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EX-32 - VITRO DIAGNOSTICS INCexhibit320711.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


[ X ]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2011

OR


[   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from          to         


Commission file number 1-17378


VITRO DIAGNOSTICS, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)


               Nevada               

     84-1012042     

(State or other jurisdiction

I.R.S. Employer

of incorporation or organization)

Identification number


4621 Technology Drive, Golden, CO  80403
(Address of Principal Executive Offices)

Issuer's telephone number:     (303) 999-2130

 

Former name, former address, and former fiscal year, if changed since last report

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 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  [ X ]    No [    ]


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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  

Large accelerated filer [    ] Accelerated filer [    ]   Non-accelerated filer [    ]

Smaller Reporting Company [  X  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]  No  [ X ].


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [  ]


As of September 12, 2011, the Registrant had 18,528,995 shares of its Common Stock outstanding.








INDEX

PART I -- FINANCIAL INFORMATION


Item 1.

Financial Statements

Page

 

 

 

 

Balance Sheets at July 31, 2011 (unaudited) and October 31, 2010

2

 

 

 

 

Statements of Operations for the three months ended

   July 31, 2011 (unaudited) and 2010

3

 

 

 

 

Statements of Operations for the nine months ended

   July 31, 2011 (unaudited) and 2010

4

 

 

 

 

Statements of Changes in Shareholders’ Deficit for the period November 1, 2009 through July 31, 2011 (unaudited)

5

 

 

 

 

Statements of Cash Flows for the six months ended

   July 31, 2011 (unaudited) and 2010

6

 

 

 

 

Notes to Unaudited Financial Statements

7

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Introduction

24

 

Liquidity and Capital Resources

24

 

Results of Operations

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls & Procedures

28

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

Item 1A

Risk Factors

29

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Submission of Matters to a Vote of Security Holders

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

 

 

 







PART 1.  FINANCIAL INFORMATION


Item 1.

   Financial Statements


The financial statements included herein have been prepared by Vitro Diagnostics, Inc. (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations.  In the opinion of management of the Company the accompanying statements contain all adjustments necessary to present fairly the financial position of the Company as of July 31, 2011 and October 31, 2010, and its results of operations for the three and nine month periods ended July 31, 2011 and 2010, its statement of changes of shareholders’ deficit for the period November 1, 2009 through July 31, 2011, and its cash flows for the nine month periods ended July 31, 2011 and 2010.  The results for these interim periods are not necessarily indicative of the results for the entire year.  The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto filed as a part of the Company's annual report on Form 10-K.    




1







VITRO DIAGNOSTICS, INC.

 

 

Balance Sheets

 

 

 

 

July 31, 2011

 

October 31, 2010

 

 

(unaudited)

 

 

Assets

 

 

 

Current assets:

 

 

 

 

Cash

 $                1,800

 

 $              17,313

 

Accounts receivable

                  2,372

 

                     270

 

Inventory, at cost

                 21,770

 

                 20,493

 

     Total current assets

                 25,942

 

                 38,076

Equipment, net of accumulated depreciation of $73,762 and $60,570

                 35,241

 

                 47,933

Patents, net of accumulated amortization of $6,879 and $4,525 (Note A)

                 24,506

 

                 26,860

Deferred costs (Note A)

                  5,543

 

                     762

Other assets

                  1,449

 

                  2,449

 

     Total assets

 $              92,681

 

 $            116,080

Liabilities and Shareholders' Deficit

 

 

 

Current liabilities:

 

 

 

 

Current maturities on capital lease obligations (Note E)

 $                9,737

 

 $              14,028

 

Accounts payable

                 50,581

 

                 44,429

 

Accrued expenses

                  6,753

 

                  8,589

 

Advances and accrued interest payable to officer (Note B)

               334,017

 

               155,733

 

Accrued payroll expenses (Note B)

            1,174,518

 

            1,350,053

 

Lines of credit (Note D)

                 34,175

 

                 90,832

 

Stock purchase warrants (Note F)

                       -   

 

                 29,300

 

     Total current liabilities

            1,609,781

 

            1,692,964

Long-term debt (Note E):

 

 

 

 

Capital lease obligations, less current maturities

                  1,461

 

                  8,856

 

     Total liabilities

            1,611,242

 

            1,701,820

Commitments and contingencies (Notes A, B, C, D, E, F, G, and H)

 

 

 

Shareholders' deficit (Note F):

 

 

 

 

Preferred stock, $.001 par value; 5,000,000 shares authorized;

 

 

 

 

   -0- shares issued and outstanding

                       -   

 

                       -   

 

Common stock, $.001 par value; 50,000,000 shares authorized;

 

 

 

 

    18,478,995 and 18,379,985 shares issued and outstanding

                 18,529

 

                 18,380

 

Additional paid-in capital

            5,346,604

 

            5,312,853

 

Services prepaid with common stock

                 (7,083)

 

                 (3,559)

 

Accumulated deficit

           (6,876,611)

 

           (6,913,414)

 

     Total shareholders' deficit

           (1,518,561)

 

           (1,585,740)

 

     Total liabilities and shareholders' deficit

 $              92,681

 

 $            116,080




See accompanying notes to these financial statements

2






 

 

VITRO DIAGNOSTICS, INC.

Statements of Operations

(unaudited)

 

 

 

 

 

 

 

For the Three Months Ended July 31, 2011

 

For the Three Months Ended July 31, 2010

Product sales

 $            1,759

 

 $            5,892

 

Cost of goods sold

                (651)

 

             (2,634)

 

 

Gross profit

               1,108

 

               3,258

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

Research and development

             35,885

 

             39,661

 

Selling, general and administrative

             13,379

 

             18,752

 

 

Total operating costs and expenses

             49,264

 

             58,413

 

 

Loss from operations

           (48,156)

 

           (55,155)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

Interest expense

             (9,931)

 

           (10,373)

 

Fair value of stock purchase warrants

                   -   

 

             26,070

 

License fee income( Note I)

                   -   

 

                   -   

 

Forgiveness of debt (Note I)

                   -   

 

                   -   

 

 

 

 

 

 

 

 

Income (loss) before income taxes

           (58,087)

 

           (39,458)

 

 

 

 

 

 

Provision for income taxes (Note C)

                   -   

 

                   -   

 

 

 

 

 

 

 

 

Net income (loss)

 $         (58,087)

 

 $         (39,458)

 

 

 

 

 

 

Net income (loss) per common share, basic

 $            (0.00)

 

 $            (0.00)

Net income (loss) per common share, diluted

 $            (0.00)

 

 $            (0.00)

 

 

 

 

 

 

Shares used in computing net income (loss) per common share:

 

 

 

Basic

       18,519,654

 

       17,949,270

 

Diluted

       18,519,654

 

       17,949,270




See accompanying notes to these financial statements

3






VITRO DIAGNOSTICS, INC.

