UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

  Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

☑ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION   FILE NUMBER 333-142076

 

IRIS BIOTECHNOLOGIES INC.

(Name of small business issuer in its charter) 

California	77-0506396
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

5201 Great America Parkway, Suite 320, Santa Clara, California 95054

(Address of principal executive offices) (Zip Code)

 

Issuer's telephone Number: (408) 867-2885

 

Securities registered under Section 12(b) of the Exchange Act: None.

 

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value

 

Indicate by check mark is the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐   No ☑

 

Indicate by check if the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes ☐   No ☑

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ☑   No ☐

 

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 (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes ☑  No ☐

 

Indicate by check mark if no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☑ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐   No ☑

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates (based on a closing sale price of $2.85 per share which was the last sale price of the common stock as of June 30, 2014) was $2,293,375.

 

As of March 31, 2015, the issuer had 15,306,436 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

TABLE OF CONTENTS

 

 

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	26
Item 3.	Legal Proceedings	26
Item 4.	Mine Safety Disclosure	27
	PART II
Item 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	28
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A.	Controls and Procedures	34
Item 9B.	Other Information	35
	PART III
Item 10.	Directors, Executive Officers, and Corporate Governance	35
Item 11.	Executive Compensation	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationship and Related Transactions, and Director Independence	39
Item 14.	Principal Accountant Fees and Services	40
Item 15.	Exhibits	41
SIGNATURES		42

PART I

 

ITEM 1. BUSINESS

Iris BioTechnologies (“Iris” or the “Company”) is a life sciences company that believes its tests will be more powerful than other products on the market and will be able to predict the best, targeted therapy to maximize efficacy and minimize side effects by using gene expression test with additional genomic, proteomic, personal life style, family medical history, and environmental exposure information to optimize longevity and quality of life.

As of January 1, 2015, hospitals, medical clinics, surgery centers, and other medical providers are required by law to have electronic medical records in HL7 format. Unlike the pdf format, HL7 is a friendly format for data extraction into the Iris BioWindows System, which will expedite the process in enabling personalized precision medicine. We believe that the true value of Iris shares will be realized after launching our products for medical, research, and consumer applications.

 

Early history of the company:

 

Founded in 1999, Iris focuses on analyzing clinical gene expression to guide the treatment of breast cancer. Over the following decade, Iris developed and refined its diagnostics technology and platform, culminating in 2008 when Iris received the North American Technology Innovation Award in Pharmacogenomics from Frost and Sullivan. In bestowing the award, Frost and Sullivan stated that, “Iris’s technology is a near-term opportunity, which would significantly transform the way in which personalized medication is currently being prescribed.”

 

Later that year, CEO Simon Chin was recognized by PharmaVoice Magazine in a special issue featuring 100 of the most inspiring individuals in the life-sciences industry, while Iris began trading as a public company on the OTCBB market.

 

2008 to Present: A major setback:

 

In prosecuting the patent applications covering its core intellectual property, Iris suffered a four-year delay due to the failure and subsequent bankruptcy of Heller Ehrman, Iris’s legal counsel at that time. The failure of Heller Ehrman, a prominent law firm with more than 700 attorneys, resulted in communications from the USPTO going unanswered, including a response to a notice of allowance of Iris’s key patent.

 

This first and most critical failure occurred approximately three weeks after Iris’s patent attorney at Heller Ehrman and their entire intellectual property department in Menlo Park left the firm in March 2008.

 

Having discovered the Heller Ehrman failures through an outside law firm doing patent work for Iris in late 2011, Iris has regained its patent rights, having the key patent granted in 2012 and 2014, and now stands ready to move forward with patent enforcement and commercialization of its products.

 

And an Opportunity:

 

From 2008 to present, we have continued to refine our technology and intellectual property; we have expanded our network in both research and clinical realms; and we have avoided some of the pitfalls and burdens of developing a brand new market. During this time, our competitors have developed a significant market, and Iris is now well positioned to capitalize on this market through superior technology. As described below, Iris has several near-term opportunities for significant growth and revenue, both within the existing market, and more broadly over time as the personalized medicine market matures and grows.

Iris Today:

 

In 2014, Iris received the IAIR Award for Best Company for Leadership in Personalized Medicine. To date, Iris has invested over $10 million in preparation for the launch of multiple products and services based upon its patented Nano-biochip and BioWindows Medical Informatics System. Iris is now prepared to proceed with commercial scale manufacturing and launch of multiple products. We currently have six US patents plus a portfolio of patents issued worldwide. Iris has been keeping up and making adjustments to our products and technology, as well as intellectual property portfolio to stay at the forefront of its market sector.

 

Iris has an extensive pipeline of personalized, precision medical products and services, including an integrated blood test, IVF applications, a BreastCancerChip, ColonCancerChip, NeuroChip, PrenatalChip, Comprehensive CancerChip, CardioChip, ViralChip and MetabolicChip; however, we have focused our initial efforts on helping breast cancer patients. In October 2010, Iris was awarded $245,000, the maximum amount given per grant under the US Qualifying Therapeutic Discovery Project (QTDP) Program. The QTDP grant provided recognition of Iris's patented Nano-Biochip™ and BioWindows™ Medical Informatics System for optimizing personalized and targeted medical treatment.

 

With the addition of outstanding people, who have a passion for making a difference in helping people through precision medicine, we have positioned ourselves well to offer our solution to the world as we prepare for dynamic growth.

 

Market Size:

 

The global market for a more personalized approach to medicine and health is expected to grow to $452 billion in 2015 according to PricewaterhouseCoopers projections. The market for personalized medicine in the United States is already $232 billion, and it is projected to grow 11 percent annually. The core diagnostic and targeted therapeutic segment of the market is expected to grow by 10 percent annually, reaching $42 billion by 2015. The related nutrition and wellness market - including retail, complementary and alternative medicine offered by consumer products, food and beverage, leisure and retail companies - is estimated at $196 billion and is projected to grow 7 percent annually to over $290 billion by 2015. With health care spending expected to reach $4.3 trillion or 19.5 percent of GDP by 2017, companies developing personalized diagnostic products are expected to yield very good return on investment.

 

Our Competition:

 

We have different competitors for different markets. In breast cancer analysis, for example, our competitors include Genomic Health, Agendia, and Nanostring. The most direct competitor is Genomic Health, which had approximately $275.7 million of revenue in 2014, a 5.4 percent increase over the revenue in 2013 and has a market capitalization of approximately $1.1 billion. Genomic Health's Oncotype Dx prognostic test determines the recurrence and potential responsiveness to chemotherapy. Its CLIA test, which is not FDA approved, is a 21-gene expression test that classifies breast cancer patients as "low," "medium" or "high" risk of developing distance metastasis. Oncotype Dx is used to analyze early-stage estrogen receptor positive breast cancers, and over 10,000 physicians have used it to help guide treatment for over 200,000 patients in 65 countries.

 

Agendia's Mammaprint prognostic test determines the likelihood of recurrence and benefit of chemotherapy. It is an FDA-approved 70-gene expression test that classifies breast cancer patients as "low" or "high" risk of developing distance metastasis in a 10-year period and their potential responsiveness to chemotherapy for lymph node negative tumors up to 5 cm. Agendia is a privately held company, and their 2014 revenue is believed to be less than $40 million.

 

Nanostring markets their nCounter Analysis System, which enables genomic analysis on a scale appropriate for pathway-based biology by digitally quantifying the activity of up to 800 genes simultaneously in a tissue sample. Nanostring generated revenue of $47.6 million and $31.4 million in 2014 and 2013 respectively, while incurring net losses of $50.0 million and $29.3 million in 2014 and 2013 respectively.

Nanostring’s Prosigna molecular diagnostic test is based on a collection of 50 genes known as the PAM50 gene signature. Prosigna can provide a breast cancer patient and her physician with a subtype classification based on the fundamental biology of the patient’s tumor, as well as a prognostic score that predicts the probability of cancer recurrence over 10 years. Physicians use Prosigna to help guide therapeutic decisions so that patients receive a therapeutic intervention only if it is clinically warranted. Prosigna is regulated as an in vitro diagnostic test and they distribute it as a kit.

 

We benefit from the fact that Genomic Health, Agendia, and Nanostring have begun the education of those in the healthcare system, paving the way for our company to penetrate the market at an accelerated pace.

 

Our Competitive Advantage:

 

In addition to the prognostic testing capabilities, similar to the offerings by Genomic Health, Agendia, and Nanostring, our tests predict the best, targeted therapy to maximize efficacy and minimize side effects by using a 100+ gene expression test with additional genomic, proteomic, personal life style, family medical history, and environmental exposure information to optimize longevity and quality of life. Iris expects revenue from multiple products and services.

 

Breast cancer gene signatures have been used to segregate patients by prognosis and therapeutic indication. Those such as Oncotype DX, Mammaprint, and PAM50 classify breast tumors into subclasses (e.g., Luminal A, Luminal B, HER2, Basal) that are broadly predictive of recurrence after initial treatment/resection, without specifying an indicated treatment modality. Other signatures (e.g., Endopredict, immune response, Myc, p53) are prognostic within individual subclasses (e.g., ER-positive, triple negative) again without specifying indicated treatment modalities. Lastly, pathway signatures (e.g., RB, MEK, PTEN) predict tumor addiction to specific oncogenes and/or responsiveness to specific treatments. These latter pathway signatures may be selectively predictive in the context of particular tumor subclasses. For example, in ER-positive disease there was a highly significant association between high RB-loss signature expression and poor disease outcome, while in ER-negative disease the opposite trend was evident. Specifically, within the ER-negative subpopulation, the RB-loss signature was associated with improved response to chemotherapy and longer relapse-free survival.

 

While currently, most published signatures are merely prognostic, the advent of neoadjuvant therapies and adaptive trials will increasingly favor the development of signatures predictive of response to individual targeted therapies. However, publicly available clinical data for targeted therapies are still sparse. In lieu of such clinical data, some researchers have used the results of pre-clinical studies using cell lines and xenografts to derive predictive signatures. In one illustrative example, cell lines were used to define an 18-gene signature of MEK functional output, independent of tumor genotype. Where the MEK pathway was activated but the cells remained resistant to the MEK inhibitor selumetinib, a 13-gene signature was identified that indicated the existence of compensatory signaling. In another example, breast cell lines were used to define a 7-gene signature predictive of responsiveness to the drug olaparib, a specific inhibitor of Poly(ADP-ribose) polymerase (PARP) – an enzyme involved in DNA repair.

 

Our test is based upon a list of genes tailored for breast cancer signatures prognostic test with future predictive capabilities, including signatures of oncogenic pathways likely to be targeted by therapeutic drugs currently in various stages of development. We envision broad use of our artificial intelligence system for optimization of targeted therapeutic strategies and may incorporate data from next-generation sequencing (NGS) and other sources.

 

Iris: The Future of Personalized Medicine

 

Iris’s technology platform developed in house is designed with the capacity and flexibility to introduce several new products each year to facilitate the treatment of many diseases affecting millions of people. Iris’s sales strategy is to sell directly to major health care customers such as Kaiser Permanente, and rely on strategic partners in the value chain to access and service smaller customers. We will also form other strategic partnerships to accelerate our revenue growth and profitability with attractive margins. In addition, we plan to offer Direct-to-Consumers products and services, both through our new Iris Wellness Labs website and various retail locations worldwide.

We have been continuing to build upon the 2009 launch of our “Health Passport” in our BioWindows™ 2.0 Informatics System. Health Passport is a HIPAA compliant, web based medical information storage system that allows participants to grant sharing capabilities of their confidential medical and lifestyle information to physicians and/or family members anywhere in the world. This allows families to build multi-generational medical family trees that will help assure that they receive more personalized care now and in the future – the right medical treatment for the right patient at the right time. In the future, the information within the BioWindows™ System will be used not only to optimize the choice of medical treatment, but also to develop personalized and targeted drugs with maximum efficacy and minimal side effects.

 

We have developed a manufacturing system with the capabilities to produce a variety of Nano-biochips™ with a choice of mRNAs, microRNAs, proteins, or other biomarker probes for the diagnosis and prognosis of breast cancer, colon cancer, and many other diseases. Our Nano-biochip manufacturing and usage tracking process has been tested with 2D and 1D barcode scanners on both labeled and stamped products in conjunction with touch screen functions, and we have streamlined the automated patient sample processing protocols.

 

We have explored collaborating with various entities in the U.S. and overseas to begin clinical research studies to determine the effectiveness of tissue genetic testing in patients undergoing surgery for breast cancer. Our biochip technology is expected to advance personalized medicine, enhancing a physician’s ability to match cancer treatment plans to genetic indicators. We anticipate enrolling 300 women who undergo breast cancer surgery. It is hoped that this research study will someday assist oncologists and breast surgeons in making better personalized treatment decisions that may favorably benefit the overall recovery and survival of future breast cancer patients. This is the beginning of a study that we expect will eventually include patients from multiple hospitals and surgical centers worldwide.

 

Our strategy has been to optimize return on our investment for investors by developing products and services that we believe could become the industry standard in the future. We believe that it is not enough just to determine which 2% of the breast cancer patients might benefit from chemotherapy, which could cost more than $30,000. We seek to optimize patient survival and quality of life while minimizing the total cost of breast cancer treatment, which could exceed $150,000 in the first year.

 

By categorizing patients according to their molecular signatures and personal profiles using our Nano-Biochips and BioWindows medical informatics system we are building a solid foundation for the practice of personalized medicine. Our vision has been for our technologies, products, and services to foster a new collaborative paradigm for disease management, enable the development of personalized and targeted drugs, empower people to optimize the quality and longevity of their lives and create an attractive return on investment for our shareholders.

 

We have the capability to launch the clinical BreastCancerChip™ through CLIA laboratory certification without FDA approval, similar to the Oncotype Dx test offered by Genomic Health. We have strategically positioned ourselves to be successful regardless of how and when the FDA decides to regulate complex molecular diagnostic and prognostic products. The Iris Nano-Biochipsä are designed to be FDA-approved kits. With FDA approval, all of our tests can be performed in any certified laboratory.

 

According to The American Cancer Society, about 1,658,37 new cancer cases are expected to be diagnosed in 2015. This estimate does not include carcinoma in situ (noninvasive cancer) of any site except urinary bladder, and does not include basal cell and squamous cell skin cancers, which are not required to be reported to cancer registries. In 2015, about 589,430 Americans are expected to die of cancer, almost 1,620 people per day. Cancer is the second most common cause of death in the US, exceeded only by heart disease, accounting for nearly 1 of every 4 deaths. Annually, approximately 12.7 million people worldwide are diagnosed with cancer.

 

Our initial focus is helping the more than 2 million breast cancer patients in the US. Each year more than a million breast biopsies, lumpectomies, and mastectomies are performed. An estimated 231,840 new cases of invasive breast cancer are expected to be diagnosed among women in the US during 2015.About 60,290 new cases of carcinoma in situ (CIS) will be diagnosed (CIS is non-invasive and is the earliest form of breast cancer), and about 40,290 women will die from breast cancer. Excluding cancers of the skin, breast cancer is the most frequently diagnosed cancer in women.

Virtually every disease has a genetic component. Diseases like cancer, heart disease, Alzheimer’s and diabetes occur as a result of many known and unknown genes interacting with each other and the environment over time. Multiple genes cause chronic diseases, each playing a minor role, so it is very important to understand how genes are being expressed and how the environment is altering that expression. To treat breast cancer with the most effective treatment regimen, it is important to be able to diagnose which types of breast cancer is actually posing a potential threat to the life of the patient.

 

The Iris BioWindows™ Informatics System for Personalized and Targeted Medicine handles the analysis of the gene expression and genetic variation data as well as protein and other biomarker information collected by the Nano-Biochip™. BioWindows™ is an artificial intelligence system, which includes a powerful database with molecular signatures, in-depth patient demographics and lifestyle information, family medical histories and treatment-response profiles for many diseases. With each new gene and every new patient the Iris BioWindowsä medical informatics system grows more powerful as new information is added to the database.

