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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
 
     
(Mark One)
   
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the Quarterly Period Ended March 31, 2014
                                            Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the Transition Period From          to

Commission File No. 001-16381

_________________
 
Arrayit Corporation
(Exact name of registrant as specified in its charter)
_________________
 
Nevada
001-16381
76-0600966
(State or Other Jurisdiction
(Commission
(I.R.S. Employer
of Incorporation or Organization)
File Number)
Identification No.)
 
927 Thompson Place, Sunnyvale CA 94085
 
(Address of Principal Executive Offices) (Zip Code)
 
408-744-1331
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  o     No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  o     No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  þ    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  þ     No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o     No þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $3,853.000.
 
As of May 4, 2014, there were 39,522,098 shares of common stock outstanding.
 
 
 

 

Form 10-Q
For the Quarterly Period Ended March 31, 2014
 
TABLE OF CONTENTS


                 
       
Page
                 
PART I. FINANCIAL INFORMATION
 
Item 1.
   
Consolidated Financial Statements
       
       
Consolidated Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013 (audited)
   
4
 
       
Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013 (unaudited)
   
5
 
       
Consolidated Statements of Cash Flows for the three months ended March 31,2014 and 2013 (unaudited)
   
6
 
       
Notes to Consolidated Financial Statements (unaudited)
   
7
 
 
Item 2.
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
16
 
 
Item 3.
   
Quantitative and Qualitative Disclosure About Market Risk
   
18
 
 
Item 4.
   
Controls and Procedures
   
18
 
 
PART II. OTHER INFORMATION
 
Item 1.
   
Legal Proceedings
   
19
 
 
Item 1A.
   
Risk Factors
   
20
 
 
Item 2.
   
Unregistered Sales of Equity Securities and Use of Proceeds
   
20
 
 
Item 3.
   
Defaults Upon Senior Securities
   
20
 
 
Item 4.
   
Removed and Reserved
   
20
 
 
Item 5.
   
Other Information
   
20
 
 
Item 6.
   
Exhibits
   
21
 
         Signatures
   
22
 
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 
 
2

 

This report contains trademarks and trade names that are the property of Arrayit Corporation and its subsidiaries, and of other companies, as indicated.
 
FORWARD-LOOKING STATEMENTS

Portions of this Form 10-Q, including disclosure under “Management’s Discussion and Analysis of Financial Position and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Forward-looking statements involve assumptions and describe our plans, strategies, and expectations. You can generally identify a forward-looking statement by words such as may, will, should, expect, anticipate, estimate, believe, intend, contemplate or project. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,

● 
our ability to raise capital,
● 
our ability to obtain and retain customers,

● 
our ability to provide our products and services at competitive rates,
● 
our ability to execute our business strategy in a very competitive environment,

● 
our degree of financial leverage,
● 
risks associated with our acquiring and integrating companies into our own,

● 
risks related to market acceptance and demand for our services,
● 
the impact of competitive services, and

● 
other risks referenced from time to time in our SEC filings.

With respect to any forward-looking statement that includes a statement of its underlying assumptions or bases, we caution that, while we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We do not undertake any obligations to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect unanticipated events that may occur.

 
3

 
 
PART I – FINANCIAL INFORMATION
ITEM 1.
ARRAYIT CORPORATION
CONSOLIDATED BALANCE SHEETS
   
03/31/2014
(unaudited)
   
12/31/2013
 
 
  ASSETS
           
    Current Assets:
           
      Cash
  $ 220,951     $ 290,659  
      Accounts receivable, net
    516,040       401,467  
      Inventory
    528,997       457,678  
      Prepaid expenses
    66,250       190,492  
      Total current assets
    1,332,238       1,340,296  
                 
      Property and equipment, net
    202,924       78,485  
      Deposits
    118,924       118,924  
      Total assets
  $ 1,654,086     $ 1,537,705  
                 
  Liabilities and Stockholders' Deficit
               
    Current liabilities:
               
      Accounts payable and accrued liabilities
  $ 6,167,113     $ 5,828,229  
      Due to related parties
    -       478,533  
      Customer deposits
    -       67,981  
      Notes payables, current portion including related parties
    772,258       768,001  
      Total current liabilities
    6,939,371       7,142,744  
      Notes payable, long term
    -       -  
      Total liabilities
    6,939,371       7,142,744  
                 
