ITEM 1. BUSINESS.
Company History
We were incorporated in the State of Nevada on June 21, 2006, as El Palenque Nercery, Inc. On June 30, 2006, we changed our name to El Palenque Vivero, Inc., and on March 23, 2010, we changed our name to A5 Laboratories Inc. On April 8, 2010, we effectuated a forward split of our issued shares of common stock on the basis of 10-for-1. Our business offices are located at 2525 Robinhood Ln, S1100 , Houston TX and our telephone number is (713) 465-1001.
Principal Services
Contract Research and Laboratory Services
We plan to offer a full range of testing services to the pharmaceutical industry in a variety of fields, all in compliance with Good Laboratory Practices (GLP) and current Good Manufacturing Practices regulations (camp) through in-house and outsourcing arrangements. The comprehensive services we provide help to expedite the development process by providing immediate resources and technical expertise to help our clients meet deadlines, pursue projects of varying priority and risk, handle changes in workload, handle multiple projects, and pursue developments without in-house resources. Our Custom Research Organization (CRO) services can be divided into two sections: Analytical and Quality Assurance.
Analytical
We plan to offer a wide range of analytical services to support a client’s quality control, product development, method development, validation and marketed product activities. We are able to provide quantitative and qualitative, as well as consulting and analytical services, in chemistry, microbiology and chromatography to the pharmaceutical, biotechnology and cosmetics industries. At our facility, we are able to perform a wide variety of quality control tests on raw materials as well as finished products. We also offer a full range of ICH stability conditions and provide total stability management. In addition, we can develop and validate new methods, revalidate existing methods to ensure compliance with current regulatory requirements and perform technology transfers.
These services can be broken down as follows:
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Quality Assurance and Support Services
We will also provide various support services via which clients receive quality testing data on their products through compliance with Good Laboratory Practices (GLPs) and Good Manufacturing Practices (GMPs). The Quality Assurance department independently audits and tracks every project to assure accurate and reliable results. Every report includes a Quality Assurance Letter verifying and qualifying data and compliance, which completes the audit trail. We can prepare or help our customer to obtain all regulatory
authorization to import and distribute their pharmaceutical product via getting D.I.N ( drug identification Number) or nutraceuticals products via getting N.P.N (natural product Number) from Health Canada.
Interferon
The normal function of the immune system is essential for health, and dysfunction of the immune system leads to a wide diversity of diseases. Deficiency of immune cell production or defective immune cell function can lead to a spectrum of immunodeficiency diseases. Over-activity of various components of the immune system leads to the development of allergic or autoimmune diseases. Leukemia and lymphoma are the result of malignant transformation in cells of the immune system. Cytokines are soluble mediators acting as cell-to-cell messengers in the immune system. They are critical for normal immune system function, and their expression may be perturbed in disease states. They are involved in the regulation of the growth, development, and activation of immune system cells and the mediation of the inflammatory response. In general, cytokines are pleotropic in that they are capable of acting on many different cell types. This pleotropism results from the presence of receptors for the same cytokine on multiple cell types, leading to the formation of “cytokine networks.”
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Interferons (IFNs) are cytokines that exhibit a broad spectrum of immune-modulating and anti-proliferative properties. Alpha (leukocyte) IFN-a is made by white blood cells; beta (fibroblast) IFN-b is made by skin cells and gamma (immune) IFN-g is made by lymphocytes after stimulation by antigen. IFNs are not species-specific. IFNs are coded by three distinct cell genes; they have important differences in amino acid sequence, stimulus for induction, producer cell and role in the body. The active substance is not IFN itself, but proteins that IFN causes to be produced by other cells of the immune system.
Interferon-gamma is produced by stimulated T-lymphocytes (CD4+ and CD8+) and natural killer (NK) cells (both components of the immune system) in response to infection and antigenic challenge. IFN-gamma shows little structural relationship to IFN-alpha and IFN-beta. IFN-gamma has antiviral and antiproliferative properties and several biological actions not shared with the other interferons. It alone is a potent activator of macrophages and neutrophils, enhancing the production of reactive oxygen species and the killing of microbacterial, fungal and protozoan pathogens. Another important difference is its role as a primary mediator of the immune response. Cytokines such as IFN-gamma play an essential role in the mechanisms of immunity. When the host is challenged with a pathogen, cytokines are synthesized in situ and it is the influence of these cytokines on the other cells of the immune system, which contributes towards development of immunity to that pathogen.
We have acquired proprietary technology from Vida Nutra Pharma Inc., for cost effective gamma interferon (IFN-g) production technology. The application of human gamma interferon in immune-based therapy has potential therapeutic applications in cancers, chronic hepatitis B, opportunistic infections in HIV patients, antibiotic resistant bacterial and fungal infections, parasite infections, sepsis, and diabetes. Interferon (IFN)-gamma is a soluble protein produced by immune cells in response to infection and antigenic challenge. IFN-gamma has antiviral and antiproliferative properties and is a potent activator of macrophages and neutrophils, enhancing killing of microbacterial, fungal and protozoan pathogens.
We have not yet created sufficient IFN-gamma to effectively test it across a large enough animal or human population to generate any meaningful data on the efficacy of IFN-gamma as a treatment method.
A large number of experimental and clinical data indicate a wide spectrum of disease states that are potentially amenable to IFN-gamma treatment. In several of the diseases, IFN-gamma immune-based therapy is in phase II or III clinical trials. Recombinant IFN-gamma immune-based therapy has been approved for clinical therapy of three rare diseases. The major hurdle to overcome in IFN-gamma treatment is the cost of dosages that can easily run into tens of thousands of dollars for a single treatment. Cost has been the limiting factor in the expansion of recombinant IFN-gamma to clinical settings treating major diseases, and we believe that our technology may be able to significantly lower this cost, by a factor of 10 to 1 or even 100 to 1 by the application of our interferon production technology. We intend to focus on production of natural human gamma interferon for clinical trials and therapeutics if we are able to prove efficacy and efficiency, we expect to commercialize our product.
Gamma interferons are manufactured commercially in three ways: by genetic engineering, by cell culture, and from human white blood cells. In the United States, only one type of gamma interferon is approved for commercial sale: Actimmune, which is a recombinant form of human IFN-gamma and is produced in E. coli bacteria.
The critical step in the production of natural IFNs involves activation by inducers to stimulate IFNs secretion in spleen cells. In the past, inducers used for stimulating IFN secretion were toxic agents such as bacterial endotoxins, plant lectins (ConA, PHA), as well as viruses and the issue of safety was one of the main factors that limited clinical application of natural IFNs.
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Markets, Customers and Distribution
Contract Research and Laboratory Services
The drug development process is a lengthy, expensive activity monitored and regulated by a number of governing bodies. The identification of any new drug candidate involves proving its safety and efficacy through a series of prescribed laboratory experiments and tests including safety and biological activity testing. The drug industry has been under increasing pressure from managed care, industry consolidation and competition, and globalization to increase annual output of new products and conduct the research in a more cost-effective and time-efficient manner. The increasing pressure from managed care and industry competition will continue forcing sponsors to expand their outsourcing to contract research organizations. Stricter regulatory requirements both in the United States and abroad have also made CROs a more attractive alternative to in-house testing and management.
Market situation appraisal for CRO indicates a market size of approximately $15 million for the Quebec market, $20 million for the Ontario market, and $190 - 230 million for the US market.
We provide services to a diverse client base consisting of emerging pharmaceutical companies, biotechnology companies, large pharmaceutical companies, specialty pharmaceuticals, drug delivery companies, and generics.
Interferon
Thus far, IFN-gamma has been recognized as clinically effective in the prophylaxis of chronic granulomatous disease, as adjunctive treatment in at least one systemic intracellular infection, visceral leishmaniasis and in treatment of osteopretosis. However, we believe that IFN-gamma treatment can prove to be effective in all types of diseases ranging from cancer, viral infections, sepsis, AIDS and diabetes.
Many of the infectious diseases listed affect large segments of the world population and could benefit from IFN-gamma as both first line therapy or as an adjunct therapy in restoring proper immune system function.
