ENTEROLOGICS, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Enterologics, Inc. was incorporated under the laws of the State of Nevada on September 2, 2009 to develop, test, and obtaining regulatory approvals for, manufacturing, commercializing and selling new prescription drug products.
On September 6, 2011 Enterologics, Inc acquired BioBalance Corp and BioBalance LLC, and they are a wholly-owned subsidiary of Enterologics, Inc.
Activities during the development stage include developing the business plan, acquiring technology and raising capital.
(B) Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
(C) Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company at times has cash in excess of FDIC insurance limits and places its temporary cash investments with high credit quality financial institutions. At March 31, 2013 and 2012 the Company did not have any balances that exceeded FDIC insurance limits.
(D) Website Development
The Company has adopted the provisions of FASB Accounting Standards Codification No. 350 Intangible-Goodwills and Other. Costs incurred in the planning stage of a website are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated three year life of the asset. During the three months ended March 31, 2013 and 2012, the Company incurred $3,145 respectively, in website development costs. As of March 31, 2013 and 2012, amortization of $2,096 and $,1834 respectively has been taken.
(E) Principles of Consolidation
The consolidated financial statements included the accounts of Enterologics, Inc and its wholly-owned subsidiary Biobalance Corp, and Biobalance LLC, from the date of acquisition of September 6, 2011 through March 31, 2013. All material intercompany balances and transactions have been eliminated in consolidation.
(F) Stock-Based Compensation
In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation – Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718. FASB Accounting Standards Codification No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.
(G) Loss Per Share
Basic and diluted net (loss) per common share is computed based upon the weighted average common shares outstanding as defined by FASB Accounting Standards Codification Topic 260, “Earnings Per Share.” As of March 31, 2013 and 2012, there were 38,804,487 and 33,166,649 shares issued and outstanding, respectively.
(H) Research and Development
In accordance with ASC Topic 730, “Research and Development”, expenditures for research and development of the Company’s products and services are expensed when incurred, and are included in operating expenses. The Company recognized research and development costs of $10,967 and $28,995 for the three months ended March 31, 2013 and 2012, respectively.
(I) Fair Value of Financial Instruments
The carrying amounts of the Company's accounts payable, accrued expenses, and notes payable related approximate fair value due to the relatively short period to maturity for these instruments.
(J) Acquisitions and Intangible Assets
We account for acquisitions in accordance with ASC 805, Business Combinations (“ASC 805”) and ASC 350, Intangibles- Goodwill and Other (“ASC 350”). The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. Our unaudited condensed consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.
The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following an asset acquisition.
(K) Long-lived Assets
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets in accordance with ASC Topic 360, which generally requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period of time, and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair market value of the assets.
(L) Impairment of Goodwill and Intangible Assets
We evaluate goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of the goodwill may not be fully recoverable. We evaluate goodwill for impairment at the reporting unit level and have allocated goodwill to the reporting unit based on an estimate of its relative fair value. The evaluation is a two-step approach requiring us to compute the fair value of a reporting unit and compare it with its carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed to measure the potential goodwill impairment. Significant judgment is involved in estimating cash flows and fair value. Management’s estimates, which fall under Level 3 of the U.S. GAAP fair value hierarchy as defined by FASB ASC Topic 820-10-35, are based on historical and projected operating performance, recent market transactions and current industry trading multiples. See Note 12 for further information regarding goodwill and related impairment charges recorded during 2013 and 2012.
Other intangible assets are tested for impairment at least annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable. We estimate the fair value of our Patent and Website using the best information available, using both a market approach, as well as a discounted cash flow model, commonly referred to as the income approach. If the estimated fair value is less than the carrying value, the intangible asset is written down to its estimated fair value. Significant judgment is involved in estimating fair value and long-term revenue forecasts. Management’s estimates, which fall under Level 3 of the U.S. GAAP fair value hierarchy as defined by FASB ASC Topic 820-10-35, are based on historical and projected revenue performance and industry trends. As of December 31, 2012, the estimated fair value of our other intangible assets exceeded their carrying values.