 

By combining all this data our artificial intelligence system can look for patterns and begin sorting patients into increasingly similar groupings. Within each similar group is the most appropriate treatment protocol. In essence the system is a comparative effectiveness approach to a specific disease. By comparing patients with similar backgrounds and gene profiles you increase the probability of prescribing the proper protocol the first time. As more patient information is added to the database the groupings become more concise and treatment protocols more personalized. The physician’s job becomes one of further fine-tuning the therapy and eventually reducing or even eliminating trial and error medicine.

 

Our Nano-Biochips™ are special silicon chips with multiple functions. One of the applications is to enable physicians to identify and analyze the DNA’s gene expression profile involved in a disease. DNA is a ladder like molecule that can be split into half ladders with a little bit of chemical manipulation. If you could look inside the nano-biochips™, you would see half ladders that represent specific genes anchored in separate wells on the silicon substrate. Each half ladder is a sequence of nucleotide bases called oligonucleotides or peptide nucleic acids.

 

Split DNA has the unique ability of reconnecting to its compliment, the other half ladder, very precisely under properly controlled conditions. This process is called hybridization. Our chip uses this quality to act as a test probe to capture abnormal genetic information. The genetic material that is captured is messenger RNA, and in an abnormal state is responsible for creating the conditions that lead to disease. This captured material is also referred to as cDNA and cRNA.

 

Messenger RNA (mRNA) is extracted and purified from collected tissue samples with commercially available automated machines, tagged with fluorescent molecules and processed inside the nano-biochip. The mRNAs of interest are captured by their respective probes (half ladders) and energized, exciting the fluorescent tags to emit light, which can be photographed and digitized. The intensity of the light emitted from the fluorescent molecules is a measure of the genes activity. The digitized photograph is automatically encrypted and sent either to a local server or over the Internet to our artificial intelligence system (BioWindows™) for analysis.

 

The captured information, referred to as “gene expression” or “a gene signature” is selectively compared in our BioWindows™ database, which is currently being compiled from correlations between reference gene signatures, prior treatment strategies and clinical outcomes. The initial database is a collection of historical data derived from the analysis of breast cancer tissues from other breast cancer patients with the same or similar clinical and gene expression profiles. After the gene signature comparison, a secure, confidential and clinically actionable report is then generated and sent to the treating physician.

We are also working on incorporating affordable, next-generation human genome sequencing, the genomes of microbes in living organisms, as well as protein biomarker profiling to make our technology platform even more powerful. It took more than $3 billion and thirteen years to complete the sequencing of the human genome. In 2014, it would be possible to sequence a person’s genome for less than $1,000. Choosing the right combination of surgery, radiation, chemotherapies, hormonal therapies, monoclonal antibody treatment, anti-angiogenic therapy, or other medical treatment requires a solid molecular signature diagnosis along with the analysis of life style dynamics. Where life critical medical decision-making and patient care are concerned, physicians and patients are beginning to realize that personalizing healthcare is a choice and the future of medicine.

 

We believe we are at the right place at the right time with the right intellectual property to make a significant difference to improve healthcare and achieve attractive return on investment for our investors. 2015 will be a defining year for us and for our industry.

Our Solution

 

Our nano-biochip™ technology platform was developed using a convergence of scientific disciplines in nanotechnology, semiconductor manufacturing, microfluidics, chemistry, molecular biology, genetics, genomics, and information technology. We expect that our product platform will lead to more effective diagnosis and treatment not only for patients with breast cancer, but also for those with neurological disorders, heart disease, diabetes and other gene-related metabolic problems.

 

Our technology platform includes a combination of:

 

·

Oligonucleotide, peptide nucleic acid (PNA) probes with superior binding affinity and specificity that are the ideal length and highly purified, protein biomarkers, and other molecules

 

·

A proprietary binding system to secure probes to a soft metal chip surface

 

·

Controlled probe spacing and chip surface design to maximize sensitivity

 

·

Microfluidics and the use of paramagnetic labels with a magnetic field to enhance hybridization speed. Microfluidics deals with the precise control and manipulation of microliter and nanoliter volumes of fluids.

 

·

A flexible, low-cost chip design and manufacturing process

 

·

Use of robotics for precise automated chip manufacturing

 

·

An information technology system based on proprietary algorithms for analysis, correlation and classification of test results.

 

We are also developing other new technologies, and we will discuss them in more detail in the future. Single cell genomics and proteomics, DNA editing, nano-particle applications, circulating tumor cell analysis, cell free DNA, stem cell therapy, microbiome modification, and potential therapeutics for various diseases are within the framework of our focus to build upon our patented technologies.

 

Our initial products can be marketed as CLIA laboratory tests without FDA approval, similar to Genomic Health’s Oncotype DX test or as 510(k) products approved by the FDA, enabling our tests to be used in any certified laboratory. To get FDA approval, a human clinical “in vivo” trial is not required. Human tissue study “in vitro” is sufficient for getting 510(k) approval from the FDA, which we will be seeking. This will enable us to sell our nano-biochip diagnostic kits on a worldwide basis directly to major hospital networks, clinical laboratories, pharmaceutical companies, research institutions and individuals.

The Iris BioWindows™ database comprising data fields for patient demographic information, personal medical history, family medical history, and gene expression information is in use for storing actual patient information. Physicians, with the patient’s consent, can view information by choosing any medical record from their personal list of patients. Actual patient gene signature information will be added to the database after we process each patient’s specimen through our nano-biochip for breast cancer and other diseases. In the future, our database will also contain information on protein signatures.

 

As the database grows, it will become increasingly more powerful as patient cohorts become more refined. No individual drug successively serves every patient with a specific disease but different drugs are highly successful with specific groups of patients yet are toxic to others. The ability to empower the clinician to choose the best treatment regimens for their patients is the heart of the Iris BioWindows™ system.

 

With our manufacturing system, we plan to build medical products such as the BreastCancerChip™, ColonCancerChipä™, Comprehensive Cancer Chip™, NeuroChip™, CardioChip™, and MetabolicChip™, as well as chips for other applications including veterinary, agricultural and environmental problems. We also intend to use our BioWindows™ database to enable drug development, stem cell research, and evolving clinical applications.

 

Summary of Medical Care

 

According to the Centers for Medicare and Medicaid Service, US healthcare spending is projected to be 19.9 percent of GDP by 2022. A Forbes magazine article dated February 2, 2014 stated that the projected annual US healthcare Spending for 2015 is approximately $4.0 trillion.. Spending on national health care totaled $2.9 trillion or 17.4 percent of GDP in 2013.

 

The American Cancer Society estimates that approximately 231,840 American women were diagnosed with invasive breast cancer in 2015, as well as an estimated 60,290 additional cases of in situ breast cancer. A breast cancer patient, after the removal of the tumor, is usually treated with radiation and/or chemotherapy followed by additional therapies such as hormonal therapy or molecular antibody treatment.

 

According to a study from the National Cancer Institute (NCI), the average cost of chemotherapy is about $31,000, and most patients that receive chemotherapy do not benefit from this painful treatment with its many undesirable side effects. Some drugs to be taken after chemotherapy could cost $40,000-$80,000 per year. For some patients, the total cost of breast cancer treatment could exceed $150,000 in the first year.

 

Most of our current medical practice in this country is based on “standards of care” which are determined by averaging responses over large groups of patients based on clinical trials. Another way to arrive at “standards of care” is to group patients into cohorts (groups) based on their specific characteristics. Instead of looking for generalities within a large group of patients, medical practitioners can focus on specifics and what cohort best fits each individual.

 

Which characteristics should be considered in building a subset or cohort? Many characteristics are obvious and are presently considered to optimize treatment; gender, age, weight, height, ethnicity, family history and disease history for instance. There are others that are not so obvious; diet, allergies, immunizations, obstetric history, stress and lifestyle as well as environmental factors including employment and residential history. But probably the most important are personal biomarkers.

 

In medicine, a biomarker is an indicator of a particular disease state or a particular state of a patient; blood pressure and cholesterol are two familiar ones. Over the past few decades, major advances in molecular analysis technologies have brought the definition of a biomarker to the arena of the genome. The present biomarkers that medicine relies on for disease diagnosis and prognosis are only a glimpse into the molecular basis of common diseases. The addition of genomic analysis would allow medicine to define diseases precisely, uniquely and unequivocally.

In a February 16th 2009 AP article Dr. Richard Schilsky, American Society of Clinical Oncology (ASCO) president, was quoted as saying that “a bad test is as dangerous to a patient as a bad drug.” “The tricky part is to figure out which of those (genetic differences) are clinically important and which are just variations that exist.” The most complete genomic testing is about uncovering a tumor’s genetic signature by measuring the gene expression activity that drives the aggressiveness of the tumor, its possibility of recurrence and what specific type of therapeutic regimen would save and optimize the patient’s quality of life.

 

Breast cancer, like all diseases, is very complex involving an individual’s genome interacting with its environment over time. Only 5% of breast cancers are due to inherited mutations; the other 95% are due to acquired somatic mutations and improperly regulated genes due to environmental factors. Why do some people get cancer and others don't? Why is cancer more aggressive in some patients compared to others? Why does the same drug cure some patients and cause severe side effects in others? Why does someone need twice the standard dose to have a positive effect while others need only half? Existing diagnostic procedures cannot answer these questions.

 

The answer and solution to all these questions is the same, genomics and personalized medicine. With the information available in our BioWindows^TM informatics system physicians would be able to stratify patients into cohorts with common, yet unique, disease characteristics. When you add a new patients genomic and life dynamics into the system for comparison they are added to groups that share the greatest number of similarities in all aspects. As the system grows you move further and further away from “generic” treatments, based on outdated clinical trials and trial and error medicine and enter the new era of truly personalized medicine.

 

Our Strategy

 

Product Strategy

 

We have identified our products for development based on the high prevalence, societal impact and economic consequences of certain serious medical conditions such as breast cancer. It has become apparent to us, with respect to breast cancer, that there remains an acute need for a robust staging classification system, as well as more effective predictive, and prognostic tools to assist in medical treatment decisions. Recently, the characterization of gene mutations and gene expression patterns as they relate to this disease has become the prime focus of a great deal of research and discovery.

 

Breast Cancer Chip

 

A woman is diagnosed with breast cancer every three minutes in the U.S. NCI also estimates that more than $8 billion is spent in the U.S. each year on treatment of breast cancer and there are more than two million women alive in the U.S. who had a history of cancer of the breast.

 

With the increasing success of early mammography screening programs, a growing number of breast biopsies are being performed to determine if suspicious growths are malignant or benign. Up until now, malignant tissue has been graded based on traditional tumor/nodal/metastasis (TNM). The current testing procedures also use immunohistochemical tissue staining techniques for additional cancer cell sub-classification and staging, which is used for clinical decisions regarding treatment and prognosis.

 

Mammography can detect a breast tumor once it has reached a certain size, but cannot tell if the tumor is benign or malignant. A breast biopsy can determine if a tumor is cancer but cannot predict how aggressive the disease will be or how the patient will respond to the various treatment modalities. Starting at the point of a breast biopsy diagnosis of cancer, the nano-biochip and BioWindows™ artificial intelligence program are designed to enable a treating physician to quickly prescribe a personalized treatment regimen that will have the greatest probability of success for each patient’s particular type of cancer. This knowledge could be the difference between life and death in some cases and a better quality of life for all patients.

Future Products

 

We are also working on gene markers for a comprehensive CancerChipä and specific markers associated with prostrate, lung, liver, kidney and ovarian cancers. Certain genes associated with schizophrenia, Alzheimer disease, autoimmune system disorders, and metabolic and drug metabolism disorders have also been reviewed. We are continuing to work on the selection of newly discovered genes to be included in other products such as the NeuroChipä and CardioChipä.

 

Critical Performance Factors

 

We have been developing our first product to analyze breast tumors using 100 or more gene probes. By comparing the patient sample to our intended reference database, our test will identify the tumor gene profile as benign or malignant, predict the tumor’s aggressiveness, guide the physician in selecting the most appropriate treatment and, subsequently, monitor the effectiveness of treatment.

 

We have developed our flexible and easily adaptable nano-biochip platform to address technology requirements that impact the clinical value of genomic information acquired.

 

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Probe Sensitivity - Sensitivity, as it applies to PNA chip probes, is the measure of how well the test nucleic acids hybridize to specific and complimentary DNA and RNA sequences in a given sample. The consequence of low attraction (low sensitivity) is quantitatively low sequence hybridization and a resulting loss in the power and specificity of genomic analysis, i.e. false negatives test results. A highly sensitive system has the ability to efficiently capture targeted gene sequences and accurately measure small variations in their expression. Sensitivity is affected by probe length, design and binding affinity, purity, and concentration within each spot in an array.

 

·

Probe Specificity - Specificity, as it applies to PNA chip probes, is the ability for test nucleic acids to selectively hybridize to only those specific DNA and RNA sequences in a given sample to which hybridization is intended. The consequence of low selectivity (low specificity) is incorrect and erroneous hybridization, leading to imprecise genomic analysis, i.e. false positives test results. A highly specific system has the ability to capture only the relevant and intended target gene sequences, which only then provides the ability to measure small variations in gene expression. Specificity is affected by probe length, design and purity.

 

·

Hybridization Speed - The number of tests, large volume of analyses required for each test, and required response time in a clinical setting demands speed. Hybridization speed is affected by probe binding affinity, spacing and density, steric hindrance (limited test specimen accessibility to the probe due to a large amount of unwanted molecules near the probe), and proximity of test probes to the DNA sample. Test probes are specific gene sequences synthesized for the purpose of capturing specific genes in each patient sample.

 

·

Design Flexibility and Cost - A flexible manufacturing process and chip design allows for rapid development and modification of chip products at a low chip cost. A low chip cost will enable delivery of high margin products at a price point suitable for clinical requirements, and will help to encourage wide-scale adoption of high throughput genomic diagnostic testing.

 

Our Technological Solutions

 

Our silicon biochip gene detection platform consists of proprietary technologies incorporated into oligonucleotide and PNA chips, customized readers/scanners and our BioWindows genetic information interpretation system. The nano-biochip is built on a semiconductor substrate and contains oligonucleotide and/or PNA probes, which use hybridization to identify specific genes in cells from patient tissue or blood samples. The pools of cRNA or cDNA in patient samples are labeled with fluorescent molecules and then circulated through the integrated microfluidics biochip where complementary molecular binding takes place with the attached test probes. The remaining uncomplimentary cRNA or cDNA is then washed away.

 

The fluorescence of the hybridized genes is analyzed by a laser scanner or a CCD reader (a microscope attached to a digital camera) which, with the assistance of the BioWindows software system, determines if the recognized genes, their mutation or expression patterns are representative of the specific disease optical pattern that the chip is designed to detect. This analysis is performed by comparing the detected hybridization patterns to our reference database of hybridization profiles.

 

Test Probes

 

Our probes can be manufactured to exacting specifications and varied in composition and length. Probes will be pre-synthesized and can be verified before attachment to ensure they are homologous and highly purified. We can manufacture probes to their optimal length to ensure the appropriate probe length for each nano-biochip product. Sample DNA targets (gene sequences associated with cancer, infectious disease, and other metabolic or gene related disorders) vary in composition and length. Consequently, specific hybridization with a patient sample is enhanced when probes are designed for their specific targeted gene sequences.

 

PNA probes capture specific DNA and RNA (ribonucleic acid) sequences more efficiently than oligonucleotide and complimentary DNA (cDNA) probes. Unlike oligonucleotides, PNAs are synthesized analogs that lack pentose sugar phosphate structural backbone groups. The deoxyribose backbone is replaced by a peptide backbone. The resulting hybridization to complementary RNA or DNA has a higher affinity than corresponding nucleotides.