Statements of Operations

(unaudited)

 

 

 

For the Nine Months Ended July 31, 2011

 

For the Nine Months Ended July 31, 2010

Product sales

 $          10,867

 

 $            9,565

 

Cost of goods sold

             (3,063)

 

             (4,525)

 

 

Gross profit

               7,804

 

               5,040

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

Research and development

           105,630

 

           134,059

 

Selling, general and administrative

             63,741

 

             71,148

 

 

Total operating costs and expenses

           169,371

 

           205,207

 

 

Loss from operations

          (161,567)

 

          (200,167)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

Interest expense

           (30,930)

 

           (31,034)

 

Fair value of stock purchase warrants

             29,300

 

             42,670

 

License fee income

             10,000

 

                   -   

 

Forgiveness of debt

           190,000

 

                   -   

 

 

 

 

 

 

 

 

Income (loss) before income taxes

             36,803

 

          (188,531)

 

 

 

 

 

 

Provision for income taxes (Note C)

                   -   

 

                   -   

 

 

 

 

 

 

 

 

Net income (loss)

 $          36,803

 

 $       (188,531)

 

 

 

 

 

 

Net income (loss) per common share, basic

 $             0.00

 

 $            (0.01)

Net income (loss) per common share, diluted

 $             0.00

 

 $            (0.01)

 

 

 

 

 

 

Shares used in computing net income (loss) per common share:

 

 

 

Basic

       18,428,169

 

       17,767,212

 

Diluted

       18,497,551

 

       17,767,212





See accompanying notes to these financial statements

4






VITRO DIAGNOSTICS, INC.

Statement of Changes in Shareholders' Deficit

 

 

 

 

 

 

 

 

 

 

 

Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Prepaid with

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Common

 

Accumulated

 

 

 

Shares

 

Amount

 

Shares

 

Par Value

 

Capital

 

Stock

 

Deficit

 

Total

Balance, October 31, 2009

             -   

 

 $         -   

 

     17,214,620

 

 $   17,214

 

 $     5,203,219

 

 $     (1,605)

 

 $(6,656,282)

 

 $(1,437,454)

Conversions of amounts due on account (Note F)

             -   

 

            -   

 

         216,429

 

          217

 

            33,083

 

              -   

 

                    -   

 

  33,300

Sale of common stock and stock purchase warrants (Note F)

             -   

 

            -   

 

         500,000

 

          500

 

            12,000

 

              -   

 

                    -   

 

  12,500

Private placement of common stock (Note F)

             -   

 

            -   

 

         300,000

 

          300

 

            29,700

 

              -   

 

                    -   

 

  30,000

Common stock issued to director (Note F)

             -   

 

            -   

 

           63,830

 

            64

 

            14,936

 

              -   

 

                    -   

 

  15,000

Common stock issued to directors for future services (Note F)

             -   

 

            -   

 

           85,106

 

            85

 

            19,915

 

      (20,000)

 

                    -   

 

  -   

Prepaid services earned (Note F)

             -   

 

            -   

 

                 -   

 

            -   

 

                   -   

 

        18,046

 

                    -   

 

  18,046

Net loss for the year ended October 31, 2010

             -   

 

            -   

 

                 -   

 

            -   

 

                   -   

 

              -   

 

  (257,132)

 

  (257,132)

Balance, October 31, 2010

             -   

 

 $         -   

 

     18,379,985

 

 $   18,380

 

 $     5,312,853

 

 $     (3,559)

 

$(6,913,414)

 

$(1,585,740)

Prepaid services earned (Note F)

             -   

 

            -   

 

                 -   

 

            -   

 

                   -   

 

         8,559

 

                    -   

 

  8,559

Common stock issued to director for future services (Note F)

             -   

 

            -   

 

           99,010

 

            99

 

              9,901

 

      (10,000)

 

                    -   

 

  -   

Vesting of officer stock options (Note F)

             -   

 

            -   

 

                 -   

 

            -   

 

            18,900

 

              -   

 

                    -   

 

  18,900

Common stock issued to SAB member for future services

(Note F)

             -   

 

            -   

 

           50,000

 

            50

 

              4,950

 

        (5,000)

 

                    -   

 

  -   

Net income for the nine months ended July 31, 2011

             -   

 

            -   

 

                 -   

 

            -   

 

                   -   

 

              -   

 

   36,803

 

  36,803

Balance, July 31, 2011 (unaudited)

             -   

 

 $         -   

 

     18,528,995

 

 $   18,529

 

 $     5,346,604

 

 $   (10,000)

 

 $ (6,876,611)

 

 $(1,521,478)





See accompanying notes to these financial statements

5





VITRO DIAGNOSTICS, INC.

Statements of Cash Flows

(unaudited)

 

 

For The Nine Months Ended July 31,

For the Nine Months Ended July 31,

 

 

2011

 

2010

Cash Flows from operating activities:

 

 

 

 

Net income (loss)

 $        36,803

 

 $     (188,531)

 

Adjustments to reconcile net loss to net cash used in

 

 

 

 

  operating activities:

 

 

 

 

Depreciation and amortization

           15,546

 

           14,824

 

Stock-based compensation

           30,376

 

           27,821

 

Fair value of stock purchase warrants

          (29,300)

 

          (42,670)

 

Changes in current assets and current liabilities:

 

 

 

 

  (Increase) in accounts receivable, inventories,

 

 

 

 

   prepaid expenses and deposits

           (2,379)

 

           (7,958)

 

  (Decrease) increase in accounts payable and accrued expenses

        (154,435)

 

           91,248

Net cash used in operating activities

        (103,389)

 

        (105,266)

Cash flows from investing activities:

 

 

 

 

Purchases of equipment

              (500)

 

           (9,674)

 

Payments for patents and deferred costs

           (4,781)

 

           (4,376)

Net cash used in investing activities

           (5,281)

 

          (14,050)

Cash flows from financing activities:

 

 

 

 

Proceeds from advances from officer

         161,500

 

           42,200

 

(Payments) draws on lines of credit, net

          (56,657)

 

               540

 

Principal payments on capital lease

          (11,686)

 

          (10,435)

 

Proceeds from sale of common stock

                 -   

 

           87,500

Net cash provided by financing activities

           93,157

 

         119,805

 

Net change in cash

          (15,513)

 

               489

Cash, beginning of year

           17,313

 

               104

 

Cash, end of period

 $          1,800

 

 $             593

Supplemental disclosure of cash flow information:

 

 

 

 

Cash paid during the year for:

 

 

 

 

   Interest

 $        14,146

 

 $        24,430

 

   Income taxes

 $               -   

 

 $               -   

 

Non-cash investing and financing activities:

 

 

 

 

  Common stock issued to directors for services

 $        15,000

 

 $        20,000

 

  Conversion of amounts due on account to common stock

 $               -   

 

 $        15,000

 

  Issuance of stock purchase warrants

 $               -   

 

 $        75,000




See accompanying notes to these financial statements

6



VITRO DIAGNOSTICS, INC.

Notes to Unaudited Financial Statements


NOTE A: NATURE OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation


The unaudited condensed financial statements presented herein have been prepared by the Company in accordance with the instructions for Form 10-Q and the accounting policies in its Form 10-K for the year ended October 31, 2010 and should be read in conjunction with the notes thereto.


In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments (consisting only of normal recurring adjustments), which are necessary to provide a fair presentation of operating results for the interim periods presented. The results of operations presented for the period ended July 31, 2011 is not necessarily indicative of the results to be expected for the year.