    Commitments and contingencies
    -       -  
                 
  Stockholders' Deficit
               
    Preferred stock,  $0.001 par value; 20,000,000 shares authorized;
               
    Preferred stock, Series A, 22,034 shares outstanding
    22       22  
    Preferred stock, Series C, $0.001 par value 87,145 shares outstanding
    87       87  
    Common stock, $0.001 par value; 480,000,000 shares authorized 39,432,248 and 38,139,616 issued and outstanding
    39,241       37,948  
    Additional paid-in capital
    19,335,228       19,054,387  
    Accumulated deficit
    (24,659,863 )     (24,697,483 )
    Total stockholders’ equity (deficit)
    (5,285,285 )     (5,605,039 )
      Total liabilities and stockholders' deficit
  $ 1,654,086     $ 1,537,705  
The accompanying notes are an integral part of these consolidated financial statements

 
4

 
 
ARRAYIT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Statement of Operations
 
For the Three Months Ended March 31, 2014
   
For the Three Months Ended March 31, 2013
 
  Total Revenues
  $ 1,090,704     $ 942,916  
  Cost of Sales
    708,832       455,512  
  Gross Margin
    381,872       487,404  
                 
  Selling, General and Administrative
    653,876       250,520  
  Research and Development
    6,949       -  
  Legal Expense
    47,188       30,215  
  Income (loss) from operations
    (326,141 )     206,669  
                 
  Gain on extinguishment of liabilities
    391,306       142,071  
  Bad debt recovery
    -       5,312  
  Interest (expense)
    (27,546 )     (118,574 )
  Net income (loss)
  $ 37,620     $ 235,478  
  Income (loss) per share - basic
  $ .00     $ .01  
  Income (loss) per share - diluted
  $ .00     $ .00  
                 
  Basic weighted average number of common shares
    38,189,606       28,286,629  
  Diluted weighted average number of common shares
    69,552,227       59,294,580  
The accompanying notes are an integral part of these consolidated financial statements

 
5

 
 
ARRAYIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
   
For the Three Months Ended
 
   
March 31
 
   
2014
   
2013
 
 Cash flows from operating activities:
           
  Net loss
  $ 37,620     $ 235,478  
  Adjustments to reconcile net loss to net cash provided by operating activities:
               
   Depreciation
    10,017       -  
   Gain on extinguishment of liabilities
    (391,306 )     (142,071 )
   Provision (recovery)for bad debts
    86,142       (5,312 )
   Settlement of legal suit
    (5,890 )     -  
   Stock for Avant guarantee
    74,142       -  
   Stock paid for services
    16,025       -  
  Changes in operating assets and liabilities
               
   Inc/dec in accounts receivable
    (200,715 )     (5,238 )
   Inc/dec in inventory
    (71,319 )     132,862  
   Inc/dec in prepaids
    124,242       (9,071 )
   Inc/dec in deposits
    -       -  
   Inc/dec in accounts payable and accrued liabilities
    408,615       (113,876 )
   Inc/dec in bank overdraft
    -       (91,967 )
   Inc/dec in due to related parties
    (19,101 )     (21,000 )
   Inc/dec in accrued interest
    -       20,348  
   Inc/dec in customer deposits
    (67,981 )     42,269  
 Net cash provided (used) by operating activities
    491       42,422  
                 
 Cash flows from investing activities:
               
  Cash paid for purchase of fixed assets
    (134,456 )     -  
  Net cash used by investing activities
    (134,456 )     -  
 
               
 Cash flows from financing activities:
               
  Proceeds from loans, net
    10,889       -  
  Repayment of notes payable
    (6,632 )     (42,422 )
  Proceeds from issuance of common stock
    60,000       -  
  Net cash provided (used) by financing activities
    64,257       (42,422 )
 Net increase (decrease) in cash
    (69,708 )     -  
                 
 Cash, beginning of period
    290,659       518  
                 
 Cash, end of period
  $ 220,951     $ 518  
                 
 Supplemental cash flow information:
               
  Cash paid for interest
  $ 16,657     $ 32,149  
  Cash paid for income taxes
  $ -     $ -  
 Noncash Transaction:
               
  Conversion of accrued interest to notes payable
               
  $ 10,889     $ 20,348  
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
6

 
ARRAYIT CORPORATION
NOTES TO CONSOLIDATED UNAUDITED STATEMENTS
March 31, 2014

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Arrayit Corporation (the “Company” or “Arrayit”) is a Nevada “C” Corporation that entered into the life sciences industry in 1996.  Arrayit is a leading edge developer, manufacturer and marketer of next-generation life science tools and integrated systems for the large scale analysis of genetic variation, biological function and diagnostics. Using Arrayit’s proprietary and patented technologies, the Company provides a comprehensive line of products and services that currently serve the sequencing, genotyping, gene expression and protein analysis markets, and the Company expects to enter the market for manufacturing molecular diagnostics.