Actimmune, a recombinant human IFN-gamma currently approved for IFN-gamma immunotherapy is expensive - ~ 3x10 6 IFN Units or 100 micrograms cost $470 US (Sigma catalogue # I1520). In chronic hepatitis B, for instance, treatment of a single patient requires 150 micrograms per day for 4 weeks and costs $19,740 US. Treating 1000 patients would then cost ~ $20 million US. Cost reductions as function of number of patients to be treated can be envisaged, however even a two-fold reduction would make little difference in the cost of treating large number of chronic hepatitis B sufferers. This same rationale applies to many of the diseases that are potentially susceptible to IFN-gamma immunotherapy and currently limits the use of IFN-gamma - making it at best a second line therapy.
Current production of natural human IFN-gamma from 5 kg of spleen cells obtained from 10-20 human donors will yield 3X10 9 IFN Units of IFN-gamma or 10 6 doses. Based on the site visit, cost of production at laboratory scale can be set at $100,000 US for 10 6 doses, or $0.10 US per dose. However, this cost per dose will probably increase ten-fold when manufactured under GMP (Good Manufacturing Practice) conditions. The cost is then estimated at $1 US per dose when produced under GMP. Production scaled up 100 fold without further increase in cost is challenging but feasible.
We will attempt market penetration at reduced price structures of natural IFN-gamma with respect to Actimmune. Given the current number of infectious diseases as well as cancer, for which IFN-gamma immune-based therapy may be effective, we believe we will be able to find a market for our product if its efficacy is proven.
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Competition
CRO
We face competition from various CRO companies ranging from small, private businesses to large enterprises. Many of our competitors have longer operating histories, better brand recognition and greater financial resources than we do. In order for us to successfully compete in our industry we will need to:
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develop awareness of our services among our client base;
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continue developing the scope of services we can provide and improve efficiency and accuracy; and
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increase our financial resources.
However, there can be no assurance that even if we do these things we will be able to compete effectively with the other companies in our industry.
We believe that we will be able to compete effectively in our industry because of:
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well diversified portfolio of services and testing procedures; and
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intimate knowledge of local and international pharmaceutical companies.
However, as we are a newly-established company, we face the same problems as other new companies starting up in an industry, such as lack of available funds. Our competitors may be substantially larger and better funded than us, and have significantly longer histories of research, operation and development than us. In addition, they may develop similar testing procedures to ours and use the same methods as we do and generally be able to respond more quickly to new or emerging technologies and changes in legislation and regulations relating to the industry. Additionally, our competitors may devote greater resources to the development, promotion and sale of their services than we do. Increased competition could also result in loss of key personnel, reduced margins or loss of market share, any of which could harm our business.
Interferon
We face many of the same challenges in developing our Interferon technology. We face competition from various pharmaceutical companies ranging from small, private businesses to large multinational enterprises. Many of our competitors have longer operating histories, better brand recognition and greater financial resources than we do. In order for us to successfully compete in our industry we will need to:
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further development of our Interferon technology;
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assure that all of our technological progress is properly protected via intellectual property mechanisms; and
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increase our financial resources.
We believe that we will be able to compete effectively in our industry due to the potential inherent advantages of our technology. The following are some of the potential advantages:
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Fully glycosylated natural IFN-gamma showed full or partial resistance against crude granulocyte protease, elastase, cathepsin G and plasmin while recombinant E. coli human IFN-gamma was sensitive to all of these proteases that are found in body. This data strongly implies that natural IFN-gamma is expected to have a longer half-live in the body because of its greater resistance to proteases than the currently marketed recombinant human IFN-gamma.
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Production of human IFN-gamma is not efficient in E. coli bacteria as it yields improperly folded species of the recombinant protein. Biological efficacy depends on properly folded protein. Improperly folded protein is a target for proteases in the body that rapidly degrade it. Although recombinant human IFN-gamma is subject to a refolding protocol to restore biological activity, this refolding process does not necessarily ensure a homogeneously refolded protein. Higher doses of recombinant protein may thus necessary to ensure adequate concentration of properly folded species. By comparison, natural IFN-g, which is produced in spleen cells, responsible for natural IFN-g production, is properly folded and thus requires lower dosages for biological response.
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Natural human IFN-gamma has fewer side-effects and better patient safety. Long-term intra-muscular or subcutaneous injections of IFN-alpha, beta, gamma in patients with chronic myelogeneous leukemia (CML) can cause severe, long-lasting cutaneous complications consistent with necrotizing vasculitis which frequently require surgical intervention. The high concentrations of IFN at the injection site were suspected. We believe that the absence of glycosylation may be responsible for the production of interferon-neutralizing antibodies in these patients. Consequently, lower dosages of IFN-gamma are expected to have fewer side effects, improved patient compliance, and good market acceptance.
To be competitive and expand research into use of natural human gamma interferon, we anticipate that a single dose of natural human IFN-gamma corresponding to 3,000 units will be priced at $50 US (an equivalent dose of 3X10 6 Units of Actimmune costs $470 US). Assuming a dose of 4,500 IFN Units per patient for 4 weeks and 10,000 patients treated yields more than $20,000,000 in sales. A further 10-fold price reduction and one million patients treated, i.e. $5 US per dose to reach an even larger market, gives more than $200,000,000 in sales potential. A sliding scale will be used in making the transition in cost reduction to maximize profitably. The inventory of IFN-gamma doses remaining after projected sales is 50% of total doses produced in each scenario, allowing an additional margin in price reduction.
If we are unable to establish these competitive advantages or if we are not able to develop our interferon technology to the point that it is commercially viable, it is likely that we will not be able to continue our business.
Intellectual Property
We have filed for a provisory patent with the U.S. patent office in order to preserve our natural gamma interferon technology (U.S. provisional Patent No. US 61-400719). We do own copyrights on all of the content of our website: www.a5labs.com.
Research and Development
We did not incur any research and development expenses from our inception to September 30, 2011.
Government Regulations
We are not aware of any government regulations which would have a significant impact on our operations.
Environmental Regulations
We are not aware of any material violations of environmental permits, licenses or approvals that have been issued with respect to our operations. We expect to comply with all applicable laws, rules and regulations relating to our business, and at this time, we do not anticipate incurring any material capital expenditures to comply with any environmental regulations or other requirements.
While our intended projects and business activities do not currently violate any laws, any regulatory changes that impose additional restrictions or requirements on us or on our potential customers could adversely affect us by increasing our operating costs or decreasing demand for our products or services, which could have a material adverse effect on our results of operations.
Employees
As of August 14, 2013, we had 2 employees, both of which are engaged on a full time basis.
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WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 1A.
ITEM 1A. RISK FACTORS.
This Annual Report contains forward-looking statements that involve risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” or “anticipation” or the negative thereof or other variations thereon or comparable terminology. Actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Annual Report. The following risk factors should be considered carefully in addition to the other information in this Annual Report.
Risks Related to our Business and Industry
WE MAY BE REQUIRED TO PERFORM ADDITIONAL CLINICAL TRIALS OR CHANGE THE LABELING OF OUR PRODUCTS IF SIDE EFFECTS OR MANUFACTURING PROBLEMS ARE IDENTIFIED AFTER OUR PRODUCTS ARE ON THE MARKET.
If side effects are identified after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and product recalls, reformulation of products, additional clinical trials, changes in labeling of products, and changes to or re-approvals of our manufacturing facilities may be required, any of which could have a material adverse effect on sales of the affected products and on our business and results of operations.
After products are approved for commercial use, we or regulatory bodies could decide that changes to the product labeling are required. Label changes may be necessary for a number of reasons, including the identification of actual or theoretical safety or efficacy concerns by regulatory agencies or the discovery of significant problems with a similar product that implicates an entire class of products. Any significant concerns raised about the safety or efficacy of our products could also result in the need to recall products, reformulate those products, to conduct additional clinical trials, to make changes to the manufacturing processes, or to seek re-approval of the manufacturing facilities. Significant concerns about the safety and effectiveness of a product could ultimately lead to the revocation of our marketing approval. The revision of product labeling or the regulatory actions described above could be required even if there is no clearly established connection between the product and the safety or efficacy concerns that have been raised. The revision of product labeling or the regulatory actions described above could have a material adverse effect on sales of the affected products and on our business and results of operations.
