Regenicin, Inc. - Quarter Report: 2015 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Regenicin, Inc.
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] 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 [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.

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 153,483,050 as of January 28, 2016.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Our consolidated financial statements included in this Form 10-Q are as follows:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended December 31, 2015 are not necessarily indicative of the results that can be expected for the full year.

REGENICIN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

REGENICIN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements.

REGENICIN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

See Notes to Consolidated Financial Statements.

REGENICIN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements.

REGENICIN, INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - THE COMPANY  

Windstar, Inc. was incorporated in the state of Nevada on September 6, 2007. On July 19, 2010, the Company amended its Articles of Incorporation to change the name of the Company to Regenicin, Inc. (“Regenicin”). In September 2013, Regenicin formed a new wholly-owned subsidiary for the sole purpose of conducting research in the State of Georgia (together, the “Company”). The subsidiary has no activity since its formation due to the lack of funding.

The Company’s original business was the development of a purification device.  Such business was assigned to the Company’s former management in July 2010.

The Company adopted a new business plan and intended to develop and commercialize a potentially lifesaving technology by the introduction of tissue-engineered skin substitutes to restore the qualities of healthy human skin for use in the treatment of burns, chronic wounds and a variety of plastic surgery procedures.

The Company entered into a Know-How License and Stock Purchase Agreement (the “Know-How SPA”) with Lonza Walkersville, Inc. (“Lonza Walkersville”) on July 21, 2010. Pursuant to the terms of the Know-How SPA, the Company paid Lonza Walkersville $3,000,000 and, in exchange, the Company was to receive an exclusive license to use certain proprietary know-how and information necessary to develop and seek approval by the U.S. Food and Drug Administration (“FDA”) for the commercial sale of technology held by the Cutanogen Corporation (“Cutanogen”), a subsidiary of Lonza Walkersville. Additionally, pursuant to the terms of the Know-How SPA, the Company was entitled to receive certain related assistance and support from Lonza Walkersville upon payment of the $3,000,000. Under the Know-How SPA, once FDA approval was secured for the commercial sale of the technology, the Company would be entitled to acquire Cutanogen, Lonza Walkersville’s subsidiary, for $2,000,000 in cash.  

After prolonged attempts to negotiate disputes with Lonza Walkersville failed, on September 30, 2013, the Company filed a lawsuit against Lonza Walkersville, Lonza Group Ltd. and Lonza America, Inc. (“Lonza America”) in Fulton County Superior Court in the State of Georgia.

On November 7, 2014, the Company entered into an Asset Sale Agreement (the “Sale Agreement”) with Amarantus Bioscience Holdings, Inc., (“Amarantus”). Under the Sale Agreement, the Company agreed to sell to Amarantus all of its rights and claims in the litigation currently pending in the United States District Court for the District of New Jersey against Lonza Walkersville and Lonza America, Inc. (the “Lonza Litigation”). This includes all of the Cutanogen intellectual property rights and any Lonza manufacturing know-how technology. In addition, the Company agreed to sell the PermaDerm® trademark and related intellectual property rights associated with it. The purchase price paid by Amarantus was: (i) $3,600,000 in cash, and (ii) shares of common stock in Amarantus having a value of $3,000,000. See Note 4 for a further discussion.

The Company intends to use the net proceeds of the transaction to fund development of cultured cell technology and to pursue approval of the products through the FDA. The Company has been developing its own unique cultured skin substitute since receiving Lonza’s termination notice. 

NOTE 2 - BASIS OF PRESENTATION

Interim Financial Statements:

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures 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. Operating results for the three months ended December 31, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2015, as filed with the Securities and Exchange Commission.

Going Concern:

The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred cumulative losses of approximately $11.0 million from inception, expects to incur further losses in the development of its business and has been dependent on funding operations through the issuance of convertible debt and private sale of equity securities. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company is using the proceeds from the Asset Sale to fund operations. Once the funds are exhausted, management plans to finance operations through the private or public placement of debt and/or equity securities. However, no assurance can be given at this time as to whether the Company will be able to obtain such financing. The consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 

Financial Instruments and Fair Value Measurement:

The Company measures fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the valuation methodologies in measuring fair value:

• Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable or inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The carrying value of cash, prepaid expenses and other current assets, accounts payable, accrued expenses and all loans and notes payable in the Company’s consolidated balance sheets approximated their values as of and December 31, 2015 and September 30, 2015 due to their short-term nature.

