10QSB 1 calba10q081407woex.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 000-33039 CALBATECH, INC. (Exact name of Company as specified in its charter) Nevada 86-0932112 (State or jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 23341 Del Lago, Laguna Hills, CA 92653 (Address of principal executive offices) (Zip Code) Company's telephone number: (949) 450-9910 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) been subject to such filing requirements for the past 90 days. Yes X No. As of June 30, 2007, the Company had 124,926,732 shares of common stock issued and outstanding. Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets: June 30, 2007 and December 31, 2006 Condensed Consolidated Statements of Operations: Three and Six Months Ended June 30, 2007 and 2006 Condensed Consolidated Statements of Cash Flows: Six Months Ended June 30, 2007 and 2006 Notes to Condensed Consolidated Financial Statements: Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Part II - Other Information Item 1. Legal Proceedings Item 2. Changes In Securities And Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission Of Matters To A Vote Of Security Holders Item 5. Other Information Item 6. Exhibits And Reports On Form 8-K Signature REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Turner, Jones &Associates, P.L.L.C. Certified Public Accountants 108 Center Street, North, 2ndFloor Vienna, Virginia 22180-5712 (703) 242-6500 FAX (703) 242-1600 To the Board of Directors and Stockholders of CalbaTech, Inc. 15375 Barranca Parkway, Suite I-101 Irvine, CA 92618 We have reviewed the condensed consolidated balance sheet of CalbaTech, Inc. and subsidiaries as of June 30, 2007, and the related condensed consolidated statements of income and cash flows for the six-month periods ended June 30, 2007 and 2006. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial statements, referred to above, for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CalbaTech, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. s/s: Turner, Jones & Associates, P.L.L.C Turner, Jones & Associates, P.L.L.C Vienna, Virginia August 13, 2007 CALBATECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) June 30, December 31, 2007 2006 ASSETS CURRENT ASSETS: Cash $ 18,492 $ 10,212 Accounts receivable, net of allowance of $14,625 and $17,642, respectively 127,296 94,181 Inventory 188,577 212,405 Prepaid expenses 28,214 31,973 Total current assets 362,579 348,771 Fixed assets, net 105,854 123,665 Other assets: Unamortized financing costs, net of accumulated amortization and write off of $264,964 and $248,994, respectively 32,037 48,007 $ 500,470 $ 520,443 LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Cash overdraft $ - $ 12,401 Accounts payable and accrued expenses 1,104,076 1,044,884 Capital leases payable 36,093 35,642 Notes payable - banks 69,745 67,250 Notes payable, including $125,754 and $84,878 to related parties, respectively 331,954 554,689 Settlement liability 644,376 619,354 Convertible notes payable 53,577 53,577 Total current liabilities 2,239,822 2,387,797 Long term debt, less current maturities: Capital leases payable 23,936 29,889 Derivative liability related to convertible debentures 1,547,290 1,732,097 Warrant liability related to convertible debentures 142,236 563,728 Note payable to banks 16,675 21,190 Convertible notes payable 706,059 540,083 Total long term liabilities 2,436,196 2,886,987 Total liabilities 4,676,018 5,274,784 DEFICIENCY IN STOCKHOLDERS' EQUITY Preferred stock, par value $0.001 per share; 25,000,000 shares authorized; 1,250,000 shares issued and outstanding as of June 30, 2007 and December 31, 2006 1,250 1,250 Common stock, par value $0.001 per share; 200,000,000 shares authorized, 124,926,732 and 108,791,489 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively 124,928 108,792 Additional paid in capital 7,291,478 6,803,867 Treasury stock, at cost (87,647) (87,647) Accumulated deficit (11,505,557) (11,580,603) Total deficiency in stockholders' equity (4,175,548) (4,754,341) $ 500,470 $ 520,443
See the accompanying notes to the consolidated financial statements CALBATECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, Six months ended June 30, 2007 2006 2007 2006 REVENUES: Net sales $ 285,691 $ 242,555 $ 597,661 $ 655,122 Cost of sales (128,321) (37,178) (280,463) (232,273) Gross profit 157,370 205,377 317,198 422,849 OPERATING EXPENSES: Selling and administrative 398,213 397,857 866,449 966,494 Depreciation and amortization 3,366 6,054 6,978 12,107 Total operating expenses 401,579 403,911 873,427 978,601 LOSS FROM OPERATIONS (244,209) (198,534) (556,229) (555,752) Other income - 3,000 3,000 7,700 Income derived from settlement of debt 315,624 - 315,624 - Unrealized gain (loss) on adjustment of derivative and warrant liability to fair value of underlying securities 78,983 (820,583) 606,299 973,224 Interest expense, net (141,403) (148,059) (293,648) (411,809) Net Income (Loss) before income taxes 8,995 (1,164,176) 75,046 13,363 Income taxes - - - - NET INCOME (LOSS) $ 8,995 $(1,164,176) $ 75,046 $ 13,363 Net Income per common share-basic (Note A) $ 0.00 $ (0.01) $ 0.00 $ 0.00 Net Income per common stock-assuming fully diluted (Note A) $ 0.00 (See Note A) (See Note A) Weighted average number of common shares outstanding-basic 123,487,101 95,918,110 119,096,746 91,334,214 Weighted average number of common shares outstanding-fully diluted 291,666,743 (See Note A) (See Note A)
See the accompanying notes to the consolidated financial statements CALBATECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 75,046 $ 13,363 Adjustments to reconcile net loss to net cash used in operating activities: Adjustments for depreciation and amortization 17,811 22,907 Common stock issued or subscribed in connection with services rendered 163,701 37,750 Common stock issued for officer compensation 311,040 207,163 Common stock issued in settlement of debt 29,006 123,725 Income derived in settlement of debt (315,624) - Accretion of convertible notes payable 165,976 179,737 Unrealized losses (gains) on adjustment of derivative and warrant liability to fair value of underlying securities (606,299) (973,224) Amortization and write off of financing costs 15,970 55,391 Amortization of prepaid interest - 49,911 (Increase) decrease in: Accounts receivable (33,115) 23,032 Inventory 23,828 75,103 Prepaid expenses 3,759 (407) Increase (decrease) in: Cash overdraft (12,401) - Accounts payable and accrued expenses 154,405 (27,831) Net cash used in operating activities (6,897) (213,380) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of fixed assets - (6,495) Net cash used in investing activities - (6,495) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from (to) shareholders 31,876 - Proceeds (payments) on notes payable and capital leases, net (16,699) (45,605) Net cash provided by financing activities 15,177 (45,605) Net decrease in cash and cash equivalents 8,280 (265,480) Cash and cash equivalents at beginning of period 10,212 301,143 Cash and cash equivalents at end of period $ 18,492 $ 35,663 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 3,595 $ 9,443 Cash paid during the period for taxes - - Unrealized (gain) loss on adjustment of derivative and warrant liability to fair value of underlying securities $ (606,299) $ (973,224) NON - CASH FINANCING ACTIVITIES: Common stock issued in exchange for services $ 474,741 $ 244,913
See the accompanying notes to the consolidated financial statements CALBATECH, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 NOTE A - SUMMARY OF ACCOUNTING POLICIES General The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. 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 and six-month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. The unaudited consolidated financial statements should be read in conjunction with the consolidated December 31, 2006 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. Business and Basis of Presentation CalbaTech, Inc., (formerly Traffic Technology Inc.) ("Company") was organized on April 29, 2002 under the laws of the state of Nevada. The Company is focused on incubating life science based companies that are developing next generation products and technologies. The Company acquired Molecula Research Laboratories, LLC as a subsidiary in October, 2003. On December 31, 2005, Molecula Research Laboratories, LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula, Inc. in the state of Nevada. Products and intellectual property of the dissolved LLC were transferred to Molecula, Inc., in the state of Nevada. Molecula develops and sells numerous research reagents for cell transfection, DNA and RNA purification, protein expression, gene expression analysis and other innovative and fundamental products. The Company, through another of its subsidiaries, KD Medical, Inc., manufactures and distributes microbiological culture medias and other research regents. KD Medical's products are used in genetic engineering, drug discovery, molecular biology labs and biopharmaceutical production. The Company, through another of its subsidiaries, LifeStem, Inc., is positioning itself to become a leader in the adult stem cell banking business, a leading supplier of "Cellular Logistics" by providing services and technologies to facilitate the efficient acquisition and delivery of purified adult stem cells, development of stem cell delivery devices for clinical applications and clinical applications of specific stem cell based therapies. From its inception through the date of these financial statements the Company has incurred significant operating expenses. Consequently, its operations are subject to all risks inherent in the establishment of a new business enterprise. As of June 30, 2007, the Company has accumulated losses of $11,505,557 which include an unrealized loss on derivative and warrant liability related to convertible debentures of $295,825 for the years ended December 31, 2006 and 2005 and a goodwill impairment of $1,624,213 for the year ended December 31, 2004. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Molecularware, Inc., KD Medical Inc., LifeStem, Inc., Molecula Research Laboratories, LLC and that of Traffic Technology, Inc. with whom the Registrant merged. All significant inter-company transactions and balances have been eliminated in consolidation. Acquisitions On January 3, 2003, the Company completed an Agreement and Plan of Exchange ("Agreement") with Traffic Technology, Inc. ("Traffic"). As a result of the acquisition, there was a change in control of the public entity, and Traffic Technology, Inc. changed its name to CalbaTech, Inc. For accounting purposes, Calbatech became the surviving entity. The transaction was accounted for using the purchase method of accounting. The total purchase price and carrying value of net assets acquired of Traffic was $200,000 of which $100,000 was paid in cash and $100,000 was paid in notes payable. The results of operations of Traffic subsequent to the Agreement are included in the Company's consolidated statement of losses. In November 2004, the Company acquired KD Medical, Columbia Maryland, one of the nation's leading manufacturers of microbiological culture medias and other research agents. The Company paid $350,000 in cash, 200,000 shares of common stock valued at $52,000 and incurred an obligation to pay an additional $150,000 by November, 2005. Additionally, the Company is obligated to issue up to 750,000 shares of common stock valued at $195,000 based on certain contractual milestones, such as, KD Medical's revenue in excess of $1,000,000 and earnings of $10,000 before interest and taxes for the year ended December 31, 2004 (500,000 and 250,000 shares of common stock, respectively). In 2005, KD Medical met its goals of both revenue and profitability. The Company issued 100,000 of the 750,000 shares in 2005 and remaining 650,000 shares as of December 31, 2006. The total consideration paid was $1,605,213 and the significant components of the transaction are as follows: Cash paid $350,000 Excess of liabilities assumed over assets acquired 858,213 Debt issued 150,000 Common stock issued at acquisition 52,000 Original obligation to additional shares of common stock based on operating performance milestones 195,000 Goodwill impaired $1,605,213 Revenue Recognition For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00- 21"), MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company's consolidated financial position and results of operations was not significant. Use of Estimates The preparation of the financial statement in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Foreign Currency Translation The Company translates the foreign currency financial statements in accordance with the requirements of Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Assets and liabilities are translated at current exchange rates, and related revenue and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in stockholders' equity. Foreign currency translation gains and losses are included in the statement of operations. Cash Equivalents For the purpose of the accompanying financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. Inventories Inventories are stated at the lower of cost or market determined by the average cost method. Inventories consist of products available for sale to distributors and customers. Components of inventories as of June 30, 2007 and December 31, 2006 are as follows: June 30, December 31, 2007 2006 Raw materials $157,093 $133,936 Finished goods 31,484 78,469 Total $188,577 $216,130 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 as follows: Furniture and fixtures 5 years Office equipment 3 to 5 years Manufacturing equipment 3 to 8 years Impairment of Long-Lived Assets The Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS 144). 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 discounted 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. SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs. The Company did not incurred an impairment loss for the six months ended June 30, 2007 and 2006 Income Taxes The Company has adopted Financial Accounting Standards No. 109 ("SFAS 109") which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. Research and Development The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs". Under SFAS 2, 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 did not incur expenditures on research and product development for the six months ended June 30, 2007 and 2006. Advertising The Company follows the policy of charging the costs of advertising to expenses as incurred. The Company charged to operations $4,574 and $2,406, as advertising costs for the six months ended June 30, 2007 and 2006, respectively. Comprehensive Income Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented. Segment Information The Company has adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131") in the years ended December 31, 2001 and subsequent years. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. Stock Based Compensation Effective January 1, 2006, the beginning of the Company's first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted, modified, or settled stock options. Compensation expense recognized included the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified- prospective method. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company's pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. Upon adoption of SFAS 123(R), the Company is using the Black-Scholes option-pricing model as its method of valuation for share-based awards granted beginning in fiscal 2006, which was also previously used for the Company's pro forma information required under SFAS 123. The Company's determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, and certain other market variables such as the risk free interest rate. The Company had no employee stock options issued and outstanding at June 30, 2007. All prior awards of stock options were vested at the time of issuance in prior years. Net income (loss) per share The following reconciliation of net income and share amounts used in the computation of income (loss) per share for the three and six months ended June 30, 2007 and for the six months ended June 30, 2006.
Three months Six months Six months ended June 30, ended June 30, ended June 30 2007 2007 2006 Net income used in computing basic net income per share $ 8,995 75,046 13,363 Impact of assumed assumptions: Amortization of debt discount (interest expense) on convertible debentures 81,680 165,976 179,737 Impact of equity classified as liability: Gain on warrant liability marked to fair value (78,983) (606,299) (973,224) Net income( loss) in computing diluted net income (loss) per share: $ 11,692 (365,277) (780,124)
The weighted average shares outstanding used in the basic net income per share computations for the three and six months ended June 30, 2007 was 123,487,101 and 119,096746. The weighed average used for basic net income per share for the six months ended June 30, 2006 was 91,334,214. In determining the number of shares used in computing diluted loss per share for the six months ended June 30 2007 and 2006, common stock equivalents derived from shares issuable in conversion of the Callable Secured Convertible Notes and exercise of 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. The fully diluted number of shares for the three months ended June 30, 2007 was 291,666,743. Liquidity As shown in the accompanying financial statements, the Company incurred a net loss from operations of $244,209 and $556,229 during the three and six months ended June 30, 2007. The Company's total liabilities exceeded its total assets by $4,175,548 as of June 30, 2007. Concentration of Credit Risk Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company periodically reviews its trade receivables in determining its allowance for doubtful accounts. At June 30, 2007 and December 31, 2006, allowance for doubtful account balance was $14,625 and $17,642, respectively. New Accounting Pronouncements In December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration Payment Arrangements ("FSP 00-19-2") which addresses accounting for registration payment arrangements. FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of EITF 00-19-2, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those fiscal years. The Company has not yet determined the impact that the adoption of FSP 00-19-2 will have on its financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company's financial condition or results of operations. Reclassifications Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year. NOTE B - PROPERTY, PLANT, AND EQUIPMENT Property, plant and equipment at June 30, 2007 and December 31, 2006 are as follows: June 30, December 31, 2007 2006 Furniture and fixtures $41,260 $41,260 Equipment 351,138 351,138 Computer equipment 56,654 56,654 449,052 449,052 Less: Accumulated depreciation 343,198 325,387 Net property and equipment $105,854 $123,665 The total depreciation expense for the three and six months ended June 30, 2007 amounted to $8,783 and $17,811, respectively of which $5,417 and $11,757 is included in cost of goods sold for each respective period. The total depreciation expense for the three and six months ended June 30, 2006 amounted to $11,438 and $22,907, respectively. For the three and six months ended June 30, 2006, $5,384 and $10,800 is included in cost of goods sold for each respective period. NOTE C - NOTES PAYABLE Notes payable at June 30, 2007 and December 31, 2006 consists of the following: June 30, December 31, 2007 2006 Note payable-State of Maryland, accrues interest at 0% per annum, unsecured. In accordance with a forbearance agreement, if KD Medical defaults on any payments, cumulative interest at 10% per annum will be added. as of June 30, 2007, cumulative amount of interest was $263,181 $206,200 $249,400 Notes payable-unsettled claims from acquisition of Molecularware; accrues interest at 12% per annum, unsecured (See below) - 