IF WE OR OUR SUPPLIERS ARE UNABLE TO COMPLY WITH ONGOING AND CHANGING REGULATORY STANDARDS, SALES OF OUR PRODUCTS COULD BE DELAYED OR PREVENTED.
Virtually all aspects of our business, including the development, testing, manufacturing, processing, quality, safety, efficacy, packaging, labeling, record-keeping, distribution, storage and advertising and promotion of our products and disposal of waste products arising from these activities, are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA and the Department of Health and Human Services Office of Inspector General (HHS OIG). Our business is also subject to similar and/or additional regulation in other countries. Compliance with these regulations is costly and time-consuming.
Our manufacturing facilities and procedures and those of our suppliers are subject to ongoing regulation, including periodic inspection by the FDA and other regulatory agencies. For example, manufacturers of pharmaceutical products must comply with detailed regulations governing current good manufacturing practices, including requirements relating to quality control and quality assurance. We must spend funds, time and effort in the areas of production, safety, quality control and quality assurance to ensure compliance with these regulations. We cannot assure that our manufacturing facilities or those of our suppliers will not be subject to regulatory action in the future.
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Our products generally must receive appropriate regulatory clearance before they can be sold in a particular country, including the United States. We may encounter delays in the introduction of a product as a result of, among other things, insufficient or incomplete submissions to a regulatory agency for approval of a product, objections by another company with respect to our submissions for approval, new patents by other companies, patent challenges by other companies that result in a 180-day exclusivity period, and changes in regulatory policy during the period of product development or during the regulatory approval process. Regulatory agencies have the authority to revoke drug approvals previously granted and remove from the market previously approved products for various reasons, including issues related to current good manufacturing practices for that particular product or in general. We may be subject from time to time to product recalls initiated by us or by regulatory authorities.
Our inability or the inability of our suppliers to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, consent decrees restricting or suspending our manufacturing operations, delay of approvals for new products, injunctions, civil penalties, recall or seizure of products, total or partial suspension of sales and criminal prosecution. Any of these or other regulatory actions could materially adversely affect our business and financial condition.
WE DEPEND ON THIRD PARTIES TO SUPPLY RAW MATERIALS AND OTHER COMPONENTS AND MAY NOT BE ABLE TO OBTAIN SUFFICIENT QUANTITIES OF THESE MATERIALS, WHICH WILL LIMIT OUR ABILITY TO MANUFACTURE OUR PRODUCTS ON A TIMELY BASIS AND HARM OUR OPERATING RESULTS.
The manufacture of Interferon requires, and our product candidates will require, raw materials and other components that must meet stringent regulatory requirements. Some of these raw materials and other components are available only from a limited number of sources. Obtaining approval to change, substitute or add a raw material or component, or the supplier of a raw material or component, can be time consuming and expensive, as testing and regulatory approvals are necessary.
OTHER COMPANIES MAY CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS.
Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. The manufacture, use and sale of new products with conflicting patent rights have been subject to substantial litigation in the pharmaceutical industry. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. A number of pharmaceutical companies, biotechnology companies, universities and research institutions may have filed patent applications or may have been granted patents that cover aspects of our products or our licensors’ products, product candidates or other technologies.
Future or existing patents issued to third parties may contain claims that conflict with our products. We may be subject to infringement claims from time to time in the ordinary course of our business, and third parties could assert infringement claims against us in the future. Litigation or interference proceedings could force us to:
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stop or delay selling, manufacturing or using products that incorporate or are made using the challenged intellectual property;
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pay damages; or
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enter into licensing or royalty agreements that may not be available on acceptable terms, if at all.
Any litigation or interference proceedings, regardless of their outcome, would likely delay the regulatory approval process, be costly and require significant time and attention of key management and technical personnel.
We may not be able to prevent third parties from infringing or using our intellectual property. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite our efforts to protect this proprietary information, however, unauthorized parties may obtain and use information that we regard as proprietary. Other parties may independently develop similar know-how or may even obtain access to these technologies.
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The laws of some foreign countries do not protect proprietary information to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries.
The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in pharmaceutical patents. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights.
THE STRATEGY TO LICENSE RIGHTS TO OR ACQUIRE AND COMMERCIALIZE PROPRIETARY, BIOLOGICAL INJECTABLE OR OTHER SPECIALTY INJECTABLE PRODUCTS MAY NOT BE SUCCESSFUL AND WE MAY NEVER RECEIVE ANY RETURN ON OUR INVESTMENT IN THESE PRODUCTS.
We may license rights to or acquire products or technologies from third parties. Other companies, including those with substantially greater financial and sales and marketing resources, will compete with us to license rights to or acquire these products and technologies. We may not be able to license rights to or acquire these proprietary or other products or technologies on acceptable terms, if at all. Even if we obtain rights to a pharmaceutical product and commit to payment terms, including, in some cases, significant up-front license payments, we may not be able to generate product sales sufficient to create a profit or otherwise avoid a loss.
A product candidate may fail to result in a commercially successful drug for other reasons, including the possibility that the product candidate may:
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be found during clinical trials to be unsafe or ineffective;
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fail to receive necessary regulatory approvals;
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be difficult or uneconomical to produce in commercial quantities;
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be precluded from commercialization by proprietary rights of third parties; or
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fail to achieve market acceptance.
WE MAY BECOME SUBJECT TO FEDERAL OR STATE FALSE CLAIMS OR OTHER SIMILAR LITIGATION BROUGHT BY PRIVATE INDIVIDUALS AND THE GOVERNMENT.
The Federal False Claims Act (and equivalent state statutes) allows persons meeting specified requirements to bring suit alleging false or fraudulent Medicare or Medicaid claims and to share in any amounts paid to the government in fines or settlement. These suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claim action, pay fines and/or be excluded from Medicare and Medicaid programs. False claims litigation can lead to civil monetary penalties, criminal fines and imprisonment and/or exclusion from participation in Medicare, Medicaid and other federally funded health programs. Other alternate theories of liability may also be available to private parties seeking redress for such claims. A number of parties have brought claims against numerous pharmaceutical manufacturers, and we cannot be certain that such claims will not be brought against us, or if they are brought, that such claims might not be successful.
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WE MAY NEED TO CHANGE OUR BUSINESS PRACTICES TO COMPLY WITH CHANGES TO, OR MAY BE SUBJECT TO CHARGES UNDER, THE FRAUD AND ABUSE LAWS.
We are subject to various federal and state laws pertaining to health care fraud and abuse, including the federal Anti-Kickback Statute and its various state analogues, the federal and state False Claims Act and additional marketing and pricing laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs such as Medicare and Medicaid. We may have to change our advertising and promotional business practices, or our existing business practices could be challenged as unlawful due to changes in laws, regulations or rules or due to administrative or judicial findings, which could materially adversely affect our business.
WE FACE UNCERTAINTY RELATED TO PRICING AND REIMBURSEMENT AND HEALTH CARE REFORM.
In both domestic and foreign markets, sales of our products will depend in part on the availability of reimbursement from third-party payers such as government health administration authorities, private health insurers, health maintenance organizations and other health care-related organizations. However, reimbursement by such payers is presently undergoing reform, and there is significant uncertainty at this time how this will affect sales of certain pharmaceutical products. There is possible U.S. legislation or regulatory action affecting, among other things, pharmaceutical pricing and reimbursement, including under Medicaid and Medicare, the importation of prescription drugs that are marketed outside the U.S. and sold at prices that are regulated by governments of various foreign countries.
Medicare, Medicaid and other governmental reimbursement legislation or programs govern drug coverage and reimbursement levels in the United States. Federal law requires all pharmaceutical manufacturers to rebate a percentage of their revenue arising from Medicaid-reimbursed drug sales to individual states.
Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation, rules and regulations designed to contain or reduce the cost of health care. Existing regulations that affect the price of pharmaceutical and other medical products may also change before any of our products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we develop in the future. In addition, third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services and litigation has been filed against a number of pharmaceutical companies in relation to these issues. Additionally, significant uncertainty exists as to the reimbursement status of newly approved injectable pharmaceutical products. Our products may not be considered cost effective or adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an adequate return on our investment.
WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES FOR PRODUCT LIABILITY CLAIMS.
Product liability is a major risk in testing and marketing biotechnology and pharmaceutical products. We may face substantial product liability exposure in human clinical trials and for products that we sell after regulatory approval. We maintain insurance coverage for product liability claims in the aggregate amount of $100 million, including primary and excess coverage, which we believe is reasonably adequate coverage. Product liability claims, regardless of their merits, could exceed policy limits, divert management’s attention and adversely affect our reputation and the demand for these products.
WE DEPEND HEAVILY ON THE PRINCIPAL MEMBERS OF OUR MANAGEMENT AND RESEARCH AND DEVELOPMENT TEAMS, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
We depend heavily on the principal members of our management and research and development teams Each of the members of the executive management team is employed “at will.” The loss of the services of any member of the executive management team may significantly delay or prevent the achievement of product development or business objectives.
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TO BE SUCCESSFUL, WE MUST ATTRACT, RETAIN AND MOTIVATE KEY EMPLOYEES, AND THE INABILITY TO DO SO COULD SERIOUSLY HARM OUR BUSINESS AND OPERATIONS.
To be successful, we must attract, retain and motivate executives and other key employees. We face competition for qualified scientific, technical and other personnel, which may adversely affect our ability to attract and retain key personnel. We also must continue to attract and motivate employees and keep them focused on our strategies and goals.
Risks Related to Our Common Stock
THERE IS NO LIQUID MARKET FOR OUR COMMON STOCK.
Our shares are traded on the OTCBB and the trading volume has historically been very low. An active trading market for our shares may not develop or be sustained. We cannot predict at this time how actively our shares will trade in the public market or whether the price of our shares in the public market will reflect our actual financial performance.
OUR COMMON STOCK MAY BE CONSIDERED “A PENNY STOCK” AND MAY BE DIFFICULT FOR YOU TO SELL.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock has been for much of its trading history and may continue to be less than $5.00 per share, and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.
COMPLIANCE AND CONTINUED MONITORING IN CONNECTION WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and public disclosure may create uncertainty regarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time. We are committed to maintaining high standards of corporate governance and public disclosure. Complying with evolving interpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and procedures, and may divert management time and attention from the achievement of revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to uncertainties related to practice, our reputation might be harmed which would could have a significant impact on our stock price and our business. In addition, the ongoing maintenance of these procedures to be in compliance with these laws, regulations and standards could result in significant increase in costs.
OUR PRINCIPAL STOCKHOLDER HAS SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS THAT MAY NOT BE IN THE BEST INTEREST OF ALL OTHER STOCKHOLDERS.
The Company’s Chief Executive Officer and Chief Operating Officer each control approximately 25% of its voting stock through their ownership of the Series A Preferred Stock. He may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may expedite approvals of company decisions, or have the effect of delaying or preventing a change in control, adversely affect the market price of our common stock, or be in the best interests of all our stockholders.
YOU COULD BE DILUTED FROM THE ISSUANCE OF ADDITIONAL COMMON STOCK.
As of August 14, 2013, we had 100,000,000 shares of common stock outstanding and 100,000,000 shares of preferred stock outstanding. We intend to seek approval to increase the authorized number of common shares to 500,000,000 and preferred stock to 200,000,000. We are authorized to issue up to 100,000,000 shares of common stock and 100,000,000 shares of preferred stock. To the extent of such authorization, our board of directors will have the ability, without seeking stockholder approval, to issue additional shares of common stock or preferred stock in the future for such consideration as the board of directors may consider sufficient. The issuance of additional common stock or preferred stock in the future may reduce your proportionate ownership and voting power.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
We rented an office totaling 10,000 square feet in area and were paying $15,000 in rent on a monthly basis. The lease expired in January 2012 and the Company is no longer paying rent at that location. Commencing April 1, 2013, we began leasing property at our current location, 2525 Robinhood Street, Suite 1100, Houston TX.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We are not aware of any legal proceedings to which we are a party or of which our property is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
Our shares of common stock trade on the OTCBB under the symbol “AFLB.OB”.
The following table sets forth the high and low trade information for our common stock for each quarter since the Company changed business plans on July 5, 2010. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.
(b) Holders
As of August 14, 2013, a total of 100,000,000 shares of the Company’s common stock are authorized and currently outstanding. They are held by approximately 14 shareholders of record.
(c) Dividends
We have not declared or paid any dividends on our common stock and intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by Nevada law.
(d) Securities Authorized for Issuance under Equity Compensation Plan
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This annual report on Form 10-K and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the section entitled “Risk Factors”, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
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Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Plan of Operation
A5 Laboratories Inc. is a development stage company specializing in production of natural interferons using a unique technology that allows the Company to produce interferons for the human and animal health market. The Company is not currently in production. In order to execute our business plan, we need to raise additional capital to avoid the interruption of our current Custom Research Organization (CRO) and CRO related software sales operations.
On August 2, 2010, the Company filed a provisory patent with the U.S. Patent office in order to preserve our technology for the production of natural gamma interferons. Over the next 12 months, the Company plans to produce interferon in different research centers worldwide. The Company currently has two research labs engaged to produce interferons using our own technology. The first lab in Europe has finished their work and the results will be published in the next fiscal quarter. The second lab in North America will being testing immediately after the publication of the first set of results. Although this technology has previously been tested, the Company is currently focused on producing interferons in different independent laboratories.
After completion of lab scale production of interferons using our technology in North America and with the assurance of repeatability of our technology in various centers, we will begin producing interferons for in vitro testing at our own facility in Montreal. Simultaneously, we plan to proceed with the necessary regulatory efforts needed in Europe to register our product for veterinary use. If successful, we plan on introducing the interferon for one species (bovine or porcine).
Results of Operations
Our results of operations are summarized below:
Year Ended September 30, 2012 Compared to the Year Ended September 30, 2011
During the year ended September 30, 2012, we did not earn any revenues. We have not earned any revenues since our inception and there is no assurance that we will be able to earn any revenues in the future.
Our expenses for the years ended September 30, 2012 and 2011 can be summarized as follows:
Our net income for the year ended September 30, 2012, was $694,279 compared to a net loss of $3,024,617 for the year ended September 30, 2011, an improvement of $3,718,896. During the years ended September 30, 2012 and September 30, 2011, we did not generate any revenues from operations.
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During the year ended September 30, 2012, we incurred operating expenses (and respective net operating losses) of $377,715, compared to operating expenses of $2,091,546 incurred during the year ended September 30, 2011, a reduction in expenses of $1,713,831. The operating expenses incurred during the year ended September 30, 2012 and 2011, consisted of (i) $215,469 and $258,940, respectively, of management fees to a related party; (ii) $25,166 and $139,327, respectively, in fees paid to professionals; (iii) $43,970 and $183,916, respectively, in rent paid to an officer of the Company; (iv) $84,579 and $474,336, respectively, in other general and administrative expenses and (v) impairment of software of $0 and $1,035,027, respectively. Our expenses decreased during the year ended September 30, 2012, primarily based on the reduced scope and scale of our business operations relating to the activity engaged by our two operating labs. Additionally, expenses decreased primarily due to the impairment of software $1,035,027 in the fiscal year ended September 30, 2011 when Management determined that it was more likely than not that any significant future benefits would be realized due to the development costs.
Other expenses incurred during the year ended September 30, 2012, included: (i) interest expense of $206,024; (ii) derivative expense of $144,581, (iii) change in fair value of the derivative liability of ($1,386,527) and (iv) tax refund of $36,071. During the year ended September 30, 2011, the $933,071 in other income and expenses was comprised primarily of charges of $1,196,045 due to derivative expense on newly issued debt, partially offset by the market to market accounting associated with the fair market value of the derivative liability.
