UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

☑	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

☐	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.

(Exact Name of small business issuer as specified 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

 

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   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 for such shorter period that the registrant was required to submit and post such files). Yes ☑    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 definitions 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  ☑
(Do not check if a 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 ☑

 

As of May 15, 2015 the issuer had 15,353,903 outstanding shares of Common Stock.

  

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	21
	PART II
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
	Signatures	24

  

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS.

 

INDEX TO FINANCIAL STATEMENTS

 

	Page
Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	4
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014	5
Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the three months ended March 31, 2015	6
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014	7
Notes to the Condensed Consolidated Financial Statements	8

 

 

IRIS BIOTECHNOLOGIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
			March 31,				December 31,
			2015				2014
			(unaudited)
ASSETS
Current assets:
Cash		$	179,099			$	322,929
Total current assets			179,099				322,929
Property, plant and equipment, net of accumulated depreciation of $238,169 and $237,357 as of March 31, 2015 and December 31, 2014, respectively			11,112				8,887
Total assets		$	190,211			$	331,816
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable		$	160,767			$	237,014
Convertible note payable			5,000				5,000
Advances, related party			200				200
Total current liabilities			165,967				242,214
Long term debt:
Convertible notes payable			26,000				26,000
Total debt			191,967				268,214
Commitments and contingencies			—				—
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, no par; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, no par; 20,000,000 shares authorized; 15,306,436 and 15,194,436 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively			8,507,968				8,355,741
Additional paid in capital			2,768,083				2,705,460
Common stock subscription receivable			(128,375	)			(128,375	)
Accumulated deficit			(11,149,432	)			(10,869,224	)
Total stockholders' (deficit) equity			(1,756	)			63,602
Total liabilities and stockholders' (deficit) equity		$	190,211			$	331,816
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
		Three months ended March 31,
		2015				2014
Operating expenses:
Selling, general and administrative		$	257,220			$	176,363
Research and development (Note 1)			21,603				14,226
Depreciation			812				743
Total operating expenses			279,635				191,332
Net loss from operations			(279,635	)			(191,332	)
Other income (expense):
Interest income (expense)			(573	)			(1,128	)
Net loss before provision for income taxes			(280,208	)			(192,460	)
Income taxes			—				—
Net loss		$	(280,208	)		$	(192,460	)
Loss per common share-basic and diluted		$	(0.02	)		$	(0.01	)
Weighted average number of common shares outstanding-basic and diluted			15,249,175				13,927,596
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2015
(unaudited)
		Preferred shares								Common shares								Additional Paid in				Subscription				Accumulated
		Stock				Amount				Stock				Amount				Capital				Receivable				Deficit				Total
Balance, December 31, 2014			—			$	—				15,194,436			$	8,355,741			$	2,705,460			$	(128,375	)		$	(10,869,224	)		$	63,602
Common stock issued in January 2015 at $2.11 per share for services rendered			—				—				9,000				19,017				—				—				—				19,017
Common stock issued in January 2015 at $1.96 per share for services rendered			—				—				9,000				17,645				—				—				—				17,645
Common stock issued in January 2015 at $1.44 per share for services rendered			—				—				1,000				1,445				—				—				—				1,445
Common stock issued in February 2015 at $0.92 per share for services rendered			—				—				1,000				917				—				—				—				917
Common stock issued in February 2015 at $1.45 per share for services rendered			—				—				8,000				11,556				—				—				—				11,556
Common stock issued in February 2015 at $1.84 per share for services rendered			—				—				37,500				68,924				—				—				—				68,924
Common stock issued in March 2015 at $0.92 per share for services rendered			—				—				8,000				7,336				—				—				—				7,336
Common stock issued in March 2015 at $0.71 per share for services rendered			—				—				1,000				711				—				—				—				711
Common stock issued in March 2015 at $0.66 per share for services rendered			—				—				37,500				24,676				—				—				—				24,676
Fair value of vesting warrants for services			—				—				—				—				4,341				—				—				4,341
Fair value of vesting options			—				—				—				—				58,282				—				—				58,282
Net loss			—				—				—				—				—				—				(280,208	)			(280,208	)
Balance, March 31, 215			—			$	—				15,306,436			$	8,507,968			$	2,768,083			$	(128,375	)		$	(11,149,432	)		$	(1,756	)
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
		Three months ended March 31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(280,208	)		$	(192,460	)
Adjustments to reconcile net loss to cash (used in) operating activities:
Depreciation			812				743
Common stock issued in exchange for services rendered			152,227				14,890
Options and warrants issued in exchange for services rendered			62,623				23,189
Changes in operating liabilities:
Accounts payable and accrued liabilities			(76,247	)			(26,779	)
Net cash used in operating activities:			(140,793	)			(180,417	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment			(3,037	)			(2,354	)
Net cash used in investing activities:			(3,037	)			(2,354	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock			—				606,584
Exercise of common stock options and warrants			—				60,000
Net cash provided by financing activities			—				666,584
(Decrease) Increase in cash and cash equivalents			(143,830	)			483,813
Cash and cash equivalents beginning of period			322,929				18,988
Cash and cash equivalents end of period		$	179,099			$	502,801
Supplemental disclosures of cash flow information:			—				—
The accompanying notes are an integral part of these financial statements