175,273 Notes payable-settlement of outstanding claims of Molecularware; accrues interest at 12% per annum, unsecured (See below) - 45,138 Notes payables-shareholders, accrues interest at 0% per annum, unsecured 125,754 84,878 331,954 554,689 Less: current maturities: (331,954) (554,689) $ - $ - Calbatech agreed to issue up to $600,000 of convertible debentures to Molecularware to settle debts. The time frame for settling those debts and issuing convertible debentures was ninety days. As of December 31, 2006, $45,138 was settled in the form of debentures. The Company determined that the remaining $175,273 and $45,138 could not be identified or could verify its existence. Therefore the Company reported as gain on disposition of debt of a total of $315,624 inclusive of accrued interest; which represented the remaining non extinguished debt in the three months ended June 30, 2007. NOTE D - NOTES PAYABLE - BANKS Notes payable - bank at June 30, 2007 and December 31, 2006 consists of the following: June 30, December 31, 2007 2006 Bank term debt, guaranteed by its officers, and bears interest at a rate of 9% per annum, with monthly payments of $1,048 over five years, maturing Oct, 2009 $ 27,705 $ 30,548 Lines of credit, guaranteed by its officers, in the total amount of $74,150 and bears interest rates from 9.4% to 14.24% per annum. The credit line calls for minimum payment of interest only 58,715 57,892 86,420 88,440 Less: current portion (69,745) (67,250) $ 16,675 $ 21,190 NOTE E - CONVERTIBLE NOTES PAYABLE A summary of convertible promissory notes payable at June 30, 2007 and December 31, 2006 is as follows: June 30, December 31, 2007 2006 10% convertible debenture, with related party, is payable on demand, unpaid principal together with accrued and unpaid interest is, at the option of the holder, convertible into shares of the Company's common stock at a time or conversion price equal to fifty percent of the closing price of the Company's common stock on the date of conversion. The Company has recorded $100,000 as a beneficial conversion discount- interest expense during the year ended December 31, 2003. In 2005, the note was converted to a non-interest bearing debenture. $ 53,577 $ 53,577 10% convertible debenture with interest due quarterly subject to certain conditions, due three years from the date of the note. The holder has the option to convert unpaid principal to the Company's common stock at the lower of (i) $0.14 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty days before, but not including, conversion date. The Company granted the note holder a security interest in substantially all of the Company's assets and intellectual property and registration rights. (see below) 706,059 540,083 759,636 593,660 Less: current maturities (53,577) (53,577) $706,059 $540,083 The Company entered into a Securities Purchase Agreement with four accredited investors on May 23, 2005 for the issuance of an aggregate of $2,000,000 of convertible notes ("Convertible Notes"), and attached to the Convertible Notes were warrants to purchase 12,143,290 shares of the Company's common stock. The Convertible Notes accrue interest at 10% per annum, payable quarterly, and are due three years from the date of the note. The note holder has the option to convert any unpaid note principal to the Company's common stock at a rate of the lower of (i) $0.14 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date. As of June 30, 2007, the Company issued to the investors Convertible Notes in a total amount of $2,000,000 in exchange for net proceeds of $1,635,667. The proceeds that the Company received were net of prepaid interest of $133,333 representing the first eight month's interest calculated at 10% per annum for the aggregate of $2,000,000 of convertible notes, and related fees and costs of $255,000. Prepaid interest is amortized over the first eight months of the note and capitalized financing costs were amortized over the maturity period (three years) of the convertible notes. The transaction, to the extent that it is to be satisfied with common stock of the Company would normally be included as equity obligations. However, in the instant case, due to the indeterminate number of shares which might be issued under the embedded convertible host debt conversion feature, the Company is required to record a liability relating to both the detachable warrants and the embedded convertible feature of the note payable (included in the liabilities as a "derivative liability". The accompanying financial statements comply with current requirements relating to warrants and embedded warrants as described in FAS 133, EITF 98-5 and 00-27, and APB 14 as follows: - The Company allocated the proceeds received between convertible debt and the detachable warrants based upon the relative fair market values on the dates the proceeds were received. - Subsequent to the initial recording, the increase in the fair value of the detachable warrants, determined under the Black- Scholes option pricing formula and the increase in the embedded derivative in the conversion feature of the convertible debentures are accrued as adjustments to the liabilities at June 30, 2007. - The expense relating to the increase in the fair value of the Company's stock reflected in the change in the fair value of the warrants and derivatives (noted above) is included as an other comprehensive income item in the form of an unrealized interest expense arising from convertible financing on the Company's balance sheet. - Accreted principal of $706,059 as of June 30, 2007. The following table summarizes the various components of the convertible debentures as of June 30, 2007: Convertible debentures: $ 706,059 Warrant liability 142,236 Derivative liability 1,547,290 2,395,585 Cumulative adjustment of derivative and warrant liability to fair value 310,475 Net unrealized loss related to conversion of convertible note to common shares charged to interest expense (909,994) Accretion of principal related to convertible debenture (706,059) Total convertible debentures: $1,090,007 NOTE F - CONVERTIBLE PREFERRED STOCK On April 15, 2004, the Company issued 1,250,000 shares of Preferred Stock at a price of $0.20 per share to one entity. The preferred shares issued are convertible on a 1 to 1.5 basis of preferred stock to common shares. These shares have not been converted as of June 30, 2007. NOTE G - COMMON STOCK In January 2006, the Company issued 5,960,000 shares of common stock in exchange for convertible notes payable of $67,694. In February 2006, the Company issued 4,534,446 shares of common stock in exchange for convertible notes payable of $56,030. In March 2006, the Company issued 8,286,532 shares of common stock for officer's prior year's compensation, at $0.025 per share, which represented the value of the services received and which did not differ materially from the value of the stock when services were rendered. In March 2006, the Company issued 400,000 shares of common stock for services rendered at $0.09 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In March 2006, the Company issued 25,000 shares of common stock for services rendered at $0.07 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In July 2006, the Company issued 600,000 shares of common stock for services rendered at $0.07 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In July 2006, the Company issued 650,000 shares of common stock in settlement of a stock subscription issued in conjunction with the acquisition of KD Medical. In August 2006, the Company issued 690,909 shares of common stock for services rendered at $0.05 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In October 2006, the Company issued 355,606 shares of common stock for services rendered at $0.044 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In October 2006, the Company issued 959,181 shares of common stock in exchange for convertible notes payable of $19,663. In October 2006, the Company issued 400,000 shares of common stock for services rendered at $0.047 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In October 2006, the Company issued 6,000,000 shares of common stock for officer's compensation, at $0.042 per share, which represented the value of the services received and which did not differ materially from the value of the stock when services were rendered. In November 2006, the Company issued 125,000 shares of common stock for services rendered at $0.045 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In December 2006, the Company issued 3,092,683 shares of common stock for services rendered at $0.041 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In February 2007, the Company issued 9,000,000 shares of common stock for officer's prior year's compensation, at $0.035 per share, which represented the value of the services received and which did not differ materially from the value of the stock when services were rendered. In February 2007, the Company issued 978,590 shares of common stock in exchange for convertible notes payable of $18,006. In March 2007, the Company issued 2,500,000 shares of common stock for services rendered at $0.036 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In April 2007, the Company issued 656,653 shares of common stock for services rendered at $0.03 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In May 2007, the Company issued 2,000,000 shares of common stock for services rendered at an average of $0.027 per share, which represents the value of the services received and which did not differ materially from the value of the stock issued. In May 2007, the Company issued 500,000 shares of common stock in exchange for convertible notes payable of $5,500. In June 2007, the Company issued 500,000 shares of common stock in exchange for convertible notes payable of $5,500. NOTE H - OPTIONS AND WARRANTS The following table summarizes the changes in options outstanding and the related prices for the shares of the Company's common stock issued to consultants at June 30, 2007.