Arrayit has earned respect as a leader in the health care and life sciences industries with its proven expertise in three key areas:  the development and support of microarray tools and components, custom printing and analysis of microarrays for research, and the identification and development of diagnostic microarrays and tools for early detection of treatable disease states.  As a result, Arrayit has provided tools and services to thousands of the leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, government agencies and biotechnology companies worldwide.

Arrayit has a December 31 year end.

Arrayit’s principal office is in Sunnyvale, California. Arrayit presently has nine employees.


Interim financial statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Arrayit’s Annual Report filed with the SEC on Form 10-K/A. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for fiscal year 2013 as reported in Form 10-K/A, have been omitted.
 
 
7

 
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The following includes a description of subsidiaries and percentage ownership at March 31, 2014:

Subsidiary
Date of Incorporation
Business of Entity
Ownership
TeleChem International, Inc.
November 1, 1993
Import, export, manufacturing and distribution of wholesale industrial chemicals
100% owned by Arrayit Corporation
Arrayit Scientific Solutions, Inc.
October 15, 2009
Markets a test for Parkinson’s Disease incorporating the technology and equipment developed by Arrayit Corporation
98% owned by Arrayit Corporation and 2% owned by the former President of Arrayit Scientific Solutions, Inc.
Avant Diagnostics, Inc.
June 2, 2009
Markets a test for Ovarian Cancer incorporating the technology and equipment developed by Arrayit Corporation
38.46% owned by Arrayit Corporation

The Company had previously consolidated the financial statements of Avant Diagnostics, Inc. as a majority owned subsidiary and this is reflected in the unaudited consolidated financial statements for the three and nine months ended September 30, 2012.  On December 31, 2012, Avant Diagnostics, Inc. issued additional shares of its common stock which reduced the Company’s ownership interest in Avant Diagnostics, Inc. so that the Company no longer had a controlling financial interest.  In accordance with FASB ASC 810-10-40, “Deconsolidation of a Subsidiary or Derecognition of a Group of Assets”, as of December 31, 2012, the Company deconsolidated its majority ownership interest and recognized a non-cash, net gain on the transaction.  Thus, the Company’s March 31, 2014 unaudited financial statements do not include the effect of the financial statements of Avant Diagnostics, Inc.

In July 2013, the Company issued 500,000 shares of its common stock with a market price of $0.12 per share or $60,000 to settle debt of Avant Diagnostics, Inc.  Arrayit Corporation was the guarantor of the debt.  The Company recorded a charge of $38,962 on the transaction and received equipment from Avant Diagnostics, Inc. valued at $21,038.

In March 2014, the Company issued 500,000 shares of common shares of its common stock with a market price of $0.14 per share or $74,142 to settle additional debt of Avant Diagnostics, Inc.  Arrayit Corporation was the guarantor of the debt.  The Company recorded a charge of $74,142 on the transaction.

On December 12, 2011, Arrayit Corporation signed an Agreement and Plan of Distribution with its subsidiary, Avant Diagnostics, Inc., whereby 19,350,000 shares of common stock of Avant Diagnostics (38.46% of the total outstanding) owned by Arrayit Corporation will be distributed ratably to the shareholders of Arrayit Corporation on the record date which will occur upon approval by the SEC of the Form S-1 registration statement to be submitted by Avant Diagnostics, Inc.

Summary of Significant Accounting Policies

Financial Reporting:

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. Revenues and expenses are reported on the accrual basis, which means that income is recognized as it is earned and expenses are recognized as they are incurred. Inventories are stated at the lower of cost or market, cost determined on the basis of FIFO. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.
 