 

The stronger binding is attributed to the neutrality of the backbone, which results in the elimination of sub molecular electrical charge repulsion that is present in unmodified DNA/DNA or RNA/RNA duplexes. This binding strength is confirmed by their higher melting temperatures (higher thermal stability). PNAs also have increased specificity for DNA binding. As a result, a PNA/DNA mismatch is more destabilizing than a mismatch in a DNA/DNA duplex. PNA/DNA mismatches are therefore more likely to be degraded during the washing cycle, resulting in more accurate and specific hybridization detection and quantification.

 

Binding System

 

Our binding system utilizes a proprietary spacer technology to bind oligonucleotides to soft metal wells on the surfaces of the chip. The technology is based on a “lock and key” molecular design that includes a stable anchor bond to the solid surface, a spacer arm which gives flexibility to the probe allowing it to interact with its environment in a way which minimizes steric hindrance (limited test specimen accessibility to the probe due to a large amount of unwanted molecules near the probe), and a reactive terminal molecule which binds to the probe. This technique provides a reliable method to immobilize probe molecules with a robust, stable connection to the chip-binding surface while optimizing their sensitivity and specificity.

 

Probes stand vertically, attached to the metal well surface on one end by the anchor. The connection ensures probe stability and integrity during the hybridization and subsequent washing cycles. In addition, the spacer between the probe and metal base optimizes a probe’s ability to make contact and bind with the sample cDNA and/or cRNA by distancing the probe from the chip surface.

Microfluidics

 

Wells on our chip, in which probes are secured, are interconnected by a system of microchannels. A central fluidics station distributes the genetic target and washing solutions through the microchannels on the chip during the hybridization and washing cycles. The controlled flow of solution enhances hybridization by ensuring that the sample cDNA and/or cRNA come in contact with the probes.

 

Magnetic Labels

 

Our biochip platform can currently complete the hybridization process in 20 minutes. We are also developing a proprietary technology that labels nucleic acid target molecules with paramagnetic labels. Activation of a magnetic field under the probe molecules induces and directs rapid migration of the charge-labeled molecules to a solid support and could dramatically shorten the hybridization rate to five minutes.

 

Nano-Biochip Fabrication

 

Our approach to chip design is similar to that used in building an “Application Specific Integrated Circuit (ASIC)”. We build a base substrate (requiring less than 10 mask layers) before depositing the probes as required. With the flexible ASCI chip design, a new mask set is not required which will reduce any retooling costs and considerably reduce chip modification time.

 

We have developed our Piezo Arrayer™ robotic micro pump system and can precisely deliver different probe solutions simultaneously.

 

BioWindows TM

 

Our bioinformatics provides an artificial intelligence system with proprietary algorithms for acquisition and analysis of genomic hybridization information. This proprietary system optically reads hybridization data from nano-biochips and analyzes results based on a variety of statistical algorithms that suggest and evaluate test result hypotheses.

 

Hybridization information is compared with an Iris repository of hybridization profiles, patient profiles, reference information, clinical information associated with hybridization profiles, and statistical summaries to provide appropriate treatment scenarios for a variety of pathological conditions, ailments and diseases. The system will utilize normalization and expression level controls when relevant to accommodate variations in hybridization conditions, label intensity and other factors as well as control for the overall health and metabolic activity of a cell.

 

Competition

 

The medical diagnostic industry is characterized by rapidly evolving technology and intense competition. Our competitors include medical diagnostic companies, most of which have financial, technical and marketing resources significantly greater than our resources. In addition, there are a significant number of biotechnology companies working on evolving technologies that may supplant or make our technology obsolete. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures. We are aware of certain development projects for products to prevent or treat certain diseases targeted by us. The existence of these potential products or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed.

Genomic Health Inc.

 

The current test offered by our main competitor, Genomic Health Inc., is a “home-brew test” and is not an FDA approved kit. That means hospitals and clinical laboratories cannot purchase and run the test in their own extensive network of laboratories.

 

Genomic Health’s strategy was to get to market first. They used existing RT-PCR technology and relied on existing protocol to collect paraffin-preserved patient samples. Genomic Health marketed their test broadly and we believe that some physicians are beginning to protect themselves from potential malpractice lawsuits by offering the test to patients and asking them to sign a waiver if they choose not to have the test done.

 

The Genomic Health test works only for a subset of breast cancer patients. We have focused on providing testing that can benefit all breast cancer patients before they undergo any prescribed treatment. We believe our nano-biochip more precisely diagnoses and identifies the best medical treatment choices at the time of the initial biopsy. The significant advantage of early optimal medical intervention leads to reduced diagnostic and treatment costs over the life of the patient and an improvement in the patient’s quality of life. We believe that our strategy of early diagnosis, prognosis and personalized care will grow rapidly to become the “de facto” model in the breast cancer clinical market.

 

Affymetrix Inc.

 

Affymetrix’s microarray technology relies on solid-phase chemical synthesis (stacking chemical molecules on top of each other) of their test probes, which is not capable of producing a high yield of purified, immobilized molecules. Probes are immobilized using a three-dimensional nylon membrane support structure. Immobilization structural chemistry lacks specificity and therefore increases the probability that target sample DNA will bind nonspecifically to either the immobilized probe DNA or the solid surface of the chip, resulting in erroneous false positive test results.

 

Also, the chemistry of probe support membranes varies among batches, and these variances affect the amount of DNA material deposited. As a result of these limitations, Affymetrix requires the use of 10 mismatch quality control probes for every functional probe in a probe “group”. Hybridization results are analyzed based on findings within the control group. These technology constraints result in limitations of sensitivity and specificity.

 

Agilent/Agendia

 

Like Affymetrix, Agilent can also make synthesized oligo chips, and Agendia, a private company, buys this type of chip for their test. We believe that Agilent’s PROBE SENSITIVITY is about 16% compared to that of 4 - 10% for Affymetrix. We believe our PROBE SENSITIVITY could be 99% purified. Even if Agilent were to copy our approach in probe design, synthesis, and deposition, their chip performance would still be limited by their use of glass as a substrate. Glass lacks the necessary chemistry for advanced surface binding and enhanced hybridization performance. Should Agilent also switch to a semiconductor substrate, our product would still have an advantage because of its use of PNA probes, an advanced probe-binding system, and enhanced hybridization technologies discussed in elsewhere in this prospectus.

 

On February 6, 2007, the U.S. Food and Drug Administration (FDA) approved Agendia’s 70-gene test for predicting breast cancer recurrence. The clearance of Agendia's ‘de novo 510(k)' application sets a precedent. This will make it easier and faster for Iris to get approval for its Nano-Biochip. Agendia has previously received clearance from European authorities to market their test in Europe and they claim substantial progress in market acceptance and reimbursement. The Agendia test is gaining acceptance in the U.S.

Other Competitors

 

As we introduce products and services for new applications using our powerful technology platforms, we will have many more competitors in in multiple multi-billion-dollar markets. Some of these competitors include Theranos, Foundation Medicine, and Invitae.

 

Sales and Marketing

 

We expect that our marketing efforts will capitalize on the existing wide market acceptance as well as private and governmental health insurance reimbursement to provide for genomic and genetics breast cancer testing (Genomic Health, Agendia, and Myriad are active in this sector); however, while some of our competitors receive reimbursement for similar testing, until we begin our operations we cannot be certain that we will similarly be reimbursed. Our sales and marketing will be done initially through partners, distributors, and company representatives. In the United States, the initial customer base we wish to target once our products are ready to be introduced to the market includes leading clinical research institutions and companies such as Stanford, UCSF, M.D. Anderson Cancer Center, the National Cancer Institute (NIH), Quest Diagnostics, Laboratory Corporation, Sutter Medical, and Kaiser Permanente.

 

Direct-to-consumer radiology service centers demonstrate the growing popularity of self-reliance and a “need to know” philosophy in the management of personal health matters. Genomic diagnostic testing will, quite logically, be a part of this movement. We will be selling our products into a new market segment in the field of medical diagnostics.

 

Iris has been covered by ABC News, Forbes, CNBC, Yahoo Finance, Market Watch, US Pharmacist, Drug Benefit Trends and other publications here in the US as well as media in the UK, France, Germany, Australia, Canada, and Asian countries. Drug Benefit Trends is a publication for medical directors, pharmacy directors, and other managed care decision makers. This publication is peer reviewed and the three-page article that highlights the Company and the current status of personalized medicine is on the front cover of the March 2008 issue.

 

Our CEO, Simon Chin, has also been interviewed by radio shows in California and Florida. Since we launched our BioWindows™ medical information system on May 11, 2008, people have been entering their personal information into the system. Our desire is to launch BioWindows™ worldwide, customized to meet the local needs.

 

Our management realizes that one of the key ingredients to becoming a successful company is brand recognition so we will engage in more publicity campaigns. Customer and user training will also be provided to facilitate the use of our products and services. As far as sales channels are concerned, preliminary discussions have been made with major health care providers and HMOs. We have also been working with various patient advocacy groups as a part of our marketing outreach program.

 

Intellectual Property

 

Our proprietary technologies reside in our US patents and other patents that have been granted to us in many countries around the world.

 

1. US 7,108,971 - Binding Chemistry: “Reversible binding of molecules to metal substrates through affinity interactions.” This patent application states that a testing probe binding system, utilizing a proprietary heterobifunctional spacer comprising a hydrocarbon, efficiently binds oligonucleotides to soft metal surfaces on the chip. The invention relates to the immobilization of ligands onto solid surfaces and their use in hybridization, purification, immunoassays, biosensors and other biochemical applications. Our patent protection expires on May 15, 2020.

2. US 6,852,493 - Enhanced Hybridization: “Magnetic field enhanced hybridization of target molecules to immobilize probes.” This patent claim states that labeling nucleic acid target molecules with paramagnetic labels and activating a magnetic field under probe molecules on the chip, can accomplish rapid hybridization of complementary nucleic acid molecules. Our patent protection expires on May 15, 2020.

3. US 7,270,954 - Peptide Nucleic Acids (PNAs): “Hybridization of target DNA with immobilized nucleic acid analogs.” This patent claim states that PNAs replace oligonucleotides and cDNA as probes in the detection of specific DNA and RNA sequences. Utilizing the company’s proprietary binding system and hybridization technology, PNA probes capture more efficiently specific DNA and RNA sequences than do oligonucleotide and cDNA probes. Our patent protection expires on June 30, 2020.

4. US 7,062,076 - BioWindows System: “Artificial intelligence system for genetic analysis.” This patent claim states that BioWindows provides a complete artificial intelligence system, utilizing proprietary algorithms, for acquisition and analysis of nucleic-acid array- hybridization information. This system reads data from nano-biochips, analyzes test results based on maintained parameters, evaluates patient risk for various ailments, and displays patient treatment alternatives. This system may utilize the Internet, via a secured encrypted web interface, for both transmission of nano-biochip hybridization data and the interpretation of this data. Our patent protection expires on August 28, 2020.

5. US 8,107,693 – This patent has broader claims than US 7,062,076 - BioWindows System: “Artificial intelligence system for genetic analysis.” This patent claim states that BioWindows provides a complete artificial intelligence system, utilizing proprietary algorithms, for acquisition and analysis of nucleic-acid array- hybridization information. This system reads data from nano-biochips, analyzes test results based on maintained parameters, evaluates patient risk for various ailments, and displays patient treatment alternatives. This system may utilize the Internet, via a secured encrypted web interface, for both transmission of nano-biochip hybridization data and the interpretation of this data. Our patent protection expires on August 28, 2020.

6. US 8,693,751 – The latest patent in a family of patents on our “Artificial intelligence system for genetic analysis.” This one has broader claims than US 8,107,693. Our patent protection expires on August 28, 2020.

Government Regulation

 

Regulation by governmental authorities in the United States and other countries will be a significant factor in the production and marketing of any products that may be developed by us. The nature and the extent to which such regulations may apply will vary depending on the nature of the products. Our products can be marketed as clinical laboratory tests according to the government CLIA standard without FDA approval, similar to Genomic Health’s Oncotype Dx test or as 510(k) products approved by the FDA, enabling our tests to be used in any certified laboratory. Agendia’s MammaPrint, which serves the same function as the Oncotype Dx, is approved by the FDA as a de novo 510(k) product. Human clinical trial was not required. Only human tissues were studied “in vitro” using their MammaPrint microarrays.

 

Although clinical laboratory services are not typically subject to FDA regulation, the FDA does regulate the sale or distribution, in interstate commerce, of medical devices, including in vitro diagnostic test kits. In addition, reagents and equipment used by clinical laboratories may be subject to FDA regulation. Clinical laboratory tests that are developed and validated by a laboratory for use in examinations performed by the lab itself are called “home brew” tests. Most home brew tests are currently not subject to premarket review by FDA although analyte-specific reagents or software provided to us by third parties and used by us to perform home brew tests may be subject to review by FDA prior to marketing. Devices subject to FDA regulation must undergo premarket review prior to commercialization unless the device is of a type exempted from such review.

All medical devices are categorized by the FDA into three different classes. The class in which a device is assigned determines the level of review required by the FDA to obtain approval for the marketing of the device to the public. Class I medical devices are subject to the least regulatory control and present minimal potential harm to the user. Class II medical devices include devices for which general controls alone are insufficient to assure safety and effectiveness, and additional existing methods are available to provide such assurances. Therefore, Class II devices are subject to special controls in addition to the general controls of Class I devices. Special controls may include special labeling requirements, mandatory performance standards, and post market surveillance. Devices in Class II are held to a higher level of assurance than Class I devices that they will perform as indicated and will not cause injury or harm to patient or user. Devices in this class are typically non-invasive and include x-ray machines, powered wheelchairs, infusion pumps, surgical drapes, surgical needles and suture material, and acupuncture needles. Class III devices are devices for which there is insufficient information to determine the safety and effectiveness of the device. Examples of Class III devices include heart valves, breast implants, implantable pacemakers and generally all medical devices that are implanted in the body. Class III devices are held to a higher level of assurance than Class II devices and require obtaining premarket approval, or PMA, from the FDA.

 

Although biochips similar to the one we intend to market have previously been considered Class II devices and therefore are only subject to premarket notification, since our products are   designed to enable a treating physician to prescribe a personalized treatment regimen there is a possibility that the FDA may consider our products a Class III device for this intended use requiring PMA. We intend to meet with the FDA to determine whether they will categorize our product for its current intended use as a Class II or Class III device. If the FDA determines that the intended use of our products would categorize our product as a Class II device we will submit a premarket notification to the FDA. However, in the event that the FDA determines that the intended use of our product would categorize it as a Class III device requiring premarket approval, we intend to modify the intended use to initially market our product as a test for predicting breast cancer recurrence and still file a 510(k) premarket notification. Then simultaneously with, or subsequent to, the filing of a premarket notification we will also file a PMA for use of our product by a treating physician to prescribe a personalized treatment regimen.

 

Premarketing notification is accomplished by submitting a 510(k) to the FDA. A 510(k) notification provides data to show that the new device is substantially equivalent to other devices that were introduced into the marketplace prior to May 1976, or pre-amendment devices. In order to complete a 510(k) notification for the FDA we will need to collect safety and effectiveness data to support 510(k) notification. This data is normally obtained through an evaluation in a clinical study process.

 

Premarket approval, or PMA, is the most stringent type of device marketing application required by the FDA and is based on a determination by the FDA that the PMA contains sufficient valid scientific evidence to assure that the device is safe and effective for its intended use. A PMA application is therefore a scientific, regulatory document to the FDA to demonstrate the safety and effectiveness of the Class III device. If a PMA application lacks valid clinical information and scientific analysis it will delay the FDA’s review and approval. Once a final application is prepared, FDA regulations provide that it has 180 days from the submission of the application to review a PMA and make a determination, but the review time can be longer. In addition, before approving or denying a PMA an appropriate FDA advisory committee may review the PMA at a public meeting and provide the FDA with its recommendations. After an applicant is notified of its approval or denial by the FDA a notice is published on the Internet, which provides interested parties with an opportunity to petition the FDA for reconsideration within 30 days of the decisions.

