the development, use and distribution of diagnostic medical tests known as “laboratory developed tests”; |
| ·● | the Health Insurance Portability and Accountability Act of 1996, or HIPAA and analogous state laws; |
| ·● | federal, state and local laws governing the handling and disposal of medical and hazardous waste; |
| ·● | Occupational Safety and Health AdministrationOSHA rules and regulations; and |
| ·● | changes to other federal, state and local laws, including tax laws. |
These laws and regulations are extremely complex and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Any determination that we have violated these laws or regulations, or the public announcement that we are being investigated for possible violations of these laws or regulations, could harm our operating results and financial condition. In addition, a significant change in any of these laws or regulations may require us to change our business model in order to maintain compliance with these laws or regulations, which could harm our operating results and financial condition.
We need to maintain federal and state operating licenses and similar clearances to conduct our clinical laboratory testing.
Our clinical laboratory, located in The Woodlands, Texas, is regulated by CLIA. CLIA is a federal law that regulates clinical laboratory testing performed on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical laboratory testing in the United States. Our CLIA certification requires itseach clinical laboratory to be inspected every other year in addition to being subject to random CLIA inspections. Our clinical laboratory is also subject to license requirements imposed by the State of Texas. Texas laws establish quality standards for day-to-day operation of the clinical laboratory, including the training and skills required of personnel and quality control. If a CLIA or state inspector finds deficiencies, that finding could lead to the revocation or suspension of, or limitations being placed upon, our CLIA accreditation or Texas license. Any revocation, suspension or limitation could prevent us from performing all or some of its clinical laboratory testing services and could harm our operating results and financial condition.
In addition, our current diagnostic tests take advantage of the “laboratory developed test” exception from FDA review. The FDA maintains that it has authority to regulate the development and use of laboratory developed tests as diagnostic medical devices under the Federal Food, Drug and Cosmetic Act, but to date has decided not to exercise its authority with respect to most laboratory developed tests performed by high complexity CLIA-certified laboratories as a matter of enforcement discretion. Our diagnostic products have not obtained FDA premarket clearance or approval. The FDA regularly considers the application of additional regulatory controls over the use of laboratory developed tests by laboratories such as ours. Further, the FDA has recently been petitioned to exercise regulatory authority over certain laboratory developed tests and to initiate enforcement action against companies that make effectiveness claims about laboratory developed tests that are without sufficient analytical and clinical support. As a result, it is possible that the FDA may look at the sale and use of laboratory developed tests with heightened scrutiny or modify their regulatory approach with respect to laboratory developed tests. If FDA regulation of laboratory developed tests increases or if regulation of the various medical devices used in laboratory-developed testing ensues, it would lead to an increased regulatory burden resulting in additional costs and delays in introducing tests, including genetic tests; thistests. This may hinder us from developing and marketing certain products or services and could harm our operating results and financial condition.
We are subject to environmental laws and potential exposure to environmental liabilities.
We are subject to various international, federal, state and local environmental laws and regulations that govern our operations, including the handling and disposal of nonhazardous and hazardous wastes, the recycling and treatment of electrical and electronic equipment, and emissions and discharges into the environment. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We are also subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties affected by such contamination. The presence of, or failure to remediate properly, such substances could adversely affect the value and the ability to transfer or encumber such property. Based on currently available information, although there can be no assurance, we believe that such costs and liabilities have not had and will not have a material adverse impact on our consolidated results of operations.
Our business is subject to technological obsolescence.
Proteomics, biotechnology and related pharmaceutical technology have undergone and are subject to rapid and significant change. We expect that the technologies associated with proteomics, biotechnology research and development will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any processes, discovery platforms or products that we develop may become obsolete before we recover any expenses incurred in connection with developing these products.
We currently generatehave historically generated almost all of our revenue through a limited number of collaboration and licensing partners.
A limited number of collaboration and licensing partners currently generatehave generated almost all of our revenue for us.historical revenue. Although we are attempting to expand the number of collaboration and licensing partners that we have, we can provide no assurance that we will be successful in doing so. In the event we are unable to enter into successful relationships with additional collaboration and licensing partners, our business, financial condition and results of operations could be materially and adversely affected.
Some of our diagnostic research and product development programs require access to human tissue and/or blood samples, other biological materials and related information which may be in limited supply.
We may not be able to obtain or maintain access to human tissue, blood and other biological materials and information on acceptable terms, or may not be able to obtain needed consents from individuals providing tissue, blood or other samples. In addition, government regulation in the U.S. and foreign countries could result in restricted access to, or use of, human tissue or blood samples or other biological materials. If we lose access to sufficient numbers or sources of tissue or blood samples or other required biological materials, or if tighter restrictions are imposed on the use of related clinical or other information or information generated from tissue or blood samples or other biological materials, these research and development programs and our operating results and financial condition could be harmed.
We rely on independent healthcare providers, laboratories and others to collect and process patient specimens.
We rely primarily on healthcare providers and other clinical laboratories to collect and send to our laboratory for testing most of our clinical laboratory specimens. Although we believe we pay our service providers fair market value consideration for specimen collection and processing services and in compliance with anti-kickback and anti-referral laws, legal restrictions prohibit us from paying additional consideration, such as a referral fee, for these services. Because these services are time-consuming and may not be a business priority for the companies and individuals we rely on to provide them, the fair market value consideration may not be sufficient incentive for them to continue providing these services. If we are unable to obtain or maintain needed collection and processing services, we wouldwill be unable to obtain patient samples for testing, which wouldwill harm our operating results and financial condition.
We rely on a single laboratory facility to process our diagnostic tests.
We rely on a single CLIA-approved laboratory facility in The Woodlands, Texas to perform our diagnostic tests. This facility and certain pieces of laboratory equipment would be difficult to replace and may require significant replacement lead-time. This facility may be affected by natural disasters such as earthquakes, floods and fires. In the event our clinical testing facility or equipment is affected by man-made or natural disasters, we would be unable to continue our diagnostic business and meet customer demands for a significant period of time. Although we maintain insurance on this facility, including business interruption insurance, it may not be adequate to protect us from all potential losses if this facility wereis damaged or destroyed. In addition, any interruption in our diagnostic business wouldwill result in a loss of goodwill, including damage to our reputation. If our diagnostic business wereis interrupted, it wouldwill seriously harm our business.
We have no marketing or sales staff, and if we are unable to develop sales and marketing capability, we may not be successful in commercializing our products.
We currently have no sales, marketing or distribution capability. We instead depend on collaborations or agreements with third parties that have established distribution systems and direct sales forces. To the extent that we enter into co-promotion or other licensing arrangements, our revenue will depend upon the efforts of third parties over which we may have little or no control. If we are unable to reach and maintain an agreement with one or more pharmaceutical, biomedical or biotechnology companies or other potential collaborators under acceptable terms, we may be required to market our products directly. We may elect to establish our own specialized sales force and marketing organization to market our products. If we are unable to develop a marketing and sales force with technical expertise and with supporting distribution capability, we may not be able to successfully commercialize our products.
We have no commercial production capability and we may encounter production problems or delays, which could resulthurt our ability to generate revenue in lower revenue.the future.
To date, we have not produced any product in commercial quantities. Customers for any potential products and regulatory agencies will require that we comply with current good manufacturing practices that we may not be able to meet. We have established and are in the process of establishing agreements with contract manufacturers to supply sufficient quantities of our products to conduct clinical trials as well as for the manufacture, packaging, labeling and distribution of finished products if our potential products are approved for commercialization. If such arrangements are terminated and if we are unable to manufacture or contract for a sufficient supply of our potential products on acceptable terms, our clinical testing schedule may be delayed, resulting in the delay of submission of products for regulatory approval and initiation of new development programs. If we determine to manufacture products ourselves, we may not be able to maintain acceptable quality standards if we ramp up production. To achieve anticipated customer demand levels, we will need to scale-up our production capability and maintain adequate levels of inventory. We may not be able to produce sufficient quantities to meet market demand. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties. This reliance could reduce our gross margins and expose us to the risks inherent in relying on others. We may not be able to successfully outsource our production or enter into licensing or other arrangements under acceptable terms with these third parties, which could adversely affect our business.
We face potential difficulties in obtaining product liability and related insurance. If we are subject to product liability claims and have not obtained adequate insurance to protect against these claims, our financial condition would suffer.