 
8

 

Management acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

Non-Controlling Interest:

The Company accounts for the non-controlling interest in its subsidiaries under ASC 810-10-45-16, Non-controlling Interest in a Subsidiary.  This standard defines a non-controlling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The standard requires, among other items, that a non-controlling interest be included in the consolidated statement of financial position within equity separate from the parent's equity; consolidated net income to be reported at amounts inclusive of both the parent's and non-controlling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and non-controlling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value.  Additionally, the standard defines a non-controlling interest as a financial instrument issued by a subsidiary that is classified as equity in the subsidiary's financial statements.  A financial instrument issued by a subsidiary that is classified as a liability in the subsidiary's financial statements based on the guidance in other standards is not a controlling interest because it is not an ownership interest.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

Income/Loss per Common and Common Equivalent Share

The computation of basic income/loss per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from their exercise using the treasury stock method and the average market price per share during the year.  The Company determined that the effect of common stock equivalents (Stock Options, Stock Warrants and convertible Series “C” Preferred Shares) outstanding at March 31, 2014 should be included in diluted earnings per common share for the three months ended March 31, 2014.

 
9

 
 
NOTE 3 – GOING CONCERN
 
The accompanying consolidated financial statements of the Company were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has large working capital deficits and accumulated deficits. At March 31, 2014, Arrayit had a working capital deficit of $5,607,133, and an accumulated deficit of $24,659,863.  The Company currently devotes a significant amount of its resources on developing clinical protein biomarker diagnostic products and services, and it does not expect to generate substantial revenue until certain diagnostic tests are cleared by the United States Food and Drug Administration and commercialized. Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures, including required past due payroll and income tax payments, over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to raise such additional funding from various possible sources, including its parent company, the public equity market, private financings, sales of assets, collaborative arrangements and debt. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies or products that it might otherwise seek to retain. There can be no assurance that the Company will be able to raise additional funds, or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not be able to pay off its obligations, if and when they come due.

These factors create substantial doubt about Arrayit’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

The ability of Arrayit to continue as a going concern is dependent on Arrayit generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance Arrayit will be successful in these efforts.
 
NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable are shown net of an Allowance for Doubtful Accounts.  As more fully explained in Note 5 below, accounts receivable has been reduced by Accounts Receivable loans sold with recourse.

   
March 31, 2014
   
December 31, 2013
 
Gross accounts receivable
  $ 1,092,240     $ 627,269  
Less
               
Allowance for doubtful accounts
    (127,000 )     (115,000 )
Loan value of receivables sold with recourse (see Note 5)
    (449,200 )     (110,802 )
Total
  $ 516,040     $ 401,467  

 
 
10

 
 
NOTE 5 – ACCOUNTS RECEIVABLE SOLD WITH RECOURSE
Pursuant to an agreement dated July 5, 2007 and renewed on September 10, 2013, the Company has sold some of its Accounts Receivable to a financial institution with full recourse.  The financial institution retains a 15% portion of the proceeds from the receivable sales as reserves, which are released to the Company as the Receivables are collected.  The maximum commitment under this facility is $450,000, and is limited to receivables that are less than 31 days outstanding. The facility bears interest at 16% at March 31, 2014, and is secured by an unconditional guarantee of the Company and a first charge against the Accounts Receivable.  At March 31, 2014, the balance outstanding under the recourse contracts was $449,200 net of a hold back reserve of $224,854 (December 31, 2013, $110,802 net of a hold back reserve of $113,788).  Because of the Company’s credit policies, repossession losses and refunds in the event of default have not been significant and losses under the present recourse obligations are not expected to be significant, it is at least reasonably possible that the Company’s estimate will change within the near term.

NOTE 6 – FIXED ASSETS
Property and equipment consisted of the following:

   
March 31, 2014
   
December 31, 2013
 
Fixed Assets – Cost
  $ 462,104     $ 327,648  
Less
               
Accumulated Depreciation
    (259,180 )     (249,163 )
Total
  $ 202,924     $ 78,485  

Depreciation expense totalled $10,017 and $Nil, respectively, for the three months ended March 31, 2014 and 2013. 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities, consisted of the following:

   
March 31, 2014
   
December 31, 2013
 
ACCOUNTS PAYABLE
           
             
Trade vendors
  $ 1,526,796     $ 1,028,943  
Professional advisors
    2,526,389       2,738,824  
                 
Total Accounts Payable
    4,053,186       3,767,767  
                 
ACCRUED LIABILITIES
               
                 
Payroll and applicable taxes
    1,770,065       1,704,468  
Judgment interest
    162,981       181,481  
Other
    180,881       174,513  
                 