 

When FDA approval of a clinical diagnostic device requires human clinical trials, and if the device presents a “significant risk” (as defined by the FDA) to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to FDA is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is required. We do not believe that we are required to obtain an IDE exemption since our products are not implanted in the body they would not be considered “significant risk devices.”

After we have completed the 510(k) process, but before we begin manufacturing and distributing our products, we will be required to register with the FDA, in a process known as establishment registration. This registration provides the FDA with the location of the facility manufacturing the medical device, but this registration does not establish approval of the device by the FDA. In addition, most medical device establishments registered with the FDA must also identify the device that they have in commercial distribution. This process is known as medical device listing and is a means for the FDA to keep apprised of the devices that are being manufactured and sold.

 

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. In addition to potential product specific post-approval requirements, all devices are subject to:

 

·

The Quality System Regulation, which requires manufacturers to follow comprehensive design, testing, control, documentation and other quality assurance procedures during the manufacturing process,

 

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Labeling regulations,

 

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The Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur.

 

We believe that the initial FDA approval of our premarketing notification could be obtained in approximately three months, once we have submitted our 510(k) to the FDA for review; however, obtaining approval can take significantly longer if the FDA requests additional information with respect to the filing submitted. Failure to comply with the applicable United States medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications, suspension of export certificates and criminal prosecution.

 

With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote biologics, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has broad enforcement authority, and failure to abide by applicable FDA regulations can result in penalties including the issuance of a warning letter directing the entity to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.

 

We and our contract medical product manufacturers are subject to periodic inspection by the FDA and other authorities where applicable, and are required to comply with the applicable FDA current Good Manufacturing Practice regulations. Good Manufacturing Practice regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation, and provide for manufacturing facilities to be inspected by the FDA.   

 

In addition, we will be subject to FDA regulations with respect to the import and export of any of our products. To the extent we may decide to utilize a foreign manufacturer, all foreign manufacturers must meet applicable United States medical device regulations in order to import devices. These requirements include registration of establishment, listing of devices, manufacturing in accordance with the quality system regulation and medical device reporting of adverse events. In addition, the foreign manufacturers must designate a United States agent. As with domestic manufacturers, foreign manufacturing sites are subject to FDA inspection. With respect to the exportation of our products, any medical device that is legally in the United States may be exported anywhere in the world without prior FDA notification or approval and the export restrictions only apply to unapproved devices, which have not been registered with the FDA. In addition, the United States exporter is required to comply with the laws of the importing country.

Furthermore, outside the United States, our ability to market our products is contingent upon obtaining International Standards Organization (ISO) certification, and in some cases receiving specific marketing authorization from the appropriate foreign regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. While we currently do not have any product registrations filed, in the future we intend to file an EU product registration, which would cover all member states. Foreign registration is an ongoing process as we register additional products and/or product modifications.

 

In addition, customers using diagnostic tests for clinical purposes in the United States are also regulated under the Clinical Laboratory Improvement Amendments of 1988, or CLIA. CLIA is intended to ensure the quality and reliability of all medical testing in laboratories in the United States by requiring that any healthcare facility in which testing is performed meets specified standards in the areas of personnel qualification, administration, participation in proficiency testing, patient test management, quality control, quality assurance, and inspections.

 

We are also subject to various state and local laws and regulations in the United States relating to laboratory practices and the protection of the environment. In each of these areas, as above, regulatory agencies have broad regulatory and enforcement powers, including the ability to levy fines and civil and criminal penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a material adverse effect upon us. In addition, in the course of our business, we handle, store and dispose of chemicals. The environmental laws and regulations applicable to our operations include provisions that regulate the discharge of materials in the environment. Usually these environmental laws and regulations impose “strict liability,” rendering a person liable without regard to negligence or fault on the part of, or conditions caused by, others. We have not been required to expend material amounts in connection with our efforts to comply with environmental requirements. Because the requirements imposed by these laws and regulations frequently change, we are unable to predict the cost of compliance with these requirements in the future, or the effect of these laws on our capital expenditures, results of operations or competitive positions.

 

Employees

 

As of March 31, 2015 we have 7 full-time and part-time employees and 6 full-time and part-time consultants. As we prepare to transition from product development to commercialization, we are currently in contract negotiations to hire additional employees. We have not experienced any work stoppages and we consider relations with our employees to be good.

 

ITEM 1A. RISK FACTORS

 

Risks Related to Our Financial Results

 

We May Never Commercialize Any Of Our Products Or Earn A Profit.

 

We have incurred losses since we were formed. We have incurred an accumulated deficit during development stage of $10,869,224 as of December 31, 2014. To date, we have experienced negative cash flow from development of our gene profiling medical treatment technology. We currently have no products ready for commercialization, have not generated any revenue from operations and expect to incur substantial net losses for the foreseeable future to further develop and commercialize our technology. We cannot predict the extent of these future net losses, or when we may attain profitability, if at all. If we are unable to generate significant revenue or attain profitability, we will not be able to sustain operations.

We Will Need To Raise Additional Capital To Commercialize Our Nano-BioChip Technology, and Our Failure To Obtain Funding When Needed May Force Us To Delay, Reduce or Eliminate Our Product Development Programs.

 

We expect that our existing capital resources will be sufficient to fund our operations for the next 12 months. To expand at an accelerated growth rate, we will be required to raise additional capital to complete the development and commercialization of our current product candidates. The development of our business will require substantial additional capital in the future to conduct research and development and commercialize our nano-biochip technology. We have historically relied upon private sales of our equity to fund our operations. We currently have no credit facility or committed sources of capital. If our capital resources are insufficient to meet future requirements, we will have to raise additional funds to continue the development and commercialization of our nano-biochip technology. When we seek additional capital, we may seek to sell additional equity or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms.

 

If We Fail To Maintain Effective Internal Controls Over Financial Reporting, The Price Of Our Common Stock May Be Adversely Affected.

 

Our internal controls over financial reporting may have weaknesses and conditions that will need to be addressed, the disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or operating results. In addition, management's assessment of our internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors.

 

Any actual or perceived weaknesses and conditions that need to be addressed in our internal controls over financial reporting or disclosure of management's assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

Risks Related To Our Business

 

The Commercial Success Of Our Products Will Depend On The Degree Of Market Acceptance Of These Products Among Physicians, Patients, Health Care Payors And The Medical Community.

 

The use of the nano-biochip gene expression kit has never been commercialized. Even if approved for sale by the appropriate regulatory authorities, physicians may not order diagnostic tests based on our nano-biochip gene technology, in which event we may be unable to generate significant revenue or become profitable. In addition, physicians and patients may not utilize the nano-biochip gene expression kit unless third-party payors, such as managed care organizations, Medicare and Medicaid, pay a substantial portion of the test’s price. There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology. Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that tests using our technologies are:

 

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Not experimental or investigational,

 

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Medically necessary,

 

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Appropriate for specific patient,

 

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Cost-effective, and

 

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Supported by peer-reviewed publications.

 

Since each payor makes its own decision as to whether to establish a policy to reimburse for a test, seeking these approvals is a time-consuming and costly process. We cannot be certain that coverage for the nano-biochip gene expression kit will be provided by any third-party payors.

Our Financial Results Will Initially Depend On Sales Of One Product, The Nano-BioChip Gene Expression Kit And We Will Need To Generate Sufficient Revenues From This Product To Run Our Business.

 

For the near future, we expect to derive substantially all of our revenues from sales of one product, the nano-biochip gene expression kit. We are in the early stages of research and development for other products that we may offer as well as for enhancements to the current product. If we are unable to generate sales of the nano-biochip gene expression kit or to successfully develop and commercialize other products or product enhancements, our revenues and our ability to achieve profitability would be impaired, and the market price of our common stock could decline.

 

At Present, Our Success Depends Solely On the Successful Commercialization of Our Nano-Biochip Technology and BioWindows Artificial Intelligence System for Our Proposed Use As A Cancer Diagnostic Analysis Tool.

 

The successful commercialization of our nano-biochip based diagnostic kits is crucial for our success. Our proposed products and their potential applications are in an early stage of clinical and manufacturing/process development and face a variety of risks and uncertainties. Principally, these risks include the following:

 

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Future clinical study results may show that the nano-biochip diagnostic kits is not an effective means of diagnosing the appropriate treatment for patients with cancer;

 

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Future clinical study results may be inconsistent with our previous preliminary testing results and data from our earlier studies may be inconsistent with clinical data;

 

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Even if we have determined that our nano-biochip diagnostic kits are safe and effective for their intended purposes we cannot predict with any certainty the amount of time necessary to obtain FDA approvals and whether any such approvals will ultimately be granted;

 

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Even if our nano-biochip diagnostic kits are shown to be safe and effective for their intended purposes, we may face significant or unforeseen difficulties in obtaining or manufacturing sufficient quantities or at reasonable prices;

 

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Our ability to complete the development and commercialization of nano-biochip diagnostic kits for our intended use is significantly dependent upon our ability to obtain and maintain experienced and committed partners to assist us with obtaining clinical and regulatory approvals for, and the manufacturing, marketing and distribution of, the nano-biochip diagnostic kits on a worldwide basis;

 

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Even if nano-biochip diagnostic kits products are successfully developed, commercially produced and receive all necessary regulatory approvals, there is no guarantee that there will be market acceptance of the products; and

 

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Our competitors may develop analytical methods which are superior or less costly than our own with the result that our products, even if they are successfully developed, manufactured and approved, may not generate significant revenues

 

If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our nano-biochip diagnostic kits products for some other reason, it would likely seriously harm our business.

If We Fail to Comply With FDA Requirements, Or Fail to Obtain Regulatory Approval, We May be Limited or Prohibited In Our Ability to Commercialize Our Products and May Be Subject to Stringent Penalties.

 

Although we may market our product as a CLIA test, similar to Genomic Health’s Oncotype Dx, it is our intent to obtain FDA pre-market clearance through the filing of a 501(k) for our products. Under the 510(k) pre-market clearance process the FDA generally has 90 days to review and make a decision on approving our 510(k); however, obtaining approval can take significantly longer if the FDA requests additional information with respect to the filing submitted. We cannot predict with any certainty the amount of time necessary to obtain such FDA approvals and whether any such approvals will ultimately be granted. Delays in obtaining FDA approvals of any proposed product and failure to receive such approvals would have an adverse effect on the product’s potential commercial success and on our business, prospects, financial condition, and results of operations.

 

In addition to the 510(k) pre-market clearance, we may be required to obtain pre-market approval (PMA) from the FDA. Although biochips similar to the one we intend to market have previously been exempt from obtaining pre-market approval from the FDA, since our products are designed to enable a treating physician to prescribe a personalized treatment regimen there is a possibility that the FDA may require our products to obtain pre-market approval. We will not know if pre-market approval will be required by the FDA until we make the appropriate filings. If the FDA does not view our products as exempt from pre-market approval, the use of our products could be delayed, halted or prevented, which would impair the commercialization of our products and could materially harm our business.

 

Moreover, in obtaining FDA marketing clearance and/or   pre-market approval we would also be subject to a number of FDA requirements, including restrictions regarding performance claims as well as the FDA’s Quality System Regulation, which establishes extensive regulations for quality assurance and control as well as manufacturing procedures. Failure to comply with these regulations could result in enforcement action against us, our partners, or our contract manufacturers. Adverse FDA action in any of these areas would have a significant impact on our operations.

 

We believe that the biochip we intend to market does not require pre-market approval (PMA) from the FDA. Although we do not believe that our products would require pre-market approval, we cannot assure you that the FDA will view our products, as exempt from pre-market approval requirements. If the FDA does not view our products as exempt from pre-market approval, the use of our products could be delayed, halted or prevented and enforcement action could be initiated which could involve criminal or civil penalties, any of which would impair the commercialization of our products and materially harm our business.

 

If We Are Unable To Develop Products To Keep Pace With Rapid Medical And Scientific Change, Our Operating Results And Competitive Position Would Be Harmed.  

 

In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. For advanced cancer, new chemotherapeutic strategies are being developed that may increase survival time and reduce toxic side effects. These advances require us continuously to develop new products and enhance existing products to keep pace with evolving standards of care. Our test could become obsolete unless we continually innovate and expand our product to demonstrate recurrence and treatment benefit in patients treated with new therapies. New treatment therapies typically have only a few years of clinical data associated with them, which limits our ability to perform clinical studies and correlate sets of genes to a new treatment’s effectiveness. If we are unable to demonstrate the applicability of our tests to new treatments, then sales of our tests could decline, which would harm our revenues.

 

Our Competitive Position Depends On Maintaining Intellectual Property Protection  

 

Our ability to compete and to achieve and maintain profitability depends on our ability to protect our proprietary discoveries and technologies. We currently rely on a combination of patents to protect our intellectual property rights. We also rely upon unpatented know-how and continuing technological innovation to develop and maintain our competitive position.

We currently have four U.S. patents granted. Any patents that have been, or may be, issued to us might be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that avoids our patents. We cannot be certain that the steps we have taken will prevent the misappropriation and use of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

 

If We Are Unable To Compete Successfully, We May Be Unable To Generate Revenues Or Achieve Profitability.  

 

Some of our competition comes from existing diagnostic methods used by pathologists and oncologists. These methods have been used for many years and are therefore difficult to change or supplement. We also face competition from companies, such as Genomic Health, that offers a 21-gene (including 5 control genes) signature “home-brew test” which is not FDA approved and Agendia B.V. that offers a 70-gene test for predicting breast cancer recurrence. Commercial laboratories with strong distribution networks for diagnostic tests, such as Genzyme Corporation, Laboratory Corporation of America Holdings and Quest Diagnostics Incorporated, may become competitors. Other potential competitors include companies that develop diagnostic tests such as Bayer Healthcare LLC, Celera Genomics, a business segment of Applera Corporation, Roche Diagnostics, a division of F. Hoffmann-La Roche Ltd, and Veridex LLC, a Johnson & Johnson company, other small companies and academic and research institutions. In addition, in December 2005, the federal government allocated a significant amount of funding to The Cancer Genome Atlas, a project aimed at developing a comprehensive catalog of the genetic mutations and other genomic changes that occur in cancers and maintaining the information in a free public database. As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifying targeted treatment options will be developed and these products may compete with ours.

 

Many of our present and potential competitors have widespread brand recognition and substantially greater financial and technical resources and development, production and marketing capabilities than we do. Others may develop lower-priced, less complex tests that could be viewed by physicians and payors as functionally equivalent to our test, which could force us to lower the list price of our test and impact our operating margins and our ability to achieve profitability. If we are unable to compete successfully against current or future competitors, we may be unable to increase market acceptance for and sales of our test, which could prevent us from increasing or sustaining our revenues or achieving or sustaining profitability and could cause the market price of our common stock to decline.

 

Our Research And Development Efforts Will Be Hindered If We Are Not Able To Contract With Third Parties For Access To Archival Tissue Samples.

 

Our clinical development relies on our ability to secure access to excised tumors or tumor biopsy samples, as well as information pertaining to their associated clinical outcomes. Others have demonstrated their ability to study archival samples and often compete with us for access. Additionally, the process of negotiating access to archived samples is lengthy since it typically involves numerous parties and approval levels to resolve complex issues such as usage rights, institutional review board approval, privacy rights, publication rights, intellectual property ownership and research parameters. If we are not able to negotiate access to archival tumor tissue samples with hospitals or potential collaborators, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future products will be limited or delayed.