We do not have product liability or other professional liability insurance. In the future, we may, in the ordinary course of business, be subject to substantial claims by, and liability to, persons alleging injury from the use of our products. If we are successful in having products approved by the FDA, the sale of such products would expose us to additional potential product liability and other claims resulting from their use. This liability may result from claims made directly by consumers or by others selling such products. We do not currently have any product liability or professional liability insurance, and it is possible that we will not be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop. A successful product liability claim in excess of any insurance coverage we may procure could exceed our net worth. While we desire to reduce our risk by obtaining indemnity undertakings with respect to such claims from licensees and distributors of our products, we may not be able to obtain such undertakings and, even if we do, they may not be sufficient to limit our exposure to claims.
We are dependent on our management team, and the loss of any key member of this team may prevent us from successfully implementing our business plan in a timely manner.
Our success depends largely upon the continued services of our executive officers and other key management and development personnel. While we have entered into employment agreements with each of our executive officers, they may each terminate their employment with us at any time without penalty. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees could seriously harm our business, financial condition or results of operations. In such an event we may be unable to recruit personnel to replace these individuals in a timely manner, or at all, on acceptable terms.
There is a high demand for, and short supply of, key personnel needed for our clinical laboratory testing services.
Our existing clinical laboratory services operations need individuals who are licensed as clinical laboratory scientists. We believe that to continue operating and to expand our clinical laboratory testing services, we must continue to attract and retain these licensed clinical laboratory scientists. There is a shortage of licensed scientists in the State of Texas, and we compete for these personnel with hospitals, other clinical laboratories, and other healthcare providers. Licensed scientists may prefer to work for these other organizations either because of the compensation offered, the reputations of the organizations, or other personal considerations. If we are unable to attract and retain a sufficient number of licensed scientists, the current operations of our clinical laboratory testing business could be harmed and the future growth of these services could be delayed or prevented.
If our current research collaborators or scientific advisors terminate their relationships with us or develop relationships with a competitor, our ability to discover proteins and biomarkers, and to commercialize our diagnostic products, could be adversely affected.
We have relationships with research collaborators at academic and other institutions who conduct research at our request. These research collaborators are not our employees. As a result, we have limited control over their activities and, except as otherwise required by our collaboration agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to discover genes, proteins and biomarkers involved in human disease and commercialize diagnostic products will depend in part on the continuation of these collaborations. If any of these collaborations are terminated, we may not be able to enter into other acceptable collaborations. In addition, our existing collaborations may not be successful.
Our research collaborators and scientific advisors may have relationships with other commercial entities, some of which could compete with us. Our research collaborators and scientific advisors sign agreements which provide for the confidentiality of our proprietary information and the results of studies conducted at our request. We may not, however, be able to maintain the confidentiality of our technology and other confidential information related to all collaborations. The dissemination of our confidential information could have a material adverse effect on our business.
If we acquire any companies or products in the future, such companies and products could prove difficult to integrate, disrupt our business, dilute stockholdershareholder value and adversely affect our operating results.
We may acquire or make investments in complementary companies, businesses, assets, products and services in the future. We have not made any such acquisitions or investments to date, and therefore, our ability to make acquisitions or investments is unproven. Acquisitions and investments involve numerous risks, including:
| ·● | difficulties in integrating operations, technologies, services and personnel; |
| ·● | the diversion of financial and management resources from existing operations; |
| ·● | the risk of entering new markets; |
| ·● | the potential loss of key employees; and |
| ·● | the inability to generate sufficient revenue to offset acquisition or investment costs. |
In addition, if we finance any acquisitions by issuing convertible debt or equity securities, our existing stockholdersshareholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute any acquisitions or investments, our business and prospects may be seriously harmed.
On September 7, 2010, we entered into a definitivethe merger agreement to acquire StemTroniX, Inc., a Texas corporation.with Rozetta-Cell. Consummation of the merger is subject to certain customary conditions, including approval by our shareholders and the shareholders of StemTroniX.Rozetta-Cell. We may not be able to obtain the shareholder approval necessary to complete the merger. Even if we successfully complete the acquisition, we may experience difficulties in integrating operations, technologies, services and personnel. Any failure by use to successfully acquire StemTroniXRozetta-Cell and integrate its business with our business could have a material adverse affect on our business and results of operations. A description of our proposed acquisition of Rozetta-Cell is set forth herein under “Item 1. Business – Strategic Acquisitions.”
Our business may be harmed by any disruption to our computer hardware, software and Internet applications.
Our business requires manipulating and analyzing large amounts of data, communicating the results of the analysis to our internal research personnel and our collaborators via the Internet and tracking and communicating the results, via the Internet and other modalities, of the tests performed by our clinical laboratory testing business. Also, we rely on a global enterprise software system to operate and manage our business. Our business, therefore, depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or there is an interruption in Internet service in a way that affects access to our data by our accounting and billing departments, internal research personnel or collaborators or access to our laboratory testing results by referring professionals or patients, our operating results and financial condition could be harmed.
Our computer and communications hardware is protected through physical and software safeguards. However, it remains vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. If we fail to maintain the necessary computer capacity and data to support our accounting and billing departments and our collaborators’ and licensees’ discovery, research, and development activities, including our associated computational needs, we could experience a loss of or delay in revenues. In addition, any sustained disruption in Internet access provided by other companies could harm our operating results and financial condition.
Risks Related to Our Stock
Future sales of our common stock may cause our stock price to decline.
As of April 7, 2010, we had 427,397,31326, 2011, there were 513,848,729 shares of our common stock outstanding. Of this amount, 299,477,236409,028,176 shares were freely tradable without restriction, unless the shares are purchased by our affiliates. The remaining 127,920,077104,820,553 shares were “restricted securities” as that term is defined under Rule 144 of the Securities Act. None of our directors, executive officers or employees is subject to lock-up agreements or market stand-off provisions that limit their ability to sell shares of our common stock. The sale of a large number of shares of our common stock, or the belief that such sales may occur, could cause a drop in the market price of our common stock.
We have the ability to issue securities with rights that may be superior to those of our common stock.
Our board has the power to establish the dividend rates, preferential payments on any liquidation, voting rights, redemption and conversion terms and privileges for any series of our preferred stock. WeThere are currently have outstanding 1,500,000 shares of our Series B Preferred Stock outstanding. Dr. Ira L. Goldknopf owns 100% of our outstanding Series B Preferred Stock, which have voting rightsgives him that givenumber of votes equal to the holders a majoritynumber of the votes in any voteof all outstanding shares of our common stock.stock plus one additional vote. The sale or issuance of any additional shares of our preferred stock having rights superior to those of our common stock may result in a decrease in the value or market price of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of ownership without further vote or action by our stockholdersshareholders and may adversely affect the voting and other rights of the holders of our common stock.
We have entered into a merger agreement with StemTroniX, Inc.Rozetta-Cell that requires that we issue a substantial number of shares of our common stock to StemTroniXthe Rozetta-Cell shareholders.
In FebruaryOn September 7, 2010, we entered into a definitivethe merger agreement to acquire StemTroniX, Inc., a Texas corporation.Rozetta-Cell. Subject to the terms and conditions of the merger agreement, which has been approved by the boards of directors of both us and StemTroniX,Rozetta-Cell, if the merger is completed, each outstanding share of StemTroniXRozetta-Cell common stock will be converted into the right to receive fourteen and sixth-tenths (14.60)10 shares of our common stock, subject to certain adjustments as provided in the merger agreement. This will result in us issuing approximately one billion shares of common stock to the shareholdershareholders of StemTroniX,Rozetta-Cell which will result in immediate and substantial dilution to our incumbent shareholders. Such dilution could have a material negative adverse effect on the price of our common stock.
A description of our proposed acquisition of Rozetta-Cell is set forth herein under “Item 1. Business – Strategic Acquisitions.”
We intend to raise additional funds in the future through issuances of securities and such additional funding may be dilutive to stockholdersshareholders or impose operational restrictions.
We intend to raise additional capital in the future to help fund our operations through sales of shares of our common stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders,shareholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholdersshareholders will be reduced. These stockholdersshareholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
| ·● | announcements of technological innovations or new commercial therapeutic products by us, our collaborative partners or our present or potential competitors; |
| ·● | announcements by us or others of results of validation studies and clinical trials; |
| ·● | developments or disputes concerning patent or other proprietary rights; |
| ·● | adverse legislation, including changes in governmental regulation and the status of our regulatory approvals or applications; |
| ·● | changes in health carehealthcare policies and practices; and |
| ·● | economic and other external factors, including general market conditions. |
In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many early-stage companies and that often have been unrelated or disproportionate to the operating performance of these companies. Market fluctuations such as these may seriously harm the market price of our common stock. Further, securities class action suits have been filed against companies following periods of market volatility in the price of their securities. If such an action is instituted against us, we may incur substantial costs and a diversion of management attention and resources, which would seriously harm our business, financial condition and results of operations.