Total Accrued Liabilities
    2,113,927       2,060,462  
                 
TOTAL
  $ 6,167,113     $ 5,828,229  
 
 
11

 
 
NOTE 8 – DEBT

   
March 31, 2014
   
December 31, 2013
 
             
Notes payable, interest at 10%, which was due August 10, 2010 and is now past due, secured by 1,000,000 shares out of the Company's common stock, pledged to the private lender without compensation by the Company's Chairman.
  $ 250,000     $ 250,000  
Notes payable, interest at 8%, unsecured due on demand from Arrayit creditors
    26,117       26,117  
Notes payable, interest at rates varying from 8% to 10%, unsecured due on demand from Officers and Directors, their families and other shareholders
    496,141       491,884  
                 
Total notes payable, including related parties
  $ 772,258     $ 768,001  
                 
Long term debt
    -       -  
Short term debt
  $ 772,258     $ 768,001  
 
NOTE 9 – WARRANTS AND OPTIONS

The following table summarizes options and warrants outstanding at March 31, 2014:

   
Number of Options and Warrants
   
Weighted Average Exercise Price Per Share
 
             
Outstanding at December 31, 2013
   
5,116,154
 
   
$
 
0.37
 
 
 
Granted
    110,000     $ 0.65  
Cancelled/forfeited
    -       -  
Expired
    0       -  
Exercised
    0       -  
Outstanding at March 31, 2014
    5,226,154     $ 0.38  

During the quarter ended March 31, 2014, the Company issued 110,000 warrants to purchase common stock at $0.65 expiring on February 26, 2019 in conjunction with the settlement of a lawsuit.
 
 
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NOTE 10 – ROYALTY OBLIGATIONS

The Parkinson’s Institute – ARRAYIT SCIENTIFIC SOLUTIONS, INC.

Pursuant to an agreement dated February 9, 2009 between the Company, and The Parkinson's Institute, a California Corporation, Arrayit Scientific Solutions, Inc. is obligated to make payments, of 5% of gross earnings generated from Research derived from the biological specimens from Parkinson's disease patients and control patients provided by the Parkinson's Institute.

There were no revenues generated during the fiscal period ended March 31, 2014 and hence no obligation to pay any royalties to the Parkinson’s Institute.
 
NOTE 11 – STOCK-BASED COMPENSATION
 
The Company adopted ASC 718 and ASC 505, "Share-Based Payment", to account for its stock options and similar equity instruments issued.  Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period.  ASC 718 and ASC 505 requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

Operations for the periods ended March 31, 2014 and 2013 include $Nil and $Nil of stock-based compensation, arising from the granting of no unregistered common shares, respectively.

NOTE 12 – CONVERTIBLE PREFERRED STOCK

Convertible Preferred Stock

The Series A Preferred Stock has no stated dividend rate and has a liquidation preference of $.001 per share. The Series A Preferred Stock also has voting rights that entitle the preferred shareholders to vote with the common shareholders as if the preferred stock had converted to common. Both the conversion ratio of the preferred into common (9.6:1) and the number of shares outstanding is subject to revision upon reverse stock dividends or splits that reduce the total shares outstanding.

The Series C Preferred Stock has no stated dividend rate.  The Series C Preferred Stock also has voting rights that entitle the preferred shareholders to vote with the common shareholders as if the preferred stock had converted to common. The conversion ratio of the preferred into common is not subject to revision upon reverse stock dividends or splits that reduce the total shares outstanding.  The 103,143 Series C Preferred Stock was issued on February 21, 2008.  These Series C Preferred shares are convertible into 36,100,000 common shares at the rate of 350:1.  On August 15, 2008 the articles of designation for the Series C Preferred Stock were amended to limit the conversion to common shares to 10% of the holders’ original holdings in any quarter.  During the three months ended March 31, 2014 and 2013 there were no conversions.