 

IRIS BIOTECHNOLOGIES INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(Unaudited)

 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

General

 

The accompanying unaudited condensed financial statements of Iris Biotechnologies, Inc., (the “Company”), have been prepared in accordance with the rules and regulations (Regulation S-X) of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X . Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three month period ended March 31, 2015, are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. The unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2014 financial statements and footnotes thereto included in the Company’s Form 10-K filed on March 31, 2015.

 

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 March 31, 2015, 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.

 

Cash and Cash Equivalents

 

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 consolidated 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 the 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.

 

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 and Net Operating Losses.  As of March 31, 2015, the Company has provided a 100% valuation against the deferred tax benefits.

 

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 period. For all periods presented, 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 15,360,175 and 14,108,596 for the three months ended March 31, 2015 and 2014, respectively.

 

Concentrations of Credit Risk

 

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash. The Company places its cash with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit of $250,000. The Company does not have accounts receivable at March 31, 2015 and December 31, 2014.

 

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 $21,603 and $14,226 for the three months ended March 31, 2015 and 2014, respectively.

 

Liquidity and Dependency of Key Management

 

To date the Company has generated no revenues, has incurred expenses, has used $140,793 in operations for the three months ended March 31, 2015. As shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a loss from operations of $279,635 during the three months ended March 31, 2015. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise.

 

Since inception on February 16, 1999 through March 31, 2015, we have sustained cumulative net losses of $11,149,432. Our losses have resulted primarily from research and development expenses, patent costs and legal and accounting expenses. From inception through March 31, 2015, 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 at least one year. 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 the future.

 

The future success or failure of the Company is dependent primarily upon the continued efforts of Simon Chin, the Company’s Chief Executive Officer, Chief Financial Officer and the majority shareholder who has historically provided financial support and raised funding from third party sources. As in the past, Mr. Chin has committed to provide all necessary funding needed to meet the Company’s financial obligations through the next twelve months and beyond.

  

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 unaudited condensed consolidated 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 unaudited condensed financial statement as of March 31, 2015.

 

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 measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.  Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash. As of March 31, 2015, there were outstanding stock options to purchase 2,404,571 shares of common stock, 1,674,154 shares of which were vested.

 

Recent Accounting Pronouncements

 

There are various 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 March 31, 2015 and December 31, 2014 are as follows:

 

		March 31, 2015				December 31, 2014
Computer equipment		$	77,286			$	74,249
Office equipment			1,728				1,728
Furniture and fixtures			4,764				4,764
Manufacturing equipment			165,503				165,503
			249,281				246,244
Less: accumulated depreciation			(238,169	)			(237,357	)
		$	11,112			$	8,887

 

NOTE 3 - LONG TERM CONVERTIBLE NOTE PAYABLE

 

Long-term debt at March 31, 2015 and December 31, 2014 are as follows: 

 

		March 31, 2015				December 31, 2014
Note payable, dated June 22, 2012			15,000				15,000
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				31,000
Less: current portion			(5,000	)			(5,000	)
Long term portion		$	26,000			$	26,000

 

NOTE 4 - STOCKHOLDER EQUITY

 

Preferred stock

 

The Company is authorized to issue 5,000,000 shares of no par preferred stock. From date of inception through March 31, 2015, 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 March 31, 2015 and December 31, 2014 the Company has 15,306,436 and 15,194,436 shares of common stock issued and outstanding, respectively.

 

During the three months ended March 31, 2015, the Company issued an aggregate of 112,000 shares of common stock for services in the amount of $152,227 based on quoted market prices at the time of issuance.