Options Outstanding Options Exercisable Exercise Number Weighted Average Weighed Average Price Outstanding Remaining Contractual Exercise Price Number Weighted Average Life (Years) Exercisable Exercise Price $0.001 80,000 5.42 $0.001 80,000 $0.001
Transactions involving stock options issued to consultants are summarized as follows:
Weighted Average Number of Shares Price Per Share Outstanding at December 31, 2005 80,000 $0.01 Granted - - Exercised - - Canceled or expired - - Outstanding at December 31, 2006 80,000 0.01 Granted - - Exercised - - Canceled or expired - - Outstanding at June 30, 2007 80,000 $0.01
Warrants The Company granted an aggregate of 12,143,290 warrants during the year ended December 31, 2005 in connection with the issuance of convertible notes payable (see note E). The Company did not grant any compensatory warrants during the six months ended June 30, 2007 and the years ended December 31, 2006. The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock. Warrants Outstanding
Warrants Outstanding Warrants Exercisable Weighted Average Weighted Weighted Number Remaining Contractual Life Average Number Average Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price $0.20 6,071,645 3.00 $0.20 6,071,645 $0.20 $0.35 6,071,645 3.00 $0.35 6,071,645 $0.35 12,143,290 3.00 $0.275 12,143,290 $0.275
Transactions involving warrants issued to non-employees are summarized as follows:
Weighted Average Number of Shares Price Per Share Outstanding as of January 1, 2006 12,173,290 $0.275 Granted - - Exercised - - Canceled or expired - - Outstanding as of December 31, 2006 12,143,290 0.275 Granted - - Exercised - - Canceled or expired - - Outstanding as of June 30, 2007 12,143,290 $0.275
NOTE I - RELATED PARTY TRANSACTIONS From time to time the Company's officers and shareholders advance funds to the Company. The notes payable-related parties balance outstanding was $125,754 and $84,878 as of June 30, 2007 and December 31, 2006, respectively. No formal arrangements or repayment terms exist (see Note E). NOTE J - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at June 30, 2007 and December 31, 2006 are as follows: June 30, 2007 December 31, 2006 Accounts payable $270,667 $242,195 Accrued salaries 306,417 244,571 Payroll liabilities 365,764 366,361 Accrued Interest 161,228 191,758 $1,104,076 $1,044,885 NOTE K - INCOME TAXES The Company has adopted Financial Accounting Standards No. 109, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. A management estimates that at June 30, 2007, the Company has available for federal income tax purposes a net operating loss carry forward of approximately $9,000,000, expiring in the year 2023, that may be used to offset future taxable income. Due to significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Components of deferred tax assets as of June 30, 2007 and December 31, 2006 are as follows: Non current: 2006 2005 Net operating loss carry forward $3,150,000 $3,150,000 Valuation allowance (3,150,000) (3,150,000) Net deferred tax asset - - NOTE L - COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company leases production and administration facilities in Columbia, Maryland at a rate of approximately $12,393 per month. The Company has recorded equipment purchased under non-cancelable leases with an original cost of $87,766 as of June 30, 2007. Depreciation expenses of $6,302 have been charged to operations for the six months ended June 30, 2007 for leased equipment. Employment Agreements The Company has employment agreements with key employees. In addition to salary and benefit provisions, the agreements include defined commitments should the employees terminate the employment with or without cause. NOTE M - DEFAULT LIABILITY As of June 30, 2007, a default liability totaling $644,376, including accrued interest at statutory rates, existed against the Corporation's subsidiary, KD Medical, Inc. The Company will contest any attempt to enforce said default. NOTE N - GOING CONCERN MATTERS The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements for the six months ended June 30, 2007 and 2006, the Company has incurred operating losses of $556,229 and $555,752, respectively. In addition, the Company has a deficiency in stockholder's equity of $4,175,548 and $4,754,341 at June 30, 2007 and December 31, 2006, respectively. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's existence is dependent upon management's ability to develop profitable operations. Management is devoting substantially all of its efforts to establishing its business and there can be no assurance that the Company's efforts will be successful. However, the planned principal operations have not fully commenced and no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern. In order to improve the Company's liquidity, the Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance that the Company will be successful in its efforts to secure additional equity financing. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. When used in this Form 10-QSB and in our future filings with the Securities and Exchange Commission, the words or phrases will likely result, management expects, or we expect, will continue, is anticipated, estimated or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. These statements are subject to risks and uncertainties, some of which are described below. Actual results may differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated events or circumstances occurring after the date of such statements. General Overview CalbaTech, Inc., (formerly Traffic Technology Inc.) ("Company") was organized on April 29, 2002 under the laws of the state of Nevada. The Company is focused on incubating life science based companies that are developing next generation products and technologies. The Company acquired Molecula Research Laboratories, LLC as a subsidiary in October, 2003. On December 31, 2005, Molecula Research Laboratories, LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula, Inc. in the state of Nevada. Products and intellectual property of the dissolved LLC were transferred to Molecula, Inc., in the state of Nevada. Molecula develops and sells numerous research reagents for cell transfection, DNA and RNA purification, protein expression, gene expression analysis and other innovative and fundamental products. The Company, through another of its subsidiaries, KD Medical, Inc., manufactures and distributes microbiological culture medias and other research regents. KD Medical's products are used in genetic engineering, drug discovery, molecular biology labs and biopharmaceutical production. The Company, through another of its subsidiaries, LifeStem, Inc., is positioning itself to become a leader in the adult stem cell banking business, a leading supplier of "Cellular Logistics" by providing services and technologies to facilitate the efficient acquisition and delivery of purified adult stem cells, development of stem cell delivery devices for clinical applications and clinical applications of specific stem cell based therapies. Revenues CalbaTech has generated revenues of $285,691 from operations for the three months ended June 30, 2007, compared to $242,555 for the three months ended June 30, 2006. For the six months ended June 30, 2007 CalbaTech generated revenues of $597,661 as compared to revenues of $655,122 for the six months ended June 30, 2006. This decrease was due to the last repercussions from the move into the new facility by KD and Molecula, and any significant downtime from operations that were impaired from the move has been eliminated. The Company believes that revenues will increase in the coming year for the following reasons as Molecula and KD Medical can more efficiently capitalize on their synergistic operations and increase marketing efforts to take advantage of common markets between Molecula and KD. Redundancies in management teams have also been eliminated. Cost of revenues consists of direct manufacturing costs and applied overhead expenses for the research reagent business, as well as labor costs associated with its service revenue. Cost of revenues as a percentage of net revenues were 47% for the six months ended June 30, 2007, as compared to 35% for the same period in 2006. The cost of goods sold percentage will fluctuate from quarter to quarter because absorbed overhead increases when volume is decreasing and because labor ratios are less than optimized in manufacturing processes when revenues are lower. As revenues increases, cost of goods sold as a percentage of revenue should become more and more favorable for the company. Costs and Expenses Total operating expenses decreased both for the three month period ending June 30, 2007 as well as for the six month period ending June 30, 2007 as compared to the same periods in 2006. Total operating expenses were $401,579 for the three months ended June 30, 2007 as compared to $403,911 in the same period in 2006. For the six months ended June 30, 2007, total operating expenses were $873,427 as compared to $978,601 for the six months ended June 30, 2006. The reduction in expenses was 1% over the three month period ended June 30, 2007 from the same period in 2006 and 11% for the six months ended June 30, 2007 over the same period in 2006 as management has worked to cut costs and control expenses. Net Income Due primarily to income derived from settlement of debt and to an unrealized gain on adjustment of derivative and warrant liability to fair value of underlying securities relating to the convertible notes it obtained in 2005, the Company realized Net Income for the three months ended June 30, 2007 of $8,995 as compared to a Net Loss of $1,164,176 at June 30, 2006 which was also due primarily due primarily to an unrealized gain on adjustment of derivative and warrant liability to fair value of underlying securities relating to the convertible notes it obtained in 2005. Operationally, the Company believes that increased revenues and profitability generated by KD Medical, continued growth and new profitability of Molecula, along with anticipated sales of the service of the Stem Cell Microbank(TM) will result in a net profit for 2007. Liquidity and Capital Resources As of June 30, 2007, CalbaTech had current assets of cash, accounts receivable, and inventory totaling $362,579, and total assets of $500,470. These numbers compare to current assets of $348,771 and total assets of $520,443 as of December 31, 2006. As a result of our operating losses, for the six months ended June 30, 2007, we generated a cash flow deficit of $8,897 from operating activities. The Company has used its working capital to finance ongoing operations and the development and marketing of its products. The Company's success and ongoing financial viability is contingent upon its selling of its products and the related generation of cash flows. However, should it be necessary, Management believes it would be able to meet its cash flow requirements through additional debt or equity financing. There is no assurance that such financing will be available