Financial data presented herein are unaudited.


Nature of Organization


The Company was incorporated under the laws of Nevada on February 3, 1986.  From November of 1990 through July 31, 2000, the Company was engaged in the development, manufacturing and distribution of purified human antigens (“Diagnostics”) that were derived primarily from human tissues.  The Company also developed cell technology including immortalization of certain cells that allowed entry into other markets besides diagnostics.  However, during the 1990’s, the Company’s sales were solely attributable to the sales of purified human antigens for diagnostic applications.   


Following the sale of its Diagnostics operations in August of 2000, the Company began devoting all efforts to its cellular generation technology which evolved from a focus on induction of cellular immortalization to technology related to stem cells.  Stem cell technology has potentially broad application to many medical areas, including drug discovery and development together with numerous therapeutic applications to diseases involving cellular degeneration, injury or to the treatment of cancer.  The Company launched a series of products targeting basic research in stem cell technology in 2009.  These Tools for Stem Cell and Drug Discovery offer researchers basic tools needed to advance stem cell technology including stem cells and their derivatives, media for growth and differentiation of stem cells and advanced tools for measurement of stem cell quality, potency and response to toxic agents.  The Company has been granted patents for its proprietary technology related to the immortalization of human cells and subsequently expanded this technology to include patented and patent-pending technology involving generation of stem cells with potential application to a variety of commercial opportunities including the treatment of degenerative diseases and drug discovery.




7





The Company also owns patented technology related to treatment of human infertility.  The Company has been granted a US patent for its process to manufacture VITROPIN.  VITROPIN is a highly purified urinary follicle-stimulating hormone (FSH) preparation produced according to the Company’s patented purification process.


The Company also owns patented technology that provides protection to a specific cell line derived from human pancreatic tissues that gives rise to structures comparable to the Islets of Langerhans (beta islets).  These islets also synthesize and secrete insulin in response to elevated glucose levels, as do beta islets contained within pancreatic tissue.  Vitro has also developed a process for the commercial production its cell line-derived islets.  Furthermore, the Company previously obtained regulatory approval for an animal protocol to determine reversal of Type I diabetes, a critical step in the demonstration of efficacy.  This patent affords an exclusive proprietary position to the Company for a new cellular therapy to treat Type I diabetes.


Basis of Presentation – Going Concern


The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has suffered significant losses since inception and has working capital and shareholders’ deficits at July 31, 2011, that raise substantial doubt about its ability to continue as a going concern. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and generate revenues and profits from operations.


The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  The Company has financed its operations primarily through cash advances from the president and chairman, as well as through various private placements of equity securities.  At various times during the nine months ended July 31, 2011 and year ended October 31, 2010, the president and chairman advanced the Company a total of $215,400 for working capital on an “as needed” basis. In December 2009 the Company raised $87,500 through a private placement of common stock and warrants.  And in September 2010, the Company raised $30,000 in a private placement of common stock to two investors.  There is no assurance that these advances or equity offerings will continue in the future.

 

The Company has formed strategic alliances and is presently engaged in discussions with other companies that have expressed interest in the commercialization of the Company’s stem cell and fertility drug technology. Management intends to pursue these and other opportunities with the objective of establishing strategic alliances to enhance its revenue generation and to fund further development and commercialization of its key technologies. Also, the Company has new stem cell products that were launched during fiscal year 2009.  Initial revenues from these products have been established and management intends to pursue enhanced revenue generation from this product line and development of other related products to the fullest extent possible given its resources.  A current focus is expanded distribution of the Companys advanced stem cell media, MSCGro, since management believes that these products show performance advantages over the current



8





leaders in this market sector.  There is no assurance that any of these initiatives will yield sufficient capital to maintain the Company’s operations. In such an event, management intends to pursue various strategic alternatives.


In March 2011, the Company formed a license agreement with a third party for its patented technology related to treatment of infertility.  The terms of this agreement included a license fee and royalties on any future sales derived from the patent license by the licensee.  The transaction resulted in a significant reduction of the Company’s accrued payroll obligation to a former employee.  See Note I for further discussion regarding this transaction.


Summary of Significant Accounting Policies


Use of estimates


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


Cash equivalents


For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.


Accounts receivable


Accounts receivable consists of amounts due from customers.  The Company considers accounts more than 30 days old to be past due. The Company uses the allowance method for recognizing bad debts. When an account is deemed uncollectible, it is written off against the allowance. The Company generally does not require collateral for its accounts receivable.  At July 31, 2011 and October 31, 2010 no allowances were recorded and all amounts due from customers were considered collectible.


Inventory


Inventories, consisting of raw materials and finished goods, are stated at the lower of cost (using the specific identification method) or market.  Finished goods inventories include certain allocations of labor and overhead.  At July 31, 2011 and October 31, 2010, finished goods included approximately $6,500 and $10,100, respectively, of labor and overhead allocations.  Inventories consisted of the following:






9







 

July 31, 2011

 

October 31, 2010

Raw materials

 $    10,456

 

 $       7,603

Finished goods

11,314

 

          12,890

 

 $  21,770

 

 $     20,493



Research and development


The Company’s operations are predominantly in research and development (“R&D”).  These costs are expensed as incurred and are primarily comprised of costs for: salaries, overhead and occupancy, contract services and other outside costs, quality assurance and analytical testing. As the Company has also expanded its operations to include manufacturing and R&D, we report cost of goods sold, including estimates of labor, materials and overhead allocations to the production of specific products. 


Property, equipment and depreciation


Property and equipment are stated at cost and are depreciated over the assets’ estimated useful lives using the straight-line method.  Depreciation expense totaled $13,192 and $12,473 for the nine months ended July 31, 2011 and 2010, respectively.


Upon retirement or disposition of equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.  Repairs and maintenance are charged to expense as incurred and expenditures for additions and improvements are capitalized.


Patents, deferred costs and amortization


Patents consist of costs incurred to acquire issued patents.  Amortization commences once a patent is granted.  Costs incurred to acquire patents that have not been issued are reported as deferred costs.  If a patent application is denied or expires, the costs incurred are charged to operations in the year the application is denied or expires.


The Company amortizes its patents over a period of ten years.  Amortization expense totaled $2,354 and $2,351 for the nine months ended July 31, 2011 and 2010, respectively.  Estimated aggregate amortization expense for each of the next five years is as follows:



10






Year ended October 31,

 

 

2011

$

786 

2012

 

3,144 

2013

 

3,144 

2014

 

3,144 

2015

 

      3,144

Thereafter

 

11,144

 

$

 24,506 


The Company’s patents consisted of the following at July 31, 2011:

Generation and differentiation of adult stem cell lines

 $

31,385 

This patent is for a proprietary stem cell line with potential application to treatment of diabetes in both animals and humans.

 

 

    Less accumulated amortization

 

(6,879)

 

 $

24,506


The Company has incurred costs totaling $5,543 relating to the filing of a new United States patent application entitled “POU5-F1 Expression in Human Mesenchymal Stem Cells” and the development of new technology related to generation of human induced pluripotent stem cells (iPS).  These costs are included as deferred patent costs in the accompanying balance sheet at July 31, 2011.