 

NOTE 5 — 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 was $200 outstanding at March 31, 2015 and December 31, 2014.

 

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 March 31, 2015:

 

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				3.56			$	1.00				60,100			$	1.00
	2.00				60,200				4.56				2.00				25,084				2.00
					120,300				4.06				1.50				85,184			$	1.29

 

 

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

 

				Number of Shares				Weighted Average Price Per Share
	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
	Issued				—				—
	Exercised				—				—
	Expired				—				—
	Outstanding at March 31, 2015				120,300			$	1.50

 

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. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value of the vested warrants during the three months ended March 31, 2015 and 2014, respectively, (as determined as described below) of $4,341 and $966 is charged to 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			1.37	%
Expected stock price volatility			224.98	%
Expected dividend payout			—
Expected option life-years (a)			4.56

__________________________

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

 

Options

 

Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from using the Company’s historical stock prices. Management determined this assumption to be a more accurate indicator of value. The Company accounts for the expected life of options based on the contractual life of options for non-employees. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification.

 

The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.  The fair value of stock-based payment awards during the three months ended March 31, 2015 was estimated using the Black-Scholes pricing model.

 

In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the number of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

 

The Company estimated forfeitures related to option grants at a weighted average annual rate of 0% per year based on historical data, for options granted during the three months ended March 31, 2015 and 2014.

 

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 March 31, 2015:

 

	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				4.22			$	0.13				80,000			$	0.13
	0.80				85,000				5.96				0.80				85,000				0.80
	1.00				906,875				1.86				1.00				813,958				1.00
	1.11				200,000				5.76				1.11				200,000				1.11
	1.25				600,000				6.42				1.25				37,500				1.25
	2.25				167,696				3.15				2.25				167,696				2.25
$	1.14				2,039,571				3.95			$	1.14				1,384,154			$	1.11

 

Transactions involving employee stock options issued are summarized as follows:

 

		Number of Shares				Weighted Average Price Per Share
Outstanding at December 31, 2013:			1,879,571			$	0.90
Granted			—				—
Exercised			(400,000	)			(0.15	)
Canceled or expired			(40,000	)			(1.00	)
Outstanding at December 31, 2014			1,439,571			$	1.10
Granted			600,000				1.25
Exercised			—				—
Expired			—				—
Outstanding at March 31, 2015:			2,039,571			$	1.14

 

On January 1, 2015, the Company granted 600,000 employee stock options with an exercise price of $1.25 vesting over four years and expiring five years from issuance for 400,000 options and ten year for 200,000 options. The fair value (as determined as described below) of $710,752 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			1.61	%  to  2.12	%
Expected stock price volatility				186.74	%
Expected dividend payout				—
Expected option life-years (a)			3.75 to 6.25

__________________________

(a)The expected option life is based on “simplified” method.

 

 

The fair value of the vested portion previously granted employee options of $55,477 and $20,496 was charged during the three months ended March 31, 2015 and 2014, 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 March 31, 2015:

 

	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				4.99			$	1.00				185,000			$	1.00
	1.40				105,000				3.99				1.40				105,000				1.40
	1.12				365,000				4.70			$	1.12				290,000			$	1.14

 

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

 

				Number of Shares				Weighted Average Price Per Share
	Outstanding at December 31, 2013:				365,000			$	1.12
	Granted				—				—
	Exercised				—				—
	Expired				—				—
	Outstanding at December 31, 2014:				365,000			$	1.12
	Granted				—				—
	Exercised				—				—
	Expired				—				—
	Outstanding at March 31, 2015:				365,000			$	1.12

 

The fair value (as determined as described below) of the non-employee options of $2,805 and $1,728 was charged during the three-month period ended March 31, 2015 and 2014, 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			1.71	%
Expected stock price volatility			224.98	%
Expected dividend payout			—
Expected option life-years (a)			7.99

__________________________

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

 

 

NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

Litigation

  

On August 20, 2012, the Company, as plaintiff, 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. 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.

 

NOTE 8 - SUBSEQUENT EVENTS

 

In April 2015, the Company issued 8,000 shares for legal fees and 10,000 shares as consulting services.

 

In May 2015, the Company issued 24,000 shares for legal fees and 2,000 shares as consulting services.

 

On May 5, 2015, the Company converted its $3,000 note payable into 3,467 shares of common stock at a price of $1.00 per share.