in the future to meet additional capital needs of the Company, or that any such terms or conditions of any such financing would be favorable to the Company. Both the management of the Company's current growth and the expansion of the Company's current business involve significant financial risk and require significant capital investment. The independent auditors report on the Company's and CalbaTech's December 31, 2006 financial statements included in this Form states that the Company's recurring losses raise substantial doubts about the Company's ability to continue as a going concern. Nevertheless, through the raising of capital resources and by adjusting its operations and development to the level of capitalization , management believes it has sufficient capital resources to meet projected cash flow deficits through the next twelve months. However, if thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition. Introduction CalbaTech, Inc., (formerly Traffic Technology Inc.) ("Company") was organized on April 29, 2002 under the laws of the state of Nevada. The Company is focused on incubating life science based companies that are developing next generation products and technologies. The Company acquired Molecula Research Laboratories, LLC as a subsidiary in October, 2003. On December 31, 2005, Molecula Research Laboratories, LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula, Inc. in the state of Nevada. Products and intellectual property of the dissolved LLC were transferred to Molecula, Inc., in the state of Nevada. Molecula develops and sells numerous research reagents for cell transfection, DNA and RNA purification, protein expression, gene expression analysis and other innovative and fundamental products. The Company, through another of its subsidiaries, KD Medical, Inc., manufactures and distributes microbiological culture medias and other research regents. KD Medical's products are used in genetic engineering, drug discovery, molecular biology labs and biopharmaceutical production. The Company, through another of its subsidiaries, LifeStem, Inc., is positioning itself to become a leader in the adult stem cell banking business, a leading supplier of "Cellular Logistics" by providing services and technologies tofacilitate the efficient acquisition and delivery of purified adult stem cells, development of stem cell delivery devices for clinical applications and clinical applications of specific stem cell based therapies. CORPORATE MISSION AND OBJECTIVES In order to accomplish its goals, CalbaTech is pursuing a strategy of combining products and technologies, and the companies that provide them, into the following divisions: 1) Molecular Applications; 2) Research Reagents; and 3) Cellular Therapeutics. By pursuing such a strategy, each division should produce value added and increasing returns on shareholders' investment through cross marketing of products and geographic expansion, as well as to achieve product enhancement and efficiency. THE RESEARCH REAGENTS DIVISION STRATEGY The Company's acquisition strategy is to combine several reagents providers into a credible commercial entity. MOLECULA RESEARCH LABORATORIES, LLC CalbaTech acquired Molecula in October 2003. During 2005, Molecula Research Laboratories, LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula, Inc. in the state of Nevada. Products and intellectual property of the dissolved LLC were transferred to Molecula, Inc. Molecula develops and sells numerous research reagents for cell transfection, DNA and RNA purification, protein expression, gene expression analysis and other innovative and fundamental products. Molecula also sells transfection reagents, a novel IPTG replacement for increased protein expression, neuropeptides and biochemicals. Please see www.molecula.com. KD MEDICAL, INC. CalbaTech acquired KD in the last quarter of 2004. This acquisition substantially increased both product range and revenue in the Research Reagents Division. The product ranges of KD and Molecula are highly complementary, with little over lap. A strength of KD is in the supply of specialized media for culture of model research organisms such as bacteria, yeast, insects and mammalian cell lines. It also supplies products to approximately 300 National Institutes of Health ("NIH") laboratories, contracts invaluable for establishing new products in a favorable government setting. Its secondary products are related to molecular biology reagents. Conversely, Molecula's primary focus is in the design and supply of high value molecular biology reagents such as siRNA and DNA antisense oligonucleotides. It also has reagents such as IPTG that are complementary to customized media. A large proportion of molecular biology research depends upon culture of a model organism (bacteria, fruit fly, etc.), which is genetically manipulated by transfection of customized oligonucleotides (siRNA). Thus, an alliance of KD and Molecula will be well placed to provide a competitive single source for these culture media transfection reagents and specialized modifier molecules such as siRNA. Please see www.kdmedical.com. COMPETITIVE ANALYSIS Manufacturers of molecular biology products can be divided into two distinct categories within the industry. One category is the multinational companies with extensive research and development who both out-source and have in-house manufacturing facilities. The other category is the small, independent, local manufacturers such as KD Medical and Molecula. While the multinationals have better brand recognition due to greater advertising and marketing resources, a group of smaller, independent, local companies, including KD, have been emerging over the past ten years that are designed to compete with the three major molecular biology companies. Companies like KD and Molecula have lower overhead and regional shipping proximity resulting in a consistently profitable record of growth. That, combined with customer acceptance (once products are in the various research institutes supply stores) gives small companies an equal access to end users which puts them on an equal footing with the large companies. Most importantly, the smaller companies fill the consumer need for quality products that are less expensive and available immediately. Competitors include Fisher Scientific, Ambion, Proligo, and Qiagen. CUSTOMERS KD Medical and Molecula service five distinct customer types: 1) Federally funded research centers such as the National Institutes of Health, the Naval Medical Center, and the National Cancer Institute; 2) Federally funded "Supply Stores" such as at the National Institutes of Health; 3) University and private research centers such as Glaxo Smith-Kline, Johnson & Johnson, Merck & Co., Pfizer Research, and Wyeth Pharmaceuticals; 4) Medical distributors such as Fisher Scientific and VWR International; and 5) OEMs such as Genetix, Ltd. and PML Microbiologicals, Inc. MARKET SIZE The general laboratory supplies industry is $12 Billion to $14 Billion, and the molecular biology market to which the Company provides products and services for medical research and drug discovery on which billions of dollars are spent each year. Specifically, the molecular biology market is approximately $600 Million per year. GROWTH POTENTIAL Growth within the Research Reagents Division will be accomplished through the complementary nature of the subsidiaries within the division and the division of labor. KD has moved into its new state-of-the-art ISO 9002 certified and FDA compliant facility featuring two class 100 clean rooms. It is believed that this new facility will provide additional growth opportunities to KD, not only in expanding product lines to existing customers but by providing contract manufacturing and leasing opportunities to pharmaceutical companies. FINANCIAL PROJECTIONS The Reagents Division has two companies with combined 2006 revenues of approximately $1.250 Million in gross revenues. CalbaTech believes that combined revenues within the division will be similar in 2007. THE CELLULAR THERAPIES DIVISION STRATEGY The Cellular Therapies Division was created to house CalbaTech's emerging interests in cellular applications, particularly those relating to the use of adult stem cells. The Company believes this is an emerging market in which there are major opportunities for new entrants to establish new standards through novel stem cell research techniques and business models. The Company is positioning itself through strategic alliances to identify and take advantage of such opportunities as they emerge from the interaction between fundamental research and an evolving regulatory environment. CalbaTech's wholly owned subsidiary LifeStem, Inc. was established take advantage of this rapidly expanding market. In addition to advancing its unique business model for stem cell banking and the provision of purified stem cells to researchers, CalbaTech has filed two patent application for intellectual property relating to (1) a device for the efficient and effective delivery of stem cells to diseased or dead areas of the heart (2) a method of collecting and storing two different types of stem cells in micro quantities for autologous use. LIFESTEM, INC. The market for stem cell technology is currently $500 million, and has been estimated to grow to $30 billion by the year 2010 (Source DMD). This is projected due to the growth of new cellular therapeutics (both embryonic and adult stem cells), as well as clinical applications to compete with, or complement, existing pharma-based solutions. LifeStem's strategy is to leverage CalbaTech's infrastructure of companies to obtain a leadership position in the fast emerging stem cell collection arena and become the preferred provider of adult stem cells to the clinical researcher as part of a comprehensive package of stem cell based services. LifeStem believes that over time it can position itself to become a leader of "Cellular Logistics" in this large new market. The company is focused on the following: (1) Providing a Stem Cell Microbank(TM) service to individuals; (2) Providing services and technologies to facilitate the efficient acquisition and delivery of purified adult stem cells to the research market and; (3) Developing delivery devices for clinical applications. Stem Cell MicroBank(TM) Service The therapeutic possibilities that may be provided by collecting and preserving healthy adult stem cells on a pre-disease basis may revolutionize the practice of medicine. The power and promise of stem cell therapies is just emerging, and the corresponding development of new clinical applications and therapies are expected to follow. LifeStem's Stem Cell Microbank(TM) Service focuses on refining existing collection processes that are gaining significant acceptance. The focus will be providing a stem cell collection process and storage service that maintains adult stem cells for future use and broadens the availability of a collection and storage service. LifeStem believes that preserving one's healthy cells for future use for treatments, both known