 
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NOTE 13 – STOCKHOLDERS’ EQUITY

   
TOTAL ARRAYIT CORPORATION STOCKHOLDERS' EQUITY (DEFICIENCY)
 
                                       
Additional
             
   
Preferred Series A
   
Preferred Series C
   
Common Stock
   
Paid In
   
Accumulated
       
Description
 
Number
   
Dollar
   
Number
   
Dollar
   
Number
   
Dollar
   
Capital
   
Deficit
   
Total
 
Balance, December 31, 2013
    22,034     $ 22       87,145     $ 87       38,139,616     $ 37,948     $ 19,054,387     $ (24,697,483 )   $ (5,605,039 )
                                                                         
Issuance of shares for cash
    -       -       -       -       136,365       136       59,864       -       60,000  
                                                                         
Issuance of shares for services
    -       -       -       -       106,834       107       15,918       -       16,025  
                                                                         
Issuance of shares for settlement of legal suit
    -       -       -       -       90,000       90       63,750       -       63,840  
                                                                         
Issuance of share for guarantee of Avant debt
    -       -       -       -       500,000       500       73,642       -       74,142  
                                                                         
Issuance of shares for debt conversion
    -       -       -       -       459,433       459       67,667       -       68,126  
                                                                         
Net Income (Loss) for the three months ended
                                                                     
March 31, 2014
    -       -       -       -       -       -       -       37,620       37,620  
Balance, March 31, 2014
    22,034     $ 22       87,145     $ 87       39,432,248     $ 39,241     $ 19,335,228     $ (24,659,863 )   $ (5,285,285 )
 
 
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NOTE 14 – INCOME TAXES

At March 31, 2014 and December 31, 2013, the Company had net operating loss (NOL) carry-forwards available to offset future taxable income of approximately $24 million. The utilization of the NOL carry-forwards is dependent upon the tax laws in effect at the time the NOL carry-forwards can be utilized. It is likely that utilization of the NOL carry-forwards are limited based on changes in control. A valuation allowance of approximately $9.0 million and $9.0 million has been recorded against the deferred tax asset as of March 31, 2014 and December 31, 2014, respectively. The NOL carry-forwards will fully expire in 2033.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

Long Term Lease Commitments

The Company leases its office facility in Sunnyvale, California under operating leases that expire December 31, 2020.

Future minimum lease payments are as follows
 
2014
  $ 175,500  
2015
    241,020  
2016
    227,568  
2017
    234,388  
2018
    263,364  
2019
    271,272  
2020
    279,408  
         
    $ 1,692,520  

Rent expense was $77,230 and $37,012 for the three months ended March 31, 2014 and 2013, respectively.

NOTE 16 – SUBSEQUENT EVENTS

On April 24, 2014 the Company issued 86,000 shares for services of $13,752.

 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three months ended March 31, 2014, this “Management’s Discussion and Analysis” should be read in conjunction with the Consolidated Unaudited Financial Statements, including the related notes, appearing in Item 1 of this Quarterly Report, as well as the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013.  The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results reported in the future will not differ from those estimates or that revisions of these estimates may not become necessary in the future.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, includes statements that constitute “forward-looking statements.”  These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to the Company's (i) expectation that certain of its liabilities listed on the balance sheet under the headings "Accounts Payable," "Accrued Liabilities" and "Note Payable" will be retired by issuing stock versus cash during the next 24 months; (ii) expectation that it will continue to devote capital resources to fund continued development of the Arrayit technology; (iii) anticipation that it will incur significant capital expenditures to further its deployment of the Arrayit offerings; and (iv) anticipation of a significant increase in operational and SG&A costs as it accelerates the development and marketing of the Arrayit operations.
 
 
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those to be identified in our Annual Report on Form 10-K/A for the year ended December 31, 2012 in the section titled “Risk Factors,” as well as other factors that we are currently unable to identify or quantify, but may exist in the future.

In addition, the foregoing factors may generally affect our business, results of operations and financial position.  Forward-looking statements speak only as of the date the statement was made.  We do not undertake and specifically decline any obligation to update any forward-looking statements.

Results of Operations

Comparison of Operating Results –Three Months Ended March 31, 2014 and 2013

Gross revenues for the three months ended March 31, 2014 and 2013 were $1,090,704 and $942,916, respectively, representing a 15% increase in gross revenues for the period.  The Company shipped more laboratory instruments, including three NanoPrint Microarray Printers, five SpotBot Microarray Printers and a Colorimetric Microarray Platform during the three months ended March 31, 2014.

The cost of sales for the three months ended March 31, 2014 and 2013 were $708,832 and $455,512, respectively resulting in gross profit for the period of $381,872 and $487,404, respectively.  The Company’s cost of sales is dependent upon product mix.  During the first quarter of 2014, the gross margin was 35% versus 51% for the first quarter of 2013.  The Company sold more high-throughput NanoPrint Microarray Printers in the first quarter of 2014, which have a lower gross margin percentage than the entry-level microarray manufacturing instruments and consumables that were sold in the first quarter ended March 31, 2013.