 

 

ITEM 2. 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 unaudited condensed consolidated 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 March 31, 2015, we have sustained cumulative net losses of $11,149,432. Our losses have resulted primarily from research and development expenses, patent costs and legal and accounting expenses. From inception through March 31, 2015, 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. 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 the future.

 

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.

 

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.

 

In 2014, Iris received the IAIR Award for Best Company for Leadership in Personalized Medicine. Iris is in preparation for the launch of multiple products and services based upon its patented Nano-biochip and BioWindows Medical Informatics System. We currently have six US patents plus a portfolio of patents issued worldwide. We expect additional patent issuance in 2015. 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.

 

We have been in discussions with various entities in regard to launching our products in the US and abroad. We have also had discussions with equipment financing sources with respect to building or buying additional equipment, which would allow us to expand our manufacturing capacity.

 

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.

  

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.

 

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 three locations in California - Headquarters in Santa Clara (near Stanford University), Laboratory in San Leandro (near UC Berkeley and UC San Francisco), and Business Development in Davis (near UC Davis).

 

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.

 

Plan of Operation

 

We are a life science company focused on the development and commercialization of Nano-Biochips™ 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. The Nano-Biochips™ have the ability to quickly and very accurately analyze the activity of multiple genes involved in a specific disease. Our manufacturing system has the capability to produce a variety of chips with a choice of mRNA, microRNA, protein, or other biomarker probes for the diagnosis and prognosis of many diseases. 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, metabolic problems, and other diseases.

 

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 March 31, 2015, 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

 

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.

 

From our inception through March 31, 2015, we have not generated any revenues and have incurred cumulative losses of $11,149,432. 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.

 

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 718-10 Compensation (ASC 718-10). 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.

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

Revenues

 

We have generated no operating revenues from operations since our inception. On April 9, 2014, we formed a subsidiary company called Iris Wellness Labs, Inc. for the purpose of commercializing our products and services worldwide. We believe we will begin earning revenues from operations in 2015 from actual operations as we transition to that of an active growth stage company.

 

Costs and Expenses

 

Selling, general and administrative (“SG&A”) expenses increased by $80,857 from $176,363 for the three months ended March 31, 2014 to $257,220 for the three months ended March 31, 2015, primarily due to stock compensation expenses. 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 $214,850 for the three months ended March 31, 2015 and $38,079 for the three months ended March 31, 2014, a period to period increase of $176,771. The remaining SG&A expenses, which required cash amounted to $42,370 and $138,284 for the three months ended March 31, 2015 and 2014, respectively. We used stock in lieu of cash to conserve our cash resources.

 

Research and development costs increased from $14,226 for the three months ended March 31, 2014 to $21,603 for the three months ended March 31, 2015.

 

As a result of the above-mentioned expenses, net losses increased from $192,460 for the three months ended March 31, 2014 to a net loss of $280,208 for the three months ended March 31, 2015.

 

Liquidity and Capital Resources

 

As of March 31, 2015, we had working capital of $13,132 as compared to working capital of $80,715 as of December 31, 2014. Our cash position was $179,099 as of March 31, 2015 compared to $322,929 as of December 31, 2014. From three months ended March 31, 2015 we have incurred an operating cash flow deficit of $140,793, which has been principally financed through the private placement of our common stock, 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.

 

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 can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. We believe that we will continue to incur net losses and negative cash flows from operating activities for the next two years. Based on the resources available to us, we have sufficient cash to operate for one year at the current burn rate with our CEO’s agreement to continue fund our operations. We may need additional financing thereafter.

 

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 unaudited condensed consolidated financial statements require 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 consolidated 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 subtopic 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable 

 

ITEM 4. 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 Quarterly Report on Form 10-Q.  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 March 31, 2015, 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 March 31, 2015, 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 consolidated 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 consolidated financial statements that would not be prevented or detected.

 

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.

 

 Changes in Internal Control Over financial Reporting

 

During the three months ended March 31, 2015, there were no changes to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

On August 20, 2012, the Company, as plaintiff, 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. 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 1A. RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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

 

During the three months ended March 31, 2015, we issued 112,000 shares of common stock to consultants for services rendered and satisfaction of certain accrued expenses in the amount of $152,227. In connection with the issuance of such shares, we relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS.

 

Exhibit Number		Description of Exhibit
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.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

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

 

	IRIS BIOTECHNOLOGIES INC.
Date: May 15, 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)

 

 

 

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