10-Q 1 f10q0613_caldera.htm QUARTERLY REPORT f10q0613_caldera.htm


UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
or
 
o 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:  000-54748
 
CALDERA PHARMACEUTICALS, INC.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
20-0982060
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
One Kendall Square, Building 200, Suite 2
Cambridge, Massachusetts, 02139
 (Address of principal executive offices) (Zip Code)
 
(617) 294-9697
 (Registrant’s telephone number, including area code)

278 DP Road, Suite D
Los Alamos, New Mexico 87544
 (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer                       
¨
Non-accelerated filer
o
Smaller reporting company     
x
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
 
Number of shares of common stock outstanding as of August 14, 2013 was 4,197,270.
 
 
 

 
 
CALDERA PHARMACEUTICALS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
     
Page
 
 
PART I.—FINANCIAL INFORMATION
     
Item 1.
Financial Statements
     
 
Consolidated Balance Sheets as at June 30, 2013 (Unaudited) and December 31, 2012
   
F-1
 
 
Consolidated Statements of Operations for the six months ended June 30, 2013 and 2012, respectively (Unaudited)
   
F-2
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, respectively (Unaudited)
   
F-3
 
 
Notes to the unaudited Consolidated Financial Statements
   
F-4 to F-20
 
Item 2.
Management’s Discussion and Analysis of Financial Information and Results of Operations
    1  
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
    9  
Item 4.
Controls and Procedures
    9  
           
 
PART II—OTHER INFORMATION
       
Item 1.
Legal Proceedings
    10  
Item 1A.
Risk Factors
    11  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    19  
Item 3.
Defaults Upon Senior Securities
    19  
Item 4.
Mine Safety Disclosures
    19  
Item 5.
Other Information
    19  
Item 6.
Exhibits
    91  
SIGNATURE
    20  
GLOSSARY
       
 
 
 

 
 
PART I - FINANCIAL INFORMATION
  
Item 1.
Financial Statements.
 
CALDERA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS
 
   
June 30,
2013
(unaudited)
   
December 31,
2012
 
ASSETS
           
             
Current assets:
           
Cash
 
$
1,690,490
   
$
378,643
 
Accounts receivable, net
   
56,520
     
59,849
 
Prepaid expenses
   
174,637
     
17,055
 
                 
Total current assets
   
1,921,647
     
455,547
 
                 
Non-current assets:
               
Intangible assets, net
   
568,732
     
594,574
 
Plant and equipment, net
   
399,515
     
391,530
 
Investment in Certificate of deposit
   
25,000
     
-
 
     
993,247
     
986,104
 
                 
TOTAL ASSETS
 
$
2,914,894
   
$
1,441,651
 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current liabilities:
               
Accounts payable
 
$
468,695
   
$
374,048
 
Other payables and accrued expenses
   
230,426
     
197,307
 
Loans payable
   
219,580
     
218,324
 
Bridge notes payable, net of debt discount
   
19,065
     
233,955
 
Derivative financial liability
   
1,995,715
     
17,539
 
Dividends payable
   
95,905
     
156,873
 
                 
Total current liabilities
   
3,029,386
     
1,198,046
 
                 
Non-current liabilities:
               
Loans payable
   
306,282
     
332,055
 
Other payables and accrued expenses
   
81,600
     
160,000
 
                 
     
387,882
     
492,055
 
                 
TOTAL LIABILITIES
   
3,417,268
     
1,690,101
 
                 
Convertible Redeemable Preferred Stock
               
Series A Cumulative Convertible Redeemable Preferred Stock, $0.001 par value, 400,000 shares authorized, 105,000 and 341,607 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively, liquidation preference is $5.70 per share.
   
133,350
     
2,065,392
 
                 
Commitments and contingencies
               
                 
STOCKHOLDERS’ DEFICIT:
               
Common stock, $0.001 par value, 50,000,000 authorized shares, 4,851,270 and 4,956,270 shares issued and, 4,197,270 and 4,302,270 outstanding as of June 30, 2013 and December 31, 2012, respectively.
   