and those yet to be developed, is of utmost importance. The benefits of stem cell therapies have shown great success in the treatment of life threatening disease such as chronic heart failure and cancer. There is also significant promise that stem cells will play a prominent role in cures for other diseases such as Parkinsons, Alzheimers and Diabetes and others. According to the American Cancer Society, cancer is now the number one killer of Americans surpassing heart disease. This concept has great promise not only for the cure of such diseases but also in the prevention of disease though the periodic re-injection of one's own healthy stem cells in effect giving the immune system a "boost" of healthy stem cells. The MicroBanking process, patent pending, is based on the theory that it is not necessary to harvest a quantity of stem cells capable of regenerating the ENTIRE immune system at the time of collection, but rather that these cells can be collected in micro quantities and cryo-preserved for future cellular expansion prior to reintroduction into the recipient, or in the alternative, that the number of stem cells necessary for a therapy does not necessitate using a number of stem cells necessary to regenerate one's complete immune system. The company further believes that it is in the client's best interest to store a stem cell samples from two tissue sources. This concept is defined as a Stem Cell Microbank(TM). LifeStem has applied for trademark protection for the term "Stem Cell Microbank". Delivery Devices LifeStem recognizes that the demand for efficient and minimally invasive methods of delivering stem cells into diseased and/or injured tissue will be critical to any successful stem cell based therapy. To this end, LifeStem, through CalbaTech, has acquired a unique and novel method for the delivery of stem cells. To date, researchers have been necessarily focused on elucidating the complex science of identifying, isolating, and understanding stem cells. The outcome of this body of research has been a tremendous advance in medical science, giving rise to a whole new field of medical treatment. However with the preponderance of stem research dedicated to basic science, very little work has been done in developing clinical delivery systems for stem cells. Most stem cell research and development has concentrated on cellular therapeutics as opposed to the delivery of stem cells. Addressing the need for alternatives to existing catheter based delivery options is LifeStem's stem cell delivery device. This device is a patent pending proprietary system developed for the regeneration of cardiac muscle post myocardial infarction. This device is designed for the targeted delivery of peripheral blood-derived autologous stem cells to diseased tissue for the purpose of regenerating healthy functional tissue. The device is a disposable sheath placed over a rigid fiber optic endoscope with attached diagnostic and delivery mechanisms. Our device allows the physician to detect dead and diseased cardiac tissue and deliver a precise amount of stem cells thereby promoting regeneration. The device is intended to be compatible with endoscopes from various manufactures. Although the device has been initially designed for cardiac applications, its applicability extends beyond cardiac applications. The device has the capability of delivering stem cells into all areas of the body that are accessible via an endoscope. As other stem cell related therapies are developed, LifeStem's stem cell delivery device should be well positioned to facilitate the targeted delivery of stem cells into other damaged tissues of the body. LifeStem is currently seeking a collaborative partner to develop a prototype of the device and is discussing this possibility with several of the nation's leading medical device manufacturers. FINANCIAL PROJECTIONS LifeStem is licensed by the State of California for its Stem Cell Microbank Service, and is working with its collaborative partner, Solana Medspas, to roll-out of its services to medspas through the Solana Medspa network. As part of the roll-out, LifeStem has provided marketing materials, training materials and begun providing training to the medspas. The relationship with Solana Medspas is an important relationship as the LifeStem services fit the medspa demographic very well. LifeStem has further refined its business model so that it anticipates opening, through the medspas or otherwise, approximately fifty total collection sites in the United States. To date, a significant number of the medspas through which LifeStem originally contracted have ceased operations and therefore would not result in any collections of adult stem cells. LifeStem has, however, contracted with newly started medspas that will carry the LifeStem service, and LifeStem believes that these new spas are significantly better financially situated so as to be able to sustain themselves and carry the LifeStem service for a long time to come. To such end, LifeStem is working diligently to have these new medspas up to speed and providing the LifeStem Service as quickly as possible, with the first new site to begin offering the collection service within the third quarter of 2007. LifeStem's Service has recently been featured in a magazine, Atlanta Life, which was distributed to approximately 500,000 recipients, and potential clients of the service have contacted the Atlanta location to inquire as to when the service will be available. LifeStem believes that this will result in clients for its service within the third quarter of 2007. Further, LifeStem has taken the opportunity to license its technology to a newly formed company in the United Kingdom to provide the Stem Cell Microbank Service to the United Kingdom. THE MOLECULAR APPLICATIONS DIVISION The Molecular Applications Division currently consists of one company, MolecularWare and the bulk of the other R&D projects in various stages of development. CTI acquired MolecularWare, Inc., to provide services in the bioinformatics sector. MolecularWare had developed software that offers data management software solutions for high throughput biology. BUSINESS DEVELOPMENT AND CROSS MARKETING OPPORTUNITIES The CalbaTech strategy brings together several product lines that complement each other, both in their application areas and in their target markets. This affords considerable opportunity for co- marketing and cross marketing opportunities not yet available to the individual companies. In addition, the strategy brings together developing technologies and intellectual property that, combined, promise the development of future products for the research, diagnostic and therapeutic markets. Implementation of the strategy immediately generates expanded opportunities for cross marketing such that the new portfolio of products and technologies can generate an accelerated revenue stream while minimizing marketing costs. Additionally, an infrastructure has been built that enables the "plug-in" of new products or brands. The keys to realizing the potential of the complementary products are: - The customers for one product are also potential customers for another; - Exposure to one product results in exposure to the others; Brand recognition of each product line is retained and leveraged to expose loyal customers to the other brands; - The internet and electronic marketing facilitate this much more than "traditional" marketing; and - Joint promotions linking brands and/or product lines. Leveraging Brand Recognition and Existing Customer Base Each of the CalbaTech companies already each has created brand recognition and a satisfied customer base. These can all be leveraged to cross market the products of the others. Joint promotions to each other's customer base further cements these links. The scenario is one of sister companies/brands working together, although there may be additional value in building equity in an overall marketing banner above the different entities. PATENTS AND PROPRIETARY TECHNOLOGY It is the Company's intention to protect its proprietary property through the filing of U.S. and international patent applications, both broad and specific, where necessary and reasonable. The Company believes it will attain strong and broad patent protection for its technologies. It is the Company's intention that all its products be protected under various pending patents, issued patents, copyrights and trademarks. The Company has the policy of disclosing its proprietary information only under a Confidentiality Agreement. This Agreement has a special clause regarding ownership by the Company of all inventions related to, or based in any way upon, the Company's technologies. PROPERTIES Corporate The Company's principal executive and administrative offices are located at 23341 Del Lago, Laguna Hills, California 92653. KD Medical KD's facility is located at 6935-A Oakland Mills Road, Columbia, MD. It is a 7,000 square foot facility conveniently located between Baltimore and Washington near the NIH. The facility has two clean rooms for sterile production, a medical packaging room for contract medical packaging, a large warehouse and a walk in cold box. KD currently capability manufactures over a half million liters of molecular biology reagents and buffers, and close to three quarters of a million bacterial and yeast biological media products yearly. ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT We do not anticipate the sale of any significant property, plant or equipment during the next twelve months. Other than as provided within this Form 10QSB and other filings, we do not anticipate the acquisition of any significant property, plant or equipment during the next 12 months. NUMBER OF EMPLOYEES The Company currently has twenty employees. The Company does not have any collective bargaining agreements covering any of its employees, has not experienced any material labor disruption and is unaware of any efforts or plans to organize its employees. The Company considers relations with its employees to be good. Forward Looking Statements. The foregoing Managements Discussion and Analysis of Financial Condition and Results of Operations "forward looking statements" within the meaning of Rule 175 under the Securities Act of 1933, as amended, and Rule 3b-6 under the Securities Act of 1934, as amended, including statements regarding, among other items, the Company's business strategies, continued growth in the Company's markets, projections, and anticipated trends in the Company's business and the industry in which it operates. The words "believe," "expect," "anticipate," "intends," "forecast," "project," and similar expressions identify forward-looking statements. These forward- looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to, those risks associated with economic conditions generally and the economy in those areas where the Company has or expects to have assets and operations; competitive and other factors affecting the Company's operations, markets, products and services; those risks associated with the Company's ability to successfully negotiate with certain customers, risks relating to estimated contract costs, estimated losses on uncompleted contracts and estimates regarding the percentage of completion of contracts, associated costs arising out of the Company's activities and the matters discussed in this report; risks relating to changes in interest rates and in the availability, cost and terms of financing; risks related to the performance of financial markets; risks related to changes in domestic laws, regulations and taxes; risks related to changes in business strategy or development plans; risks associated with future profitability; and other factors discussed elsewhere in this report and in documents filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Form 10-KSB will, in fact, occur. The Company does not undertake any obligation to revise these forward- looking statements to reflect future events or circumstances and other factors discussed elsewhere in this report and the documents filed or to be filed by the Company with the Securities and Exchange Commission. Inflation In the opinion of management, inflation has not had a material effect on the operations of the Company. Cautionary Factors that may Affect Future Results We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business and our products. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could adversely affect us. Trends, Risks and Uncertainties The Company has sought to identify what it believes to be the most significant risks to its business as discussed in "Risk Factors" above, but cannot predict whether or to what extent any of such risks may be realized nor can there be any assurances that the Company has identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to the Company's stock. Limited operating history; anticipated losses; uncertainly of future results The Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be evaluated with a view to the risks encountered by a company in an early stage of development, particularly in light of the uncertainties relating to the business model that the Company intends to market and the potential acceptance of the Company's business model. The Company will be incurring costs to develop, introduce and enhance its products, to establish marketing relationships, to acquire and develop products that will complement each other, and to build an administrative organization. To the extent that such expenses are not subsequently followed by commensurate revenues, the Company's business, results of operations and financial condition will be materially adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of its products and services. The Company expects that negative cash flow from operations may exist for the next 12 months as it continues to develop and market its products and services. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may be required to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in additional dilution to the Company's shareholders. Potential fluctuations in quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside the Company's control, including: the demand for the Company's products and services; seasonal trends in demand and pricing of products and services; the amount and timing of capital expenditures and other costs relating to the expansion of the Company's operations; the introduction of new services and products by the Company or its competitors; price competition or pricing changes in the industry; political risks and uncertainties involving the world's markets; technical difficulties and general economic conditions. The Company's quarterly results may also be significantly affected by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Due to the foregoing factors, among others, it is possible that the Company's operating results may fall below the expectations of the Company and/or investors in some future quarter. Management of Growth The Company expects to experience growth in the number of employees relative to its current levels of employment and the scope of its operations. In particular, the Company may need to hire scientists, as well as sales, marketing and administrative personnel. Additionally, acquisitions could result in an increase in employee headcount and business activity. Such activities could result in increased responsibilities for management. The Company believes that its ability to attract, train, and retain qualified technical, sales, marketing, and management personnel, will be a critical factor to its future success. During strong business cycles, the Company may experience difficulty in filling its needs for qualified personnel. The Company's future success will be highly dependent upon its ability to successfully manage the expansion of its operations. The Company's ability to manage and support its growth effectively will be substantially dependent on its ability to implement adequate financial and management controls, reporting systems, and other procedures and hire sufficient numbers of financial, accounting, administrative, and management personnel. The Company is in the process of establishing and upgrading its financial accounting and procedures. There can be no assurance that the Company will be able to identify, attract, and retain experienced accounting and financial personnel. The Company's future operating results will depend on the ability of its management and other key employees to implement and improve its systems for operations, financial control, and information management, and to recruit, train, and manage its employee base. There can be no assurance that the Company will be able to achieve or manage any such growth successfully or to implement and maintain adequate financial and management controls and procedures, and any inability to do so would have a material adverse effect on the Company's business, results of operations, and financial condition. The Company's future success depends upon its ability to address potential market opportunities while managing its expenses to match its ability to finance its operations. This need to manage its expenses will place a significant strain on the Company's management and operational resources. If the Company is unable to manage its expenses effectively, the Company's business, results of operations, and financial condition may be materially adversely affected. Risks associated with acquisitions As a major component of its business strategy, the Company expects to acquire assets and businesses relating to or complementary to its operations. Any acquisitions by the Company would involve risks commonly encountered in acquisitions of companies. These risks would include, among other things, the following: the Company could be exposed to unknown liabilities of the acquired companies; the Company could incur acquisition costs and expenses higher than it anticipated; fluctuations in the Company's quarterly and annual operating results could occur due to the costs and expenses of acquiring and integrating new businesses or technologies; the Company could experience difficulties and expenses in assimilating the operations and personnel of the acquired businesses; the Company's ongoing business could be disrupted and its management's time and attention diverted; the Company could be unable to integrate successfully. Liquidity and Working Capital Risks; Need for Additional Capital to Finance Growth and Capital Requirements We have had limited working capital and we may rely upon notes (borrowed funds) to operate. We may seek to raise capital from public or private equity or debt sources to provide working capital to meet our general and administrative costs until net revenues make the business self-sustaining. We cannot guarantee that we will be able to raise any such capital on terms acceptable to us or at all. Such financing may be upon terms that are dilutive or potentially dilutive to our stockholders. If alternative sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans in accordance with the extent of available funding. Potential fluctuations in quarterly operating results Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside our control, including: the demand for our products; seasonal trends in purchasing, the amount and timing of capital expenditures and other costs relating to the development of our products; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the healthcare industry. Our quarterly results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at our early stage of development, such accounting treatment can have a material impact on the results for any quarter. Due to the foregoing factors, among others, it is likely that our operating results will fall below our expectations or those of investors in some future quarter. Dependence Upon Management Our future performance and success is dependant upon the efforts and abilities of our Management. To a very significant degree, we are dependent upon the continued services of James DeOlden, Edward Deese and John Gordon, our founders and Directors. If we lost the services of Mr. DeOlden, Mr. Deese or Dr. Gordon or other key employees before we could get a qualified replacement, that loss could materially adversely affect our business. Lack of Independent Directors We cannot guarantee that our Board of Directors will have a majority of independent directors in the future. In the absence of a majority of independent directors, our executive officers, who are also principal stockholders and directors, could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors. Limitation of Liability and Indemnification of Officers and Directors Our officers and directors are required to exercise good faith and high integrity in our Management affairs. Our Articles of Incorporation provide, however, that our officers and directors shall have no liability to our shareholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase, or derived an improper benefit from the transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner that they reasonably believe to be in, or not opposed to, the best interests of the Company, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations. To further implement the permitted indemnification, we have entered into Indemnity Agreements with our officers and directors. Continued Control by Current Officers and Directors As of June 30, 2007, the present officers and directors own approximately 24% of the outstanding shares of Common Stock, and therefore are in a position to elect all of our Directors and otherwise control the Company, including, without limitation, authorizing the sale of equity or debt securities of the Company, the appointment of officers, and the determination of officers' salaries. Shareholders have no cumulative voting rights. Delays in the Introduction of Our Products or Services The Company may be subject to regulation by numerous governmental authorities. Failure to obtain regulatory approvals or delays in obtaining regulatory approvals by the Company, its collaborators or licensees would adversely