Therefore, our net income and income per share during the year ended September 30, 2012 was $694,279 or $0.01 per share, compared to a net loss and loss per share of ($3,024,617) or ($0.06) per share during the year ended September 30, 2011. The weighted average number of shares outstanding was 46,008,117 for the year ended September 30, 2012, compared to 48,051,677 for the year ended September 30, 2011.
Liquidity and Capital Resources
As of September 30, 2012, our current assets were $1,867 and our current liabilities were $902,783, which resulted in a working capital deficiency of ($900,816). As of September 30, 2012, current assets were comprised of: (i) $788 in cash; and (ii) $1,079 in Canadian General Service Taxes refundable. As of September 30, 2012, current liabilities were comprised of: (i) $122,610 in accounts payable and accrued liabilities; (ii) $415,719 in accounts payable due to a related party; (iii) $37,458 in accrued interest payable; (iv) $27,173 in notes payable due to a related party; (v) 165,145 in convertible debt (net of $66,814 of discount); and (vi) a derivative liability of $134,678 resulting from a convertible note payable issued to an officer of the Company , the Company’s Legal Counsel and an investor.
As of September 30, 2012, our total assets of $264,748 were comprised of: (i) $1,867 in current assets; (ii) $29,182 in debt issue costs (net of $21,719 of amortization); and (iii) $233,699 in property and equipment (net of $52,535 of depreciation). As of September 30, 2012, our total liabilities of $902,783 were comprised of current liabilities of the same amount.
Stockholders’ equity (deficit) increased $598,693 from ($1,236,728) as of September 30, 2011 to ($638,035) as of September 30, 2012. The change in Stockholder’s deficit was comprised primarily of net income of $694,279.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities. For the year ended September 30, 2012, net cash flows used by operations was ($85,000). Net cash flows used in operating activities for the year ended September 30, 2012, consisted of net income of $694,279 adjusted by: (i) ($1,386,527) in net income due to a change in the fair value of the derivative liability on convertible notes payable; (ii) $144,581 of derivative expense on new convertible notes issued; (iii) $30,000 in share based payments; (iv) $169,512 in amortization of debt issue cost; and (v) $9,886 in amortization of debt discount. Net cash flows used by operating activities was further changed by an increase of (i) $77,321 in other receivables; (ii) an increase of $26,624 in accrued interest; (iii) a decrease of $18,054 in accrued interest payable; and (iv) an increase in accounts payable-related party of $133,249.
Cash Flows from Investing Activities
For the year ended September 30, 2012, net cash flows used in investing activities was $nil.
Cash Flows from Financing Activities
We have financed our operations primarily from debt or the issuance of equity instruments. For the year ended September 30, 2012, net cash flows provided from financing activities was $94,030, consisting of (i) $40,303 in proceeds from convertible promissory notes; (ii) $53,727 in the issuance of convertible notes payable for legal services provided.
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We anticipate that we will meet our ongoing cash requirements by selling our equity securities or through shareholder loans. Our management has changed our business focus to the acquisition of operating assets and we estimate that our expenses over the next 12 months will be approximately $350,000, as described in the table below. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources.
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Material Commitments
As of the date of this Annual Report, we do not have any material commitments other than as described below.
Convertible Debt
Fife Note
Effective on February 23, 2011, the company entered into a secured convertible promissory note between the Company and John M. Fife (“Lender”). The note balance totaled $300,000 USD. In accordance with the terms and provision of the convertible feature, the lender will contribute funds convertible in tranche’s. The first tranche being equal to $300,000 USD and an additional ten (10) tranches equal to $200,000 USD each commencing on October 23, 2011, and continuing each subsequent month for ten months. The number of shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the higher of (i) the market price or (ii) the floor price. Where “Market Price” is defined as 80% of the average of the closing bid price for the three (3) days with the lowest closing bids during the twenty trading days immediately preceding the conversion date. Providing however that if the market prices falls below $0.05 per share of common stock the conversion factor shall be reduced by 10 percentage points.
For purposes hereof the “Floor Price” is defined as $0.0028. The trading data used to compute the closing bid shall be as reported by Bloomberg, LP or if such information is not then being reported by Bloomberg, then as reported by such other data information sources as may be selected by the lender.
In accordance with the terms of this note, a debt discount has been calculated using the “floor price” of $0.12 per share under the intrinsic value method of valuation. This calculation resulted in a total debt discount of $300,000, of which $169,512 was amortized and expensed during the year ended September 30, 2012.
Lucosky Brookman LLP Note
Effective on January 10, 2012, the Company issued to Lucosky Brookman LLP (“Lucosky”) a convertible promissory note ( the “Lucosky Note”) for legal services provided since February 1, 2011 of $53,727. The Lucosky Note bears interest at twelve percent (12%) per annum and has a term of six months. Should the Lucosky Note not be paid by the Maturity Date, an event of Default occurs and the interest rate becomes eighteen percent (18%) per annum. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the closing price for the five (5) days immediately preceding the conversion date.
Southridge Partners II LP Note
Effective on February 6, 2012, the Company issued to Southridge Partners II LP (“SRP II”) a convertible promissory note ( the “SRP II Note”) for funds provided of $15,000. The SRP II Note bears interest at five percent (5%) per annum and matures on August 31, 2012. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the low two (2) closing bid prices for the five (5) days immediately preceding the conversion date.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
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Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Such estimates for the year ended September 30, 2012 and 2011, and assumptions affect, among others, the following:
●
estimated carrying value, useful lives and related impairment of property and equipment;
●
estimated fair value of derivative liabilities;
●
estimated valuation allowance for deferred tax assets, due to continuing losses; and
●
estimated fair value of share based payments.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Debt Issue Costs and Debt Discount
The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
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Share-based Payments
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Earnings per Share
In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share, ” basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since the Company reflected a net loss in 2012 and 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
Fair Value of Financial Instruments
ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
●
Level 1 inputs: Quoted prices for identical instruments in active markets.
●
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
●
Level 3 inputs: Instruments with primarily unobservable value drivers.
Foreign Currency Transactions
The Company’s functional currency is the Canadian Dollar. The Company’s reporting currency is the U.S. Dollar. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 “Foreign Currency Translation” as follows:
(i)
Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
(ii)
Equity at historical rates; and
(iii)
Revenue and expense items at the average exchange rate prevailing during the period.
Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
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For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not hold any derivative instruments and do not engage in any hedging activities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are contained in pages through which appear at the end of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and financial disclosure for the year ended September 30, 2012, other than those matters disclosed on Form 8-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
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(b) Management’s Assessment of Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a − 15(f) and 15d − 15(f) under the Exchange Act. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2011. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The objective of this assessment is to determine whether our internal control over financial reporting was effective as of September 30, 2011. Based on our assessment utilizing the criteria issued by COSO, management has concluded that our internal control over financial reporting was not effective as of September 30, 2011. Management’s assessment identified the following material weaknesses:
●
As of September 30, 2011, there was a lack of accounting personnel with the requisite knowledge of Generally Accepted Accounting Principles (“GAAP”) in the U.S. and the financial reporting requirements of the SEC.
●
As of September 30, 2011, there were insufficient written policies and procedures to insure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements.
●
As of September 30, 2011, there was a lack of segregation of duties, in that we only had one person performing all accounting-related duties.
Notwithstanding the existence of these material weaknesses in our internal control over financial reporting, our management believes that the financial statements included in its reports fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented. We continue to evaluate the effectiveness of internal controls and procedures on an on-going basis. We plan to further address these issues once we commence operations and are able to hire additional personnel in financial reporting.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers as of August 14, 2013.
The Company’s directors serve in such capacity until the first annual meeting of the Company’s shareholders and until their successors have been elected and qualified. The Company’s officers serve at the discretion of the Company’s board of directors, until their death, or until they resign or have been removed from office.
There are no agreements or understandings for any director or officer to resign at the request of another person and none of the directors or officers is acting on behalf of or will act at the direction of any other person. The activities of each director and officer are material to the operation of the Company. No other person’s activities are material to the operation of the Company.
Frank Neukomm, age 64, Chief Executive Officer, Chief Financial Officer, Chairman
Frank Neukomm has an extensive background in finance, mergers & acquisitions, and sales & marketing. He served as a senior executive of brokerage and M&A companies, software companies, and telecom companies. He was instrumental in industries as diverse as insurance, consumer retail goods, industrial services and wireless telecommunications. Mr. Neukomm also arranged financing for and served as a director of several public companies.