We identified a material weaknessweaknesses in our internal control over financial reporting during the assessment of our internal controls that we performed in connection with the preparation of the audited consolidated financial statements included in this report.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require management to complete an annual assessment of our internal control over financial reporting. During the preparation of our audited consolidated financial statements for the year ended December 31, 2009,2010, we identified a control deficiencydeficiencies that hashave been classified as material weaknesses in our internal control over financial reporting. A material weakness is a control deficiency that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. Based on the material weaknesses identified, management concluded that our internal control over financial reporting was not effective as of December 31, 2009.2010.
The standards that must be met for management to assess the internal control over financial reporting are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing the activities necessary to make future assessments of our internal control over financial reporting and completing the implementation of any necessary improvements. Future assessments may require us to incur substantial costs and may require a significant amount of time and attention of management, which could seriously harm our business, financial condition and results of operations. If we are unable to assess our internal control over financial reporting as effective in the future, investors may lose confidence in us and our stock may be negatively impacted.
If our independent registered public accounting firm is unableWe are not required to provideobtain an unqualified attestation report on our assessment of our internal control over financial reporting from an independent registered public accounting firm, which may cause investors mayto lose confidence in us and cause our stock mayto be negatively impacted.
RulesUnder rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, will requirewe are not required to obtain from our independent registered public accounting firm to complete an attestation report on our assessment of our internal control over financial reporting. The firstIf we do not voluntarily seek to obtain an unqualified attestation report ofon our assessment thatfrom our independent registered public accounting firm, must complete will be required in connection with the preparation of our annualor if we seek to obtain such a report for our fiscal year ending December 31, 2010. The attestation process that must be performed by our independent registered public accounting firm is also new and complex. We may encounter problems or delays in receiving an unqualified attestation of our assessment by our independent registered public accountants. Compliance with these new rules could require us to incur substantial costs and may require a significant amount of time and attention of management, which could seriously harm our business, financial condition and results of operations. Ifbut our independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment,one to us, investors may lose confidence in us and our stock may be negatively impacted.
We are not subject to certain of the corporate governance provisions of the Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such provisions, will not receive the benefits and protections they were enacted to provide.
Since our common stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance rules established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002. These rules relate to independent director standards, director nomination procedures, audit and compensation committees standards, the use of an audit committee financial expert and the adoption of a code of ethics.
Our board of directors currently consists of Helen R. Park, who is our Interim Chief Executive Officer and Interim Chief Financial Officer, and Ira L. Goldknopf, who is our President, Chief Scientific Officer and Secretary. Ms. Park and Dr. Goldknopf are not “independent directors” as such term is defined by any of the national securities exchanges or inter-dealer quotation systems. Our board of directors has not created a separately-designated standing audit committee, and Ms. Park and Dr. Goldknopf do not qualify as an “audit committee financial expert”experts” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. Unless we voluntarily elect to fully comply with all of these rules, we will not receive the benefits and protections they were enacted to provide.
Our operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.
Our operating results will likely vary in the future primarily as the result of fluctuations in our billings, revenue and operating expenses. We expect to continue to incur increases in operating expenses in the future as we continue engaging in selling and marketing activities,to develop new diagnostic tests, hire additional personnel and comply with state and federal laws applicable to our business and SEC reporting requirements. If our results of operations do not meet the expectations of our shareholders or the investment community, the price of our common stock may decline.
Our shares of common stock are not listed for trading on a national securities exchange or the Nasdaq Stock Market.
Our common stock currently trades on the OTC Bulletin Board and is not listed for trading on any national securities exchange or the Nasdaq Stock Market.Market (“NASDAQ”). Investments in securities trading on the OTC Bulletin Board are generally less liquid than investments in securities trading on a national securities exchange or the Nasdaq Stock Market.NASDAQ. The failure of our shares to be approved for trading on a national securities exchange or the Nasdaq Stock MarketNASDAQ may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
We have never paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future.
We have never paid any dividends on our common stock and do not intend to pay any dividends on our common stock in the foreseeable future. We intend to use any cash generated from our operations for reinvestment in the growth of our business. Any determination to pay dividends in the future will be made by our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors deemed relevant by our board of directors. Accordingly, realization of a gain on stockholders’shareholders’ investments will depend on the appreciation of the price of our common stock. We can provide no assurance that our common stock will appreciate in value or even maintain the price at which stockholdersshareholders purchased their shares.
If our executive officers, directors and principal stockholdersshareholders choose to act together, they may be able to control our management and operations, which may prevent us from taking actions that may be favorable to you.
OurAs of April 26, 2011, our executive officers, directors and principal stockholders,shareholders, and their respective affiliates, beneficially ownowned approximately 28%14.3% of our outstanding common stock. In addition, Dr. Ira L. Goldknopf owned 100% of our Series B Preferred Stock, which gives him that number of votes equal to the number of votes of all outstanding shares of our common stock plus one additional vote. These stockholders,shareholders, acting together, have the ability to exert substantial influence over any matters requiring approval by our stockholders,shareholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.
Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
Item 2. Properties.
Our corporate headquarters and sole business office is located at 3400 Research Forest Drive, Suite B2-3,26022 Budde Road, The Woodlands, Texas 77381,77380, where we lease approximately 1,500 square feet of space for a fixed monthly rent payment of approximately $2,500. The lease expires on June 30, 2012.
Our laboratory facilities are located at 26202 Oak Ridge Drive, The Woodlands, Texas 77380, where we lease approximately 3,000 square feet of space for aan initial monthly rent and operating expense payment of approximately $5,252.$5,600. The lease expires on June 30, 2010. 2015.
We believe that our office space isand laboratory facilities are adequate to support our current operations and projected growth in our operations overfor the next 12 months.
Item 3. Legal Proceedings.
In September 2008, we entered into an arbitration agreementArbitration Agreement with Steven Rash, our former Chief Executive Officer, in connection with his agreement to resign as our Chief Executive Officer. The partiesWe agreed to arbitrate Mr. Rash’s claims for wages of $36,031 and other compensation due, breach of contracts or covenants, and benefits. We agreed to arbitrate Mr. Rash’s claims for wages of $36,031benefits, and our claims for embezzlement, fraud and breach of contract by Mr. Rash. As of April 7, 2010, arbitration hadArbitration has not been initiated by either party.
In March 2009, McLennon Law Corporation (“McLennon”) filed a lawsuit against us in the CompanySuperior Court of the State of California in and for the County of San Francisco for breach of contract for approximately $117,000 of accrued but unpaid attorney fees. We are currently in negotiations with McLennon to settle its claimfees and accrued interest thereon. In July 2010, a judgment was entered against us for a total of $148,683 for unpaid attorney fees.fees and interest. We do not intend to appeal the court’s ruling.
In September 2009, Marion McCormick, one of our former non-executive employees, attempted to convertfiled a lawsuit against us in the District Court of Montgomery County, Texas, 9th Judicial District, seeking damages and specific performance under a $30,000 convertible promissory note plus interestand a warrant exercisable into 1,000,000 shares of our common stock. In August 2010, we filed an amended answer and counterclaims against Ms. McCormick for breach of fiduciary duty and fraud. We are disputing the amount, if any, that is due to the employeeher under the note. As of December 31, 2009, the note had not been converted. In December 2009, the employee filed a law suit against us seeking damages and specific performance, and in March 2010 filed a motion for summary judgment. We have filed a motion in opposition to the motion for summary judgment. This case is currently pending.
In February 2010, Transgenomic, Inc. (“Transgenomic”) filed a lawsuit against us in the United States District Court for the District of Nebraska. The lawsuit containedcontains claims for fraud, breach of contract, slander, libel and forslander, and seeks a declaration of rights under a Collaboration and Exclusive License Agreement, dated January 23, 2009, between the parties. Onparties that we terminated on February 2, 2010. In April 12, 2010, Power3we filed a Partial Motionpartial motion to Dismissdismiss Transgenomic’s fraud claim. ThisIn June 2010, we filed a lawsuit against Transgenomic in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit contained claims for trade secret misappropriation, breach of contract, misappropriation, conversion, unjust enrichment, quantum meruit and promissory estoppel, as well as a request for injunctive relief. In July 2010, we filed a non-suit to dismiss the case is currently pending.that we had filed against Transgenomic in Texas without prejudice. We intend to re-file the claims against Transgenomic in the United States District Court for the District of Nebraska as counterclaims accompanying our response to the claims filed by Transgenomic. We have agreed to enter mediation with Transgenomic in an attempt to resolve this matter.