Impairment and Disposal of Long-Lived Assets


The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable.  If such assets are considered impaired, the impairment to be recognized is determined as the amount by which the carrying value exceeds the fair value of the assets.


The Company periodically reviews the carrying amount of it long-lived assets for possible impairment.  The Company recorded no asset impairment charges during the nine months ended July 31, 2011.  A contingency exists with respect to these matters, the ultimate resolution of which cannot presently be determined.




11





Income taxes


The Company uses the liability method of accounting for income taxes.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.


Revenue recognition


The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable, and collectability is reasonably assured.


Advertising Costs


The Company expenses all advertising costs as they are incurred.  Advertising costs were $5,335 and $13,080 for the nine months ended July 31, 2011 and 2010, respectively.


Fair value of financial instruments


The carrying amounts of cash, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short-term maturity of the instruments. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term obligations consisting of various capital lease obligations approximates its carrying value.


Concentrations of credit risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and cash equivalents, and trade accounts receivable.  As of July 31, 2011 and October 31, 2010, the Company had no amounts of cash or cash equivalents in financial institutions in excess of amounts insured by agencies of the U.S. Government.




12





Net loss per share


The Company reports net loss per share using a dual presentation of basic and diluted loss per share. Basic net loss per share excludes the impact of common stock equivalents.  Diluted net loss per share utilizes the average market price per share when applying the treasury stock method in determining common stock equivalents.  For the three and nine months ended July 31, 2011, common stock equivalents included in computing diluted net income per common share included in-the-money stock options.  For the three months ended July 31, 2011 and 2010, and for the nine months ended July 31, 2010, no common stock equivalents were included in the diluted per share calculations as all potentially dilutive securities were anti-dilutive due to the net loss in the periods.  For the nine months ended July 31, 2011, common stock equivalents totaling 69,382 were included in the diluted per share calculation, and represented certain in-the-money common stock options.


Stock-based compensation


Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “ASC”) Topic 718, “Stock Compensation,” establishes fair value as the measurement objective in accounting for share based payment arrangements, and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees.  Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the period during which the holder is required to provide services in exchange for the award, i.e., the vesting period.


Recent accounting standards

There were various accounting standards and interpretations issued during 2011 and 2010, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.

NOTE B: RELATED PARTY TRANSACTIONS

Advances and accrued interest payable to officer


Through October 31, 2010, the Company’s chief executive officer had advanced the Company a total of $139,682 used for working capital, and during the nine months ended July 31, 2011 an additional $161,500 of working capital advances were made by the officer.  The advances are uncollateralized, due on demand and accrue interest on the unpaid principal at a rate of 10% per annum.  Accrued interest payable on the advances totaled $32,835 and $16,050 at July 31, 2011 and October 31, 2010, respectively.  The total advances plus accrued interest totaling $334,017 and $155,733 at July 31, 2011 and October 31, 2010, respectively, are included as “Advances and accrued interest payable to officer” in the accompanying financial statements.




13





Employment agreements and accrued compensation


Effective May 1, 2008, the Company entered into a new Executive Employment Agreement with its CEO.  The Agreement established annual base salaries of $80,000, $85,000, and $90,000 over the three years of the Agreement, which was to expire on April 30, 2011.  On April 27, 2011 the Company’s board of directors ratified a modification to the original agreement establishing an annual base salary of $12,000 per year, effective February 1, 2011 and continuing for three years.  The Agreement also provides for incentive compensation based on the achievement of minimum annual product sales and an option to purchase one million shares of the Company’s common stock that includes contingent vesting requirements. The employment agreement includes changes in control accelerating vesting for exercise of underlying stock options and also includes severance provisions.


As a result of the patent licenses agreement on March 29, 2011, a contingency was met and as a result, 100,000 common stock options became vested.  These options are exercisable at $.19 per share and expire in July 2018.  As a result, $18,900 of stock based compensation was recorded at March 29, 2011.  These options are further discussed in Note E under the “Stock options granted to officer” caption.


The Company accrued the salaries of its CEO through April 30, 2008 under an old agreement due to a lack of working capital.  Accrued salaries and payroll taxes totaled $1,174,518 and $1,350,053 at July 31, 2011 and October 31, 2010, respectively.  His accrued salaries totaled $1,128,482 and $1,099,982 as of July 31, 2011 and October 31, 2010, respectively.  His salary is allocated as follows: 70% to research and development and 30% to administration.


On March 30, 2011 the Company licensed two of its existing patents to a former executive officer.  The transaction included license fees totaling $10,000, and a forgiveness of previously accrued payroll amounts due the former officer of $190,000.  This transaction is further discussed in Note I.

His accrued salaries totaled $200,833 and $833 at October 31, 2010 and July 31, 2011, respectively.


Total accrued payroll taxes on the above salaries totaled $45,203 and $49,238 at July 31, 2011 and October 31, 2010, respectively.


Office lease


On July 1, 2008, the Company entered into a five-year non-cancelable operating lease for a facility located in Golden, Colorado.  The facility has been leased from a company that is owned by the president’s wife.


Future minimum rental payments for the fiscal years ending are as follows:

October 31,

 

 

 

2011

 $           5,595

 

2012

            22,380

 

2013

            14,920

 

 

 

 $         42,895



14








The total rental expense was $19,666 and $19,356 for the nine months ended July 31, 2011 and 2010, respectively.


Other


The president has personally guaranteed all debt instruments of the Company including all credit card debt.


NOTE C: INCOME TAXES


A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows for the years ended:

 

October 31, 2010

 

October 31, 2009

Benefit related to U.S. federal statutory graduated rate

-28.37%

 

-29.48%

Benefit related to State income tax rate, net of federal benefit

-3.32%

 

-3.27%

Accrued officer salaries

11.32%

 

10.46%

Net operating loss for which no tax benefit is currently available

20.37%

 

22.29%

 

Effective rate

0.00%

 

0.00%


The primary components of temporary differences that give rise to the Company’s net deferred tax assets are as follows:


 

October 31, 2010

 

October 31, 2009

Net operating loss and tax credit carry forwards

$

   1,522,860 

 

$

    1,445,310 

Accrued officer salaries

 

      500,330 

 

 

        466,280 

Deferred tax asset (before valuation allowance)

 $

   2,023,190 

 

     1,911,591 



At October 31, 2010, deferred taxes consisted of a net tax asset of $2,023,190, due to operating loss carry forwards and other temporary differences of $8,203,608, which was fully allowed for in the valuation allowance of $2,023,190.  The valuation allowance offsets the net deferred tax asset for which there is no assurance of recovery.  The changes in the valuation allowance for the years ended October 31, 2010 and 2009 totaled $111,599 and $58,623, respectively.  Net operating loss carry forwards will expire in various years through 2030.




15





The Company is delinquent on filing its federal and state tax returns and may be subject to penalties and interest.  A contingency exists with respect to this matter, the ultimate resolution of which may not be presently determined.


The valuation allowance will be evaluated at the end of each year, considering positive and negative evidence about whether the asset will be realized.  At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required.


Should the Company undergo an ownership change as defined in Section 382 of the Internal Revenue Code, the Company’s tax net operating loss carry forwards generated prior to the ownership change will be subject to an annual limitation, which could reduce or defer the utilization of these losses.