Changes In Healthcare Policy Could Subject Us To Additional Regulatory Requirements That May Interrupt Commercialization Of The Nano-BioChip Gene Expression Kit And Increase Our Costs.

 

Healthcare policy has been a subject of extensive discussion in the executive and legislative branches of the federal and many state governments. We developed our commercialization strategy for our nano-biochip gene expression kit based on existing healthcare policies. Changes in healthcare policy, such as the creation of broad limits for diagnostic products in general or requirements that Medicare patients pay for portions of tests or services received, could substantially interrupt the sales of our nano-biochip gene expression kit, increase costs and divert management’s attention. For example, in 1989, the U.S. Congress passed federal self-referral prohibitions commonly known as the Stark Law, significantly restricting, regulating and changing laboratories’ relationships with physicians. We cannot predict what changes, if any, will be proposed or adopted or the effect that such proposals or adoption may have on our business, financial condition and results of operations.

 

If We Cannot Enter Into Clinical Collaborations, Our Product Development Could Be Delayed.  

 

In the past, we have entered into collaborations with medical researchers that were focused on the selection of genes for our breast cancer chip and on validation of our key technologies. In the future, we expect that we will need to rely on clinical collaborators to perform a substantial portion of our clinical trial functions. If any of our potential collaborators were to breach or terminate its agreement with us or otherwise fail to conduct its collaborative activities successfully and in a timely manner, the research, development or commercialization of the products contemplated by the collaboration could be delayed or terminated. If we were unable to enter into collaboration agreements with intended collaborators on acceptable terms, we would be required to seek alternative collaborations. We may not be able to negotiate collaborations on acceptable terms, if at all, and these collaborations may not be successful. Our success in the future depends in part on our ability to enter into agreements with leading cancer organizations. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure to enable collaborations with many companies at once, which can extend the time it takes to develop, negotiate and implement a collaboration. Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for a test such as ours, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any product that may result from a collaboration.

 

From time to time we expect to engage in discussions with potential clinical collaborators that may or may not lead to collaborations. However, we cannot guarantee that any discussions will result in clinical collaborations or that any clinical studies which may result will be enrolled or completed in a reasonable time frame or with successful outcomes. Once news of discussions regarding possible collaborations are known in the medical community, regardless of whether the news is accurate, failure to announce a collaborative agreement or the entity’s announcement of a collaboration with an entity other than us may result in adverse speculation about us, our product or our technology, resulting in harm to our reputation and our business.

 

We Are Dependent Upon Key Personnel And Consultants And The Loss Of Any Key Member Of This Team Could Have A Material Adverse Effect On Our Business.

 

Our success is heavily dependent on the continued active participation of our current executive officers listed under the “Management” section of this Annual Report. Loss of the services of one or more of these officers could have a material adverse effect upon our business, financial condition or results of operations. Further, our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees among companies in the life sciences industry is intense, and the loss of any of such persons, or an inability to attract, retain and motivate any additional highly skilled employees required for the expansion of our activities, could have a materially adverse effect on us. Our inability to attract and retain the necessary personnel and consultants and advisors could have a material adverse effect on our business, financial condition or results of operations. We have depended upon our CEO, Simon Chin, for our funding and continue to rely upon him to support us.

We Are Controlled By Current Officers, Directors And Principal Stockholders

 

Our directors, executive officers and principal stockholders and their affiliates beneficially own 65% of the outstanding shares of our common stock. So long as our directors, executive officers and principal stockholders and their affiliates control a majority of our fully diluted equity, they will continue to have the ability to elect our directors and determine the outcome of votes by our stockholders on corporate matters, including mergers, sales of all or substantially all of our assets, charter amendments and other matters requiring stockholder approval.   This controlling interest may have a negative impact on the market price of our common stock by discouraging third-party investors.

 

Provisions In Our Charter Documents Could Discourage A Takeover That Stockholders May Consider Favorable.

 

Provisions of our Articles of Incorporation could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For example, stockholder meetings may be called only by our board of directors, the chairman of the board and the president and advance notice is required prior to stockholder proposals. Furthermore, we have authorized preferred stock that is undesignated, making it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company.

 

Risks Related To Our Common Stock

 

There Is Not Now, And There May Not Ever Be An Active Market For Shares Of Our Common Stock.

 

In general, there has been very little trading activity in shares of our common stock. The small trading volume will likely make it difficult for our stockholders to sell their shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.

 

Our Common Stock Is Subject To The "Penny Stock" Rules Of The SEC.

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 

·

That a broker or dealer approve a person's account for transactions in penny stocks; and

 

·

The broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

 

·

Obtain financial information and investment experience objectives of the person; and

 

·

Make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 

·

Sets forth the basis on which the broker or dealer made the suitability determination; and

 

·

That the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES.

 

We currently have three facilities in California. Our headquarters is in Santa Clara and our laboratories are in San Leandro and Davis.

 

We lease our main office, which is located at 5201 Great America Parkway, Suite 320, Santa Clara, California 95054. The lease has a term of 12 months, which began on January 1, 2015 and expires on December 31, 2015. We currently pay rent and related costs of $300 per month.

 

We also lease our laboratory, which is located at 1933 Davis Street, Suite 280, San Leandro, California 95054. The lease has a term of 12 months, which began on January 1, 2015 and expires on December 31, 2015. We currently pay rent and related costs of $1,800 per month.

 

We also lease a laboratory and office space, which is located at 1949 5^th Street, Davis, California 95618. The lease has a term of 12 months, which began on July 1, 2014 and expires on June 30, 2015. The Company currently pays rent and related costs of $1,650 per month.

 

We are not dependent on a specific location for the operation of our business.

 

ITEM 3. LEGAL PROCEEDINGS.

 

On August 20, 2012, the Company filed a motion to allow late filing of a $100 million malpractice claim against Heller Ehrman LLP, discovered after claims bar date for not forwarding United State Patent and Trademark Office correspondence to the Company resulting in the abandonment of a critical patent, in the United States Bankruptcy Court, Northern District of California, San Francisco Division. On November 15, 2012, the Bankruptcy Court disallowed the claim. On December 5, 2012, the Company filed an appeal in the United District Court, Northern District of California, San Francisco Division seeking to have its $100 million malpractice claim against Heller Ehrman LLP reinstated. We presented case references and requested for our case to be reviewed objectively as a new case.  The Appeal Court Judge affirmed the bankruptcy court decision on August 12, 2013. Iris has filed an appeal with the US Ninth Circuit Court. The final brief was filed on February 4, 2014. We expect a court date within the next few months.

 

From time to time, the Company is involved in various litigation matters in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION

 

Our common stock was initially quoted on the OTC Bulletin Board on August 5, 2008 under the symbol “IRSB”. The following table sets forth the quarterly high and low bid information for our common stock for the two year period ended December 31, 2014.

 

 

		High Bid				Low Bid
Year Ended December 31, 2014
First Quarter		$	0.27			$	0.25
Second Quarter		$	4.50			$	0.27
Third Quarter		$	2.30			$	1.70
Fourth Quarter		$	2.25			$	1.25

 

  

		High Bid				Low Bid
Year Ended December 31, 2013
First Quarter		$	0.40			$	0.33
Second Quarter		$	0.45			$	0.38
Third Quarter		$	0.45			$	0.18
Fourth Quarter		$	0.26			$	0.18

 

As of March 31, 2015, we had 15,306,436 shares of common stock issued and outstanding and approximately 199 stockholders of record of our common stock.

 

Dividend Policy

 

Our payment of dividends, if any, in the future rests within the discretion of the Board of Directors and will depend, among other things, upon our earnings, capital requirements and financial condition, as well as other relevant factors. We have not paid any cash dividends since our inception and do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends. However, if we enter into an agreement for debt financing in the future we may be restricted from declaring dividends.

 

Equity Compensation Plan Information

 

  The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance as of the fiscal year ended December 31, 2014.

EQUITY COMPENSATION PLAN INFORMATION

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
		(a)			(b)			(c)
Equity compensation plans approved by security holders			2,244,571		$	0.90			975,514
Equity compensation plans not approved by security holders			-0-			-0-			-0-
Total			2,244,571		$	0.90			975,514

 

RECENT SALES OF UNREGISTERED SECURITIES

 

During the year ended December 31, 2014 the Company sold an aggregate of 903,230 shares of common stock for net proceeds of $886,584.

 

During the year ended December 31, 2014 the Company issued an aggregate of 237,500 shares of common stock for services in the amount of $246,928.

  

ITEM 6. SELECTED FINANCIAL DATA

 

 N/A

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

 

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Overview

 

Since inception on February 16, 1999 through December 31, 2014, we have sustained cumulative net losses of $10,869,224. Our losses have resulted primarily from research and development expenses, patent costs and legal and accounting expenses. As of December 31, 2014, we have convertible long-term debt of $26,000. From inception through December 31, 2014, we have not generated any revenue from operations. We expect to incur additional losses to perform further research and development activities. We have sufficient cash to operate for one year at the current burn rate with our CEO’s agreement to fund our operations, if needed. In order to accelerate our product introduction and to grow dynamically, we will need to raise additional funds. We do not currently have any commercial products. With additional funding, we expect to launch our nano-biochip products in less than a year.

 

In Q1 2012, we were granted another key US patent, which fortified and broadened our intellectual property position just in time to reap the benefit of the convergence of the recent technological breakthroughs in the life sciences industry and the affordability of highly intensive computational systems along with high storage capacity. In 2014, an additional key patent was granted to us. With six US patents and a portfolio of international patents already granted, we expect to play a key role this year in helping to fulfill the promise of personalized medicine in a meaningful way. We expect to begin an institutional review board (IRB) approved breast cancer clinical study very soon.

 

As mentioned earlier, we are also working on incorporating affordable, next-generation human genome sequencing, the genomes of microbes in living organisms, as well as protein biomarker profiling to make our technology platform even more powerful. It took more than $3 billion and thirteen years to complete the sequencing of the human genome. In 2015, it would be possible to sequence a person’s genome for less than $1,000. Choosing the right combination of surgery, radiation, chemotherapies, hormonal therapies, monoclonal antibody treatment, anti-angiogenic therapy, or other medical treatment requires a solid molecular signature diagnosis along with the analysis of life style dynamics. Where life critical medical decision-making and patient care are concerned, physicians and patients are beginning to realize that personalizing healthcare is a choice and the future of medicine.

 

We believe we are at the right place at the right time with the right intellectual property to make a significant difference to improve healthcare and achieve attractive return on investment for our investors. 2015 will be a defining year for us and for our industry.

 

During 2015, we expect to spend about $50,000 for public relations in conjunction with our planned product launch, which would require additional fund raising. During the severe recession, we spend investor dollars efficiently on designing and building an advanced Nano-Biochip making system, streamlining the automated patient sample processing protocols and product tracking system, and interacting with physicians and patients to demonstrate the usefulness of Iris’s BioWindows medical informatics system. We have an extensive pipeline of disease chips including a BreastCancerChipä, ColonCancerChipä, NeuroChipä, CardioChipä, ComprehensiveCancerChipä, and MetabolicChipä.

 

Under the US Qualifying Therapeutic Discovery Project (QTDP) Program, the maximum amount of a grant application was $5 million, but the maximum amount that the government actually gave for any grant was $245,000. In 2011, we received the bulk of the $245,000 awarded to us in recognition of Iris's patented Nano-Biochip™ and BioWindows™ Medical Informatics System for optimizing personalized and targeted medical treatment.

The selection criteria includes a company's ability to diagnose diseases or conditions; to determine molecular factors related to diseases or conditions by developing molecular diagnostic guided therapeutic decisions; or to develop a product, process, or technology to further the delivery or administration of therapeutics. The award was given to projects that show reasonable potential to result in new therapies to treat areas of unmet medical needs or to prevent, detect or treat chronic or acute diseases and conditions; to reduce long-term health care costs in the U.S.; or to significantly advance the goal of curing cancer within the next 30 years.

There are some risks with respect to clinical testing, regulatory approval and review cycles and uncertainty of the costs. Net positive cash inflows from any products developed may take several years to achieve. Management plans to continue financing operations with a combination of equity issuances and debt arrangements. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our research or development programs, or cease operations.

 

Management plans to continue financing operations with a combination of equity issuances and debt arrangements. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our research or development programs, or cease operations.

 

History

 

We were incorporated in the State of California on February 16, 1999 and planned to sell theranostic (choosing therapy based upon personalized diagnostic results) products and services in the medical field. In an effort to develop that business, we set up operations in two locations in California - Headquarters in Santa Clara and Laboratory in San Leandro.

 

Beginning on March 11, 1999, Simon Chin, MBA, our founder, President and CEO, Secretary and principal shareholder, entered into Common Stock Purchase Agreements with various companies, investment groups and private individuals. On March 1, 2003, Daniel Farnum, M.D., an owner of Humboldt Orthopedics and a key shareholder, and Grace Osborne, MBA, President of GCO Recruiting, joined Mr. Chin on our board of directors. On April 9, 2003, the board approved a 2 for 1 stock split, changed the authorized shares of common stock from 10 million to 20 million, and the authorized preferred stock remained at 5 million shares.

 

As of December 31, 2014 we had sold/issued 5,009,227 shares of common stock and 155,229 five-year warrants, of which 35,029 have expired to accredited investors and consultants. We received an aggregate $4,407,509 on the sale of common stock and $107,700 on exercise of 823,125 options and warrants. We issued an aggregate 7,200,000 shares of common stock on transfer of technology worth $1,800,000 and 1,939,229 shares of common stock for services worth $1,604,218. We issued an aggregate of 222,855 shares of common stock on settlement of notes payable and accrued interest worth $235,690.

 

Plan of Operation

 

We are a life science company focused on the development and commercialization of a nano-biochip gene expression kit and an artificial intelligence system to assist in establishing the foundation for personalized medicine, which will initially be utilized in the treatment of breast cancer. Although we may market our products as CLIA laboratory tests, we are designing them to be approved by the FDA, which can then be used in any certified laboratory. Starting at the point of a breast biopsy diagnosis of cancer, the nano-biochip and informatics program are designed to enable a treating physician to quickly prescribe a personalized treatment regimen that will have the greatest probability of success for each patient's particular type of cancer. Our product platform is expected to lead to more effective diagnosis and treatment not only for patients with breast cancer, but also for those with neurological disorders, heart disease, diabetes and other gene-related metabolic problems.

 

Product Research and Development

 

We anticipate spending, in order to accelerate our growth, which is contingent upon raising additional funds, at least $2,000,000 for product research and development activities related to our anticipated product launches during the next twelve months. 

Acquisition of Plant and Equipment and Other Assets

 

We do not anticipate the sale of any material property, plant or equipment during the next 12 months. We do anticipate the acquisition of some material property, plant or equipment during the next 12 months, to accelerate our growth to fulfill the unmet needs of a large, growing market.

 

Number of Employees

 

From our inception through December 31, 2014, we have principally relied on the services of outside consultants and part-time employees for services. We currently have 7 full-time and part-time employees and 6 full-time and part-time consultants. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. We anticipate that it may become desirable to add additional full and or part time employees to discharge certain critical functions during the next 12 months. This projected increase in personnel is dependent upon our ability to generate revenues and obtain sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. As we continue to expand, we will incur additional cost for personnel.

 

Results of Operations

 

To date, we have not generated revenues. The risks specifically discussed are not the only factors that could affect future performance and results. In addition to the discussion in this prospectus concerning us, our business and our operations contain forward-looking statements. Such forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. We do not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by our Management over time means that actual events or results are occurring as estimated in the forward-looking statements herein.

 

We have yet to earn revenues from operations. We may experience fluctuations in operating results in future periods due to a variety of factors, including our ability to obtain additional financing in a timely manner and on terms favorable to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and strategic alliances, and general economic conditions specific to our industry.