In March 2010, Rockmore Investment Master Fund LTD (“Rockmore”) filed a lawsuit against us in the Supreme Court for the State of New York. The lawsuit contained claims offor breach of contract and specific performance. We have not yet respondedperformance related to a convertible debenture in the amount of $31,677 and common stock warrant that we previously issued to Rockmore. In September 2010, Rockmore filed a motion for summary judgment and injunction regarding its claims, and in October 2010, we filed an opposition to Rockmore’s motion. In October 2010, the court granted Rockmore’s motion for summary judgment, but denied its request for an injunction. In March 2011, we entered into a settlement agreement with Rockmore pursuant to which we agreed to issue 12 million shares of our common stock to Rockmore in return for a full release from all claims filed by Rockmore against us.
In April 2010, we filed a lawsuit against Richard Kraniak (“Kraniak”) and Roger Kazanowski (“Kazanowski”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit contains claims for violations of the Securities Act and the Securities and Exchange Act. In May 2010, Kraniak and Kazanowski filed a motion to dismiss the lawsuit. In June 2010, we filed a response to Kraniak and Kazanowski’s motion to dismiss as well as a first amended complaint against Kraniak and Kazanowski. In July 2010, Kraniak and Kazanowski filed counterclaims against us for breach of contract, misrepresentation, civil conspiracy and defamation. In July 2010, we filed an answer to the complaint. This case is currently pending.counterclaims denying each of the alleged claims. In October 2010, we filed a second amended complaint against Kraniak and Kazanowski, which we revised and re-filed in November 2010. In December 2010, we filed motions for partial summary judgment with respect to each of the counterclaims filed by Kraniak and Kazanowski, and in March 2011, filed supplements to certain of the motions for partial summary judgment.
In April 2010, Neogenomics, Inc. (“Neogenomics”) filed a lawsuit and motion for summary judgment against us in the Supreme Court of the State of New York. The lawsuit contained claims for breach of contract and specific performance related to a convertible debenture in the amount of $200,000 that we issued to Neogenomics in April 2007. In May 2010, we filed a response to Neogenomic’s motion for summary judgment. In December 2010, the court granted Neogenomic’s motion for summary judgment, awarding Neogenomics $217,457, comprised of $200,000 of principal under the debenture and $17,457 of accrued interest thereon. We intend to appeal the court’s ruling.
In April 2010, Lucas Associates, Inc. (“Lucas Associates”) filed a lawsuit against us in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit contained claims for breach of contract, quantum meruit and fraud related to allegations that we failed to pay Lucas Associates a finder’s fee in connection with the hiring of John Ginzler as our Chief Financial Officer in 2009. In June 2010, we filed a general denial to the claims alleged in the complaint. In November 2010, we entered into a settlement with Lucas Associates pursuant to which we agreed to pay $20,000 to Lucas Associates in monthly installments of $1,250 beginning January 14, 2011.
In April 2010, John Ginzler, our former Chief Financial Officer, filed a lawsuit against us in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit contained claims for breach of contract related to an employment agreement that we had entered into with him. In June 2010, we filed a general denial to the claims alleged in the complaint. In February 2011, we entered into a settlement agreement with Mr. Ginzler pursuant to which we agreed to issue 12,285,714 shares of our common stock to him in return for a full release from all claims that he had filed against us.
In May 2010, we filed a lawsuit against Able Income Fund LLC (“Able Income Fund”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit contains claims for violations of the Securities Act and the Exchange Act. We subsequently moved for a default judgment on our claims due to Able Income Fund’s failure to timely respond to our lawsuit. In November 2010, the court denied our motion for a default judgment. We have entered mediation with Able Income Fund in an attempt to resolve this matter.
In July 2010, Able Income Fund filed a lawsuit against us in the Supreme Court of the State of New York. The lawsuit containedcontains claims for failurebreach of contract and specific performance related to repaytwo convertible debentures in the principalaggregate amount of $450,000 that we previously issued to Able Income Fund. In September 2010, we filed a motion to dismiss Able Income Fund’s lawsuit. In November 2010, Able Income Fund filed an amended complaint alleging the existence of an outstanding convertible debenture in the amount of $72,176. We filed an answer with affirmative defenses to Able Income Fund’s amended complaint in March 2011.
Item 4. (Removed and accrued interest under, a Convertible Debenture, dated April 17, 2009, issued by us in favor of Neogenomics. We have not yet responded to the complaint. This case is currently pending.
Reserved).
PART II
Item 4. | 5. Market For Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Our common stock currently trades on the OTC Bulletin Board under the symbol “PWRM”.“PWRM.” The following table sets forth the range of high and low bid pricesquotations for shares of our common stock on the OTC Bulletin Board for the periods indicated, as reported by Nasdaq.
indicated. The quotations represent inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
Fiscal Year Ended December 31, 2008 | | High | | | Low | |
Quarter ended March 31, 2008 | | $ | 0.155 | | | $ | 0.08 | |
Quarter ended June 30, 2008 | | $ | 0.14 | | | $ | 0.055 | |
Quarter ended September 30, 2008 | | $ | 0.12 | | | $ | 0.02 | |
Quarter ended December 31, 2008 | | $ | 0.05 | | | $ | 0.0089 | |
Fiscal Year Ended December 31, 2009 | | High | | | Low | |
Quarter ended March 31, 2009 | | $ | 0.04 | | | $ | 0.0095 | |
Quarter ended June 30, 2009 | | $ | 0.025 | | | $ | 0.013 | |
Quarter ended September 30, 2009 | | $ | 0.155 | | | $ | 0.01 | |
Quarter ended December 31, 2009 | | $ | 0.22 | | | $ | 0.048 | |
Fiscal Year Ended December 31, 2009 | | High | | | Low | |
| | | | | | | | |
Quarter ended March 31, 2009 | | $ | 0.04 | | | $ | 0.0095 | |
| | | | | | | | |
Quarter ended June 30, 2009 | | $ | 0.025 | | | $ | 0.013 | |
| | | | | | | | |
Quarter ended September 30, 2009 | | $ | 0.155 | | | $ | 0.01 | |
| | | | | | | | |
Quarter ended December 31, 2009 | | $ | 0.209 | | | $ | 0.048 | |
Fiscal Year Ended December 31, 2010 | | High | | | Low | |
| | | | | | | | |
Quarter ended March 31, 2010 | | $ | 0.04 | | | $ | 0.0095 | |
| | | | | | | | |
Quarter ended June 30, 2010 | | $ | 0.025 | | | $ | 0.013 | |
| | | | | | | | |
Quarter ended September 30, 2010 | | $ | 0.039 | | | $ | 0.023 | |
| | | | | | | | |
Quarter ended December 31, 2010 | | $ | 0.042 | | | $ | 0.0168 | |
The last reported trading price of our common stock as reported on the OTC Bulletin Board on April 7, 2010May 4, 2011 was $0.0395$0.0084 per share.
Holders
As of April 7, 2010,May 4, 2011, the number of stockholdersshareholders of record of our common stock was 1,179.1,182.
Dividends
We have not paid any dividends on our common stock to date, nor do we intend to pay any dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to finance the growth of our business.
Transfer Agent
The transfer agent for our common stock is Olde Monmouth Stock Transfer Company, 200 Memorial Parkway, Atlantic Highlands, New Jersey 07716.
Recent Sales of Unregistered Securities
During our fiscal quarter ended December 31, 2009,2010, we sold the following securities without registration under the Securities Act:
In October 2009, we revisedDuring the termsthree months ended December 31, 2010, Rozetta-Cell made loans to us for a total of an outstanding warrant to acquire 13,318,682 shares of common stock held by the warrant holder.$85,682. The exercise price of the warrant was increased from $0.04 per share to $0.053 per share. We received $200,000loans are interest free and issued 3,773,585 shares of common stock upon the partial exercise of the warrant.payable on demand. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In October 2009, we issued 3,687,500 shares of common stock to a consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In October 2009, we issued 1,309,705 shares of common stock to a consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In October 2009, we issued 100,000 shares of common stock to a consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In October 2009, we issued 1,000,000 shares of common stock to a consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In December 2009, we issued 905,661 shares of common stock to a consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
In December 2009, we issued shares of our common stock to Helen R. Park, our Interim Chief Executive Officer. A description of these shares is set forth under “Item 10. Executive Compensation” of this report. These securities were issued to an accredited investor in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act directly by us without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person.
Item 6. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof, and, except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Item 1A. Risk Factors” of this report and elsewhere in this report. The following should be read in conjunction with our audited consolidated financial statements beginning on page F-1 of this report.