NOTE D: LINES OF CREDIT


The Company has a $12,500 line of credit of which $1,676 was unused at July 31, 2011.  The interest rate on the credit line was 18.00% at July 31, 2011.  The credit line is collateralized by the Company’s checking account.  Principal and interest payments are due monthly.


At July 31, 2011 the Company also had three credit cards with a combined credit limit of $27,700, of which $4,340 was unused.  The interest rates on the credit cards range from 10.24% to 29.4%.  All other credit cards previously used by the Company have been paid off and closed.


NOTE E: CAPITAL LEASE OBLIGATIONS


In July 2007, the Company entered into a capital lease agreement to acquire laboratory equipment.  The Company is obligated to make 3 monthly payments of $25 and monthly payments of $382 through August 2012.  


In June 2008, the Company entered into a capital lease agreement, also for the acquisition of laboratory equipment.  The Company is obligated to make monthly payments of $830 through May 2012.


In July 2009, the Company entered into a capital lease agreement, also for the acquisition of laboratory equipment.  The Company was obligated to make monthly payments of $570 through June 2011.  This obligation was fully paid at July 31, 2011.




16






Year ended October 31,

 

 

2011

$

  2,807 

2012

 

  9,628 

 

 

12,435 

Less: imputed interest

 

 (1,237)

Present value of net minimum lease payments

$

 11,198 


The president of the Company has personally guaranteed the lease obligations.


NOTE F: SHAREHOLDERS’ DEFICIT


Preferred Stock


The Company has authorized 5,000,000 shares of $.001 par value preferred stock, of which none were issued and outstanding at July 31, 2011.  These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors.


Sales of common stock


In September 2010, the Company sold 300,000 shares of its common stock to two investors for $30,000, or $.10 per share.  The transaction was recorded at fair value, which was determined to be 83% of the quoted market price on the day prior to the negotiated sale of stock, due to the restricted nature of the shares.


Sale of Common Stock and Warrants


On December 29, 2009 the Company sold an aggregate of 500,000 shares of common stock together with an aggregate of 500,000 warrants for $87,500 to three investors.  The warrants were exercisable for a period of twelve months from the date of issuance to purchase an additional 500,000 shares of common stock at an exercise price of $0.175 per share.


The Company applied the provisions of ASC Topic 815, “Derivatives and Hedging” and related standards for the accounting of the valuation of the common stock warrants issued as part of the private placement of common stock completed on December 29, 2009. Accordingly, the Company recorded a warrant liability upon the issuance of its common stock, equal to the estimated fair market value of the various features of the warrants.  The initial warrant liability of $75,000 represented a non-cash adjustment to the carrying value of the related financial instruments.  The warrants were exercisable upon issuance, and expired unexercised on December 29, 2010.  The liability was adjusted quarterly to the estimated fair market value based upon then current market conditions, and any change in the estimated fair market value was charged to the Company’s operating results.


17





  

The following assumptions were utilized to determine the estimated fair value of the warrants upon issue:


Expected volatility

 

142%

Contractual term

 

1 year

Risk free interest rate

 

0.47%

Expected dividend rate

 

0%

 

 

 


Common stock issued for services


On May 18, 2011, the Company appointed Mr. Duane Knight, CPA, to its Scientific Advisory Board (“SAB”).  Concurrently, the Company issued 50,000 shares of the Company’s common stock to him as compensation to be earned during his two years of service on the SAB.  The transaction was valued at $5,000, or $.10 per share, which approximated the market value of the stock on the date of the transaction.  As of July 31, 2011, $417 had been expensed, and is reflected in “Services paid with common stock” in the accompanying condensed balance sheet.


On April 27, 2011, the Company issued 99,010 shares of the Company’s common stock to Mr. Erik Van Horn, Director as compensation to be earned during his service in 2011.  The transaction was valued at $10,000, or $.101 per share, which approximated the market value of the stock on the date of the transaction.  As of July 31, 2011, $7,500 had been expensed, and is reflected in “Services paid with common stock” in the accompanying condensed balance sheet.


On September 8, 2010 the Company agreed to convert to common stock certain amounts due an attorney who provides various legal services to the Company.  As a result, $10,000 of amounts due the attorney was converted to 71,429 shares of common stock at a price of $0.14 per share, which approximated the market value of the stock on the date of the transaction.


Also on September 8, 2010 the Company agreed to convert to common stock certain amounts due a consultant who provides various professional accounting services to the Company.  As a result, $8,300 of amounts due the consultant was converted to 59,286 shares of common stock at a price of $0.14 per share, which approximated the market value of the stock on the date of the transaction.


In February 2010, the Company appointed Mr. Richard Huebner to its Board of Directors.  The Company issued to Mr. Huebner 106,383 shares of the Company’s common stock as compensation for his commitment to serve on the Company’s board of directors.  The transaction was valued at $25,000, or $.235 per share based on the fair value of the stock on the transaction date.  Of the total transaction amount, $15,000 was considered as incentive to serve as a director, and as such the amount was charged to operations as stock compensation expense for the year ended October 31, 2010.  The remaining $10,000 was considered as compensation to be earned during his service in 2010.   As of July 31, 2011 the entire $10,000 had been expensed, and is reflected in “Services paid with common stock” in the accompanying condensed balance sheet.




18





Also in February 2010, the Company issued 42,553 shares of the Company’s common stock to Mr. Erik Van Horn, Director as compensation to be earned during his service in 2010.  The transaction was valued at $10,000, or $.235 per share based on the fair value of the stock on the transaction date.  As of July 31, 2011 the entire $10,000 had been expensed, and is reflected in “Services paid with common stock” in the accompanying condensed balance sheet.


On December 21, 2009 the Company agreed to convert to common stock certain amounts due an attorney who provides various legal services to the Company.  As a result, $15,000 of amounts due the attorney was converted to 85,714 shares of common stock at a price of $0.175 per share, which approximated the market value of the stock on the date of the transaction.


In February 2009, the Company appointed Dr. Pamela L. Rice to its Scientific Advisory Board.  The Company issued 12,000 shares of the Company’s common stock as compensation for her commitment to serve on the SAB.  The transaction was valued at $1,800, or $.15 per share based on the fair value of the stock on the transaction date.  As of July 31, 2011 the entire $1,800 had been expensed, and is reflected in “Services paid with common stock” in the accompanying condensed balance sheet.



Stock options granted to officer


On May 1, 2008, the Company granted a stock option to its president to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $0.19 per share, and expire in 2018.  On the grant date, the traded market value of the stock was $0.19 per share.  The options vest upon the achievement of certain contingencies.  As a result of the patent license agreements of March 29, 2011 as discussed in Note I, a contingency was met resulting in the vesting of 100,000 of these options.  As such, the Company recorded $18,900 in stock based compensation on March 29, 2011.  None of the other contingencies have been met as of July 31, 2011. The weighted average exercise price and weighted average fair value of these options on the grant date were $0.19 and $0.189, respectively.  