Robert Farr, age 67, Vice President of Operations and Director
Robert C, Farr brings a 34 year diversified business background in operations leadership replete with examples of improved productivity and increased profits. Broad experience with several Fortune 500 companies includes successes in marketing, customer relations, administration, finance, operations, new products and worldwide vendor selection / purchasing. Mr. Farr’s recent experience includes securing and structuring funding for both public and private companies including debt and equity as well as international funding through the US Ex-Im Bank, Mr. Farr has a BS in finance from Mississippi State University and was a U.S. Naval officer in the Vietnam Conflict.
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Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq., as amended.
Family Relationships
None
Subsequent Executive Relationships
No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past five years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past five years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past five years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past five years. None of our directors or executive officers or their respective immediate family members or affiliates are indebted to us.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the years ended September 30, 2012 and 2011.
Outstanding Equity Awards
None.
Director Compensation
The table below lists the aggregate amount of payments that were made to directors during the year ended September 30, 2012.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
As of August 14, 2013, our authorized capitalization was 200,000,000 shares of capital stock, consisting of 100,000,000 shares of common stock, $0.001 par value per share and 100,000,000 shares of preferred stock, par value $0.001. As of August 19, 2013, there were 100,000,000 shares of our common stock outstanding, all of which were fully paid, non-assessable and entitled to vote. Each share of our common stock entitles its holder to one vote on each matter submitted to the stockholders.
The following table sets forth, as of August 14, 2013, the number of shares of our common stock owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of our outstanding shares, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our common stock beneficially owned.
(1)
Beneficial ownership is determined in accordance with Rule 13d-3 of the Exchange Act and generally includes voting or investment power with respect to securities.
Changes in Control
We are not aware of any arrangements that may result in a change in control of the Company.
Description of Securities
General
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001, and 100,000,000 shares of preferred stock, par value $0.001. All classes of common stock are currently outstanding.
Common Stock
The shares of our common stock presently outstanding, and any shares of our common stock issues upon exercise of stock options and/or warrants, will be fully paid and non-assessable. Each holder of common stock is entitled to one vote for each share owned on all matters voted upon by shareholders, and a majority vote is required for all actions to be taken by shareholders. In the event we liquidate, dissolve or wind-up our operations, the holders of the common stock are entitled to share equally and ratably in our assets, if any, remaining after the payment of all our debts and liabilities and the liquidation preference of any shares of preferred stock that may then be outstanding. The common stock has no preemptive rights, no cumulative voting rights, and no redemption, sinking fund, or conversion provisions. Since the holders of common stock do not have cumulative voting rights, holders of more than 50% of the outstanding shares can elect all of our Directors, and the holders of the remaining shares by themselves cannot elect any directors. Holders of common stock are entitled to receive dividends, if and when declared by the board of directors, out of funds legally available for such purpose, subject to the dividend and liquidation rights of any preferred stock that may then be outstanding.
Voting Rights
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders.
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Dividends
Subject to preferences that may be applicable to any then-outstanding shares of preferred stock, if any, and any other restrictions, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Company’s board of directors out of legally available funds. The Company and its predecessors have not declared any dividends in the past. Further, the Company does not presently contemplate that there will be any future payment of any dividends on common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The Company had been a party to a sublease agreement with a company controlled by Richard Azani, the Company’s former Chief Executive Officer. See Item 2
The Company paid consulting fees to its former Chief Executive Officer of $-0- and $245,112 for the years ended September 30, 2012 and 2011, respectively.
Director Independence
The common stock of the Company trades on the OTCBB, a quotation system which currently does not have director independence requirements. As of September 30, 2012, none of the Company’s directors were considered to be “independent.”
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
a. Audit Fees: Aggregate fees billed by Bravos and Associates CPA and Berman & Co. for professional services rendered for the audit of our annual financial statements for the years ended September 30, 2012 and 2011, were approximately $-0- and $15,000, respectively.
b. Audit-Related Fees: No fees were billed for assurance and related services reasonably related to the performance of the audit or review of our financial statements and not reported under “Audit Fees” above in the years ended September 30, 2012 and 2011, respectively.
c. Tax Fees: Aggregate fees billed by Berman & Co. for tax services for the year ended September 30, 2012 and 2011, were $0 and $0, respectively.
d. All Other Fees: Aggregate fees billed by Berman & Co. for professional services other than those described above for the years ended September 30, 2012 and 2011, were approximately $23,000 and $28,000, respectively.
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PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
* filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
A5 LABORATORIES INC.
Date:Augest 14 ,2013
By:
/s/ Frank Neukomm
Frank Neukomm
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Frank Neukomm
Chief Executive Officer, (Principal Executive Officer), Chairman of the Board
August 14, 2013
Frank Neukomm
/s/ Robert Farr
Chief Operations Officer and President
August 14, 2013
Robert Farr
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
A5 Laboratories Inc.
We have audited the accompanying balance sheets of A5 Laboratories Inc. (a development stage company), as of September 30, 2012 and 2011, and the related statements of operations, stockholders’ equity and cash flows for the periods then ended and from June 21, 2006 (inception) to September 30, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerations of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A5 Laboratories, Inc. as of September 30, 2012 and 2011, and the results of its operations and its cash flows for the periods then ended and from June 21, 2006 (inception) to September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a net loss of $3,024,617 and net cash used in operations of $346,488 for the year ended September 30, 2012. The Company also has a working capital deficit of $900,916 and a deficit accumulated during the development stage of $2,738,994 at September 30, 2012. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regards to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Thomas Bravos, CPA
August 14, 2013
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A5 Laboratories, Inc.
(A Development Stage Company)
Years Ended September 30, 2012 and 2011
Statements of Operations
(Audited)
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A5 LABORATORIES, INC.
(A Development Stage Company)
Statements of Cash Flows
(Audited)
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Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
A5 Laboratories Inc. (the “Company”) was incorporated in the State of Nevada on June 21, 2006. The Company was originally incorporated as El Palenque Nercery, Inc. and changed its name to El Palenque Vivero, Inc. on June 30, 2006. On March 23, 2010, it further changed its name to A5 Laboratories Inc., which is based in Quebec, Canada.
The Company intends to provide contract research and laboratory services to the pharmaceutical industry. To date, the activities of the Company have been limited to training and raising capital.
The Company’s fiscal year end is September 30.
Development Stage
The Company's financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include equity based financing and further implementation of the business plan.
Risks and Uncertainties
The Company intends to operate in an industry that is subject to rapid change. The Company’s operations will be subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Such estimates for the years ended September 30, 2012 and 2011, and assumptions affect, among others, the following:
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estimated carrying value, useful lives and impairment of property and equipment;
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estimated fair value of derivative liabilities;
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estimated valuation allowance for deferred tax assets; and
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estimated fair value of share based payments
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Cash and Cash Equivalents
The Company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents. At September 30, 2012 and 2011, the Company had no cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At September 30, 2012 and 2011, there were no balances that exceeded the federally insured limit.
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Property and Equipment
Property and equipment (including related party purchases) is stated at cost, less accumulated depreciation computed on a straight-line basis over the estimated useful lives. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized when deemed material. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company recognized an impairment of $1,035,027 during the year ended September 30, 2011. See Note 5.
Beneficial Conversion Feature
For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.
When the Company records a BCF, the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The discount would be amortized to interest expense over the life of the debt.
Derivative Liabilities
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Debt Issue Costs and Debt Discount
The Company paid debt issue costs, and recorded debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. When a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
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Share-Based Payments
Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. Share-based payment awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded as a component of general and administrative expense.
Earnings per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Since the Company reflected a net loss in 2012 and 2011, respectively, the effect of considering any common stock equivalents, if exercisable, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
The Company had the following potential common stock equivalents at September 30, 2012 and 2011:
Income Taxes
Provisions for federal and state income taxes are calculated based on reported pre-tax earnings and current tax law.