Overview
We are a leading bio-technology company focused on the development and marketing of novel diagnostic products through the analysis of proteins. Our business is focused on the development of novel diagnostic tests in the fields of cancer and neurodegenerative and neuromuscular diseases such as amytrophic lateral sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s disease and Parkinson’s disease. We also address clinical questions related to early disease detection, treatment response, monitoring of disease progression, prognosis and others through collaborations with leading academic and research institutions. We apply proprietary methodologies to discover and identify protein biomarkers associated with diseases. We also use advanced protein separation methods to identify and resolve variants of specific biomarkers (known as “translational proteomics”) for developing a procedure to measure a property or concentration of an assay and commercializing novel diagnostic tests. By discovery and development of protein-based disease biomarkers, we have developed tools for diagnosis, prognosis, early detection and identification of new target drugs in cancer and neurodegenerative and neuromuscular diseases such as amytrophic lateral sclerosis, Alzheimer’s disease and Parkinson’s disease.diseases.
We have developed a portfolio of products including BC-SeraPro™, a proteomic blood serum test for the early detection of breast cancer for which we have completed Phase I clinical trials, and NuroPro®, a serum test for the detection of neurodegenerative diseases including Alzheimer’s, Parkinson’s and ALS diseases for which we are currently engageengaged in Phase II clinical trials. These products are designed to analyze proteins and their mutations to assess an individual’s risk for developing disease later in life or a patient’s likelihood of responding to a particular drug, assess a patient’s risk of disease progression and disease recurrence, and measure a patient’s exposure to drug therapy to ensure optimal dosing and reduced drug toxicity. Armed with this risk response assessment information, individuals can take action to prevent or delay the onset of disease and physicians can ensure that patients receive the most appropriate treatment offor their disease.
Recent Developments
In February 2010, we entered into a definitive merger agreement to acquire StemTroniX, Inc., a Texas corporation. StemTroniX is a medical biotechnology company that is committed to improving the lives of individuals by using autologous adult stem cell technology to repair tissue damage in patients. Autologous adult stem cell therapy is the process of using an individual’s blood to purify their stem cells and re-introduce them into that individual for the purpose of repairing and regenerating damaged tissue. StemTroniX provides a system to augment this process.
Subject to the terms and conditions of the merger agreement, which has been approved by the boards of directors of both us and StemTroniX, if the merger is completed, each outstanding share of StemTroniX common stock will be converted into the right to receive fourteen and sixth-tenths (14.60) shares of our common stock, subject to certain adjustments as provided in the merger agreement.Strategy
The merger agreement contains customary representations and warranties by us and StemTroniX, covenants by StemTroniX to conduct its business in the ordinary course until the merger is completed, and covenants by StemTroniX to not take certain actions during such period. StemTroniX has also agreed to not solicit proposals relating to business combination transactions with other parties or enter into discussions concerning any proposals for business combination transactions with other parties.
Consummation of the merger is subject to certain customary conditions, including, among others, the approval of the merger by the shareholders of StemTroniX, the approval of the issuance of our common stock in connection with the merger by our shareholders, the approval of an amendment to our certification of incorporation by our shareholders to increase the number of shares of common stock authorized for issuance to that number of shares necessary to ensure that an adequate number of shares is available for issuance to the shareholders of StemTroniX, the receipt of any required governmental approvals and expiration of applicable waiting periods, the accuracy of the representations and warranties by us and StemTroniX (generally subject to a material adverse effect standard), and material compliance by us and StemTroniX with our respective obligations under the merger agreement.
We expect to complete the acquisition of StemTroniX in May or June 2010.
Strategy
Currently, we are continuing to develop and commercializecurrently developing proteomic and related biomarker tests that will assist providers and payers in determining the most appropriate therapeutic intervention for a particular patient. These tests are developed based on our know-how and expertise, in partnership with thought leaders and leading healthcare institutions, and intellectual property that we have developed on our own, licensed from others, or acquired from other parties. Our tests are available to patients by physician’s prescription to providers located primarily in the United States and may be performed in our CLIA-certified laboratory or partnered with other test providers.
We intend to complete Phase II clinical trials for NuroPro® and begin commercialization of NuroPro® during 2010, and to complete Phase II clinical trials for BC-SeraPro™ during 2010.2011. We also intend to develop additional diagnostic products utilizing the proteomic research and results that we have achieved and for which we have filed patent applications with the USPTO. By utilizing the intellectual property that we have in our possession, building on the intellectual property portfolio through additional clinical trials, and integrating the proprietary andacquiring complementary intellectual property portfolio of StemTroniX,from other bio-technology companies, we will have the ability to successfully create, market and sell a diverse diagnostic product offering based on our proteomic research.offering.
Our goal during 20102011 is to enter into collaboration and licensing agreements with other leading bio-technology companies, academic and research institutions like the Baylor College of Medicine, whothat have the resources and expertise to engage in successful commercialization campaigns of our products. Through these agreements, we will generate revenue through a combination of licensing fees, royalties and milestone payments that we receive from our collaboration and licensing partners.
Recent Developments
On September 7, 2010, we entered into the Merger Agreement with Rozetta-Cell pursuant to which Rozetta-Cell will merge with and into us, the separate corporate existence of Rozetta-Cell will cease, and we will continue as the surviving company. A description of our proposed acquisition of Rozetta-Cell is set forth herein under “Item 1. Business – Strategic Acquisitions.”
Outlook
We expect sales of our BC-SeraPro™ and NuroPro® diagnostic products to increase during 20102011 as we complete Phase II clinical studies on these products. We also expectintend to developcontinue developing several additional diagnostic products during 2010.2011. As a result, we expect revenue to increase over the next 12 months as we enter into additional collaboration and licensing agreements with other biotechnologybio-technology companies, academic and research institutions and governmental agencies. We intend to reduce our liabilities by retiring our outstanding debt, which will decrease substantially, if not eliminate, the derivative liabilities that we have been incurring for the past few years. The combination of increased revenue and reduced debt, coupled with significant capital-raising initiatives that we plan to complete during 2010,2011, will provide us with the assets and operating results necessary to grow at an exponential rate for the foreseeable future.
Critical Accounting Policies
Critical Accounting Policies
Our This “Management’s Discussion and Analysis of Financial Condition and Results of Operations contained herein” is based upon our consolidated financial statements and accompanying notes, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions.
The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For a more complete discussion of our accounting policies and procedures, see our audited financial statements beginning on page F-1 of this report.
Revenue Recognition
Our revenue consists primarily of licensing fees, royalties, and milestone payments and sample fees that we receive from our licensing partners that it receivesreceived under licensing agreements that we have with third parties. We recognize thesethe fees and payments as revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed and determinable, and collectibilitycollectability is reasonably assured in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, (“ASC 605”)Revenue Recognition.
Stock-Based Compensation
We account for employee stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation(“ASC 718”), using the modified prospective transition method. Under this method, compensation expense includes: (a) compensation expense for all share-basedstock-based payments granted, but not yet vested, as of January 1, 2006 based on the grant-date fair value, and (b) compensation expense for all share-basedstock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. Such amounts have been reduced by our estimate of forfeitures of all unvested awards.
We account for non-employee stock-based compensation in accordance with ASC 718 and ASC Topic 505,Equity (“ASC 505”). ASC 718 and ASC 505 require that we recognize compensation expense based on the estimated fair value of stock-based compensation granted to non-employees over the vesting period, which is generally the period during which services are rendered by the non-employees.
We use the Black-Scholes pricing model to determine the fair value of the stock-based compensation that we grant to employees and non-employees. We are required to make certain assumptions in connection with this determination,The Black-Scholes pricing model takes into consideration such factors as the most importantestimated term of which involves the calculationsecurities, the conversion or exercise prices of the securities, the volatility with respect toof the price of our common stock.stock, interest rates, and the probability that the securities will be exercised to determine the fair value of the securities. The selection of these criteria requires management’s judgment and may impact our net income or loss. The computation of volatility is intended to produce a volatility value that is representative of our expectations about the future volatility of the price of our common stock over an expected term. We used our share price history to determine volatility and cannot predict howwhat the price of ourits shares of common stock will react on the open marketbe in the future since our common stock has only been trading on the OTC Bulletin Board since March 30, 2006.future. As a result, the volatility value that we calculated may differ from the futureactual volatility of the price of our shares of common stock.stock in the future.
Derivative Financial Instruments
ASC Topic 815 (“ASC 815”) requires thatWe record all derivative financial instruments be recorded on theour balance sheet at fair value.value in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market basedmarket-based pricing models incorporating readily observable market data, and requiring judgment and estimates.