affect the marketing of products or services developed by the Company, as well as hinder the Company's ability to generate product revenues. Further, there can be no assurance that the Company, its collaborators or licensees will be able to obtain the necessary regulatory approvals. Although the Company does not anticipate problems satisfying any of the regulations involved, the Company cannot foresee the possibility of new regulations that could adversely affect the business of the Company. The healthcare industry is a highly regulated industry and is subject to numerous statutes, rules and regulations administered by healthcare commissions or similar regulatory authorities of each jurisdiction. The Company may be required to submit applications relating to their activities or products (including detailed background information concerning controlling persons within their organization) that are then reviewed for approval. The Company may incur significant expense in seeking to obtain licenses for its products and concepts. No assurances can be given that its products will be approved in any particular jurisdiction. The failure to obtain such approval or delay in obtaining such approval in any jurisdiction that the Company seeks to introduce its products or concepts may have a materially adverse effect upon the Company's business. Dependence on Independent Parties to Produce our Products The Company may be dependent upon current and future collaborations with and among independent parties to research, develop, test, manufacture, sell or distribute our products. The Company intends to continue to rely on such collaborative arrangements. Some of the risks and uncertainties related to the reliance on such collaborations include, but are not limited to 1) the ability to negotiate acceptable collaborative arrangements, 2) the fact that future or existing collaborative arrangements may not be successful or may not result in products that are marketed or sold, 3) such collaborative relationships may actually act to limit or restrict the Company, 4) collaborative partners are free to pursue alternative technologies or products either on their own or with others, including the Company's competitors, for the diseases targeted by the Company's programs and products and 5) the Company's partners may terminate a collaborative relationship and such termination may require the Company to seek other partners, or expend substantial additional resources to pursue these activities independently. These efforts may not be successful and may interfere with the Company's ability to manage, interact and coordinate its timelines and objectives with its strategic partners. Government Regulation and Legal Uncertainties The Company is not currently subject to many direct government regulations, other than the securities laws, the regulations thereunder applicable to all publicly owned companies, the Food and Drug Administration, the American Association of Blood Banks, and the laws and regulations applicable to businesses generally. It is possible that certain laws and regulations may be adopted at the local, state, national and international level that could effect the Company's operations. Changes to such laws could create uncertainty in the marketplace which could reduce demand for the Company's products or increase the cost of doing business as a result of costs of litigation or a variety of other such costs, or could in some other manner have a material adverse effect on the Company's business, financial condition, results of operations and prospects. If any such law or regulation is adopted it could limit the Company's ability to operate and could force the business operations to cease, which would have a significantly negative effect on the shareholder's investment. The integrated disclosure system for small business issuers adopted by the Securities and Exchange Commission in Release No. 34-30968 and effective as of August 13, 1992, substantially modified the information and financial requirements of a "Small Business Issuer," defined to be an issuer that has revenues of less than $25,000,000; is a U.S. or Canadian issuer; is not an investment company; and if a majority-owned subsidiary, the parent is also a small business issuer; provided, however, an entity is not a small business issuer if it has a public float (the aggregate market value of the issuer's outstanding securities held by non-affiliates) of $25,000,000 or more. The Company is deemed to be a "small business issuer." The Securities and Exchange Commission, state securities commissions and the North American Securities Administrators Association, Inc. ("NASAA") have expressed an interest in adopting policies that will streamline the registration process and make it easier for a small business issuer to have access to the public capital markets. The Company can make no assurances that any of these agencies will adopt any such policies. Also, an agency could adopt such policy that may have a detrimental effect to the Company's operations and it could have a significantly negative effect on the value of the Company's equity. Limited Market Due To Penny Stock The Company's stock differs from many stocks, in that it is a "penny stock." The Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks." These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended. Because our securities probably constitute "penny stock" within the meaning of the rules, the rules would apply to us and our securities. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all. Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34- 29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include:- - Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; -Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; - "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; - Excessive and undisclosed bid-ask differentials and markups by selling broker- dealers; and - The wholesale dumping of the same securities by promoters and broker- dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Furthermore, the "penny stock" designation may adversely affect the development of any public market for the Company's shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in "penny stock" is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in the Company's common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock." Rule 15g-9 of the Commission requires broker- dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them. PART II. ITEM 1. LEGAL PROCEEDINGS. Other than as set forth below, the Company is not a party to any material pending legal proceedings and, to the best of its knowledge, no such action by or against the Company has been threatened. The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have material adverse effect on its financial position, results of operations or liquidity. In 2005, a corporation claimed that it had a claim against K-K Medical, Inc., one of the Company's subsidiaries, in such that it claims to have a judgment of $644,376 against K-D Medical, Inc., inclusive of interest. The Company intends to take all steps necessary to contest the validity of such claim on behalf of K-D Medical, Inc. if and when such a formal claim is made. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Sales of Unregistered Securities. The Registrant had no sales of unregistered securities during the three-month period ending June 30, 2007 other than disclosed within this Form 10QSB, and in particular, Notes B and C to the Financial Statements. Use of Proceeds. Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were not any matters submitted requiring a vote of security holders during the three-month period ending June 30, 2007 other than as disclosed herein. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Reports on Form 8-K. No reports on Form 8-K were filed during the three-month period covered in this Form 10-QSB other than disclosed below. (b) Exhibits. Exhibits included or incorporated by reference herein: See Exhibit Index. EXHIBIT INDEX Exhibit No. Description 2.1 Articles of Incorporation* 2.1.1 Articles of Amendment to Articles of Incorporation, dated September 16, 1998* 2.1.2 Articles of Amendment dated March 20, 2003* 2.1.3 Articles of Merger dated March 20, 2003 for redomicile * 2.1.3.1 Merger Agreement underlying Articles of Merger for redomicile * 2.1.4 Articles of Merger dated March 20, 2003 for merger of subsidiary, CalbaTech, Inc., into Parent, Traffic Technology, Inc. with name change to CalbaTech, Inc. post merger * 2.1.4.1 Merger Agreement underlying Articles of Merger for merger of Subsidiary and Parent and concurrent name change * 2.2 Bylaws of Traffic Technology, Inc., a Nevada Corporation * 6.1 Consulting Agreement with Pinnacle West Capital Corporation, dated May 30, 2000* 6.2 Distributor Agreement with Layton Solar, dated April 3, 2000* 6.2.1 Amendment to Distributor Agreement with Layton Solar, dated August 24, 2000* 6.3 Distributor Agreement with IMS Industries, dated March 17, 2000* 6.4 Distributor Agreement with Taiwan Signal Technologies Co., dated June 30, 2000* 6.5 Distributor Agreements with Artflex, Sinalizacao and Viaria Ltd., dated August 7, 2000* 6.6 Distributor Agreement with Supremetech Engineering Co., dated August 15, 2000* 6.7 Consulting Service Agreement for LED Traffic Signal Technology Transfer and Licensing with JCI Group, Inc. (China), dated January 8, 2001* 6.8 LED Single Lens Traffic Signal Technology Transfer and Consulting Service Agreement with JCI Group, Inc. Japan), dated April 25, 2001* 6.9 Form of Distributor Agreement (United States)* 10.1 Employment Agreement for James DeOlden * 10.2 Employment Agreement for Edward Deese * 10.3 Employment Agreement for John Gordon * 10.4 Employment Agreement for David Killen * 10.5 Asset Purchase Agreement (Zoval Enterprises) * 10.6 Agreement and Plan of Reorganization for the acquisition of MolecularWare * 10.7 Agreement and Plan of Reorganization for the acquisition of Molecula * 10.8 Indemnification Agreement - James DeOlden * 10.9 Indemnification Agreement - Edward Deese * 10.10 Indemnification Agreement - John Gordon * 24.1 Power of Attorney (filed herein) 31.1 Certification of President and Chief Executive Officer pursuant to Rules 13A-14 and 15D-14 of the Securities Exchange Act of 1934. 31.2 Certification of Principal Accounting Officer pursuant to Rules 13A-14 and 15D-14 of the Securities Exchange Act of 1934. 32.1 Certification pursuant of Chief Executive Officer to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes Oxley Act of 2002. 32.2 Certification pursuant of Chief Financial Officer to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes Oxley Act of 2002. *Documents previously filed with the SEC SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated: Signature Title Date /s/ James DeOlden CEO/Secretary/Director August 14, 2007 James DeOlden /s/Edward Dees President/Treasurer/Director August 14, 2007 Edward Deese /s/John Gordon, PhD Vice-President/CTO/Director August 14, 2007 John Gordon, PhD CERTIFICATIONS