4,851
     
4,957
 
Series B Cumulative Convertible Preferred Stock, $0.001 par value, 3,000,000 authorized shares, and 2,119,947 shares issued and outstanding as of June 30, 2013, liquidation preference is $2.50 per share.
   
2,120
     
-
 
Additional paid in capital
   
10,012,208
     
4,649,109
 
Treasury stock, at cost, 654,000 shares of common stock as of June 30, 2013 and December 31, 2012
   
(473
)
   
(473
)
Accumulated deficit
   
(10,654,430
)
   
(6,967,435
)
                 
Total stockholders’ deficit
   
(635,724
)
   
(2,313,842
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
$
2,914,894
   
$
1,441,651
 

See notes to the unaudited consolidated financial statements
 
 
F-1

 
 
CALDERA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
 
   
Three months
ended
June 30,
2013
   
Three months ended
June 30,
2012
   
Six months
ended
June 30,
2013
   
Six months
ended
June 30,
2012
 
                         
Sales
 
$
82,881
   
$
493,288
   
$
320,295
   
$
871,025
 
                                 
Cost of sales
   
99,624
     
174,488
     
271,723
     
352,124
 
                                 
Gross (loss)/profit
   
(16,743
)
   
318,800
     
48,572
     
518,901
 
                                 
Operating expenses:
                               
Selling, general and administrative expenses
   
926,945
     
597,547
     
1,489,991
     
1,076,038
 
Depreciation
   
28,044
     
19,932
     
55,650
     
39,024
 
Amortization
   
12,921
     
12,921
     
25,842
     
25,842
 
Total operating expenses
   
967,910
     
630,400
     
1,571,483
     
1,140,904
 
                                 
Operating loss
   
(984,653
)
   
(311,600
)
   
(1,522,911
)
   
(622,003
)
                                 
Other income/(expense)
                               
Interest income
   
564
     
139
     
685
     
494
 
Interest expense
   
(119,794
)
   
(4,392
)
   
(139,701
)
   
(7,838
)
Change in fair value of derivative liabilities
   
59,728
     
-
     
(148,571
)
   
-
 
                                 
Total other income/(expense)
   
(59,502
)
   
(4,253
)
   
(287,587
)
   
(7,344
)
                                 
Net loss
   
(1,044,155
)
   
(315,853
)
   
(1,810,498
)
   
(629,347
)
                                 
Deemed preferred stock dividends
   
(1,728,912
)
   
-
     
(1,728,912
)
   
(2,857
)
Preferred stock dividends
   
(108,838
)
   
(39,070
)
   
(147,585
)
   
(77,874
)
                                 
Net loss applicable to common stock
 
$
(2,881,905
)
 
$
(354,923
)
 
$
(3,686,995
)
 
$
(710,078
)
                                 
Net loss per common stock: -
                               
Basic and diluted
 
$
(0.68
)
 
$
(0.08
)
 
$
(0.86
)
 
$
(0.17
)
                                 
Weighted average number of common stock outstanding: -
                               
Basic and diluted
   
4,254,962
     
4,302,270
     
4,278,485
     
4,300,456
 

See notes to the unaudited consolidated financial statements
 
 
F-2

 
 
CALDERA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
 
   
Six months ended
June 30,
2013
   
Six months ended
June 30,
2012
 
             
Cash flow from operating activities
           
Net loss
 
$
(1,810,498
)
 
$
(629,347
)
Adjustments for non-cash items:
               
Depreciation
   
55,650
     
39,024
 
Amortization
   
25,842
     
25,842
 
Amortization of bridge note discount
   
111,050
     
-
 
Stock based compensation payments
   
229,259
     
40,573
 
Loss on plant and equipment scrapped
   
1,082
     
-
 
Increase in receivables provision
   
14,086
      -  
Increase in fair value of derivative financial liability
   
148,571
      -  
Increase in legal settlement accrual
   
115,273
      -  
Changes in operating assets and liabilities:
            -  
Increase in accounts receivable
   
(10,757
)
   
(176,239
)
Increase in prepaid expenses
   
(157,582
)
   
(92,341
)
Increase in accounts payable
   
94,647
     
62,863
 
(Decrease)/Increase in other payables and accrued expenses
   
(18,487
)
   