(M) Fair Value
The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.
ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
| | · | Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets; |
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| | · | Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and |
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| | · | Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities. |
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| | | The valuation techniques that may be used to measure fair value are as follows: |
| | A. | Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities |
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| | B. | Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method |
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| | C. | Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost) |
The Company also adopted the provisions of ASC 825, Financial Instruments. ASC 825allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of this Statement and did not elect the fair value option for any financial assets and liabilities transacted in the three months ended March 31, 2013 and 2012. All of the Company’s intangible assets are valued using the level 3 inputs as of March 31, 2013.
(N) Recent Accounting Pronouncements
In July 2012 the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies how entities test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test currently required by ASC Topic 350-30 on general intangibles other than goodwill. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, provided that the entity has not yet issued its financial statements. The Company does not anticipate any material impact from the adoption of ASU 2012-02.
In August 2012, the FASB issued ASU 2012-03, Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010 in ASU No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In October 2012, FASB issued ASU 2012-04, Technical Corrections and Improvements in ASU No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material to the Company.
NOTE 2 ASSET PURCHASE AQUISITION
On September 6, 2011, the Company acquired 100% of the common stock of Bio Balance Corp and its subsidiary Bio Balance LLC from New York Health Care, Inc for $300,000 in cash, 393,391 shares of our common stock with a fair value of $150,000 based on the fair value on the date of the grant and a Note Payable for $100,000 to be paid in three equal installments of $33,333.33 with the first installment due on September 6, 2012, and annually thereafter with the last payment due no later than September 6, 2014. This note accrues interest at a rate of 5% per annum and $1,250 and $1,250 of interest expense was recognized for the three months ended March 31, 2013 and 2012, respectively. These financial statements are presented in a consolidated format.
| Purchase price | | $ | 550,000 | |
| Patents | | $ | 93,644 | |
| Goodwill | | | 481,353 | |
| Less: Assumption of Accounts Payable | | | -24,997 | |
| Total assets acquired | | $ | 550,000 | |
The table below summarizes the unaudited pro forma information of the results of operations as though the acquisitions had been completed as of January 1, 2011:
| | Enterologics Corp and Subsidiary year ended December 31, 2012 | | Enterologics Corp and subsidiary year ended December 31, 2011 | |
| Gross revenue | - | | $ | - | |
| Total expenses | (451,600) | | | (234,542) | |
| Net income (loss) before taxes | (451,600) | | $ | (243,542) | |
| Earnings (loss) per share | (0.01) | | $ | (0.01) | |
NOTE 3 NOTES PAYABLE- RELATED PARTIES
On March 23, 2009 a related party loaned $3,500 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 5%, and matured on February 28, 2010. As of December 31, 2009 the Company recorded accrued interest of $135. In February 2010, the loan and accrued interest of $151 was repaid. (See note 5).
On August 17, 2010 a related party loaned $5,000 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 5%, and originally matures on November 15, 2010, which was extended until February 1, 2011. As of December 31, 2010 the Company recorded accrued interest of $93. On January 10, 2010 the loan and accrued interest of $21 were repaid. (See note 5).
On October 22, 2010 a related party loaned $5,000 to the Company for operating expenses. The loan is unsecured, carries an interest rate of 5%, and matures on January 15, 2011. As of December 31, 2010 the Company recorded accrued interest of $45. On January 10, 2010 the loan and accrued interest of $21 were repaid. (See note 5).
On November 24, 2010 a related party loaned $2,000 to the Company for operating expenses. The loan is unsecured, carries an interest rate of 5%, and matures on May 23, 2011. As of December 31, 2010 the Company recorded accrued interest of $10On January 10, 2010 the loan and accrued interest of $8 were repaid. (See note 5).