We have issued several convertible promissory notes, convertible debentures and stock warrants and hashave evaluated the terms and conditions of the conversion and exercise features contained in the notes and warrantsthese securities to determine whether they represent embedded or freestanding derivative instruments under the provisions of ASC Topic 815 (“ASC 815”).815. We determined that the conversion and exercise features contained in the notes and warrantsthese securities represent freestanding derivative instruments that meet the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instruments in the notes and warrantsthese securities is reflected in our balance sheet as a liability. The fair value of the derivative financial instruments of the convertible promissory notes and warrantsin these securities was measured at the inception date of the notes and warrantssecurities and each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments arewere recorded as non-operating, non-cash income or expense at each balance sheet date.
During the year ended December 31, 2009 and the three months ended March 31, 2010, we valued the conversion features in itsour convertible notes and convertible debentures using a binomial lattice valuation model. The binomial lattice valuation model values the embedded derivatives based on a probability-weighted discounted cash flow model. This model is based on future projections of the five primary alternatives possible for settlement of the features included within the embedded derivatives, which are: (i) payments are made in cash, (ii) payments are made in stock, (iii) the holder exercises its right to convert the notes and debentures, (iv) we exercise ourthe holder exercises its right to convert the notes and debentures, and (v) we default on the notes and debentures. We useused the model to analyze the underlying economic factors that influence which of these events will occur, when they are likely to occur, and the price of itsour common stock and specific terms of the notes and debentures, such as the interest rate and conversion price, that will be in effect when they occur. Based on the analysis of these factors, we useused the model to develop a set of potential scenarios. Probabilities of each scenario occurring during the remaining term of the notes and debentures are determined based on management'smanagement’s projections. These probabilities arewere used to create a cash flow projection over the term of the notes and debentures and determine the probability that the projected cash flow will be achieved. A discounted weighted averageweighted-average cash flow for each scenario iswas then calculated and compared to the discounted cash flow of the notes and debentures without the compound embedded derivative in order to determine a value for the compound embedded derivative.
During the three months ended June 30, 2010, we changed the method by which we valued the conversion features in our convertible notes and convertible debentures by switching from the binomial lattice valuation model to the Black-Scholes pricing model. As a result, the conversion features in our notes and debentures were valued under the binomial lattice valuation model at December 31, 2009, and were valued under the Black-Scholes pricing model at December 31, 2010. This change has been deemed by us to be a change in accounting estimate in accordance with ASC Topic 250, Accounting Changes and Error Corrections. We useused the Black-Scholes pricing model to determine the fair valuesvalue of its warrants. Thisour warrants at December 31, 2010 and 2009.
The Black-Scholes pricing model takes into consideration such factors as the estimated term of the derivatives,convertible notes, convertible debentures and warrants, the conversion or exercise prices of the securities, as applicable, the volatility of the price of our common stock, interest rates, and the probability that the warrantssecurities will be exercised to determine the fair value of the warrants.securities. The selection of these criteria requires management'smanagement’s judgment and may impact our net income or loss. The computation of volatility is intended to produce a volatility value that is representative of our expectations about the future volatility of the price of our common stock over an expected term. We used our share price history to determine volatility and cannot predict what the price of our shares of common stock will be in the future. As a result, the volatility value that we calculated may differ from the actual volatility of the price of our shares of common stock in the future.
During the year ended December 31, 2009, we revised the exercise price of several of our outstanding warrants. We accounted for the revisions to the exercise price of the warrants in accordance with ASC 718. Pursuant to the provisions of ASC 718, we revalued the warrants by comparing the terms of the original warrants with the terms of the revised warrants and recorded the difference in value between the two warrants as a deemed dividend in accordance with ASC 470. We used the Black-Scholes pricing model to calculate the amount of the deemed dividend to be recorded.
For a more complete discussion of our accounting policies and procedures, see our notes to consolidated financial statements beginning on page F-7.
Recent Accounting Pronouncements
In May 2009,January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The guidance now codifiedamends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. It requires new disclosures about significant transfers in and out of Level 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The updated guidance also clarifies existing disclosure requirements regarding inputs and valuation techniques, as ASC Topic 855 (“ASC 855”)well as the level of disaggregation for each class of assets and liabilities for which establishes general standardsseparate fair value measurements should be disclosed. The guidance was effective January 1, 2010, except for the separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements which are effective for us beginning in the first quarter of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 requires the disclosureour fiscal year ended December 31, 2011. Our adoption of the date through which an entity has evaluated subsequent events and the basis for selecting that date (i.e., whether that date represents the date the financial statements were issued or were available to be issued). These new provisions became effective for interim or fiscal periods ending after June 15, 2009. The adoption of these provisionsupdated guidance did not have a materialan impact on our financial conditionstatements and results of operations.
In June 2009, the FASB issued guidance now codified as ASC Topic 105 (“ASC 105”) as the single source of authoritative nongovernmental U.S. GAAP. ASC 105 doesdeferred provisions are not change current U.S. GAAP, but is intendedexpected to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents have been superseded and all other accounting literature not included in the FASB ASC is considered non-authoritative. These new provisions became effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of these provisions did not have a materialsignificantly impact on our financial condition and results of operations.statements.
Comparison of the Years Ended December 31, 20092010 and 20082009
Net Revenue
Net revenue consists primarily of licensing fees, royalties and milestone payments that we receive from our licensing partners. Revenue increased $113,975 toWe generated revenue of $115,000 for the year ended December 31, 2009 from $1,0252009. We did not generate any revenue for the year ended December 31, 2008.2010. The increase of $113,975decrease in revenue resulted primarily from milestone fees that we received underour decision to terminate the Collaboration and Exclusive License Agreement with Transgenomic, Inc. in January 2010. We expect sales of our BC-SeraPro™ and NuroPro® diagnostic productsintend to increase during 2010 as we complete Phase II clinical studies on these products. As a result, we expect revenue to increase over the next 12 months as we enter into additional collaboration and licensing agreements with other biotechnologybio-technology companies, academic and research institutions and governmental agencies.agencies during 2011. As a result, we expect to begin to generate revenue during the next 12 months as we begin to generate licensing fees, royalties and milestone payments under these agreements.
Operating Expenses
Operating expenses consist primarily of employee compensation and benefits, professional and consulting fees, and other selling, general and administrative expenses.
Employee Compensation and Benefits. Employee compensation and benefits consists of all salaries and other cash compensation, equity-based compensation, employee benefits and the related payroll taxes. Employee compensation expense decreased $673,455$218,804 to $149,263 for the year ended December 31, 2010 from $368,067 for the year ended December 31, 2009 from $1,041,522 for the year ended December 31, 2008.2009. The decrease of $673,455$218,804 was due primarily to decreasesa decrease of $334,130$143,767 for salary and equity-based compensation expenses $102,876 for health insurance benefits and $36,982 for payroll taxes, each associated with a decrease in the number of peopleindividuals who we employed during 2009.the year ended December 31, 2010, and a decrease of $75,037 for payroll taxes associated therewith. We expect employee compensation expense to increase over the next 12 months as we continue to retain additional executive management personnel, lab technicians and other employees in connection with the growth of our business.
Professional Fees. Professional fees consist of fees paid to our independent accountants, lawyers, laboratory and technology consultants and other professionals and consultants. Professional fees increased $2,963,716decreased $3,483,950 to $1,441,879 for the year ended December 31, 2010 from $4,925,829 for the year ended December 31, 2009 from $1,962,113 for the year ended December 31, 2008.2009. The increasedecrease of $2,963,716$3,483,950 was primarily due primarily to an increasea decrease of $4,472,910$3,967,209 for the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services, partially offset by decreasesincreases of $254,230$291,922 for legal and accounting fees, $427,951 forgeneral consulting fees and decreases in other professional$314,311 for legal fees. We expect professional fees to increase over the next 12 months as we incur additional legal, accounting, laboratory and technology fees in connection with the general expansion of our business and operations.
Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses consist of selling and marketing expenses, lab services and supplies, clinical validation studies, computer hardware and system costs, bank service charges, filing fees and dues, non-employee customer service representative expense, rent expense, financial printer costs, transfer agent costs, the costs of investor relations campaigns and activities, postage and delivery expenses, severance expenses, general business expenses and miscellaneous general and administrative expenses. Other general and administrative expenses decreased $349,182increased $324,530 to $467,827 for the year ended December 31, 2010 from $143,297 for the year ended December 31, 2009 from $492,479 for the year ended December 31, 2008.2009. The decreaseincrease of $349,182$324,530 resulted primarily from decreasesincreases of $72,532$22,366 for marketing costs, $64,925lease payments, $26,097 for administrative expenses, $24,459 for rent associatedpayments, $57,000 for office expenses, and $17,108 for relocation expenses, and a decrease of $108,359 for expenses reimbursed under our Collaboration and Exclusive License Agreement with Transgenomic, Inc. due to our movedecision to a smaller officeterminate the agreement in 2009, $75,592 for travel and entertainment, $35,000 for clinical validation studies and $18,014 for lab supplies, as well as decreases in other miscellaneous general and administrative expenses.January 2010. We expect other general and administrative expenses to increase over the next 12 months as we continue to incur expenses for clinical validation studies, lab supplies, selling and marketing expenses, rent, computer hardware and systems, and other miscellaneous items associated with the general operation and growth of our business.