 
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Selling, general and administrative expenses for the three months ended March 31, 2014 and 2013 were $653,876 and $250,520, respectively.  The increase of $403,356 is largely attributable to adding staff, new advertising and trade show promotions, increases in rent and utilities, and consulting and other fees associated with the FDA approval process for OvaDx® during the three months ended March 31, 2014 versus the three months ended March 31, 2013.

Legal expenses of $47,188 for the three months ended March 31, 2014 were mostly attributable to general corporate matters and SEC compliance.  Legal expenses of $8,331 for the three months ended March 31, 2013 were mostly attributable to litigation with Baker Hughes.  Baker Hughes judgment against TeleChem International, Inc. and Arrayit Corporation was settled on October 24, 2013 and the Company recorded a gain on extinguishment of debt in the fourth quarter 2013.

Net income from operations was $37,620 for the three months ended March 31, 2014, compared with a net income from operations of $235,478 for the three months ended March 31, 2013.  The Company recorded a gain on extinguishment of debt of $391,306 when Mark Schena Inc. agreed to convert its accrued commissions to Arrayit Corporation restricted common shares at $1.00 per share during the three months ended March 31, 2013.  The Company recorded a gain on extinguishment of debt of $142,071 during the three months ended March 31, 2013.

Interest expense was $27,546 for the three months ended March 31, 2014, compared to $118,574 for the three months ended March 31, 2013.  The decrease in interest costs was the result of eliminating new judgment interest costs through settlement agreements.

Liquidity and Capital Resources

Cash flows provided by operations were $491 for the three months ended March 31, 2014, and cash provided by operations was $42,422 for the three months ended March 31, 2013. As of March 31, 2014, we had a working capital deficiency of $5,607,133 and an accumulated deficit of $24,659,863.  The working capital deficiency, in addition to amounts payable in the normal course of business, is primarily attributable to accrued legal expenses, deferred compensation, and judgment interest.

At March 31, 2014, the Company had no commitments, understandings or arrangements for additional working capital.  We estimate that we may require approximately $2 million over the next twelve (12) months to meet our expenses and to expand current operations to meet customer demands for our products and services.  We may require additional funds over the next eighteen (18) months to assist in realizing our business objectives and for continuing research and development.  The amount and timing of additional funds required will be dependent on a variety of factors and cannot be determined at this time.  The Company has been successful in paying its operating costs and funding its development from operations supplemented by short term borrowings from officers and third parties.   We cannot be certain that we will be able to raise any additional capital to fund our ongoing operations.

Even if we cannot raise additional capital, we believe that we will be able to continue operations for the next 12 months, based on the funding currently provided and revenues that we anticipate generating in the
near future.   Our investors should assume that any additional funding may cause substantial dilution to current stockholders. In addition, we may not be able to raise additional funds on favorable terms, if at all.

 
17

 
 
Source of Liquidity

During the third quarter of 2013, Arrayit Corporation raised $1 million of working capital from a group of accredited investors.  The sale and issuance of the securities discussed above were determined to be exempt from registration in reliance on Rule 506(b) of Regulation D.

During the fourth quarter of 2013, Arrayit Corporation raised $1,146,000 of working capital from a group of accredited investors.  The sale and issuance of the securities discussed above were determined to be exempt from registration in reliance on Rule 506(b) of Regulation D.

We are not aware of any other events or uncertainties that have a material impact upon our short-term or long-term liquidity.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

Forward-Looking Statements

This document contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls also are designed with an objective of ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely consideration regarding required disclosures.

The evaluation of our disclosure controls by our chief executive officer, who is also our acting chief financial officer, included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our chief executive officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on this review and evaluation as of the end of the period covered by this Form 10-Q, and subject to the inherent limitations all as described above, our chief executive officer, who is also our acting chief financial officer, has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) contain material weaknesses and are not effective.
 