On January 7, 2011, the Company entered into a loan agreement for a series of loans up to an aggregate of $50,000 and borrowed an initial $20,000 and issued 7% promissory notes to the lender. The principal and accrued interest under the note is due and payable on the earlier of October 9, 2011 or the date the Company receives $350,000 or more in proceeds from the sale of securities in a private offering or through an effective registration statement. During February 2011, the Company issued an additional promissory note for $10,000 due the earlier of October 9, 2011 or the date the Company receives proceeds from the sale of securities in a private offering or through an effective registration statement. In consideration of the loan commitments, the Company issued the lender 500,000 shares of common stock with a fair value of $25,000 ($.05 per share) based on the most recent cash offering price (See Notes 2 and 5). On April 11, 2011 $30,000 plus accrued interest of $301 was repaid against all of the previously issued promissory notes.
On September 14, 2011 a related party loaned $50,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 6%, and be demanded to be repaid on or after October 31, 2011. On October 15, 2012 the loan and accrued interest of $3,192 were repaid. (See note 5).
On December 2, 2011 a related party loaned $25,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid not before December 31, 2011. On January 18, 2012 the loan and accrued interest of $104 were repaid. (See note 5).
On December 19, 2011 a related party loaned $25,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid not before December 31, 2011. On January 18, 2012 the loan and accrued interest of $161 were repaid. (See note 5).
On April 27, 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 6%, and be demanded to be repaid not before May 30, 2012. On May 10, 2012 the loan and accrued interest of $21 were repaid. (See note 5).
On July 31, 2012 a related party loaned $15,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid on or after August 5, 2012 . On August 5, 2012 the loan and accrued interest of $10 were repaid. (See note 5).
On August 6, 2012 a related party loaned $4,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $22 were repaid. (See note 5).
On September 10 2012 a related party loaned $5,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $13 were repaid. (See note 5).
On September 14 2012 a related party loaned $7,500 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $17 were repaid. (See note 5).
On September 25 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $16 were repaid. (See note 5).
On November 20, 2012 a related party loaned $15,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $275. (See note 5).
On November 29, 2012 a related party loaned $7,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $120. (See note 5).
On December 7, 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $158. (See note 5).
On February 19 2013 a related party loaned $1,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $41. (See note 5).
On March 11, 2013 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $18. (See note 5).
On March 19 2013 a related party loaned $2,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $2. (See note 5).
NOTE 4 STOCKHOLDERS' EQUITY / (DEFICIENCY)
(A) Common Stock Issued to Founders for Cash
In September 2009 the Company sold a total of 10,300,000 shares of common stock to four founders for $1,030 ($.0001 per share).
(B) Common Stock Issued for Cash
In 2009, the Company sold a total of 15,700,000 shares of common stock to 55 individuals for cash of $47,080 and a subscription receivable of $20 ($.003 per share). Cash of $20 was collected during the year ended December 31, 2010.
During the three months ended March 31, 2013, the Company sold a total of 1,750,000 shares of common stock to 3 entities for cash of $11,000 ($0.01 per share).
On September 6, 2011, the Company issued 393,391 share of common stock as part of an asset purchase acquisition of Bio Balance Corp and its subsidiary Bio Balance LLC from New York Health Care. In addition $300,000 in cash was paid to New York Health Care and a Note Payable was issued for $100,000 to New York Health Care to be paid in three equal installments of $33,333.33 with the first installment due on September 6, 2012, and the annually thereafter with the last payment due no later than September 6, 2014. This note accrues interest at a rate of 5% per annum and $1,250 of interest expense was recognized for the three months ended March 31, 2013.
(C) Loan Commitment Fee
On January 7, 2011 the Company issued 500,000 shares of common stock to a related party valued at ($.05 per share) the most recent cash offering price, as a loan commitment fee. The commitment ends on September 7, 2011. The Company is amortizing the value over the term of the commitment.
On January 11, 2012 the Company issued 500,000 shares of common stock valued at ($.19 per share) the most recent cash offering price, as a loan commitment fee. The commitment ends on October 1, 2012. The Company is amortizing the value over the term of the commitment.
On May 10, 2012 the Company issued 250,000 shares of common stock valued at ($.05 per share) the most recent cash offering price, as a loan commitment fee. The commitment ends on November 10, 2012. The Company is amortizing the value over the term of the commitment.