12,018
 
                 
Net cash used in operating activities
   
(1,201,864
)
   
(717,607
)
                 
Investing activities
               
Purchase of plant and equipment
   
(64,717
)
   
(26,198
)
Investment in Certificate of Deposit
   
(25,000
)
   
-
 
                 
Net cash used in investing activities
   
(89,717
)
   
(26,198
)
                 
Financing activities
               
Advance on line of credit
   
-
     
50,000
 
Advance on commercial loans
   
-
     
148,500
 
Advance on Bridge loans
   
250,000
     
-
 
Repayment of Los Alamos County loan
   
(15,419
)
   
(14,679
)
Repayment of line of credit
   
(57
)
   
-
 
Repayment of commercial loan
   
(8,946
)
   
-
 
Repayment of Bridge loans
   
(100,000
)
   
-
 
Proceeds on Series A Preferred stock issued
   
-
     
57,500
 
Proceeds on Series B Preferred stock issued, net of issue expenses
   
2,477,850
     
-
 
Preferred stock dividends paid
   
-
     
(26,752
)
                 
Net cash provided by financing activities
   
2,603,428
     
214,569
 
                 
Net increase/(decrease) in cash
   
1,311,847
     
(529,236
)
                 
Cash at the beginning of the period
   
378,643
     
678,300
 
                 
Cash at the end of the period
 
$
1,690,490
   
$
149,064
 
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest
 
$
19,829
   
$
7,301
 
                 
Non-cash investing and financing activities:
               
Common stock issued in lieu of preferred stock dividends
 
$
-
   
$
60,705
 
Series B Preferred stock issued in exchange for Series A Preferred stock
 
$
2,065,392
     
-
 
Series B Preferred stock issued in lieu of series A Preferred stock dividends
 
$
208,558
      -  
Series B Preferred stock issued upon conversion of Bridge notes and interest thereon
 
$
384,160
      -  
Deemed preferred stock dividends relating to warrants issued to preferred stock holders
 
$
1,728,912
   
$
2,857
 
 
See notes to the unaudited consolidated financial statements
 
 
F-3

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  
GENERAL INFORMATION

Caldera Pharmaceuticals, Inc. (“the Company”) is a Delaware corporation. The principal office was relocated from Los Alamos, New Mexico to Cambridge, Massachusetts during June 2013. The Company was incorporated in November 2003.
 
The Company is a drug discovery and pharmaceutical services company that is based on a proprietary x-ray fluorescence technology, called XRpro®. Caldera offers what it believes to be uniquely broad and simple technologies to evaluate drug molecules, which increases the efficiency of analyzing and evaluating drug molecules for safety and efficacy at an early and less expensive stage of drug development.
 
The Company has generated the majority of its revenues to date through Government research contracts and Government grants utilizing its proprietary x-ray fluorescence technology.
 
2.  
ACCOUNTING POLICIES AND ESTIMATES

Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
 
In the opinion of management, all adjustments necessary to fairly present the results for the interim periods presented have been made. All adjustments made are of a normal and recurring nature and no non-recurring adjustments have been made in the presentation of these interim financial statements.
 
All amounts referred to in the notes to the financial statements are in United States Dollars ($) unless stated otherwise.

Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries in which it has a majority voting interest. Investments in affiliates are accounted for under the cost method of accounting, where appropriate. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:

Caldera Pharmaceuticals, Inc. - Parent Company
XRpro Corp. – Wholly owned subsidiary

Estimates
The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, and recovery of long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, and assumptions used in assessing impairment of long-term assets and the assumptions used in determining percentage of completion on our long-term contracts.
 
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against and by the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
 
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 
F-4

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2.  
ACCOUNTING POLICIES AND ESTIMATES (continued)
 
Fair value of financial instruments
The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
 
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
 
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, accounts payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with the accounting guidance.

ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
 
Recent accounting pronouncements
 
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

Reporting by segment
No segmental information is presented as the Company only has one significant reporting segment that is Government Revenues.