Interest Expense
Interest expense consists of the interest and discount amortization costs that we incur on the debt obligations that we have. Interest and amortization expense decreased $1,124,532 to $416,886 for the year ended December 31, 2009 from $1,541,418 for the year ended December 31, 2008. The decrease of $1,124,532 was due primarily do the retirement during 2009 of many of the debt obligations that were outstanding during 2008. We expect interest expense to continue to decrease over the next 12 months as we retire several of our remaining debt obligations.
Derivative Gain / Loss
Derivative gain / loss consists of the non-operating, non-cash income or expense resultingthat results from changes in the fair value of the derivative instruments contained in the convertible promissory notes and associated stock warrants that were outstanding at December 31, 2010 and 2009, respectively. During the three months ended June 30, 2010, we changed the method by which we valued the conversion features in its convertible notes and convertible debentures by switching from the binomial lattice valuation model to the Black-Scholes pricing model. As a result, the conversion features in our notes and debentures were valued under the binomial lattice valuation model at December 31, 2009, and 2008, respectively. were valued under the Black-Scholes pricing model at December 31, 2010.
We recognized a derivative gain of $12,995,952 for the year ended December 31, 2010 compared to a derivative loss of $13,045,921 for the year ended December 31, 2009, compared to a2009. The derivative gain of $4,415,110 forthat we recognized during the year ended December 31, 2008. The difference of $17,461,0312010 was due primarily to the increasea decrease in the trading price of our common stock betweenduring 2010. The derivative loss that we recognized during the year ended December 31, 20082009 was due primarily to an increase in the price of our common stock during 2009 and our decision to revise the exercise price of certain of our outstanding warrants to $0.053 per share during 2009. While we expect our outstanding convertible promissory notes to continue to be retired or converted into shares of common stock during the next 12 months, we cannot predict what our future derivative gain / loss isgains or losses will be in the future since such gains and losses are largely dependent upon the trading price of our common stock,stock.
Loss on Settlement of Litigation
Loss on settlement of litigation consists of the net losses that we expectrecognized in connection with the settlement of various litigation that we were a party to. Loss on settlement of litigation was $304,629 for the year ended December 31, 2010. We did not recognize any loss on settlement of litigation for the year ended December 31, 2009. The difference of $304,629 was due to our decision to enter into settlement agreements with John Ginzler and Rockmore Investment Master Fund, LTD in February 2011 and March 2011, respectively, pursuant to which we incurred losses of $161,044 and $169,818, respectively. We recorded these losses as losses on the settlement of litigation in our financial statements for the year ended December 31, 2010 in accordance with the provisions of ASC Topic 450, “Contingencies.” These losses were partially offset by a gain of $26,236 that we recognized in December 2010 in connection with the court’s ruling of the amount that we were found to owe to Neogenomics, Inc. in our litigation with it. A description of this litigation and the other material litigation to which we are currently a party is set forth herein under “Item 3. Legal Proceedings.” We may incur additional gains or losses on the settlement of litigation in the future derivative gains and lossesas we attempt to be smaller in amount as our convertible promissory notesresolve the remaining litigation to which we are retired or converted into shares of common stock, and as stock warrants are exercised or expire by their terms.currently a party.
Gain / Loss on Settlement of Debt
Gain / loss on settlement of debt consists of the gains and losses that we have recognized in connection with the retirement of outstanding debt and payment of outstanding invoices, and results when we issue shares of common stock having an aggregate value less than (in the case of gains) or greater than (in the case of losses) the outstanding principal amount of the applicable note and accrued interest thereon or the applicable invoice. We recognized a loss on the settlement of debt of $426,574 forduring the year ended December 31, 2009, compared to a2009. We did not recognize any gain or loss on the settlement of debt of $464,872.during the year ended December 31, 2010. The difference of $891,446$426,574 was due primarily to our decision to pay off a significant amount of our outstanding debt obligations and accrued interest, and numerous outstanding invoices, during 2009 by issuing shares of our common stock having an aggregate value that was greater than the outstanding principal amount of the applicable note and accrued interest or the applicable invoice. While we may continue to incur additional gains and losses on the settlement of debt in the future asin the event we continue to pay off additional outstanding debtdebts and invoices with shares of our common stock, we expect any such gains or losses to decrease as the amount of outstanding debt continuesdecreases.
Interest Expense
Interest expense consists of the interest and discount amortization costs that we incur on the debt obligations that we have. Interest and amortization expense decreased $308,954 to decrease.$107,932 for the year ended December 31, 2010 from $416,886 for the year ended December 31, 2009. The decrease of $308,954 was due primarily to our decision to retire many of the debt obligations that were outstanding during the year ended December 31, 2009. We expect interest expense to decrease over the next 12 months as we continue to retire our remaining debt obligations.
Deemed Dividends
Deemed dividends consist of the charges that we recognized in connection with the revisions that we made to the exercise price of several of our outstanding warrants. We recognized deemed dividends of $1,111,054 during the year ended December 31, 2009. We did not recognize any deemed dividends during the year ended December 31, 2010. The difference of $1,111,054 was due primarily to our decision to revise the exercise price of several of our outstanding warrants during 2009. We do not expect to incur additional charges for deemed dividends during the next 12 months since we do not currently intend to revise the terms of any of our outstanding securities in the future.
Net Income / Loss
OurWe generated net income of $10,524,422 for the year ended December 31, 2010 compared to a net loss increased $19,074,790 toof $19,211,574 for the year ended December 31, 2009. The difference of $29,735,996 was due primarily to a difference of $26,041,873 for derivative gain recognized during 2010 compared to derivative loss recognized during 2009 from $136,784 for the year ended December 31, 2008. The increaseand a decrease of $19,074,790 was primarily due to increases of $2,963,716$3,483,950 for professional fees, $17,461,031 for derivative loss, and $891,446 for loss on the settlement of debt. This was partially offset by an increase of $113,975, for net revenue, and decreases of $673,455 for employee compensation and benefits and $349,182 for other selling, general and administrative expenses.fees. We expect to generate net losses during 2011 as we continue to build our net lossbusiness. However, we expect these losses to decrease substantially during 2010in the future as we begin to generate additional revenue through our collaboration and licensing partnersagreements and as we continue to retire our outstanding debt obligations.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through private sales of equity securities and the use of short-termshort- and long-term debt.
Net cash used by operating activities was $441,561 for$386,691 during the year ended December 31, 20092010 compared to $1,447,004 for$441,561 during the year ended December 31, 2008.2009. The $1,005,443 decrease inof $54,870 for cash used by operating activities was due primarily to a difference of $29,735,996 between the net income generated during 2010 and the net loss incurred during 2009 and an increase of $17,461,031$855,016 for derivative liability, $4,079,418 for stock issued for compensation and services and $888,244 for loss on the settlement of debt. This was partially offset by an increase in net loss of $19,074,790 and a decrease in accounts payable and other liabilities, partially offset by a difference of $350,954.$26,041,873 for changes in the amount of our derivative liability and decreases of $3,483,950 for professional fees and $426,574 for losses on the conversion of financial instruments.
Net cash used by investing activities was $758 for$2,325 during the year ended December 31, 20092010 compared to $2,748 for$758 during the year ended December 31, 2008.2009. The $1,990 decrease inincrease of $1,567 for cash used byin investing activities was due to a decreasean increase in expenditures onthe amount of property and equipment purchased during 2009.2010.
Net cash provided by financing activities was $389,016 for the year ended December 31, 2010 compared to $433,988 for the year ended December 31, 2009 compared to $1,332,404 for the year ended December 31, 2008.2009. The $898,416$44,972 decrease in cash provided by financing activities was due primarily to decreases of $562,248$85,156 for proceeds from the sale of common stock, and $710,000$50,000 for proceeds from the issuance of debt. This was partially offset by an increase of $278,832notes payable and $44,298 for proceeds from the exercise of warrants, and a decreasepartially offset by an increase of $120,000$134,482 for principal payments on outstanding debt.proceeds from the issuance of notes payable to related parties.
Our primary sources of capital over the past 12 months are set forth below.