On July 31 , 2012 the Company issued 1,000,000 shares of common stock valued at ($.11 per share) the most recent cash offering price, as a loan commitment fee. The commitment ends on the six months anniversary or earlier from the proceeds of a capital raise. The Company is amortizing the value over the term of the commitment
(D) Imputed Compensation
During the three months ended March 31, 2013 and 2012, an individual contributed services to the Company at a fair value of $0 and $3,000 respectively.
(E)Stock Issued for Services
In May 2010 Company issued 20,000 shares of common stock to an outside vendor for services with a fair value of $60 ($.003 per share), based on a recent cash offering price.
(F) Preferred Stock
In October 2009, the Company amended its Articles of Incorporation to increase its authorized shares to 155,000,000 shares which shall consist of 150,000,000 shares of common stock with a par value of $.0001 and 5,000,000 shares of preferred stock with a par value of $.0001 with rights and preferences to be determined by the Board of Directors.
NOTE 5 RELATED PARTY TRANSACTIONS
On March 23, 2009 a related party loaned $3,500 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 5%, and matured on February 28, 2010. As of December 31, 2009 the Company recorded accrued interest of $135. In February 2010, the loan and accrued interest of $151 was repaid.
On August 17, 2010 a related party loaned $5,000 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 5%, and originally matures on November 15, 2010, which was extended until February 1, 2011. As of December 31, 2010 the Company recorded accrued interest of $93. On January 10, 2010 the loan and accrued interest of $21 were repaid.
On October 22, 2010 a related party loaned $5,000 to the Company for operating expenses. The loan is unsecured, carries an interest rate of 5%, and matures on January 15, 2011. As of December 31, 2010 the Company recorded accrued interest of $45. On January 10, 2010 the loan and accrued interest of $21 were repaid.
On November 24, 2010 a related party loaned $2,000 to the Company for operating expenses. The loan is unsecured, carries an interest rate of 5%, and matures on May 23, 2011. As of December 31, 2010 the Company recorded accrued interest of $10On January 10, 2010 the loan and accrued interest of $8 were repaid.
On September 14, 2011 a related party loaned $50,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 6%, and be demanded to be repaid on or after October 31, 2011. On October 15, 2012 the loan and accrued interest of $3,192 were repaid.
On December 2, 2011 a related party loaned $25,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid not before December 31, 2011. On January 18, 2012 the loan and accrued interest of $104 were repaid.
On December 19, 2011 a related party loaned $25,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid not before December 31, 2011. On January 18, 2012 the loan and accrued interest of $161 were repaid.
On April 27, 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 6%, and be demanded to be repaid not before May 30, 2012. On May 10, 2012 the loan and accrued interest of $21 were repaid.
On July 31, 2012 a related party loaned $15,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%, and be demanded to be repaid on or after August 5, 2012 . On August 5, 2012 the loan and accrued interest of $10 were repaid.
On August 6, 2012 a related party loaned $4,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $22 were repaid.
On September 10 2012 a related party loaned $5,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $13 were repaid.
On September 14 2012 a related party loaned $7,500 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $17 were repaid.
On September 25 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3% . On October 11, 2012 the loan and accrued interest of $16 were repaid.
On November 20, 2012 a related party loaned $15,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $275. (See note 3).
On November 29, 2012 a related party loaned $7,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $120. (See note 3).
On December 7, 2012 a related party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 5%. As of March 31, 2013 the loan accrued interest of $158. (See note 3).
NOTE 6 COMMITMENTS AND CONTINGENCIES
On January 12, 2011, the Company entered into a letter of intent with UST pursuant to which it was granted a right of first refusal until May 15, 2012 to enter into a definitive license agreement for the exclusive, world-wide license to UST’s intellectual property for the preservation/stabilization of E. coli probiotic bacteria. The license is intended to specifically cover E. coli bacteria when used as a probiotic and exclude use as a system for delivering vaccine materials to the gastrointestinal tract.