Intangible assets
 
a)    License Agreements
 
License agreements acquired by the Company are reported at acquisition value less accumulated amortization and impairments.
 
b)    Amortization
 
Amortization is reported in the income statement on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is indefinite. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life of the license agreement is twenty years which is the term of the patent supporting the underlying license agreements
 
All of our intangible assets are subject to amortization . We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Where intangibles are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.
 
Plant and equipment
Plant and equipment is stated at cost less accumulated depreciation.  Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:
 
Leasehold improvements
5 Years
Laboratory equipment
7 Years
Furniture and fixtures
10 Years
Computer equipment
3 Years
Motor vehicles (used)
2 Years
 
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

Concentrations of credit risk
The Company’s operations are carried out in the USA. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the USA and by the general state of the economy. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.
 
 
F-5

 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
2.  
ACCOUNTING POLICIES AND ESTIMATES (continued)

Concentration of major customers
The Company currently derives substantially all of its revenues from Government research contracts and Government grants.

These Government research contracts are primarily from two government agencies, The Department of Defense and the National Institutes of Health. The granting of research contracts from Government agencies is a competitive process and there is no certainty that we will be awarded future contracts, which may cause our revenue to fluctuate from year to year. Furthermore, Government grants are subject to audits by the granting agency. If such audits were to determine that expenditures of the grant funds did not meet the applicable criteria, these amounts could be subject to retroactive adjustment and refunded to the granting agency.

Total revenues by customer type are as follows:

   
Three months
ended
June 30,
2013
   
Three months
ended
June 30,
2012
   
Six months ended
June 30,
2013
   
Six months ended
June 30,
2012
 
                         
National Institutes of Health
 
$
50,067
   
$
493,288
   
$
253,177
   
$
871,025
 
Department of Defense
   
32,814
     
-
     
67,118
      -  
                                 
   
$
82,881
   
$
493,288
   
$
320,295
   
$
871,025
 

Accounts receivable and other receivables
We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. As a basis for accurately estimating the likelihood of collection of our accounts receivable, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on a regular basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
The balance of the receivables provision as at June 30, 2013 and December 31, 2012 was $14,086 and $0, respectively. The amount charged to bad debt provision for the six months ended June 30, 2013 and 2012 was $14,086 and $0, respectively.

Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with two financial institutions in the USA.  
 
Revenue recognition
Revenue sources consist of government grants, government contracts and commercial development contracts.
 
We account for our long-term Firm Fixed Price Government contracts and grants associated with the delivery of research on drug candidates and the development of drug candidates using the percentage-of-completion accounting method. Under this method, revenue is recognized based on the extent of progress towards completion of the long-term contract.

We generally use the cost-to-cost measure of progress for all of our long-term contracts, unless we believe another measure will produce a more reliable result. We believe that the cost-to-cost measure is the best and most reliable performance indicator of progress on our long-term contracts as all our contract estimates are based on costs that we expect to incur in performing our long-term contracts and we have not experienced any significant variations on estimated to actual costs to date. Under the cost-to-cost measure of progress, the extent of progress towards completion is based on the ratio of costs incurred-to-date to the total estimated costs at the completion of the long-term contract. Revenues, including estimated fees or profits are recorded as costs are incurred.

When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined.
 
To a much lesser extent, we enter into fixed fee commercial development contracts that are not associated with the delivery of feasible research on drug candidates and the development of drug candidates. Revenue under such contracts is generally recognized upon delivery or as the development is performed.

Sales and Marketing
Sales and marketing expenses are minimal at present. These costs, if any, are expensed as incurred and included in Selling, general and administrative expenses. The Company expects to incur sales and marketing expenses in future periods to promote its services to drug discovery enterprises.

Research and Development
The remuneration of the Company’s research and development staff, materials used in internal research and development activities, and payments made to third parties in connection with collaborative research and development arrangements, are all expensed as incurred.  Where the Company makes a payment to a third party to acquire the right to use a product formula which has received regulatory approval, the payment is accounted for as the acquisition of a license or patent and is capitalized as an intangible asset and amortized over the shorter of the license period or the patent life.

The amount expensed for unrecovered research costs, included in Selling, general and administrative expenses during the three months and the six months ended June 30, 2013 was $39,972 and $75,403, respectively.
 