The fair value of the options was determined to be $189,000, and was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:


Risk-free interest rate

3.68%

Dividend yield

0.00%

Volatility factor

228.72%

Weighted average expected life

6.5 years



Incentive plans


Effective December 2, 2000, the Company’s Board of Directors adopted an Equity Incentive Plan (the “Plan”), which replaced the Company’s 1992 Stock Option Plan.  The purpose of the Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers, consultants and directors, and to promote the Company’s business.  The Plan authorizes total awards



19





of up to 1,000,000 shares of the Company's common stock. Awards may take the form of incentive stock options, non-qualified stock options, restricted stock awards, stock bonuses and other stock grants. If an award made under the Plan expires, terminates, is canceled or settled in cash without the issuance of all shares of common stock covered by the award, those shares will be available for future awards under the Plan.  Awards may not be transferred except by will or the laws of descent and distribution.  No awards may be granted under the Plan after September 30, 2010.


The Plan is administered by the Company's Board of Directors, which may delegate its authority to a committee of the Board of Directors. The Board of Directors has the authority to select individuals to receive awards, to determine the time and type of awards, the number of shares covered by the awards, and the terms and conditions of such awards in accordance with the terms of the Plan. In making such determinations, the Board of Directors may take into account the recipient's current and potential contributions and any other factors the Board of Directors considers relevant. The recipient of an award has no choice regarding the form of a stock award. The Board of Directors is authorized to establish rules and regulations and make all other determinations that may be necessary or advisable for the administration of the Plan. All options granted pursuant to the Plan shall be exercisable at a price not less than the fair market value of the common stock on the date of grant. Unless otherwise specified, the options expire ten years from the date of grant.


The following schedule summarizes the changes in the Company’s stock options:


 

 

 

 Number of Shares

Exercise Price Per Share

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price Per Share

Balance at October 31, 2009

 1,543,500

 

$0.08 to $0.81

8.29 years

$0.17

 

Options granted

 

 -   

 

 

 

 

 

 

 

Options exercised

 

 -   

 

 

 

 

 

 

 

Options expired

 

 -   

 

 

 

 

 

 

Balance at October 31, 2010

 1,543,500

 

$0.08 to $0.81

7.60 years

$0.17

 

Options granted

 

 -   

 

 

 

 

 

 

 

Options exercised

 

 -   

 

 

 

 

 

 

 

Options expired

 

 15,000

 

$0.42 to $0.81

 -   

 

$0.48

Balance at July 31, 2011

 1,528,500

 

$0.08 to $0.45

5.91 years

$0.17

Exercisable at October 31, 2010

 543,500

 

$0.08 to $0.81

4.48 years

$0.16

Exercisable at July, 2011

 628,500

 

$0.08 to $0.35

4.34 years

$0.14



NOTE G: CONSULTING AGREEMENTS


On May 13, 2011 the Company entered into a consulting agreement with a former member of the Company’s Scientific Advisory Board.  The agreement provides for the consultant’s assistance in



20





molecular biology and related areas needed for commercialization of the Company’s stem cell product lines, as requested by management, at a compensation rate of $50 per hour.  For the three and nine months ended July 31, 2011, the consultant had billed the Company a total of $500 in connection with this agreement.


On July 27, 2009 the Company entered into a consulting agreement with SK Helsel & Associates LLC to provide certain public relations and media services.  The agreement provides compensation in the total amount of $2,500 per press release, to be paid with a combination of common stock and cash.  The agreement also provides for other related hourly based consulting services to be provided on an as-needed basis as requested by Vitro.  As of July 31, 2011 a total of $3,719 in cash and 7,880 shares of the Company’s common stock at an average price of $0.25 per share had been paid the consultant under the term of the agreement.


On June 3, 2009 the Company entered into a business development consulting agreement with Seraphim Life Sciences Consulting LLC, to provide services primarily designed to identify and bring to Vitro potential industrial partners that could benefit from Vitro’s technologies.  The agreement entitles the consultant to performance based compensation in the amount of 8% of all consideration received by the Company resulting from the consultant’s services.  The agreement also provides for compensation at hourly rates for services not considered project specific as may be requested by Vitro.  Either party may terminate the agreement at any time with thirty days written notice.  As of July 31, 2011 no services have been performed and no compensation has been paid under the agreement.


On August 20, 2007, the Company entered into a Consulting Agreement with Mr. Joe Nieusma of Superior Toxicology & Wellness (“Superior”).  This agreement was initially extended without modification through August 20, 2010, and the Company expects to further extend the agreement although no extension has been made as of the date of this report.  Under the terms of the original agreement, Superior will provide services including, but not limited to:


·

The development and funding of the Company’s current business plan;


·

The launch of products targeting applications in the development and discovery of new drug and biological products; and


·

The marketing and sales of all existing and proposed products and technology that are now available, or will be available for commercial distribution during the term of the agreement.


In exchange for the above services, the Company will pay Superior $50 per hour capped at a maximum of 240 hours for the term of the agreement.  In addition, the Company has agreed to issue Mr. Nieusma the following stock bonuses to be paid in shares of the Company’s common stock:


a.

100,000 shares upon the sale of stem-derived human beta islets as evidenced by issuance of a commercial invoice;




21





b.

100,000 shares upon the submission of a validation package to the United States Food and Drug Administration requesting approval of the use of Vitro’s stem cell-derived human beta islets for safety and efficacy testing and the use of this data within applications submitted for marketing approval of new drugs and biological products; and


c.

100,000 shares upon the receipt of $100,000 or more in capital funding of the Company based upon Vitro’s current business plan or subsequent versions thereof.  This event occurred during fiscal year ending October 31, 2008 and the Company issued 100,000 shares to its consultant on March 27, 2008.


Compensation for the successful sale of Vitro’s products, patent licenses or other revenue-generating event shall be based on industry standards and include a gross sales commission of 15% in addition to the compensation described above.



NOTE H: JOINT PRODUCT DEVELOPMENT, MANUFACTURE AND DISTRIBUTION AGREEMENTS


On May 29, 2010 the Company executed an Agreement with Mokshagundam Biotechnologies for the development of a medium formulation for growth of marine invertebrates as a potential food source.  Initially, a basal medium formulation consisting of macro nutritional substances is to be developed and this will be supplemented with growth factors commonly used in stem cell media formulations.  The Agreement provides for the Company to provide a pilot batch of medium for testing consisting of macro-nutritional support plus a mixture of common growth factors necessary for in-vitro support of self-renewal in stem cells of higher organisms.  This medium was delivered to Mokshagundam during fiscal year 2010.  The Agreement provided for a payment of $5,000 to the Company upon execution of the Agreement as an advance for the product development, and was received during the third quarter of fiscal year ended October 31, 2010.


On April 27, 2010 the Company executed an Agreement for Joint Product Development, Manufacture and Distribution (“Agreement”) with HemoGenix, Inc., a privately held biotechnology firm located in Colorado Springs, Colorado.  The Agreement provides for the joint manufacture and distribution of stem cell analysis tools.  The agreement provides for the expansion of assay platforms from HemoGenix, in particular, LUMENESC for mesenchymal stem cells (MSC) and LumiSTEM for induced pluripotent stem cells (iPS).  Also, this original agreement between the Company and HemoGenix® was expanded during the latter portions of 2010 to include joint development of cell-specific toxicity assays including those targeting liver cells, heart, kidney and neuronal cells.  Furthermore, the strategic partners intend to jointly develop additional stem cell media products and align their respective quality programs to ensure consistency.