Common stock of Amarantus represents equity investments in common stock that the Company classifies as available for sale. Such investments are carried at fair value in the accompanying consolidated balance sheets. Fair value is determined under the guidelines of GAAP which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Realized gains and losses, determined using the first-in, first-out (FIFO) method, are included in net income. Unrealized gains and losses considered to be temporary are reported as other comprehensive income (loss) and are included in stockholders equity. Other than temporary declines in the fair value of investment is included in Other income (expense) on the statement of income.

The common stock of Amarantus is valued at the closing price reported on the active market on which the security is traded. This valuation methodology is considered to be using Level 1 inputs. The total value of Amarantus common stock at December 31, 2015 is $158,750. The unrealized loss for the three months ended December 31, 2015 and 2014 was $141,250 and $534,000 net of income taxes, respectively, and was reported as a component of comprehensive loss. During the fiscal year ended September 30, 2015, the Company recognized an other than temporary loss on the stock in the amount of $2.7 million which was recognized on the statement of net income.

Recent Pronouncements:

Management does not believe that any of the recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. 

NOTE 3 - INCOME (LOSS) PER SHARE

Basic income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted loss per share gives effect to dilutive convertible securities, options, warrants and other potential common stock outstanding during the period; only in periods in which such effect is dilutive. The following table summarizes the components of the income (loss) per common share calculation:

The following securities have been excluded from the calculation of net loss per share for the quarter ended December 31, 2015, as their effect would be anti-dilutive:

The following securities have been excluded from the diluted per share calculation for the quarter ended December 31, 2014 because the exercise price was greater than the average market price of the common shares:   

NOTE 4 - SALE OF ASSET

On November 7, 2014, the Company entered into a Sale Agreement with Amarantus, Clark Corporate Law Group LLP ("CCLG") and Gordon & Rees, LLP (“Gordon & Rees”). Under the Sale Agreement, the Company had agreed to sell to Amarantus all of its rights and claims in the Lonza Litigation. These include all of the Cutanogen intellectual property rights and any Lonza manufacturing know-how technology. In addition, the Company had agreed to sell its PermaDerm® trademark and related intellectual property rights associated with it. The purchase price to be paid by Amarantus was: i) $3,500,000 in cash, and (ii) shares of common stock in Amarantus having a value of $3,000,000. A portion of the cash purchase price was allocated to repay debt. On January 30, 2015, the agreement was amended whereby the cash portion of the purchase price was increased by $100,000 to $3,600,000 and the final payment was extended to February 20, 2015. Since Amarantus did not adhere to the original and amended agreements, the Company did not record the final installment of $2.5 million until it was received on February 24, 2015.

The payments to CCLG, satisfied in full the obligations owed to CCLG under its secured promissory note. The $3,000,000 in Amarantus common stock was satisfied by the issuance of 37,500,000 shares of Amarantus common stock from Amarantus to the Company. In addition to the sale price, Amarantus paid Gordon & Rees $450,000 upon entering the agreement. The payment to Gordon & Rees was to satisfy in full all contingent litigation fees and costs owed to Gordon & Rees in connection with the Lonza Litigation.

During the three months ended December 31, 2014, the Company recorded a gain on the sale of assets of $4,104,431. In addition, as a result of the Sale Agreement, the Company determined that it is no longer liable for accounts payable to Lonza in the amount of $973,374. The liability was reversed and included in operating expenses as an item of income during the three months ended December 31, 2014.

The Company also granted to Amarantus an exclusive five (5) year option to license any engineered skin designed for the treatment of patients designated as severely burned by the FDA developed by the Company. Amarantus can exercise this option at a cost of $10,000,000 plus a royalty of 5% on gross revenues in excess of $150 million.  

NOTE 5 - INTANGIBLE ASSETS

As discussed in Note 1, the Company paid $3,000,000 to Lonza in 2010 to purchase an exclusive know-how license and assistance in gaining FDA approval. The $3,000,000 payment was recorded as an intangible asset. Due to ongoing disputes and pending any settlement of the lawsuit, the Company subsequently determined that the value of the intangible asset and related intellectual property had been fully impaired. As a result, the balance of the intangible asset was $-0- at September 30, 2014.

In August 2010, the Company paid $7,500 and obtained the rights to the trademarks PermaDerm® and TempaDerm® from KJR-10 Corp.

As discussed above in Note 4, the Company sold its intangible assets on November 7, 2014. 

NOTE 6 - LOANS PAYABLE

Loan Payable:

In February 2011, an investor advanced $10,000. The loan does not bear interest and is due on demand. At both December 31, 2015 and September 30, 2015, the loan payable totaled $10,000.