F-6

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
2.  
ACCOUNTING POLICIES AND ESTIMATES (continued)

Patent Costs
Legal costs in connection with approved patents and patent applications are expensed as incurred and classified as Selling, general and administrative expense in our consolidated statement of operations.

Share-Based Compensation
Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee's requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations for the six months ended June 30, 2013 and 2012 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have no awards with market or performance conditions.
 
Income Taxes
The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Net loss per Share
Basic net loss per share is computed on the basis of the weighted average number of common stock outstanding during the period.
 
Diluted net loss per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net loss per share are excluded from the calculation.
 
Dilution is computed by applying the treasury stock method for options and warrants. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).

Comprehensive income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income/(loss).
 
Related parties
Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company shall disclose all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.
 
 
F-7

 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
3.  
GOING CONCERN

As shown in the accompanying financial statements, the Company incurred a net loss of $1,810,498 and $629,347 during the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, the Company had an accumulated deficit of $10,654,430. The Company had a working capital deficiency of $1,107,739, including a non-cash derivative liability of $1,995,715 as of June 30, 2013. These operating losses and working capital deficiency create an uncertainty about the Company’s ability to continue as a going concern. Although no assurances can be given, management of the Company believes that potential additional issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company is economically dependent upon future capital contributions or financing to fund ongoing operations.

4.  
INTANGIBLE ASSETS

Licenses
In terms of an Exclusive Patent License agreement covering national and international patents entered into with the Los Alamos National Security LLC dated September 8, 2005, the Company has the exclusive right to the use of certain patents covering the following:

●   
Method for Detecting Binding Events Using Micro X-Ray Fluorescence Spectrometry;

●   
Flow Method and Apparatus for Screening Chemicals Using Micro X-Ray Fluorescence;

●   
Method and Apparatus for Detecting Chemical Binding;

●   
Drug Development and Manufacturing.

The agreement provides for a term as long as the last surviving patent which is generally a twenty-year period from the date of first application.

In terms of the agreement, the Company issued shares to the Licensor equal to 3% of the issued equity of the Company. The agreement contains anti-dilutive clauses that will ensure that the Licensor maintains at least a 3% shareholding in the Company until the Company achieves equity financing of at least $20 million. The anti-dilutive clauses do not result in a freestanding instrument as they are directly linked to the shareholding that the Licensor currently holds in the Company. Should any percentage of that shareholding be sold to third parties, prior to the triggering of any anti-dilution event, the anti-dilution clause will be void for that percentage of the shareholding sold to third parties.   As of June 30, 2013, the Company has not yet raised the requisite amount of financing.  The Licensor continued to hold, at a minimum 3% of the Company’s common stock.
 
The agreement has termination provisions as follows; i) at the option of the Licensor; if the Company fails to deliver any reports that are due, fails to pay any royalties or fees due, breaches any material clause of the agreement, or failure to inform the Licensor of a petition to file for voluntary or involuntary bankruptcy; ii) at the option of the Licensee by giving 90 days written notice to the Licensor.

The agreement further provides for an annual royalty to be paid to the Licensee at a rate of 2% per annum on net sales, excluding any sales to Government agencies. The agreement provides for a minimum fee of $50,000 per annum up until December 31, 2022. The fee will be deducted from any royalties due in excess of the fee due for that financial year. The Company has not paid any royalties on a percentage basis, and has only paid the minimum fee since entering into the agreement.

Future annual minimum payments required under license agreement obligations at June 30, 2013, are as follows:

   
Amount
 
       
2014
 
$
50,000
 
2015
   
50,000
 
2016
   
50,000
 
2017
   
50,000
 
2018 and thereafter
   
250,000
 
         
Total
 
$
450,000
 

Licenses consist of the following:
 
   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
             
Licenses, at cost
 
$
972,000
   
$
972,000
 
Less: Accumulated amortization
   
(403,268
)
   
(377,426
)
                 
   
$
568,732
   
$
594,574
 
 
The aggregate amortization expense charged to operations was $12,921 for the three months ended June 30, 2013 and 2012, respectively and $25,842 for the six months ended June 30, 2013 and 2012, respectively. The amortization policies followed by the Company are described in Note 2.
 