NOTE I: PATENT LICENSE AGREEMENT


Effective March 30, 2011, the Company entered into a Technology License, License Option and Technical Assistance Agreement with a former officer of the Company, granting him an exclusive license covering two of the Company’s patents: United States Patent Number 5,990,288, Method for



22





Purifying FSH and United States Patent Number 6,458,593 B1, Immortalized Cell Lines and Methods of Making The Same.  The patents are related to treatment of infertility and know-how relating to the commercial production and cellular generation of the hormone, follicle-stimulating hormone and related gonadotropin hormones for use in the treatment of infertility in both humans and animals.  In addition, the License grants the exclusive option to license a pending patent application for the commercial production of clinical grade gonadotropin hormones and, in addition, the Company’s intellectual property related to generation of crude materials containing gonadotropin hormones from certain cellular sources. The License has an initial term of five years and shall be automatically renewed for additional two year periods until terminated by either party; however, the license can be terminated after two and one-half years if there have been no sales of licensed products.


The licensee was previously an executive officer of the Company, and the Company had carried a $200,833 liability for unpaid compensation.  The terms of the license agreement required payment of a non-refundable license fee of $10,000, which was paid by a reduction of the unpaid compensation liability.  In addition, the license agreement also required the licensee forgive an additional $190,000 of the unpaid compensation liability.  In addition to the license fee and the forgiveness of the unpaid compensation liability, there shall be royalty payments of 3% and 4% of the gross sales of all licensed products sold by or on behalf of Licensee during the first and second years, respectively.  Such royalty payment shall be 4.5 % of the gross sales of all licensed products during the third year of product sales and shall remain at that level throughout the remaining term of the agreement.  



NOTE J: SUBSEQUENT EVENTS


The Company has evaluated subsequent events through the date that the financial statements were available to be issued.




23






ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS


Introduction


This section discusses the financial condition of Vitro Diagnostics, Inc. (the “Company”) at July 31, 2011 and compares it to the Company’s financial condition at October 31, 2010.  It also discusses the Company’s results of operations for the three and nine-month period ending July 31, 2011 and 2010.  This information should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010, including the audited financial statements and notes contained therein.


Certain statements contained herein and subsequent oral statements made by or on behalf of the Company may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements include, without limitation, statements regarding the Company’s plan of business operations, potential contractual arrangements, and receipt of working capital, anticipated revenues and related expenditures.  Factors that could cause actual results to differ materially include, among others, acceptability of the Company’s products in the market place, general economic conditions, receipt of additional working capital, the overall state of the biotechnology industry and other factors set forth in the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended October 31, 2010 under the caption, “Risk Factors.”  Most of these factors are outside the control of the Company.  Investors are cautioned not to put undue reliance on forward-looking statements.  Except as otherwise required by applicable securities statutes or regulations, the Company disclaims any intent or obligation to update publicly these forward looking statements, whether as a result of new information, future events or otherwise.


Liquidity and Capital Resources


During its second fiscal quarter 2011, the Company gained working capital through elimination of debt and patent license fees derived through out-licensing of two patents.  Debt financing was also used to refinance debt obligations that resulted in reduced interest expenses and debt service payments. Expenses were further reduced by reduction of deferred salary. Debt obligations of the Company were further reduced during its 3rd fiscal quarter, 2011, through payoff of an equipment lease resulting in elimination of $8,280/year in principal and interest payments.  On March 30, 2011, the Company entered into Technology License, License Option and Technical Assistance Agreement with James T. Posillico, Ph.D. (“Licensee”) granting exclusive license covering two of the Company’s patents (US 5,990,288 & US 6,458,593 B1).  These patents provide proprietary technology and products with application to treatment of infertility through use of the hormone FSH. The License also grants the Licensee an option to use of another pending patent of the Company’s in the treatment of infertility.  In consideration of the rights and licenses granted, the Licensee paid the Company a non-refundable payment of $10,000, as a reduction in a prior liability of the Company to the Licensee for deferred salary.  Also, the Licensee forgave prior deferred salary debts in the



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amount of $190,000.  In addition, there is a royalty payment of three percent (3%) of the gross sales of all licensed products made, used, sold, offered for sale, imported, leased, or otherwise transferred by or on behalf of the licensee during the first year following sales of licensed product.  The royalty payment is 4% of gross sales in the second and 4.5% in the third year following sales and remains at 4.5% throughout the five year term of the agreement.  As a result of the license fee and debt forgiveness, the Company realized a $200,000 increase in working capital that was offset by increased operating expenses incurred during its second and third quarter.  


At July 31, 2011, the Company had a working capital deficit of $1,583,839, consisting of current assets of $25,942 and current liabilities of $1,609,781.  This represents an increase in working capital of $71,049 from fiscal year end October 31, 2010.  The increase in working capital was mainly due to decreased deferred salary expense that was partially offset by operating expenses.


At July 31, 2011, current assets decreased by $12,134 and current liabilities decreased by $83,183 from October 31, 2010.  The decrease in current assets was due to decreased cash, while liabilities decreased due to debt reductions as discussed elsewhere.  The Company reported a $1,518,561 total shareholders’ deficit at July 31, 2011, which was $67,179 less than the deficit reported at October 31, 2010.  The majority of the working capital deficit ($1,508,535) is substantially attributed to accrued officer salaries and notes due to the president and CEO.  


During the nine months ended July 31, 2011, the Company’s financing activities provided $93,157 in cash to support our operating activities.  During that time, the Company’s operations used $103,389 in cash compared to $105,266 of cash used by operations during the nine months ended July 31, 2010.   Cash raised from financing activities was derived through loans from the Company’s president and CEO.  Cash usage reflects a minimum cash requirement of about $11,500 per month for operations.  Cash requirements for operations have recently been reduced by debt reductions and a reduction in deferred salary requirements to its President.   

 

The Company had lines of credit totaling $34,175 with $6,017 available in credit at July 31, 2011.  The Company must continue to service debt and the Chairman personally guarantees most of the Company debt.  Management is actively pursuing measures to reduce corporate debt while at the same time implementing various measures to increase revenues, as described elsewhere in this report.


The Company continues to pursue various activities to obtain additional capitalization, as described in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2010.  A current focus is product sales derived from launch of its Tools of Stem Cell and Drug Development product line during 2009.   Management has continued its program to expand sales of its products and especially the MSC-Gro Media product line that was shown to exhibit performance advances over competing products.   Our MSC-Gro Media has also been successfully evaluated by key accounts that are perceived by Management to represent substantial sales opportunities for the Company. In addition, the Company is engaged in discussions and product evaluations with a life science manufacturer & distributor that is also believed by Management to represent a significant distribution opportunity for the Company’s MSC-Gro Media product line.  During its 3rd quarter, the Company launched an expanded line of stem cell products for research and clinical development and a new product catalog for 2011.  These new products were introduced



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through a webinar presentation to interested scientists/prospective customers during the latter portion of our 3rd quarter.  We believe the new product launches will enhance our product sales revenues, as early as the fourth quarter of fiscal 2011, and management plans additional activities to market these newly launched products. We completed a license of the Company’s patented and patent-pending technology related to treatment of infertility during this reporting period as described elsewhere in this report.  Management has conserved capital by reducing expenditures related to its operational activities and is implementing debt reduction activities to decrease interest expenses and debt service payments.  We believe this enables the Company to gain profitability more quickly and sustain earnings growth as our product sales expand.   The Company is also pursing other approaches to increase its capital resources such as combination with revenue-generating private entities, out-licensing of its intellectual property, sale of assets or other transactions that may be appropriate.  