Loans Payable - Related Parties:

During the year ended September 30, 2015, $95,000 of Company expenses were paid directly by Randall McCoy, the Company’s Chief Executive Officer and were submitted for reimbursement. At both December 31, 2015 and September 30, 2015, the outstanding balance was $95,000. 

During the quarter ended December 31, 2015, $15,500 of Company expenses were paid directly by John Weber, the Company’s Chief Financial Officer and were submitted for reimbursement. At December 31, 2015 the outstanding balance was $15,500.

At December 31, 2015 and September 30, 2015, loans payable - related parties totaled $110,500 and $95,000, respectively. 

NOTE 7 – BRIDGE FINANCING

On December 21, 2011, the Company issued a $150,000 promissory note to an individual. The note bore interest so that the Company would repay $175,000 on the maturity date of June 21, 2012, which correlated to an effective rate of 31.23%. Additional interest of 10% was charged on any late payments. The note was not paid at the maturity date and the Company is incurring additional interest described above. At both December 31, 2015 and September 30, 2015, the note balance was $175,000.

NOTE 8 - INCOME TAXES

The Company did not incur current tax expense for the three months ended December 31, 2015. The provision for income taxes of $1,965,700 for the three months ended December 31, 2014 represents deferred taxes.

At December 31, 2015, the Company had available approximately $3.7 million of net operating loss carry forwards which expire in the years 2029 through 2035. However, the use of the net operating loss carryforwards generated prior to September 30, 2011 totaling $0.7 million is limited under Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code of 1986, as amended (the Code), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code.

Significant components of the Company’s deferred tax assets at December 31, 2015 and September 30, 2015 are as follows: 

Due to the uncertainty of their realization, a valuation allowance has been established for all of the income tax benefit for these deferred tax assets.

At both December 31, 2015 and September 30, 2015, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of December 31, 2015 and 2014, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.

The Company files its federal income tax returns under a statute of limitations. The 2012 through 2015 tax years generally remain subject to examination by federal tax authorities. The Company has not filed any of its state income tax returns since inception. Due to recurring losses, management believes that once such returns are filed, the Company would incur state minimum tax liabilities that were not deemed material to accrue.  

NOTE 9 - STOCKHOLDERS’ DEFICIENCY

Preferred Stock:

Series A

Series A Preferred pays a dividend of 8% per annum on the stated value and have a liquidation preference equal to the stated value of the shares. Each share of Preferred Stock has an initial stated value of $1 and are convertible into shares of the Company’s common stock at the rate of 10 for 1.

The dividends are cumulative commencing on the issue date whether or not declared. Dividends amounted to $17,845 and $17,845 for the three months December 31, 2015 and 2014, respectively. At December 31, 2015 and September 30, 2015, dividends payable total $339,887 and $322,042, respectively, and are included in dividends payable on the balance sheet.

At both December 31, 2015 and September 30, 2015, 885,000 shares of Series A Preferred were outstanding.

Series B

On January 23, 2012, the Company designated a new class of preferred stock called Series B Convertible Preferred Stock (“Series B Preferred”). Four million shares have been authorized with a liquidation preference of $2.00 per share. Each share of Series B Preferred is convertible into ten shares of common stock. Holders of Series B Convertible Preferred Stock have a right to a dividend (pro-rata to each holder) based on a percentage of the gross revenue earned by the Company in the United States, if any, and the number of outstanding shares of Series B Convertible Preferred Stock, as follows: Year 1 - Total Dividend to all Series B holders = .03 x Gross Revenue in the U.S. Year 2 - Total Dividend to all Series B holders = .02 x Gross Revenue in the U.S. Year 3 - Total Dividend to all Series B holders = .01 x Gross Revenue in the U.S. At December 31, 2015, no shares of Series B Preferred are outstanding.

NOTE 10 - STOCK-BASED COMPENSATION

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 505, “Equity”. Costs are measured at the estimated fair value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by ASC 505.

On January 6, 2011, the Company approved the issuance of 885,672 options to each of the four members of the board of directors at an exercise price of $0.035, as amended, per share that expire on December 22, 2015. Effective as of the expiration date, the Company extended the term of those options to December 31, 2018. All other contractual terms of the options remained the same. The option exercise price was compared to the fair market value of the Company’s shares on the date when the extension was authorized by the Company, resulting in the immediate recognition of $67,895 in compensation expense. There is no deferred compensation expense associated with this transaction, since all extended options had previously been fully vested. The extended options were valued utilizing the Black-Scholes option pricing model with the following assumptions: Exercise price of $0.035, expected volatility of 208%, risk free rate of 1.31% and expected term of 3.03 years. Stock based compensation amounted to $67,895 and $0 for the three months ended December 31, 2015 and 2014, respectively. Stock-based compensation is included in general and administrative expenses.