Significant judgment is required in determining income tax provisions and evaluating tax positions. The Company periodically assesses its liabilities and contingencies for all periods that are currently open to examination or have not been effectively settled based on the most current available information. When it is not more likely than not that a tax position will be sustained, the Company records its best estimate of the resulting tax liability and any applicable interest and penalties in the financial statements.
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using statutory rates in effect for the year in which the differences are expected to reverse. The Company presents the tax effects of these deferred tax assets and liabilities separately for each major tax jurisdiction.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that the changes are enacted. The Company records a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the asset may not be realized. The Company evaluates its deferred tax assets and liabilities on a periodic basis.
Fair Value of Financial Instruments
The carrying amounts of the Company’s short-term financial instruments, other receivables, accounts payable and accrued liabilities, approximate fair value due to the relatively short period to maturity for these instruments.
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Foreign Currency Transactions
The Company’s functional currency is the Canadian Dollar. The Company’s reporting currency is the U.S. Dollar. All transactions initiated in Canadian Dollars are translated to U.S. Dollars in accordance with ASC 830-10-20 “Foreign Currency Translation” as follows:
(i)
Monetary assets and liabilities at the rate of exchange in effect at the balance sheet date;
(ii)
Equity at historical rates; and
(iii)
Revenue and expense items at the average exchange rate prevailing during the period.
Adjustments arising from such translations are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income (loss). Therefore, translation adjustments are not included in determining net income (loss) but reported as other comprehensive income (loss).
For foreign currency transactions, the Company translates these amounts to the Company’s functional currency at the exchange rate effective on the invoice date. If the exchange rate changes between the time of purchase and the time actual payment is made, a foreign exchange transaction gain or loss results which is included in determining net income for the period.
The realized exchange gains (losses) recorded at September 30, 2012 and 2011 were $nil, respectively.
Comprehensive Income (Loss)
ASC Topic No. 220, “Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. Comprehensive income or loss is comprised of net earnings or loss and other comprehensive income or loss, which includes certain changes in equity, excluded from net earnings, primarily foreign currency translation adjustments.
Foreign Country Risks
The Company may be exposed to certain risks as its operations are being conducted in Canada. The Company’s results may be adversely affected by change in the political and social conditions in Canada due to governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversions and remittances abroad, and rates and methods of taxation, among other things. The Company does not believe these risks to be significant, and no such losses have occurred in the current or prior years because of these factors. However, there can be no assurance those changes in political and other conditions will not result in any adverse impact in future periods.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB's intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
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In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this guidance in these financial statements.
Note 2 - Going Concern
As reflected in the accompanying financial statements, the Company had net utilized cash of $85,000 in operation for the year ended September 30, 2012. The Company also has a working capital deficit of $900,916 and a deficit accumulated during the development stage of $2,738,994 at September 30, 2011. In addition, the Company is in the development stage and has not yet generated any revenues. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue its operations is dependent on Management's plans, which include potential asset acquisitions, mergers or business combinations with other entities, further implementation of its business plan and continuing to raise funds through debt or equity raises. The Company will likely rely upon equity financing in order to ensure the continuing existence of the business.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 - Fair Value of Financial Assets and Liabilities
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
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Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2: Inputs reflect: quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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At September 30, 2011, the fair value of financial instruments measured on a recurring basis includes derivative liabilities, determined based on level two inputs consisting of quoted prices in active markets for identical assets. The carrying amount reported for accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these financial instruments.
The Company has a derivative liability measured at fair market value on a recurring basis. Consequently, the Company had changes in fair value reported in the statements of operations, which were attributable to the change in market value relating to the liability for the year ended September 30, 2011.
The following is the Company’s derivative liability measured at fair value on a recurring basis at September 30, 2012 and 2011:
Note 4 - Other Receivables
As of September 30, 2012 and 2011, the Company had receivables of $1,079 and $78,400, respectively for taxes paid on products and services. Under Canadian law, the Company is required to pay GST (Goods and Services Tax) and PST (Provincial Sales Tax) on goods and services that are consumed, used or supplied in the course of their business activities. The Company is eligible to receive credit for both taxes and received the reimbursement during fiscal 2013.
Note 5 - Property and Equipment
Property and equipment consists of the following:
(1) See Note 8(B) - related party
(2) See below related to related party purchases
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During the years ended September 30, 2012 and 2011, management evaluated the recoverability of long lived assets by determining whether the carrying value can be recovered through future cash flows. Management determined that it is more likely than not that no future cash flows are to be expected from the use of its software. Due to these circumstances, the remaining book value of the asset in the amount of $1,035,027 was fully impaired and is included in the Statements of Operations for the year ended September 30, 2011 as a separate caption as prescribed under ASC 360-10-50-2.
The leasehold improvements were completed and placed into service in July 2011.
The Company purchased $24,357 of lab equipment from an entity controlled by the Company’s former Chief Executive Officer during fiscal year ended 2011. See Note 7 for software acquired from a related party.
Note 6 - Notes Payable
(A) Related Party
The following is a summary of the Company’s related party liabilities:
(1) The note is non-interest bearing, unsecured, and due on demand.
(2) The advances are non-interest bearing, unsecured, and due on demand.
(B) Convertible Debt - Secured - Derivative Liabilities
During 2012, the Company issued convertible notes as follows:
During 2011, the Company issued convertible notes, totaling $300,000, with the following provisions:
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Interest rate 6%;
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Default interest rate of 12%;
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Notes are due 48 months from the issuance date of February 23, 2011;
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Conversion rates equal to 70% or 80% of the market price on date of conversion by applying a specified formula that utilizes the average of the 3 lowest quoted closing prices 20 days immediately preceding the conversion date, and then takes the higher of the average 3 lowest closing prices or $0.12 floor price; and
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Secured by the Chief Executive Officer’s 15,000,000 shares of the Company common stock.
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The investor is entitled at its option to convert all or part of the principal and accrued interest into shares of the Company’s common stock at a conversion price as discussed above. The Company classified the embedded conversion feature as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle.
During the year ended September 30, 2011, the Company accrued $10,834. In addition $10,834 is a component of interest expense.
On February 23, 2011, the Company entered into a secured convertible promissory note between the Company and a third party (the “Lender”). The note balance totaled $300,000. The Lender expects to contribute funds in tranches, the first tranche being equal to $300,000, and an additional ten tranches equal to $200,000 each commencing on October 23, 2011, and continuing each subsequent month for ten months. No additional draw downs occurred during the year ended September 30, 2011. In January 2012, the Company received $22,000 from a lender for an additional investment, under the same terms above, which is convertible to shares pursuant to the terms described below. See Note 9(A) related to conversions of this $300,000 note.
The number of shares of common stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the higher of (i) the Market Price or (ii) the Floor Price. Where “Market Price” is defined as 80% of the average of the closing bid price for the three (3) days with the lowest closing bids during the twenty trading days immediately preceding the conversion date, provided, however, that if the market prices fall below $0.05 per share of common stock the conversion factor shall be reduced by 10 percentage points. The “Floor Price” is defined as $.012. The trading data used to compute the closing bid shall be as reported by Bloomberg, LP or if such information is not then being reported by Bloomberg, then as reported by such other data information sources as may be selected by the Lender.
The note also contains language that removes the $0.12 floor if certain “triggering events” occur during the life of the note. Since the floor price can be removed upon any one of these events occurring, the conversion feature of this note has two elements: normal conversion and conversion upon a triggering event.
Upon each occurrence of any of the following triggering events , (a) the conversion factor shall be reduced by 10 percent points (i.e., if the conversion factor were 80% immediately prior to the occurrence of the triggering event, it shall be reduced to 70% upon the occurrence of a triggering event), (b) the conversion price shall be computed without regard to the Floor Price, and (c) this note shall accrue interest at the rate of 1% per month, whether before or after judgment; provided, however, that (1) in no event shall the triggering effects be applied more than two times, and (2) notwithstanding any provisions to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law:
The following reflects possible triggering events:
(a) Collateral Shares. If the value of the Collateral Shares (15,000,000 shares discussed above) falls below $1,800,000 (valued at the Market Price of a share of Common Stock) at any time.