On May 15, 2011, the company entered into a one-year development agreement for UST to conduct suitability studies and protocols to produce data demonstrating the suitability of its stabilization technology to produce a thermostable, commercially viable formulation of an E. coli probiotic satisfying their specifications. It is contemplated that during such one-year development project the Company will make monthly payments of at least CA$8,333 (which amount may be increased depending on the scope of the work). From January 15, 2011 to May 15, 2012 UST will not negotiate with, or entertain or consider offers from, any third party with respect to the same terms of the letter of intent. The Company’s right to enter into a definitive license agreement with UST will terminate if it fails to make such monthly payments.
The letter of intent provides that the Company will negotiate in good faith with UST to enter into a license agreement by May 15, 2012 for the exclusive, worldwide license to develop, manufacture, use, sublicense, market and sell UST’s patents, patent applications, know-how and trade secrets relating to its preservation/stabilization of E. coli bacteria. Such agreement will expire on the later of (i) 20 years or (ii) the last to expire patent included in the licensed intellectual property. On May 14, 2012 the period for the Company to enter into a License agreement was extended to August 15, 2012. On August 15, 2012 the period for the Company to enter into a License agreement was extended to October 15, 2012. As of October 15, 2012 the period for the Company to enter into a License agreement was extended to December 15, 2012. As of December 31, 2012 the period for the Company to enter into a License agreement was extended to April 30, 2013. No payments will be made for months of January to April 2013. In lieu of payments for these months the company has agreed to issue 200,000 shares of its common stock par value $0.001 in favor of Universal Stabilization Technologies, Inc.
On January 30, 2013 the Company issued 100,000 shares of our common stock to UST and to pay CA$75,000 as license issue and technology transfer fees. In addition, the Company will be obligated to pay UST CA$50,000 for each new patent granted, minimum annual license payments of CA$25,000 until the first FDA approval of the BLA and CA$50,000 following the approval of the BLA, with annual payments increasing by CA$25,000 thereafter to a maximum of CA$100,000 for a orphan drug and CA$150,000 for a drug for a larger indication market. The Company will also be required to make royalty payments of up to 3% on net sales of the licensed products sold by us or our sublicenses. The Company’s right to sublicense under the license agreement is subject to UST’s approval, which will not be unreasonably withheld. In the event that the Company receives other than cash consideration from a sublicense, it will be required to pay 20% of the fair market value of such consideration to UST and in the case of equity, 20% of shares issued.
All amounts required to be paid to UST by the Company will be made in Canadian dollars at UST’s request. The Company will be required to cover any currency conversion and bank transfer costs up to 1% of the total payment. During the three months ended March 31, 2013 the company made payments to UST totaling $28,995 US Dollars.
NOTE 7 NOTES PAYABLE
On January 11, 2012, the Company entered into a loan agreement for $100,000 and issued the initial 5% promissory note for $50,000 to the lender on January 19, 2012. The principal and accrued interest under the note is due and payable on July 16, 2012 which has been extended to September 15, 2012 and has a conversion feature. An additional 5 % promissory note for $25,000 was issued on February 1, 2012. The principal and accrued interest are due and payable on August 1, 2012 which has been extended to October1, 2012.The final 5 % promissory note for $25,000 was issued on March 14, 2012. The principal and accrued interest are due and payable on September 14, 2012, with an extension issued to May 1 2013, and are currently in default. In consideration of the loan, the Company issued the lender 500,000 shares of common stock with a fair value of $95,000 ($.19 per share) based on the most recent cash offering price.
On May 10, 2012, the Company entered into a loan agreement for $50,000 and issued a 5% promissory note to the lender. The principal and accrued interest under the note is due and payable on November 10, 2012 which was extended to May 1, 2013, which is currently in default and has a conversion feature . In consideration of the loan, the Company issued the lender 250,000 shares of common stock with a fair value of $12, 500 ($.05 per share) based on the most recent cash offering price.