NOTE 11 - RELATED PARTY TRANSACTIONS

The Company’s principal executive offices are located in Little Falls, New Jersey. The headquarters is located in the offices of McCoy Enterprises LLC, an entity controlled by Mr. McCoy. The office is attached to his residence but has its own entrances, restroom and kitchen facilities.

The Company also maintains an office in Pennington, New Jersey, which is the materials and testing laboratory. An employee of the Company is an owner of Materials Testing Laboratory.

No rent is charged for either premise.

NOTE 12 - SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date of this filing. 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

Overview

A year and half after filing the lawsuit against Lonza Walkersville, Inc., and Lonza America, Inc. (the “Lonza Litigation”), we began the new 2015 fiscal year in the process of consummating an agreement to sell certain assets, including the Lonza Litigation, to Amarantus Bioscience Holdings, Inc. (the “Amarantus Agreement”). The Amarantus Agreement was finally consummated at the end of February 2015, with their final payment to us and the transfer/dismissal of the Lonza Litigation. Managements' intentions at the time were to utilize the proceeds of the Amarantus Agreement to develop the Company's own autologous Engineered Skin Substitute (ESS). It was estimated that the proceeds from the sale of the Lonza Litigation, including the Amarantus stock received, would fund the development of the new product up to the initiation of clinical trials, while at the same time reducing outstanding liabilities and supporting the business operations of the Company. Unfortunately, due to a decline in the value of the Amarantus stock, management has determined at this time that the proceeds will fall short of that goal and that further funding will most likely need to be raised.

At the start of 2015, we reached an agreement with an internationally recognized institution to provide analytical R&D services for the proposed new product. This was a necessary step in the process of validating the science supporting our new approach. We believe their research has thus far not only provided support for our new science, but has also brought us product improvements in the form of the best starting materials, an extended shelf life, and potentially reducing the manufacturing time of the product. Upon completion, we expect this research will be part of our application for FDA approval to start clinical trials, and will provide the basis of the tech transfer to our chosen manufacturers.

NovaDerm™ was selected as the name for the proposed new product and documents were completed to register the name as a new Regenicin trademark. We expect NovaDerm™ will be registered trademark during the first quarter of 2016. As reported, the tradename PermaDerm® was transferred to Amarantus as part of that agreement.

We submitted a "Request for Designation" to the FDA to determine which group within the agency would be assigned to evaluate NovaDerm™. The FDA responded in a phone conversation with our CEO and staff that the product would be designated as a "Biologic". NovaDerm™ would thus be the first and only autologous Engineered Skin Substitute classified as a Biologic for treatment of burns greater than 30%, which not only serves as a point of product differentiation, but will also open up the opportunity for NovaDerm™ to apply for Orphan Designation, with all available benefits.

The most significant hurdle in the product development process to overcome, we believe, is the collagen substrate issue. Collagen is used in many products, but it is the essential ingredient to fabricate scaffolds on which cells are grown. Type 1 Bovine Collagen is harvested from corium, which is the lower part of the Dermis layer of the cow hide. The FDA regulations and guidance dictates any animal part used in treatment of humans must be from a "Closed Herd". In our search for Closed Herd collagen, we found that most of the suppliers' claiming to sell from a “Closed Herd" were not in fact compliant with the FDA regulations and lacked the traceability required for animal materials used for drugs, devices, biologics or combination products. It was important to our analysis of this issue that the FDA guidance documents clearly state that any product being requested for clinical trials would be denied until the applicant supplied the traceability to demonstrate that all components derived from animals were obtained from “Closed Herds”. We identified only one company that was able to satisfy the FDA's Closed Herd requirements. Negotiations are ongoing regarding obtaining collagen supplies from this company, and as a result of the importance of this material to our proposed new product, both Regenicin and members of management expect to enter into an arrangement to become part owners of this vertical supply business.

There are two separate manufacturing processes that must be performed to produce NovaDerm™. First, the collagen scaffold must be fabricated to act as the platform on which to grow the skin cells. Secondly, the patient’s actual cells must be cultured and organized to make the skin. 