 
18

 
 
A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The material weaknesses we have identified are the direct result of a lack of adequate staffing in our accounting department. Currently, our chief executive officer and a controller have sole responsibility for receipts and disbursements. We do not employ any other parties to prepare the periodic financial statements and public filings. Reliance on these limited resources impairs our ability to provide for a proper segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures. As we grow, and as resources permit, we project that we will hire such additional competent financial personnel to assist in the segregation of duties with respect to financial reporting, and Sarbanes-Oxley Section 404 compliance.  Notwithstanding these material weaknesses, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented


(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting that occurred during the quarter.

PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS


On March 13, 2013, Plaintiffs Recap Marketing and Consulting LLP sued Defendants Arrayit Corporation in Fort Bend County Texas Case No. 13-DCV-204747 for breach of contract with regard to warrants to purchase common stock.  Recap seeks damages or specific performance, exemplary damages, costs of court and reasonable attorney’s fees.  On April 16, 2013, the Company’s counsel submitted an unopposed motion to transfer venue to Harris County Texas and, subject to the motion to transfer venue, original answer denying the allegations and offered the affirmative defences of failure of condition precedent and expiration of contract, estoppel, failure of consideration and waiver, and in the alternative that the number of shares is incorrect.  The parties attended a voluntary mediation conference on September 18, 2013, but were unable to reach a settlement agreement.  The case is currently scheduled for trial in July of 2014.

Sanders Ortoli Vaughn-Flam Rosenstadt LLP vs Arrayit Corporation, Case # 653313/13.  A law firm sued Arrayit for breach of contract regarding payment for services rendered.  The parties reached a settlement on February 26, 2014.
 
 
19

 

On January 13, 2014, Plaintiff Tamarin Lindenberg sued Arrayit Corporation, Arrayit Diagnostics, Inc., Avant Diagnostics, Inc, John Howell, Steven Scott and Gregg Linn in Civil Action No. L7698-13.  Plaintiff alleges violations of the New Jersey Conscientious Employee Protection Act NJSA 34:19-1 to NJSA 34:19-8 (“CEPA”), breach of contract, breach of covenant of good faith and fair dealing, economic duress and intentional infliction of emotional distress.  On February 10, 2014, Arrayit Corporation requested the removal of the State Action from the Superior Court of New Jersey, Law Division, Essex County to the United States District Court for the District of New Jersey.  Arrayit Corporation’s counsel requested that Plaintiff’s counsel dismiss Arrayit Corporation as a defendant in this matter stating there is no basis against Arrayit Corporation for the purported claim under CEPA just as there is no viable CEPA claim against any of the other non-controlling, minority shareholders (e.g. Plaintiff);  Plaintiff and Arrayit Corporation are not parties to any contractual agreements;  there is no viable legal theory for ‘indirect breach’;  Arrayit Corporation did not engage in any conduct, actions, communications or dealings with Plaintiff giving rise the purported claims against AC for alleged “economic duress,” “intentional infliction of emotional distress” or “tortious interference”; there is no good faith basis in law or fact for any of the claims attempted against Arrayit Corporation. Arrayit Corporation reserves all rights and specifically reserves all of its rights under FRCP Rule 11. 

On March 31, 2014, Avant Diagnostics, Inc. sued Arrayit Corporation and Crucible Capital Group, Inc. in The Superior Court of the State of Arizona in and for the County of Maricopa, Case No. CV2014-092882.  Avant alleges breach of contract, fraud, negligent misrepresentation, tortious interference with business expectancy, breach of duty of good faith and fair dealing, declaratory judgment, conversion, unjust enrichment, promissory estoppel.  Arrayit Corporation denies all allegations and intends to counter sue for causes of action that could include breach of contract, fraud, negligent misrepresentation, tortious interference with business expectancy, breach of duty of good faith and fair dealing, declaratory judgment, conversion, unjust enrichment, promissory estoppel, and other causes of action yet to be determined.

There are no other legal proceedings, although we may, from time to time, be party to certain legal proceedings and other various claims and lawsuits in the normal course of our business, which, in the opinion of management, are not material to our business or financial condition.

ITEM 1A – RISKS FACTORS

Not required for smaller reporting companies.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4 – REMOVED AND RESERVED

NONE
 
ITEM 5 – OTHER INFORMATION

NONE
 
 
20

 

ITEM 6 – EXHIBITS

31.1             Certification of Chief Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)
32.1             Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
 
 
21

 

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Arrayit Corporation
 
       
Dated: May 13, 2014
By:
/s/ RENE A. SCHENA  
   
Rene A. Schena
 
   
Chairman and Director
 
       
 
 
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