 

As a result of limited capital resources and no revenues from operations since inception, we have relied on the issuance of equity securities to employees and non-employees in exchange for services. Our management enters into equity compensation agreements with non-employees if it is in our best interest under terms and conditions consistent with the requirements of Accounting Standards Codification Subtopic 505-50 Equity Based Payments to Non-Employees (ASC 505-50). In order to conserve our limited operating capital resources, we anticipate continuing to compensate non-employees with equity for services during the next twelve months. This policy may have a material effect on our results of operations during the next twelve months.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Revenues

 

We have generated no operating revenues from operations since our inception. We believe we will begin earning revenues from operations in 2015 from actual operations as we transition  to an active growth stage company.

Costs and Expenses

 

From our inception through December 31, 2014, we have not generated any revenues and have incurred cumulative losses of $10,869,224. In addition, a significant part of the overall remaining costs are associated principally with equity-based compensation to employees and consultants, research and development costs and professional services rendered.

 

Selling, general and administrative (“SG&A”) expenses increased by $570,905 from $416,973 in 2013 to $987,878 in 2014. SG&A expenses consisted of accounting, legal, consulting, public relations, startup and organizational expenses. SG&A expenses also included non-cash charges from the issuance of stock, warrants and stock options in the amounts of $453,402 for 2014 and $171,438 for 2013, a year-to-year increase of $281,964. The remaining SG&A expenses requiring cash amounted to $534,476 and $245,535 for 2014 and 2013, respectively. The increase in our SG&A is primarily attributed to increased stock based professional fees and staffing costs incurred in 2014. We used stock in lieu of cash to conserve our cash resources. Research and development costs increased by $140,243 from $59,419 in 2013 to $199,662 in 2014. The research & development costs were mainly compensated in stock based compensation as we prepare our product for market.

As a result of the above-mentioned expenses, net loss increased by $706,483 from $485,535 in 2013 to $1,192,018 in 2014.

Liquidity and Capital Resources

 

As of December 31, 2014, we had working capital of $80,715 as compared to working capital deficit of $172,256 as of December 31, 2013. Our cash position was $322,929 as of December 31, 2014 compared to $18,988 as of December 31, 2013. For the year ended December 31, 2014, we have incurred an operating cash flow deficit of $640,398, which has been principally financed through the private placement of our common stock and the exercise of stock options and warrants.

 

We expect to continue to incur additional losses and negative cash flows from operating activities for the next two years.

 

For 2014 we completed the following financing transactions:

 

	a)	On January 31, 2014, we entered into an agreement to issue 20,000 shares of common stock to an investor for net proceeds of $16,000.
	b)	On February 26, 2014, we entered into an agreement to issue 725,730 shares of common stock to an investor for net proceeds of $580,584.
	c)	On March 31, 2014, we entered into an agreement to issue 5,000 shares of common stock to an investor for net proceeds of $10,000.
	d)	On August 18, 2014, we entered into an agreement to issue 100,000 shares of common stock to an investor for net proceeds of $175,000.
	e)	On September 24, 2014, we entered into an agreement to issue 17,500 shares of common stock to an investor for net proceeds of $35,000.
	f)	On October 1, 2014, we entered into an agreement to issue 10,000 shares of common stock to an investor for net proceeds of $20,000.
	g)	On October 21, 2014, we entered into an agreement to issue 25,000 shares of common stock to an investor for net proceeds of $50,000.

 

Our available working capital and capital requirements will depend upon numerous factors, including progress of our research and development programs, our progress in and the cost of pre-clinical and clinical testing, the timing and cost of obtaining regulatory approvals, the cost of filing and prosecuting patent claims and other intellectual property rights, completing technological and market developments, current and future licensing relationships, the status of our competitors, and our ability to establish collaborative arrangements with other organizations.

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing, collaborative and licensing agreements, strategic alliances, and our ability to realize the full potential of our technology in development. Such additional funds may not become available on acceptable terms, if at all, and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. Through March 31, 2015, virtually all of our financing has been through private placements of common stock, convertible notes and warrants. We intend to continue to fund operations from cash on-hand and through the similar sources of capital previously described for the foreseeable future. We believe that even though we will continue to incur net losses and have negative cash flows from operating activities for the remainder of the year. Based on the resources available to us on March 31, 2015, we can sustain the present burn rate for the next twelve months.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Inflation

 

It is our opinion that inflation has not had a material effect on our operations.

 

Critical Accounting Policies

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The following accounting policies are critical in fully understanding and evaluating our reported financial results:

 

Accounting for Stock-Based Compensation

 

We account for our stock options and warrants using the fair value method promulgated by Accounting Standards Codification Subtopic 718-10 Compensation (ASC 718-10), and 505-50 Equity Based Payments to Non-Employees (ASC 505-50) which address the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Therefore, our results include non-cash compensation expense as a result of the issuance of stock options and warrants and we expect to record additional non-cash compensation expense in the future.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

N/A

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.  

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

ITEM 9A. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose required information in a timely manner and in accordance with the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated by the SEC.  The executive who serves as our President and Chief Financial Officer has participated in such evaluation.  Management concluded, based on such review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were not effective as of the end of the period covered by this Annual Report on Form 10-K.  The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."

 

Limitations on the Effectiveness of Controls

 

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.  Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our President and Chief Financial Officer has concluded that such controls and procedures are not effective at the "reasonable assurance" level.  The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."

 

Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  Management assessed the effectiveness of the internal controls over financial reporting as of December 31, 2014, using the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based upon this assessment, our management concluded that, as of December 31, 2013, the internal controls over financial reporting were not effective. The reportable conditions and material weakness relate to a limited segregation of duties at the Company.  Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information.  Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties that allowed for the creation, review, approval and processing of financial data without independent review and authorization for preparation of schedules and resulting financial statements and related disclosures. We did not maintain a sufficient depth of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of Generally Accepted Accounting Principles commensurate with financial reporting requirements.  Accordingly, we place undue reliance on the finance team at corporate headquarters, specifically the executive who is our President and Chief Financial Officer along with outside accounting consulting.  Accordingly, management has determined that this control deficiency constitutes a material weakness.  This material weakness could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.  In addition, due to limited staffing, the Company is not always able to detect minor errors or omissions in reporting.

 

Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements.  Additional staff will enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting.  However, the potential addition of new staff is contingent on obtaining additional financing, and there is no assurance that the Company will be able to do so.

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.

 

Changes in Internal Control Over Financial Reporting

 

As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded there were no such changes during the quarter ended December 31, 2014.

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  

 

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

 

The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each as of December 31, 2014. There are no family relationships among any of our Directors and Executive Officers except for Simon Chin and his sister, Grace Osborne.

 

 

Name		Age				Position
Simon S. M. Chin, MBA			55			President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board
Ronald Mark Gemberling, M.D.			67			Chief Medical Officer
Paul Yaswen, Ph.D.			56			Chief Scientific Officer
James LeBlanc, MBA			68			Vice President, Operations
Ralph M. Sinibaldi, Ph.D.			67			Vice President, Product Development
Grace Osborne, MBA			47			Vice President, Business Development & Human Resources and Director
Douglas Hendren, M.D., MBA			64			Director

 

Executive Biographies

 

Simon Chin, President, Chief Executive Officer, Chief Financial Officer and Director - Mr. Chin, the Founder, has served as our President, Chief Executive Office and Chairman of the Board since February 1999 and as our Chief Financial Officer since March 2007. Prior to our founding, Mr. Chin was the Chief Executive Officer and Founder of DNA Laboratories where he developed key DNA chip technologies, and he also held management positions at leading companies such as Du Pont. He currently serves on the Industrial Advisory Board of the University of Pacific’s Thomas J. Long School of Pharmacy and Health Sciences.

 

Mr. Chin obtained an MBA from Santa Clara University in 1993 and a B.S. in Chemical Engineering from the University of California, Berkeley in 1982. Mr. Chin’s technological and management expertise qualifies him to serve as a director of our company.

Ronald Mark Gemberling, Chief Medical Officer - Dr. Gemberling has been our Chief Medical Officer since April 2004. In addition, Dr. Gemberling has had a medical practice in California for over thirty years. Dr. Gemberling obtained a B.A. in bacteriology at the University of California, Los Angeles in 1969 and completed his medical studies there in 1973. Dr. Gemberling received his general surgery training at the UCLA-VA Affiliated Hospitals where he finished as Chief Resident in 1978. Dr. Gemberling then spent a year as a clinical research Burn Fellow at the LA County-USC Medical Center Burn Unit before entering his training in plastic and reconstructive surgery at the University of Michigan and Chief Residency at the University of Louisville.

 

Paul Yaswen, Chief Scientific Officer – Dr. Yaswen has been our Chief Scientific Officer since October 2013. He has over two decades of experience performing breast cancer research at the Lawrence Berkeley National Laboratory. Dr. Yaswen has over 70 peer-reviewed publications, including many in high-impact journals. He also has a history of productive and rewarding interactions with breast cancer advocates, both as an instructor for the National Breast Cancer Coalition Project Lead, and as a participant in an NCI/NIEHS sponsored Breast Cancer and the Environment Research Center. Dr. Yaswen earned his Ph.D. in Cell and Molecular Biology from Brown University and his B.S. in Biology from Tuft University. He was also a NRSA Fellow in the Dept. of Cell & Molecular Biology at the Dana-Farber Cancer Institute, which is a major affiliate of Harvard Medical School.

 

James LeBlanc, Vice President, Operations – Mr. LeBlanc has been serving as our Operations Consultant since March 2006 and became our Vice President, Operations on May 8, 2009. He has more than thirty years of experience in U.S. and international management in quality assurance, manufacturing, materials, supply chain management, global distribution, regulatory compliance, product integrity and process engineering. . Prior to Iris BioTechnologies, Mr. LeBlanc has held various senior management positions in companies such as Packeteer, Inc. and Northrop Grumman Missions Systems. He has served on core management teams that implemented Six Sigma, ISO 9000 and CMMI level 3 initiatives. Mr. LeBlanc has an MBA from Santa Clara University (1977) and a B.S. in Industrial Technology from San Jose State University (1973).

 

Ralph M. Sinibaldi, Vice President, Product Development - Dr. Sinibaldi has been our Vice President of Product Development since July 2003. He was previously the Vice President, Product Development, at Genospectra, a microarray and reagent company. He was also a founding Vice President of AgraQuest; Vice President, Scientific Affairs, at Operon Technologies, Inc., the leading DNA manufacturing company, which was acquired by Qiagen, where he was responsible for the Microarray Business Unit and the science involved. Dr. Sinibaldi obtained a Ph.D. in experimental biology from the University of Illinois in 1978 and a M.S. (1974) and B.S. in biological sciences in 1970.

 

Grace Osborne, Vice President, Business Development & Human Resources and Director - Ms. Osborne has been our Vice President of Business Development & Human Resources since January 2005 and a member of our Board of Directors since March 2003. From December 1998 to May 2005, Ms. Osborne was the Founder and President of GCO Recruiters, which served fortune 100 companies and other technology companies. Ms. Osborne obtained a B.A. in human development from the University of California, Davis in 1989 and a M.B.A. from the California State University at Hayward in 1993. Ms. Osborne’s management expertise qualifies her to serve as a director of our company.

 

Douglas Hendren, Medical and Business Strategy Advisor - Dr. Hendren has been our Medical and Business Strategy Advisor since October 2013. Dr. Hendren was a partner at Humboldt Orthopedics 1989-1996. He was a founding partner of Hess Orthopaedics 1996-2010, managing partner 2001-2010 and designer and first director of the Hess surgical facility 2008-2010. Dr. Hendren obtained a B.A. in Social Relations from Harvard University in 1973, an M.D. from Case Western Reserve University in 1982, completed the Harvard Orthopaedic Program in 1988, and an M.B.A. in Sustainable Business from Bainbridge Graduate Institute in 2011.Dr. Hendren’s medical industry and management expertise qualifies him to serve as a director of our company.

Director or Officer Involvement in Certain Legal Proceedings

 

Our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.

 

Board Leadership Structure and Role in Risk Oversight

 

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders to combine these roles. Simon Chin has served as our Chairman since February 1999. Due to our small size and early stage, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.

 

Our Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.

 

Based on a review of the copies of such forms received, we believe that during 2014, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with.

 

Board of Directors

 

Our Directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.  

 

A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board individually or collectively consent in writing to the action.

 

Directors may receive compensation for their services and reimbursement for their expenses as shall be determined from time to time by resolution of the Board. Each of our directors currently receives no cash compensation for their service on the Board of Directors, but do receive a small amount of stock and stock options.

 

Audit Committee

 

We do not have a separately designated standing audit committee.

 

Code of Ethics

 

We have adopted a formal Code of Business Conduct and Ethics applicable to all Board members, executive officers and employees. Our Code of Business Conduct and Ethics has been filed as Exhibit 14 to this Annual Report and will be provided free of charge upon request to: Secretary, Iris Biotechnologies Inc., 5201 Great America Parkway, Suite 320, Santa Clara, California 95054.

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth all compensation earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year, collectively referred to as the named executive officers, for our last two completed fiscal years.

 

Summary Compensation Table

 

Name & Principal Position		Year		Option Awards  ($)		Total ($)
Simon Chin,		2014		0		250,000
President, CEO and CFO		2013		0		0

 

 

Employment Agreements with Executive Officers

 

We have not entered into any employment agreements with our executive officers.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

Director Compensation

 

We did not grant of options to purchase our common stock to our non-employee directors in 2014.

 

The following table sets forth summary information concerning total compensation paid to our non-employee directors in 2014 for services to our company.

 

Name		Stock Awards (1)			Total
Daniel Farnum, MD		$	73,351		$	73,351

---

(1)   represent aggregate grant date fair value for fiscal year 2014 of awards granted in 2014 under ASC Topic 718 as discussed in Note 6 Accounting for Share-Based Payments of the Notes to our Financial Statements included elsewhere in this report.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information, as of March 31, 2015 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

 

Name of Beneficial Owner (1)		Number of Shares Beneficially Owned (2)			Percentage of Common Stock Beneficially Owned (2)
Simon Chin		7,172,047			46.9
Ronald Mark Gemberling (3)		227,696			1.5
Paul Yaswen (4)		35,417			0.2
James LeBlanc (5)		235,539			1.5
Ralph M. Sinibaldi (6)		195,000			1.3
Grace Osborne (7)		683,415			4.5
Douglas Hendren (8)		184,565			1.2
All Executive Officers and Directors as a Group (7 persons) (9)		8,733,679			57.1

 

 

Name of Beneficial Owner (More than 5% owner, not an officer or director)		Number of Shares Beneficially Owned			Percentage of Common Stock Beneficially Owned (2)
John Hillis		945,830			6.2
Daniel Farnum, MD		1,241,279			8.1

 

 

(1)	Except as otherwise indicated, the address of each beneficial owner is c/o Iris BioTechnologies Inc., 5201 Great America Parkway, Suite 320, Santa Clara, California 95054.
(2)	Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the shares shown. Except where indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them.  Applicable percentage ownership as of March 31, 2015 is based upon 15,306,436 shares of common stock outstanding.
(3)	Consists of options to purchase 227,696 shares of common stock, which are currently vested.
(4)	Consists of options to purchase 35,417 shares of common stock, which are currently vested, but does not include options to purchase an aggregate of 64.583 shares of common stock.
(5)	Includes options to purchase 110,000 shares of common stock, which are currently vested.
(6)	Consists of options to purchase 195,000 shares of common stock, which are currently vested.
(7)	Includes 36,665 shares owned by her spouse and options to purchase 236,125 shares of common stock, which are currently vested, but does not include options to purchase an aggregate of 93,750 shares of common stock.
(8)	Includes 75,190 shares owned by his spouse, and includes options to purchase 6,250 shares of common stock, which are currently vested, but does not include options to purchase an aggregate of 93,750 shares of common stock.
(9)	Includes options to purchase 932,363 shares of common stock.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

On an ongoing basis Simon Chin, our President, Chief Executive Officer, Chief Financial Officer and Chairman of our Board of Directors, provided us with interim financing, which we have fully repaid.