(b) SEC Filings. The Company’s failure to timely file required filings with the SEC.
(c) Events of Default. The occurrence of any Event of Default.
As of September 30, 2012, as a result of the triggering events (a) and (b), the Company computes the exercise price related to convertible debt, without regard to the floor price.
The normal conversion resulted in a debt discount under ASC 470-25-8 since the calculated market price as of the date of the note was higher ($0.145) than the conversion floor of $0.12.
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(C) Debt Issue Costs
In connection with the issuance of the $300,000 note discussed above, the Company incurred debt issue costs as follows:
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8% cash - which is equivalent to $24,000, and
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8% warrants - having a fair value of $26,901, which was computed as follows;
In January 2012, we raised an additional $22,000 as discussed above, the Company incurred debt issue costs as follows:
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8% cash - which is equivalent to $1,760, and
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8% warrants - having a fair value of $154, which was computed as follows;
The debt issue costs have been capitalized and are being amortized over the life of the note.
Lucosky Brookman LLP Note
Effective on January 10, 2012, the Company issued to Lucosky Brookman LLP (“Lucosky”) a convertible promissory note ( the “Lucosky Note”) for legal services provided since February 1, 2011 of $53,727. The Lucosky Note bears interest at twelve percent (12%) per annum and has a term of six months. Should the Lucosky Note not be paid by the Maturity Date, an event of Default occurs and the interest rate becomes eighteen percent (18%) per annum. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the closing price for the five (5) days immediately preceding the conversion date.
Southridge Partners II LP Note
Effective on February 6, 2012, the Company issued to Southridge Partners II LP (“SRP II”) a convertible promissory note ( the “SRP II Note”) for funds provided of $15,000. The SRP II Note bears interest at five percent (5%) per annum and matures on August 31, 2012. Shares of Common Stock to be issued upon conversion of each tranche shall be determined by dividing (a) the conversion amount by (b) the Market Price. The “Market Price” is defined as 50% of the average of the low two (2) closing bid prices for the five (5) days immediately preceding the conversion date.
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(D) Debt Discount
During the year ended 2012 and 2011, the Company recorded debt discounts totaling $nil and $300,000, respectively.
The debt discount recorded in 2011 pertains to convertible debt that contains embedded conversion options that are required to bifurcated and reported at fair value.
During 2011, the Company amortized $66,814 in debt discount.
Note 7 - Stockholders’ Equity (Deficit)
(A) Common Stock
Stock Issued in 2012
During 2012, the Company rescinded 3.4 million shares net related to John Fife
Stock issued in 2011
During November and December 2010, the Company issued 312,500 shares of common stock for $100,000 ($0.32/share).
On June 14, 2011, the Company issued 75,000 shares of common stock for $15,000 ($0.20/share).
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On September 2, 2011, a lender converted $24,990 pertaining to a note it held with an original principal of $300,000, for 1,120,000 shares of common stock ($0.0166667/share). The quantity of shares issued is based upon the formula described above pertaining to the effect of the triggering event (see Note 6(B)).
Subsequent to September 30, 2011, a lender converted $50,000 pertaining to a note it held with an original principal of $300,000, for 3,000,000 shares of common stock ($0.0166667/share). The quantity of shares issued is based upon the formula described above pertaining to the effect of the triggering event (see Note 6(B)).
Stock issued in 2010
On March 9, 2010, the Company’s board of directors authorized a 10-for-1 forward split of its common stock effective April 8, 2010. Each stockholder of record on April 7, 2010 received ten new shares of the Company’s $0.001 par value common stock for every one old share outstanding. The effects of the split have been retroactively applied to all periods presented in the accompanying financial statements.
On June 3, 2010, the Company issued 250,000 shares of common stock for $162,500 ($0.65/share).
On July 20, 2010, the Company issued 1,569,177 shares of common stock, having a fair value of $1,380,876 ($0.88/share), based upon the closing trading price, to acquire software from an affiliate of the Company’s Chief Executive Officer.
On July 30, 2010, the Company issued 125,000 shares of common stock for $100,000 ($0.80/share). In addition, the stockholder received a 2-year warrant for 125,000 shares with an exercise price of $1.20.
On August 18, 2010, the Company issued 125,000 shares of common stock for $100,000 ($0.80/share). In addition, the stockholder received a 2-year warrant for 125,000 shares with an exercise price of $1.20.
On August 23, 2010, the Company issued 20,000 shares of common stock to a consultant, having a fair value of $16,000 ($0.80/share), based upon the closing trading price. At September 30, 2010, the Company expensed this stock issuance as a component of general and administrative expense.
On September 17, 2010, the Company issued 150,000 shares of common stock to a consultant, having a fair value of $135,000 ($0.90/share), based upon the closing trading price. At September 30, 2010, the Company expensed this stock issuance as a component of general and administrative expense.
On November 12, 2010, the Company issued 156,250 shares of common stock for $50,000 ($0.32/share).
On December 2, 2010, the Company issued 156,250 shares of common stock for $50,000 ($0.32/share).
Stock issued in 2007
During 2007, the Company issued 20,500,000 shares of common stock for $82,000 ($0.004/share).
Stock Issued in 2006
On June 21, 2006 (Inception), the Company issued 10,000,000 shares of common stock for $5,000 ($0.0005/share) to directors and officers of the Company.
On August 1, 2006, the Company issued 15,000,000 shares of common stock for $15,000 ($0.0001/share) to directors and officers of the Company.
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(B) Stock Warrants
The following is a summary of the Company’s warrants that are outstanding and exercisable at September 30, 2012 and 2011:
Note 8 - Commitments and Contingencies
(A) Contingencies
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
(B) Operating Lease - Related Party
The Company had subleased office space from a company controlled by the Company’s former Chief Executive Officer.
Rent expense for the years ended September 30, 2012 and 2011 was $43,970 and $183,916, respectively.
Rent Expense is no longer being incurred.
(C) Operating Lease
The Company had an agreement to rent equipment for a term of two years.
Rental equipment expense for the years ended September 30, 2012 and 2011 was $0 and $30,592, respectively.
There are no minimum lease payments due under this obligation.
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Note 9 - Derivative Liabilities
The Company identified conversion features embedded within convertible debt ($300,000) issued in 2011 (see 6(B)). The Company has determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative liability.
As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follows:
The Company recorded the derivative liability to debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note. The Company recorded a derivative expense of $1,196,045 for 2011.
The fair value at the commitment and remeasurement dates were based upon the following management assumptions:
Note 10 - Other Related Party Transactions
The Company accrued consulting fees to its Chief Executive Officer of $-0- and $245,112 for the years ended September 30, 2012 and 2011, respectively.
Note 11 - Income Taxes
The Company recognizes deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. The Company has established a valuation allowance to reflect the likelihood of the realization of deferred tax assets.
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The Company has a net operating loss carryforward for tax purposes totaling approximately $1,089,000 at September 30, 2011, expiring through 2031. U.S. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). Temporary differences, which give rise to a net deferred tax asset and significant deferred tax assets at September 30, 2011, are approximately as follows:
The valuation allowance at September 30, 2011 was approximately $371,000. The net change in valuation allowance during the year ended September 30, 2012 was an increase of approximately $546,000. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of September 30, 2012.
The actual tax benefit differs from the expected tax benefit for the periods ended September 30, 2012 and 2011 (computed by applying the U.S. Federal Corporate tax rate of 34% to income before taxes), as follows:
Below is a chart showing the estimated corporate federal net operating loss (NOL) and the year in which it will expire.
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Note 12 - Subsequent Events
The Company has evaluated for subsequent events between the balance sheet date of September 30, 2012 and August 14, 2013, the date the financial statements were available to be issued, and concluded that the following events or transactions occurring during that period requiring recognition or disclosure are:
(A)
Management Change
Management Changes were made in January 2013. Please see Item 10 above.
(B)
Issuance of Preferred Stock
On May 30, 2013, the Company issued 100 million shares of Series A Preferred (the ‘Series A”) stock as follows:
The Series A has a par value of $.001 and has voting rights equivalent to the company’s outstanding common stock.