Both are highly specialized manufacturing processes and must be performed under strict compliance with Current Good Manufacturing Practices (cGMP) as set forth by regulations enforced by the US Food and Drug Administration (FDA), and produced by a manufacturer registered with the FDA. After much discussion, we have identified two highly respected, recognized, domestic cGMP manufacturers that can provide cultured skin substitute materials for clinical trials, and which we anticipate eventually contracting with for the manufacture of NovaDerm™ when, and if, it is approved for commerce.

The pre-IND (investigational new drug) package for the FDA is substantially complete and must await the final results from the analytical R&D services report mentioned above. Once completed, we will request a Pre-IND meeting with the FDA. The Pre-IND meeting will give us the opportunity to ask any questions we may have for the FDA as well as getting feedback from the FDA on the information we provide about NovaDerm™. The meeting will also let us know if the FDA agrees with our plan of commercialization, or if additional information will be needed for the IND. In order to save time we have already completed much of the IND that will request permission to start clinical trials.

We also expect to continue our discussions with the Biomedical Advanced Research and Development Agency (BARDA) related to a grant application for NovaDerm™ product development.  

Our Business Moving Forward:

The company goal is to be positioned to enter FDA clinical trials in the second half of 2016. Management believes this goal is obtainable provided the following planned steps are completed on time as described below:

Calendar Q1 2016

Calendar Q2 2016

Calendar Q3 2016

Calendar Q4 2016

Begin Clinical Trials

Results of Operations for the Three Months Ended December 31, 2015 and 2014

We generated no revenues from September 6, 2007 (date of inception) to December 31, 2015. We do not expect to generate revenues until we are able to obtain FDA approval of our product and thereafter successfully market and sell the product.

We incurred operating expenses of $359,764 for the three months ended December 31, 2015, compared with operating expenses of $833,088 for the three months ended December 31, 2014. General and administrative expenses accounted for $291,131 of our operating expenses, $67,895 resulted from stock based compensation and $738 was from research and development for the three months ended December 31, 2015. The major difference and shift in operating expenses from the three months ended December 31, 2014 was accounted for by a reversal of our accounts payable in the amount of $973,374 related to the Lonza litigation. Otherwise, all operating expenses during the three months ended December 31, 2014 were from General and Administrative expenses in the amount of $140,286.

Net other income (expense) was ($4,411) for the three months ended December 31, 2015, as compared to net other income of $3,545,257 for the three months ended December 31, 2014. Other income and expenses for the three months ended December 31, 2015 consisted of only interest expenses of $4,411. Other income and expenses for the same period ended 2014 consisted of a loss on derivative liabilities of $528,230, an interest expense of $30,944, and a gain on sale of assets of $4,104,431.

After provision for preferred stock dividends of $17,845, we recorded net loss of $382,020 for the three months ended December 31, 2015. By comparison, we recorded net income attributable to common shareholders of $2,394,800 for the three months ended December 31, 2014. Our net income for the quarter ended December 31, 2014 was primarily the result of gains recorded as a result of our sale of intellectual property rights to Amarantus.

Liquidity and Capital Resources

As of December 31, 2015, we had cash of $794,845 and total current assets of $1,099,343. As of December 31, 2015, we had current liabilities of $2,322,761. We therefore had negative working capital of ($1,223,418).

Operating activities used $266,532 in cash for the three months ended December 31, 2015. The decrease in cash was primarily attributable to funding the loss for the period.

Investing activities and Financing activities provided no cash or cash expenditure during the quarter ended December 31, 2015. We note that the value of the shares of Amarantus we obtained from the sale of assets transaction have declined significantly in value since the consummation of the agreement.

We have issued various promissory notes in prior years to meet our short term demands. While this source of bridge financing has been helpful in the short term to meet our financial obligations, we will need additional financing to fund our operations, continue with the FDA approval process, and implement our business plan. Our long term financial needs are estimated to be approximately $8 to $10 million.

Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to reduce operating costs and fund operations through increased debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

Off Balance Sheet Arrangements

As of December 31, 2014, there were no off balance sheet arrangements.

Going Concern

Our consolidated financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred operating losses from inception, expect to incur further losses in the development of our business, and have been dependent on funding operations through the issuance of convertible debt and private sale of equity securities. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. The consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2015. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of December 31, 2015, our disclosure controls and procedures were not effective: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting

Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending September 30, 2016: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

We are unable to remedy our controls related to the inadequate segregation of duties and ineffective risk management until we receive financing to hire additional employees. 

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2015 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us. 

Item 1A. Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

For the three months ended December 31, 2015, we issued 0 shares of common stock for the conversion of principal issued under our bridge financing and accrued interest.

These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

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.