 

We believe that the terms of all of the above transactions were commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party on an arm’s length basis. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our company in connection with related party transactions.

 

Board Determination of Independence

 

Our board of directors has determined that Douglas Hendren is “independent” as that term is defined by NASDAQ, but that neither Simon Chin nor Grace Osborne can be deemed “independent” in light of their employment as our executive officers.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by our independent auditor for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2014 and 2013 were $27,500 and $27,500, respectively.

 

Audit-Related Fees

 

There were no other independent auditor related fees for the fiscal years ended December 31, 2014 and 2013, respectively.

 

All Other Fees

 

There were no other fees billed for products and services provided by our independent auditor for the fiscal years ended December 31, 2014 and 2013, respectively.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

We currently do not have a designated Audit Committee, and accordingly, our Board of Directors’ policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.

 

ITEM 15. EXHIBITS.

 

Exhibit Number	Description of Exhibit
3.1	Registrant’s Articles of Incorporation (incorporated by reference to the exhibits to Registrant’s Form SB-2 filed on April 12, 2007).
3.2	Registrant’s Certificate of Amendment of Articles of Incorporation (incorporated by reference to the exhibits to Registrant’s Form SB-2 filed on April 12, 2007).
3.3	Registrant’s Amended and Restated By-Laws (incorporated by reference to the exhibits to Registrant’s Form SB-2 filed on June 20, 2007).
10.1	1999 Stock Option Plan (incorporated by reference to the exhibits to Registrant’s Form SB-2 filed on April 12, 2007).
10.2	2009 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-K filed on March 31, 2009).
14	Code of Ethics (incorporated by reference to the exhibits to the Registrant’s Form 10-KSB filed on March 31, 2008)
21	List of Subsidiaries
31.1	Certifications required by Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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.

 

	IRIS BIOTECHNOLOGIES INC.
Date: March 31, 2015	By:	/s/ Simon Chin
		Simon Chin
		President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Accounting Officer and Principal Financial 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/ Simon Chin		President, Chief Executive Officer, Chief Financial Officer and Director (Principal		March 31, 2015
Simon Chin		Executive Officer, Principal Accounting Officer and Principal Financial Officer)
/s/ Grace Osborne		Vice President, Business Development and		March 31, 2015
Grace Osborne		Director
/s/ Douglas Hendren		Director		March 31, 2015
Douglas Hendren, M.D.

 

 

 

42 

 

 

 

IRIS BIOTECHNOLOGIES, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
Report of Independent Registered Public Accounting Firms		F-2
Consolidated Balance Sheets as of December 31, 2014 and 2013		F-3
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013		F-4
Consolidated Statement of Stockholders’ Equity (Deficit) for the two years ended  December 31, 2014		F-5 - F-9
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013		F-10
Notes Consolidated to Financial Statements		F-11 - F-21

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Iris Biotechnologies, Inc.

5201 Great America Parkway

Santa Clara, California 95054

 

We have audited the accompanying balance sheets of Iris BioTechnologies, Inc. (the Company) as of December 31, 2014 and 2013, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2014. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Iris BioTechnologies, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Fiondella, Milone, and LaSaracina LLP

 

Glastonbury, CT

March 31, 2014

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
			2014				2013
ASSETS
Current assets:
Cash		$	322,929			$	18,988
Total current assets			322,929				18,988
Property, plant and equipment, net of accumulated depreciation of $237,357 and $234,593 as of December 31, 2014 and 2013, respectively			8,887				4,207
Total assets		$	331,816			$	23,195
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	237,014			$	146,044
Convertible note payable			5,000				45,000
Advances, related party			200				200
Total current liabilities			242,214				191,244
Long term debt:
Convertible notes payable			26,000				16,000
Total  liabilities			268,214				207,244
Commitments and contingencies			—				—
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, no par; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, no par; 20,000,000 shares authorized; 15,194,436 and 13,579,223 shares issued and outstanding as of December 31, 2014 and 2013, respectively			8,355,741				7,122,546
Additional paid in capital			2,705,460				2,498,986
Common stock subscription receivable			(128,375	)			(128,375	)
Accumulated deficit			(10,869,224	)			(9,677,206	)
Total stockholders' equity (deficit)			63,602				(184,049	)
Total liabilities and stockholders' equity (deficit)		$	331,816			$	23,195
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
		Year ended December 31,
		2014				2013
Operating expenses:
Selling, general and administrative		$	987,878			$	416,973
Research and development (Note 1)			199,662				59,419
Depreciation			2,764				4,758
Total operating expenses			1,190,304				481,150
Net loss from operations			(1,190,304	)			(481,150	)
Other income (expense):
Interest income (expense)			(1,714	)			(4,385	)
Net loss before provision for income taxes			(1,192,018	)			(485,535	)
Income taxes			—				—
Net loss		$	(1,192,018	)		$	(485,535	)
Loss per common share - basic and diluted		$	(0.08	)		$	(0.04	)
Weighted average number of common shares outstanding - basic and diluted			14,764,202				13,250,189
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED DECEMBER 31, 2014
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
			Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance, December 31, 2012			—			$	—				13,034,573			$	6,791,238			$	2,409,725			$	(128,375	)		$	(9,191,671	)		$	(119,083	)
Common stock issued in January 2013 at $0.325 per share for services rendered			—				—				37,500				12,181				—				—				—				12,181
Common stock issued in January 2013 at $0.276 per share for services rendered			—				—				8,000				2,206				—				—				—				2,206
Sale of common stock in January 2013 at $1.00 per share			—				—				10,000				10,000				—				—				—				10,000
Common stock issued in February 2013 at $0.35 per share for services rendered			—				—				8,000				2,800				—				—				—				2,800
Common stock issued in March 2013 at $0.40 per share for services rendered			—				—				8,000				3,200				—				—				—				3,200
Sale of common stock in March 2013 at $1.00 per share			—				—				20,000				20,000				—				—				—				20,000
Common stock issued in April 2013 at $0.40 per share for services rendered			—				—				8,000				3,200				—				—				—				3,200
Common stock issued in May 2013 at $0.40 per share for services rendered			—				—				8,000				3,185				—				—				—				3,185
Sale of common stock in May 2013 at $1.00 per share			—				—				10,000				10,000				—				—				—				10,000
Common stock issued in May 2013 at $0.38 per share for services rendered			—				—				37,500				14,344				—				—				—				14,344
Sale of common stock in July 2013 at $1.00 per share			—				—				3,000				3,000				—				—				—				3,000
Subtotal			—			$	—				13,192,573			$	6,875,354			$	2,409,725			$	(128,375	)		$	(9,191,671	)		$	(34,967	)

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED DECEMBER 31, 2014
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
			Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance forward			—			$	—				13,192,573			$	6,875,354			$	2,409,725			$	(128,375	)		$	(9,191,671	)		$	(34,967	)
Common stock issued in July 2013 at $0.38 per share for services rendered			—				—				8,000				3,040				—				—				—				3,040
Common stock issue in July 2013 at $0.401 per share for services rendered			—				—				8,000				3,208				—				—				—				3,208
Common stock issued in July 2013 at $0.393 per share for services rendered			—				—				37,500				14,730				—				—				—				14,730
Common stock issued in August 2013 at $0.421 per share for services rendered			—				—				8,000				3,371				—				—				—				3,371
Sale of common stock in August 2013 at $0.80 per share			—				—				62,500				50,000				—				—				—				50,000
Sale of common stock in September 2013 at $1.00 per share			—				—				5,000				5,000				—				—				—				5,000
Common stock issued in September 2013 at $0.199 per share for services rendered			—				—				8,000				1,593				—				—				—				1,593
Sale of common stock in October 2013 at $0.80 per share			—				—				57,600				46,080				—				—				—				46,080
Subtotal			—			$	—				13,387,173			$	7,002,376			$	2,409,725			$	(128,375	)		$	(9,191,671	)		$	92,055

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED DECEMBER 31, 2014
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
			Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance forward			—			$	—				13,387,173			$	7,002,376			$	2,409,725			$	(128,375	)		$	(9,191,671	)		$	92,055
Common stock issued in October 2013 at $0.18 per share for services rendered			—				—				8,000				1,440				—				—				—				1,440
Common stock issued in October 2013 at $0.27 per share for services rendered			—				—				37,500				10,125				—				—				—				10,125
Common stock issued in November 2013 at $1.00 per share in settlement of convertible note and accrued interest			—				—				5,050				5,050				—				—				—				5,050
Common stock issued in November 2013 at $0.20 per share for services rendered			—				—				8,000				1,600				—				—				—				1,600
Common stock issued in November 2013 at $0.23 per share for services rendered			—				—				500				115				—				—				—				115
Sale of common stock in December 2013 at $0.80 per share			—				—				125,000				100,000				—				—				—				100,000
Common stock issued in December 2013 at $0.23 per share for services rendered			—				—				8,000				1,840				—				—				—				1,840
Fair value of vesting warrants issued for services			—				—				—				—				2,960				—				—				2,960
Fair value of vesting options			—				—				—				—				86,301				—				—				86,301
Net loss			—				—				—				—				—				—				(485,535	)			(485,535	)
Balance, December 31, 2013			—			$	—				13,579,223			$	7,122,546			$	2,498,986			$	(128,375	)		$	(9,677,206	)		$	(184,049	)

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED DECEMBER 31, 2014
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
			Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance, December 31, 2013			—			$	—				13,579,223			$	7,122,546			$	2,498,986			$	(128,375	)		$	(9,677,206	)		$	(184,049	)
Common stock issued in January 2014 at $0.24 per share for services rendered			—				—				8,000				1,920				—				—				—				1,920
Sale of common stock in January 2014 at $0.80 per share			—				—				20,000				16,000				—				—				—				16,000
Common stock issued in February 2014 at $0.22 per share for services rendered			—				—				38,500				8,470				—				—				—				8,470
Sale of common stock in February 2014 at $0.80 per share			—				—				725,730				580,584				—				—				—				580,584
Common stock issued in March 2014 at $0.26 per share for services rendered			—				—				9,000				2,340				—				—				—				2,340
Common stock issued in connection with options exercised at $0.15 per share			—				—				400,000				60,000				—				—				—				60,000
Sale of common stock in March 2014 at $2.00 per share			—				—				5,000				10,000				—				—				—				10,000
Common stock issued in March 2014 at $0.27 per share for services rendered			—				—				8,000				2,160				—				—				—				2,160
Common stock issued in April 2014 at $0.27 per share for services rendered			—				—				46,000				12,291				—				—				—				12,291
Common stock issued in May 2014 at $0.64 per share for services rendered			—				—				8,500				5,448				—				—				—				5,448
Common stock issued in June 2014 at $1.60 per share for services rendered			—				—				8,500				13,578				—				—				—				13,578
Subtotal			—			$	—				14,856,453			$	7,835,337			$	2,498,986			$	(128,375	)		$	(9,677,206	)		$	528,742

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED DECEMBER 31, 2014
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
			Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance forward			—			$	—				14,856,453			$	7,835,337			$	2,498,986			$	(128,375	)		$	(9,677,206	)		$	528,742
Common stock issued in June 2014 in connection with exercise of warrants at $0.13 per share			—				—				40,000				5,200				—				—				—				5,200
Common stock issued in June 2014 at $1.00 per share in settlement of note payable and accrued interest			—				—				22,898				22,898				—				—				—				22,898
Common stock issued in July 2014 at $2.26 per share for services rendered			—				—				9,000				20,344				—				—				—				20,344
Common stock issued in July 2014 at $1.50 per share for services rendered			—				—				37,500				56,234				—				—				—				56,234
Common stock issued in August 2014 at $2.11 per share for services rendered			—				—				9,000				19,015				—				—				—				19,015
Sale of common stock in August 2014 at $1.75 per share			—				—				100,000				175,000				—				—				—				175,000
Common stock issued in September 2014 at $1.86 per share for services rendered			—				—				9,000				16,774				—				—				—				16,774
Sale of common stock in September 2014 at $2.00 per share			—				—				17,500				35,000				—				—				—				35,000
Common stock issued in September 2014 at $1.00 per share in settlement of note payable and accrued interest			—				—				11,585				11,585				—				—				—				11,585
Common stock issued in October 2014 at $1.93 per share for services rendered			—				—				37,500				72,222				—				—				—				72,222
Common stock issued in October 2014 at $1.79 per share for services rendered			—				—				9,000				16,132				—				—				—				16,132
Sale of common stock in October 2014 at $2.00 per share			—				—				35,000				70,000				—				—				—				70,000
Fair value of vesting warrants for services			—				—				—				—				62,615				—				—				62,615
Fair value of vesting options			—				—				—				—				143,859				—				—				143,859
Net loss			—				—				—				—				—				—				(1,192,018	)			(1,192,018	)
Balance, December 31, 2014			—			$	—				15,194,436			$	8,355,741			$	2,705,460			$	(128,375	)		$	(10,869,224	)		$	63,602
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
		Year ended December 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,192,018	)		$	(485,535	)
Adjustments to reconcile net loss to cash (used in) operating activities:
Depreciation			2,765				4,757
Common stock issued in exchange for services rendered			246,928				82,177
Options and warrants issued in exchange for services rendered			206,474				89,261
Changes in operating liabilities:
Prepaid expenses			—				14,714
Accounts payable and accrued liabilities			95,453				49,292
Net cash used in operating activities:			(640,398	)			(245,334	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment			(7,445	)			—
Net cash used in investing activities:			(7,445	)			—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable			—				19,000
Proceeds from sale of common stock			886,584				244,080
Exercise of common stock options and warrants			65,200				—
Net proceeds, related party			—				200
Net cash provided by financing activities			951,784				263,280
Increase in cash and cash equivalents			303,941				17,946
Cash and cash equivalents beginning of period			18,988				1,042
Cash and cash equivalents end of period		$	322,929			$	18,988
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	—			$	—
Cash paid during the period for income taxes		$	—			$	—
Non cash investing and financing activities:
Common stock issued in settlement of notes payable and accrued interest		$	34,483			$	5,050
The accompanying notes are an integral part of these financial statements

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.

 

Business and Basis of Presentation

 

Iris Biotechnologies Inc. (the “Company”, “we”, “us”, “our”) was incorporated on February 16, 1999 under the laws of the State of California. The Company efforts are principally devoted to developing solutions for the detection and monitoring of monogenic and complex genomic diseases. The Company has not generated any revenue to date and consequently its operations are subject to all risks inherent in the establishment of a new business enterprise.

 

On April 9, 2014, the Company formed Iris Wellness Labs, Inc., a wholly owned subsidiary and Delaware Corporation, for the purpose of developing certain business lines. As of December 31, 2014, there were no significant assets or liabilities in Iris Wellness Labs, Inc, or operations since its formation.

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Liquidity and Dependency of Key Management

 

To date the Company has generated no revenues, has incurred expenses, and has sustained losses. As shown in the accompanying consolidated financial statements, the Company incurred a loss of $1,192,018 and $485,535 during the years ended December 31, 2014 and 2013, respectively. For the period from February 16, 1999 (date of inception) through December 31, 2014, the Company has accumulated losses of $10,869,224. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

 

The future success or failure of the Company is dependent primarily upon the Company raising funds from third parties, and the continued efforts and financial support of Simon Chin, the Company’s Chief Executive Officer, Chief Financial Officer and the majority shareholder. As in the past, Mr. Chin has committed to provide all necessary funding if needed to the meet the Company’s financial obligations through 2015.

 

Cash

 

For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.