In June 2009, we issued 6,000,000 sharesDuring the period beginning January 1, 2010 and ending April 30, 2011, Rozetta-Cell made loans to us for a total of common stock to an accredited investor for total cash proceeds of $30,000.$225,933. The loans are interest free and payable on demand.
In June 2009, we issued 500,000 shares of common stock to an accredited investor for total cash proceeds of $5,000.
In August 2009, we issued 515,600 shares of common stock to two accredited investors for total cash proceeds of $5,156.
In August 2009,During the period beginning January 1, 2010 and ending April 30, 2011, we issued a convertible promissory note and a warrant to acquire sharestotal of common stock to an accredited investor for consideration of $25,000. The note is for a principal amount of $25,000, is convertible into 2,500,000 shares of common stock, has an interest rate of 8% and is due February 26, 2010. The warrant is exercisable into 1,000,000 shares of common stock and has an exercise price of $0.10 that may be subject to adjustment depending upon the trading price of our common stock.
In September 2009, we issued 2,500,000 shares of common stock to an accredited investor for total cash proceeds of $25,000.
In September 2009, we issued 2,000,000 shares of common stock to an accredited investor for total cash proceeds of $20,000.
In September 2009, we issued a convertible promissory note and a warrant to acquire shares of common stock to an accredited investor for consideration of $25,000. The note is for a principal amount of $25,000, is convertible into 2,500,000 shares of common stock, has an interest rate of 8% and is due March 3, 2010. The warrant is exercisable into 1,000,000 shares of common stock and has an exercise price of $0.10 that may be subject to adjustment depending upon the trading price of our common stock.
During the year ended December 31, 2009, we issued 11,789,50936,799,358 shares of common stock to warrant holders upon the exercise of outstanding warrants at exercise prices ranging between $0.01 and $0.053 per share for total cash proceeds of $278,832.$234,534.
To date, our capital needs have been met primarily through the issuance of convertible promissory notes and debentures, sales of equity securities and proceeds received upon the exercise of warrants held by our security holders. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. We have used the proceeds from the exercise of warrants and our private offerings of securities to pay virtually all of the costs and expenses we have incurred. These costs and expenses were comprised of operating expenses, which consisted of the employee compensation expenses, professional fees and other general and administrative expenses discussed above, and the costs of sales discussed above to the extent such costs of sales exceeded our revenue.above.
We believe that our current cash resources will not be sufficient to sustain our operations for the next 12 months. We will need to obtain additional cash resources within the next 12 months to enable us to pay our ongoing costs and expenses as they are incurred and finance the growth of our business. We intend to obtain these funds through internally generated cash flows from operating activities, and proceeds from the issuance of equity securities.securities and proceeds from the exercise of outstanding warrants. The issuance of additional equity would result in dilution to our existing shareholders. We have not made arrangements to obtain additional financing and we can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.
The following summarizes our material long-term contractual obligations as of December 31, 2009:2010:
To date, we have made payments under these obligations with proceeds received from issuance of convertible promissory notes and debentures, sales of our equity securities, and proceeds received upon the exercise of outstanding warrants by our security holders. We intend to make future payments due under these obligations primarily through similar means during 2010.2011.
Our audited financial statements at and for each of the years ended December 31, 20092010 and 2008,2009, respectively, begin on page F-1 of this report located immediately after the signature page hereto.
None.
We believe that our board of directors should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications or skills in the following areas are most important: (i) organizational leadership and vision; (ii) strategic, financial and operational planning; (iii) proteomics and biotechnology industry experience; (iv) corporate restructuring and performance enhancement; (v) corporate finance; (vi) proteomics and biotechnology industry experience; and (vii)(vi) experience as a board member of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that our current board member possessesmembers possess the professional and personal qualifications necessary for board service, and have highlighted particularly noteworthy attributes for thisthese board membermembers below. The principal occupation and business experience, for at least the past five years, of our current director isdirectors are as follows:
As a result of these and other professional experiences, our board of directors possesses particular knowledge and experience in management, operations and finance that strengthen the board’s qualifications, skills and experience.
Helen R. Park and Ira L. Goldknopf constitute all of the members of our board of directors. Ms. Park and Dr. Goldknopf will serve until the next annual meeting of shareholders or until his successor istheir respective successors are duly elected and qualified. Officers are elected annually by our board of directors and serve at the discretion of our board of directors. We do not currently have any committees of our board of directors.
We have not implemented any formal procedures for shareholder communication with our board of directors. Any matter intended for our board of directors, or for any individual member or members of our board of directors, should be directed to our corporate secretary at Power3 Medical Products, Inc., 3400 Research Forest Drive, Suite B2-3,26022 Budde Road, The Woodlands, Texas 77381.77380. In general, all shareholder communication delivered to the corporate secretary for forwarding to the board of directors or specified members of the board of directors will be forwarded in accordance with the shareholder’s instructions. However, the corporate secretary reserves the right to not forward to members of the board of directors any abusive, threatening or otherwise inappropriate materials.
Our board of directors has not created a separately-designated standing audit committee or a committee performing similar functions. Accordingly, our full board of directors acts as our audit committee. In addition, we do not have an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act, serving on our board of directors. We currently have a small number of employees and have generated only a small amount of revenue to date. In light of the foregoing, our board of directors concluded that the benefits of retaining an individual who qualifies as an “audit committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act,expert” would be outweighed by the costs of retaining such a person. As a result, no member of our board of directors is an “audit committee financial expert.”
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Business Conduct and Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications that we make; (iii) compliance with applicable governmental laws, rules and regulations; (iv) prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code.
Item 10. Executive Compensation.
Helen R. Park
On September 7, 2008, we entered into a Consulting Agreement with Bronco Technology, Inc., a company of which Ms. Park owns all of the issued and outstanding capital stock, pursuant to which Ms. Park agreed to serve as our Interim Chief Executive Officer through June 1, 2009. In consideration for Ms. Park’s services, we agreed to pay Bronco Technology, Inc. $5,000 per month and 100,000 shares or common stock per month. Ms. Park was also entitled to receive commission payments based upon certain milestones of progress to be agreed upon by us and Ms. Park.
On June 1, 2009, we entered into an Amended and Restated Consulting Agreement with Bronco Technology, Inc. Under the terms of the agreement, Ms. Park agreed to continue to serve as our Interim Chief Executive Officer until May 31, 2011. In consideration for Ms. Park’s services, we agreed to pay Bronco Technology, Inc. $8,334 per month, subject to annual review by our board of directors or compensation committee of the board of directors, if any. We also agreed to pay Bronco Technology a cash commission payment of an amount equal to one percent, (1.0%), but not to exceed $5,000 per month, of the royalties received by us from the sale of certain of our products through license agreements signed during the term of the agreement.
Ira L. Goldknopf
Effective May 17, 2009, we entered into an Amended and Restated Employment Agreement with Dr. Ira L. Goldknopf to continue serving as our President and Chief Scientific Officer. The agreement is for a three-year term. We agreed to pay Dr. Goldknopf an annual base alarysalary of $100,000 through May 31, 2009, and an annual base salary of $125,000 for the remainder of the term, subject to annual review by our board of directors or compensation committee of the board of directors, if any. We also agreed to pay Mr. Goldknopf a cash bonus of $1,000 for each publication authored or co-authored by Dr. Goldknopf and published in a scientific or professional journal that provides value to us.
Helen R. Park
In October 2008, we issued 5,000,000 shares of common stock to Ms. Park as compensation for services rendered by Ms. Park prior to her appointment as the Company’sour Interim Chief Executive Officer. At the time the shares were authorized for issuance, we did not have enough shares of common stock available to issue to Ms. Park. In November 2008, we issued a convertible promissory note and a warrant exercisable into shares of common stock to Ms. Park in exchange for the 5,000,000 shares of common stock. The convertible promissory note had an initial principal amount of $150,000, accrued interest at an annual rate of 12% and was due on November 18, 2009. The warrant is exercisable into 5,000,000 shares of common stock, has an exercise price of $0.04, and has a term of three years. In March 2009, we issued 9,571,429 shares of common stock to Ms. Park upon her conversion of the convertible promissory note and accrued interest.
In June 2009, we issued 2,560,908 restricted shares of common stock to Ms. Park in full payment of $40,000 due under her consulting agreement through May 31, 2009, plus accrued interest, and issued 400,000 shares of common stock to Ms. Park which was due to her under her consulting agreement through May 31, 2009.
In December 2009, we issued 15,000,000 shares of common stock to Ms. Park as a performance bonus in accordance with the terms of her consulting agreement.
Ira L. Goldknopf
In June 2009, we issued 7,422,558 shares of common stock to Mr. Goldknopf in full payment of $92,142 of accrued but unpaid salary and accrued interest due under his employment agreement.