On July 31, 2012, the Company entered into an unsecured loan agreement for a series of loans up to an aggregate of $250,000 and borrowed an initial $15,000 and issued 6% promissory notes to the lender on August 1, 2012. The principal and accrued interest under the note is due and payable on the six months anniversary or earlier from the proceeds of a capital raise. An additional 6 % promissory note for $30,000 was issued on October 11, 2012. The principal and accrued interest are due and payable on April 11, 2013. An additional 6 % promissory note for $55,000 was issued on October 15, 2012. The principal and accrued interest are due and payable on April 15, 2013.In consideration of the loan commitments, the Company issued the lender 1,000,000 shares of common stock with a fair value of $110,000 ($.11 per share) based on the most recent cash offering price .The company did not borrow additional funds from the lender under the agreement and the commitment to fund additional loans expired on November 30, 2012.
On October 5, 2012 an unrelated party loaned $2,500 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%.The note was repaid with interest on October 11, 2012.
On February 19 2013 a unrelated party loaned $1,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $41. (See note 5).
On March 11, 2013 a unrelated party loaned $10,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $18. (See note 5).
On March 19 2013 a unrelated party loaned $2,000 to the Company for operating expenses. The Demand Promissory Note is unsecured, carries an interest rate of 3%. As of March 31, 2013 the loan accrued interest of $2. (See note 5).
NOTE 8 GOING CONCERN
As reflected in the accompanying financial statements, the Company is in the development stage with no operations, a net loss of $1,236,676 from inception, used cash in operations from inception of $451,985. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 9 GOODWILL AND INTANGIBLE ASSETS
In accordance with accounting standards for goodwill and other intangible assets, goodwill is not amortized but requires testing for potential impairment, at a minimum on an annual basis, or when indications of potential impairment exist. The impairment test for goodwill utilizes a fair value approach. The impairment test for identifiable intangible assets not subject to amortization is also performed annually or when impairment indications exist, and consist of a comparison of the fair value of the intangible asset with its carrying amount. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate other long-lived assets. Our annual impairment analysis is performed at the last day of our accounting period each year.
We perform our annual goodwill and intangible impairment test required under accounting standards at the last day of our accounting period each year, or when an indication of potential impairment exists. The goodwill impairment test involves a two-step process as described in the “Summary of Significant Accounting Policies” in Note 1. The first step is a comparison of each reporting unit's fair value to its carrying value. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss.
After performing the first step of the process, we determined goodwill recorded in 2012 were potentially impaired. The company has not had any revenue generated from related goodwill. After performing the second step of the process, we determined that the total amount of goodwill recorded at these reporting units was impaired and recorded charges of $0 and $481,353 and $0 in three months ended March 31, 2013 and 2012, respectively.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred at a date other than the annual impairment test date. Such indicators may include, among others: a significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates.
NOTE 10 SUBSEQUENT EVENTS
On January 11, 2012, the Company entered into a loan agreement for $100,000 and issued the initial 5% promissory note for $50,000 to the lender on January 19, 2012. The principal and accrued interest under the note is due and payable on July 16, 2012 which has been extended to September 15, 2012 and has a conversion feature. An additional 5 % promissory note for $25,000 was issued on February 1, 2012. The principal and accrued interest are due and payable on August 1, 2012 which has been extended to October1, 2012.The final 5 % promissory note for $25,000 was issued on March 14, 2012. The principal and accrued interest are due and payable on September 14, 2012, with an extension issued to May 1 2013, and are currently in default. In consideration of the loan, the Company issued the lender 500,000 shares of common stock with a fair value of $95,000 ($.19 per share) based on the most recent cash offering price.
On May 10, 2012, the Company entered into a loan agreement for $50,000 and issued a 5% promissory note to the lender. The principal and accrued interest under the note is due and payable on November 10, 2012 which was extended to May 1, 2013, which is currently in default and has a conversion feature . In consideration of the loan, the Company issued the lender 250,000 shares of common stock with a fair value of $12, 500 ($.05 per share) based on the most recent cash offering price.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