 

Property and Equipment

 

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Long-Lived Assets

 

The Company follows Accounting Standards Codification subtopic 360-10, Property, plant and equipment (“ASC 360-10”). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

Net Loss Per Common Share

 

The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. For the year ended December 31, 2014 and 2013 common stock equivalents derived from shares issuable on conversion of convertible notes and the exercise of options and warrants are not considered in the calculation of the weighted average number of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per share. Fully diluted shares outstanding were 16,297,385 and 13,831,189 as of December 31, 2014 and 2013, respectively.

 

Income Taxes

 

The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes “ASC 740-10”) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse and relate primarily to stock based compensation basis differences. As of December 31, 2014 and 2013, the Company has provided a 100% valuation against the deferred tax benefits.

  

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and related party receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company does not have accounts receivable at December 31, 2014 and December 31, 2013.

Fair Value of Financial Instruments

 

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed. There were no items required to be measured at fair value on a recurring basis in the financial statement as of December 31, 2014.

 

The company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s financial position, results of operations nor cash flows.

 

Stock Based Compensation

 

The Company follows the fair value recognition provisions of Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) and subtopic 505-50 Equity Based Payments to Non-Employees (“ASC 505-50”). Stock-based compensation expense was recognized in the consolidated financial statements for granted, modified, or settled stock options. Compensation expense recognized included the estimated expense for stock options granted, based on the grant date fair value estimated in accordance with the provisions of ASC 718-10 and ASC 505-50, and the estimated expense for the portion vesting based on the grant date fair value estimated in accordance with the original provisions of ASC 718-10 and ASC 505-50.

 

ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

The Company is using the Black-Scholes option-pricing model as its method of valuation for share-based awards granted, under ASC 718-10 and ASC 505-50. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate.

 

For the year ended December 31, 2014 and 2013, the Company granted -0- and 250,000 stock options, respectively. The fair value of issued vesting options is $143,859 and $86,301 for the year ended December 31, 2014 and 2013, respectively.

Research and Development

 

The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenditures of $199,662 and $59,419 for the year ended December 31, 2014 and 2013, respectively.

 

Recent Accounting Pronouncements

 

In July 2014, the Company adopted ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax position. The adoption of ASU 2013-11 did not have a material impact on the Company's consolidated results of operations, financial condition, or cash flows.

 

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

 

NOTE 2 - PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant and equipment at December 31, 2014 and 2013 are as follows:

 

		2014				2013
Computer equipment		$	74,249			$	67,983
Office equipment			1,728				1,728
Furniture and fixtures			4,764				3,586
Manufacturing equipment			165,503				165,503
			246,244				238,800
Less: accumulated depreciation			(237,357	)			(234,593	)
		$	8,887			$	4,207

 

NOTE 3 - LONG TERM CONVERTIBLE NOTE PAYABLE

 

Long-term debt at December 31, 2014 and 2013 are as follows: 

 

		2014				2013
Note payable, dated June 21, 2012		$	—			$	20,000
Note payable, dated June 22, 2012			15,000				15,000
Note payable, dated September 12, 2012			—				10,000
Note payable, dated December 4, 2012			2,000				2,000
Note payable, dated January 17, 2013			3,000				3,000
Note payable, dated February 1, 2013			4,000				4,000
Notes payable, dated April 4, 2013			4,000				4,000
Note payable, dated June 21, 2013			2,000				2,000
Note payable, dated September 24, 2013			1,000				1,000
Total			31,000				61,000
Less: current portion			(5,000	)			(45,000	)
Long term portion		$	26,000			$	16,000

 

On June 21, 2012, the Company issued a $20,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due two years from date of issuance. The note was convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note. On June 18, 2014, the Company issued 22,898 shares of its common stock in settlement of the convertible note payable and accrued interest.

 

On June 22, 2012, the Company issued a $15,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The note was convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On September 12, 2012, the Company issued a $10,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due two years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note. On September 21, 2014, the Company issued 11,585 shares of its common stock in settlement of the convertible note payable and accrued interest.

 

On December 4, 2012, the Company issued a $2,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On January 17, 2013, the Company issued a $3,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due two years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On February 1, 2013, the Company issued a $4,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The notes are convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On April 4, 2013, the Company issued an aggregate of $4,000 notes to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

On June 21, 2013, the Company issued a $2,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On September 24, 2013, the Company issued a $1,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due five years from date of issuance. The note is convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note.

 

On September 26, 2013, the Company issued a $5,000 note to an unrelated party, unsecured and bearing an interest rate of 7.5% per annum, due sixty days from date of issuance. The note was convertible into the Company’s common stock at a conversion rate of $1.00 per share. Based upon the value of the stock an embedded beneficial conversion feature was not present in the note. On November 1, 2013, the Company issued 5,050 shares of its common stock in settlement of the note and related interest.

 

NOTE 4 — RELATED PARTY TRANSACTIONS

 

Officer Advances

 

The Company’s President and shareholders have advanced funds on a non-interest-bearing basis to the Company for working capital purposes since the Company’s inception in February 1999.  No formal repayment terms or arrangements exist. There were $200 and $200- outstanding at December 31, 2014 and 2013.

 

NOTE 5 - STOCKHOLDER EQUITY

 

Preferred stock

 

The Company is authorized to issue 5,000,000 shares of no par preferred stock. From date of inception through December 31, 2014, the Company has not issued any preferred shares.

 

Common stock

 

The Company is authorized to issue 20,000,000 shares of no par value common stock. As of December 31, 2014 and 2013 the Company has 15,194,436 and 13,579,223 shares of common stock issued and outstanding, respectively.

 

On April 9, 2003, the Company effected a two-for-one (2 for 1) stock split of its outstanding shares of common stock, no par value. All references in the financial statements and the notes to financial statements, number of shares, and share amounts have been retroactively restated to reflect the split.

 

During the year ended December 31, 2013, the Company sold an aggregate of 293,100 shares of common stock for net proceeds of $244,080.

 

During the year ended December 31, 2013, the Company issued an aggregate of 246,500 shares of common stock for services in the amount of $82,178.

 

During the year ended December 31, 2014, the Company sold an aggregate of 903,230 shares of common stock for net proceeds of $886,584.

 

During the year ended December 31, 2014, the Company issued an aggregate of 237,500 shares of common stock for services in the amount of $246,928.

During the year ended December 31, 2014, the Company issued 400,000 shares of common stock for exercise of employee options at $0.15 per share, aggregate proceeds of $60,000.

 

During the year ended December 31, 2014, the Company issued 40,000 shares of common stock for exercise of warrants at $0.13 per share, aggregate proceeds of $5,200.

 

During the year ended December 31, 2014, the Company issued 34,483 shares of common stock in settlement of notes payable and accrued interest at $1.00 per share.

 

All common stock issued for services was valued based upon the quoted market price at the time of the issuances.

 

NOTE 6 – WARRANTS AND OPTIONS

 

Warrants

 

The following table summarizes warrants outstanding and related prices for the shares of the Company’s common stock issued at December 31, 2014:

 

Exercise Price				Number Outstanding				Warrants Outstanding Weighted Average Remaining Contractual Life (years)				Weighted Average Exercise price				Number Exercisable				Warrants Exercisable Weighted Average Exercise Price
$	1.00				60,100				3.81			$	1.00				60,100			$	1.00
	2.00				60,200				4.81				2.00				10,034				2.00
					120,300				4.31				1.50				70,134			$	1.14

 

Transactions involving the Company’s warrant issuance are summarized as follows:

 

				Number of Shares				Weighted Average Price Per Share
	Outstanding at December 31, 2012				63,629			$	0.92
	Issued				60,100				1.00
	Exercised				—				—
	Expired				(23,629	)			(2.25	)
	Outstanding at December 31, 2013				100,100			$	0.65
	Issued				60,200				2.00
	Exercised				(40,000	)			(0.13	)
	Expired				—				—
	Outstanding at December 31, 2014				120,300			$	1.50

 

On October 21, 2013, the Company issued an aggregate of 60,100 warrants for services with an exercise price of $1.00 with 25,000 vested immediately and the remainder (35,100) vesting over one year and expiring five years from issuance. The fair value of the vested warrants during the year ended December 31, 2014 and 2013 (as determined as described below) of $50,689 and $2,959 is charged to current period operations, respectively.

 

On October 21, 2014, the Company issued an aggregate of 60,200 warrants for services with an exercise price of $2.00 with all 60,200 warrants vested over one year and expiring five years from issuance. The fair value of the vested warrants during the year ended December 31, 2014 (as determined as described below) of $11,926 is charged to current period operations.

The fair value of these warrants issued and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

 

Significant assumptions:
Risk-free interest rate at grant date			0.95% to 1.78	%
Expected stock price volatility			86.22% to 186.74	%
Expected dividend payout			—
Expected option life-years (a)			3.81 to 4.56

__________________________

(a) The expected option life is based on contractual expiration dates

 

Options

 

Employee Options

 

The following table summarizes options outstanding and the related prices for the shares of the Company’s common stock issued to employees under a stock option plan at December 31, 2014:

 

	Options Outstanding																Options Exercisable
	Exercise Prices (S)				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price (S)				Number Exercisable				Weighted Average Exercise Price
$	0.13				80,000				4.46			$	0.13				80,000			$	0.13
	0.80				85,000				6.20				0.80				83,229				0.80
	1.00				906,875				2.11				1.00				802,396				1.00
	1.11				200,000				6.00				1.11				195,833				1.11
	2.25				167,696				3.40				2.25				167,696				2.25
	0.91				1,439,571				3.17			$	0.91				1,329,154			$	1.11

 

Transactions involving employee stock options issued are summarized as follows:

 

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2012:			1,779,571			$	0.89
Granted			100,000				1.00
Exercised			—				—
Canceled or expired			—				—
Outstanding at December 31, 2013			1,879,571			$	0.90
Granted			—				—
Exercised			(400,000	)			(0.15	)
Expired			(40,000	)			(1.00	)
Outstanding at December 31, 2014:			1,439,571			$	1.10

 

On October 27, 2013, the Company granted 100,000 employee stock options with an exercise price of $1.00 vesting over four years and expiring five years from issuance. The fair value (as determined as described below) of $8,805 is charged ratably over the vesting term of the options.

 

The fair value of these stock options granted and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

Significant assumptions:
Risk-free interest rate at grant date			1.30	%
Expected stock price volatility			92.82	%
Expected dividend payout			—
Expected option life-years (a)			5

__________________________

(a)The expected option life is based on contractual expiration dates

 

During the year ended December 31, 2014, the Company issued 400,000 shares of common stock for exercise of employee options at $0.15 per share, aggregate proceeds of $60,000.

 

The fair value of the vested portion previously granted employee options of $81,982 and $80,147 was charged during the year ended December 31, 2014 and 2013, respectively.

 

Non-employee options

 

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to non-employees under a stock option plan at December 31, 2014:

 

	Options Outstanding																Options Exercisable
	Exercise Prices				Number Outstanding				Weighted Average Remaining Contractual Life (Years)				Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price
$	1.00				260,000				5.24			$	1.00				175,625			$	1.00
	1.40				105,000				4.23				1.40				105,000				1.40
	1.12				365,000				4.95			$	1.12				280,625			$	1.15

 

Transactions involving non-employee stock options issued are summarized as follows:

 

				Number of Shares				Weighted Average Price Per Share
	Outstanding at December 31, 2012:				215,000			$	1.20
	Granted				150,000				1.00
	Exercised				—				—
	Expired				—				—
	Outstanding at December 31, 2013:				365,000			$	1.12
	Granted				—				—
	Exercised				—				—
	Expired				—				—
	Outstanding at December 31, 2014:				365,000			$	1.12

 

In March 2013, the Company granted 150,000 non-employee stock options with an exercise price of $1.00 vesting over four years and expiring ten years from issuance. The fair value was determined based on a black Scholes model.

 

The fair value of the vested portion of previously granted non-employee options of $61,876 and $6,154 was charged during the year December 31, 2014 and 2013, respectively.

The fair value of these options issued and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

 

Significant assumptions:
Risk-free interest rate at grant date			1.97% to 2.73	%
Expected stock price volatility			86.22% to 186.74	%
Expected dividend payout			—
Expected option life-years (a)			8.24 to 8.99

__________________________

(a) The expected option life is based on contractual expiration dates

 

NOTE 7 - LOSSES PER SHARE

 

The following table presents the computation of basic and diluted losses per share:

 

		2014				2013
Net loss available to Common stockholders		$	(1,192,018	)		$	(485,535	)
Basic and diluted loss per share		$	(0.08	)		$	(0.04	)
Weighted average common shares outstanding			14,764,202				13,250,189

 

In April 2003, a two (2) for one (1) stock split of the Company’s common stock was affected. Accordingly, all historical weighted average share and per share amounts have been restated to reflect the stock split.

 

NOTE 8 - INCOME TAXES

 

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences primarily include stock compensation and other equity-related non-cash charges, capitalized financing costs, the basis difference of derivative liabilities and certain accruals.

 

At December 31, 2014, the Company has available for federal and California income tax purposes net operating loss carry forwards of approximately $7,900,000, expiring through the year 2034, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the deferred tax assets, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Due to possible significant changes in the Company’s ownership, the future use of its existing net operating losses may be limited.

 

Deferred net tax assets consist of the following at December 31, 2014 and 2013:

 

		2014				2013
Stock Compensation		$	153,509			$	669,700
Net Operating Losses			3,137,409				2,843,247
Less valuation allowance			(3,290,918	)			(3,512,947	)
Net deferred tax asset		$	0			$	0

 

The provision for Federal taxes differs from Federal statutory rates primarily due to state taxes, shortfalls on stock compensation and the change in the valuation allowance.

 

The Company follows the provision of uncertain tax positions as addressed in FASB Accounting Standards Codification 740-10-65-1. The Company recognized no liability for unrecognized tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at December 31, 2014 and 2013.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

  

The Company’s main office is located in Santa Clara, California. The lease had a term of 12 months, which began on August 1, 2014 and expires on July 31, 2015.  The Company currently pays rent and related costs of $300.00 per month.

 

Additionally, the Company leases a laboratory, in San Leandro, California. The lease has a term of 12 months, which began on January 1, 2015 and expires on December 31, 2015. The Company currently pays rent and related costs of $1,800 per month.

 

Additionally, the Company leases a laboratory and office space, in Davis, California. The lease has a term of 12 months, which began on July 1, 2014 and expires on June 30, 2015. The Company currently pays rent and related costs of $1,650 per month.

 

Litigation

  

On August 20, 2012, the Company filed a motion to allow late filing of a $100 million malpractice claim against Heller Ehrman LLP, discovered after claims bar date for not forwarding United State Patent and Trademark Office correspondence to the Company resulting in the abandonment of a critical patent, in the United States Bankruptcy Court, Northern District of California, San Francisco Division. On November 15, 2012, the Bankruptcy Court disallowed the claim. On December 5, 2012, the Company filed an appeal in the United District Court, Northern District of California, San Francisco Division seeking to have its $100 million malpractice claim against Heller Ehrman LLP reinstated. The Company presented case references and requested for the case to be reviewed objectively as a new case.  The Appeal Court Judge affirmed the bankruptcy court decision on August 12, 2013. The Company has filed an appeal with the US Ninth Circuit Court. The final brief was filed on February 4, 2014.

 

From time to time, the Company is involved in various litigation matters in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

 

NOTE 10 - SUBSEQUENT EVENTS

 

Effective January 1, 2015, the Company granted 600,000 options to purchase stock at $1.25 per share to members of the board of directors and officers as compensation for their services.

 

In January 2015, the Company issued 16,000 shares of common stock as legal fees and 3,000 shares for consulting services.

 

In February 2015, the Company issued 37,500 shares of its common stock for board directors fees.

 

In March 2015, the Company issued 16,000 shares of its common stock as legal fees, 2,000 shares for consulting services, and 37,500 shares for board of directors fee.

 

 

 

F-21