Results of Operations


During the three months ended July 31, 2011, the Company realized a net loss of ($58,087) or ($0.00) per share on $1,759 in revenue.  The net loss was $18,629 more than the net loss for the three months ended July 31, 2010.  The increase in net loss was primarily due to other income representing the change in fair value of certain stock purchase warrants that originated in December 2009, which was not present in 2011. The warrants expired unexercised in December 2010.  Total operating expenses were $9,149 less in the third quarter 2011 than the comparable period in 2010.  Research and development expenses decreased by $3,776 and selling, general and administrative expenses decreased by $5,373.  These decreases were predominantly due to reduced deferred officer salary.


During the nine months ended July 31, 2011, the Company realized net income of $36,803 or $0.00 per share on $10,867 in revenue.  The net income in the first nine months of 2011 was $225,334 more than the loss reported during the nine-month period ended July 31, 2010.  The increased net income was due to primarily due to license fee income, forgiveness of debt, and the change in the fair value of certain stock purchase warrants as discussed above.


Current activities of the Company have shifted to marketing of its stem cell based product line. During the quarter ended July 31, 2011, the Company expanded its product line considerably, produced and released its new product catalog featuring an expanded menu of products within its product areas of human mesenchymal stem cells & derivatives, specialized cell culture media called MSC-Gro Media and assay kits for determination of stem cell quality, potency and response to toxic agents.  The latter products are jointly manufactured by the Company and its strategic partner, HemoGenix, Inc.  The new product offerings include MSC-Gro Media suitable for use in clinical studies.  Numerous investigations have shown the clinical value of mesenchymal stem cells in treatment of a variety of medical conditions, for example, diseases or injuries of the joints, cerebral palsy, autoimmune disorders, and enlarged heart resulting from prior heart attack, etc.  Thus, the Company’s availability of clinical grade media opens opportunities for use of our MSC-Gro Media in clinical applications.  Management views this component of its target market to be significant and plans to further expand its product line and regulatory approvals of its clinical grade MSC-Gro Media given the limitations of its resources.  There are also substantial markets that



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the Company is pursuing in other countries besides the US.  These efforts have also been stimulated by recent advances in formulations of the Companys MSC-Gro stem cell media whereby the Company can provide its customer’s dry powder which is then reconstituted in high purity water by the customer.  Management views this development together with the strong competitive performance advantages of our media as key components in growth of its offshore business.  To complement these advances the Company established an ongoing dialogue and related activities with additional prospective partners who are interested in using or distributing the Company’s products.  Management intends to pursue development of the sales of stem cell products to the full extent possible..  However, there are no assurances that these efforts will be successful given the Company’s limited resources, the competitive landscape and present global economic uncertainties.


R&D efforts are directed towards improvements of existing products and development of new products to add to the commercial products presently available. Research and development expenses (R&D) were $105,630 during the first nine months of 2011, which was a decrease of $28,429 over the comparable period in 2010.  Most of this decrease in R&D expense is due to salary reduction. While the R& D necessary for launch of its initial products was completed in 2009, the Company continued development of its technology related to expansion and improvements of its product line during the third fiscal quarter of 2011. In addition to line extensions described previously, the Company is also developing in-house manufacturing of some of its critical raw materials as a means of improving its profit margins.  However, the key goal is attainment of profitable operations and more efforts are focused on increased product revenues through sales of existing products.


The Company also added an expert in corporate finance to its Scientific Advisory Board during its 3rd quarter, Mr Duane Knight, CPA.  Mr. Knight has more than twenty-five years experience in consulting, accounting and corporate finance.  He is presently Operational Chief Financial Officer of Neuromonics, Inc. a medical device company that manufactures and distributes an FDA-approved and patented device to treat tinnitus, ringing in the ears, to global markets.  He has an accomplished record in business finance including partnership of a Denver, CO-based investment bank, CFO of another medical device firm and owner of a public accounting and consulting firm.  Mr. Knight was brought in to assist in the ongoing business development activities of the Company, especially as related to turn-around to profitability and the achievement of sustained earnings growth and other relevant financial activities.  





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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for trading or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.



ITEM  4.

CONTROLS AND PROCEDURES


a.  Disclosure Controls and Procedures


The Company's Principal Executive Officer and Principal Financial Officer, has established and is currently maintaining disclosure controls and procedures for the Company.  The disclosure controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.


The Principal Executive Officer and Principal Financial Officer has conducted a review and evaluation of the effectiveness of the Company's disclosure controls and procedures and has concluded, based on his evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that the information required to be disclosed by the Company is accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.     


Additionally, management identified the following internal control deficiencies.  (1) The Company has not properly segregated duties as its President initiates, authorizes, and completes all transactions.  The Company has not implemented measures that would prevent the President from overriding the internal control system.  The Company does not believe that this control deficiency has resulted in deficient financial reporting because the President is aware of his responsibilities under the SEC’s reporting requirements and personally certifies the financial reports.  In addition, the Company engaged a financial consultant to review all financial transactions to determine that they have been properly recorded in the financial statements. (2) The Company has installed accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software.  The Company does not think that this control deficiency has resulted in deficient financial reporting


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because the Company has implemented a series of manual checks and balances to verify that previous reporting periods have not been improperly modified and that no unauthorized entries have been made in the current reporting period.


Accordingly, while the Company has identified certain material weaknesses in its system of internal control over financial reporting, it believes that it has taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles.  Management has determined that current resources would be appropriately applied elsewhere and when resources permit, they will alleviate material weaknesses through various steps.


b.  Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended July 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


c. Limitations of any Internal Control Design


Our principal executive and financial officer does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive and financial officer has determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.




PART II

OTHER INFORMATION


Item 1.

Legal Proceedings


None, except as previously disclosed.


Item 1A.

Risk Factors


None, except as previously disclosed.


Item 2

Unregistered Sales of Equity Securities and Use of Proceeds



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None, except as previously disclosed.


Item 3.

Defaults Upon Senior Securities


None, except as previously disclosed.


Item 4.

Submission of Matters to a Vote of Security Holders


None, except as previously disclosed.


Item 5.

Other Information


None, except as previously disclosed.


Item 6.

Exhibits


Certification

Certification pursuant to 18 U.S.C. Section 1350



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SIGNATURES


       Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

VITRO DIAGNOSTIC, INC.

 

 

Date:     September 14, 2011   

By: _/s/ James R. Musick___ _

 

     James R. Musick

      President, Chief Executive Officer and Chief

      Financial Officer






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