F-8

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
4.  
INTANGIBLE ASSETS (continued)

Amortization expense for future periods is summarized as follows:

   
Amount
 
       
Remainder of 2013
 
$
25,842
 
2014
   
51,684
 
2015
   
51,684
 
2016
   
51,684
 
2017 and thereafter
   
387,838
 
Total
 
$
568,732
 

Patents
The Company has various patents pending or registered in its name. These patents have been internally generated and all costs associated with the research and development of these patents has been expensed.

The patents assigned to Caldera are as follows:
 
●   
Well Plate – apparatus for preparing samples for measurement by x-ray fluorescence spectrometry. Patent filed August 15, 2008

●   
Method and Apparatus for measuring Protein Post Translational Modification. Patent filed September 26, 2008.

●   
Method and Apparatus for Measuring Analyte Transport across barriers. Patent filed July 1, 2009.
 
5.  
PLANT AND EQUIPMENT

Plant and equipment consists of the following:

   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
             
Leasehold improvements
 
$
6,393
   
$
6,393
 
Furniture and fittings
   
12,556
     
9,979
 
Laboratory equipment
   
737,430
     
679,310
 
Computer equipment
   
13,276
     
29,327
 
Vehicles
   
17,658
     
17,658
 
Total
   
787,313
     
742,667
 
Accumulated depreciation
   
(387,798
)
   
(351,137
)
   
$
399,515
   
$
391,530
 

The aggregate depreciation charge to operations was $28,044 and $19,932 for the three months ended June 30, 2013 and 2012, respectively and $55,650 and $39,024 for the six months ended June 30, 2013 and 2012 respectively. The depreciation policies followed by the Company are described in Note 2.
 
 
F-9

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
6.  
OTHER PAYABLES AND ACCRUED EXPENSES
 
   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
Short-term portion
           
Credit card liabilities
 
$
11,490
   
$
7,505
 
Vacation and Sick Pay accrual
   
102,034
     
89,730
 
Other payables
   
81,600
     
97,972
 
Payroll liabilities
   
33,202
     
-
 
Other
   
2,100
     
2,100
 
     
230,426
     
197,307
 
Long-term portion
               
Other payables
   
81,600
     
160,000
 
   
$
312,026
   
$
357,307
 

The repayment schedule of other payables is as follows:
 
   
Amount
 
       
Within 1 year
  $
81,600
 
1 to 2 years
   
81,600
 
Total
 
$
163,200 
 
 
The other payables relates to the Bellows matter disclosed under Litigation in note 18 below.
 
7.  
LOANS PAYABLE
 
   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
             
Short term portion
           
Los Alamos County project participation loan
 
$
32,057
   
$
31,270
 
Los Alamos National Bank revolving draw loan
   
168,770
     
168,827
 
Los Alamos National Bank commercial loan
   
18,753
     
18,227
 
     
219,580
     
218,324
 
Long term portion
               
Los Alamos County project participation loan
   
193,675
     
209,923
 
Los Alamos National Bank commercial loan
   
112,607
     
122,132
 
     
306,282
     
332,055
 
                 
Total
 
$
525,862
   
$
550,379
 
 
The amortization of the principal outstanding on the loans payable is as follows:
 
   
Amount
 
       
Within 1 year
 
$
219,580
 
1 to 2 years
   
53,607
 
2 to 3 years
   
56,546
 
3 to 4 years
   
59,674
 
Thereafter
   
136,455
 
Total
 
$
525,862
 
 
Los Alamos County project participation loan
The Company entered into a Project Participation Agreement (as Amended) and a Loan Agreement with the Incorporated County of Los Alamos as of September 21, 2006. The Agreement provided for funding up to a maximum of $2,200,000 for the construction of a building and purchase of equipment. The maximum amount of equipment to be funded out of the total available loan of $2,200,000 was $625,000. The term of the loan is 13 years. The loan agreement provided for no repayments for 36 months with 120 equal monthly repayments commencing on September 21, 2009. The interest rate on the loan is 5% per annum. The assets funded in terms of the Project Participation Agreement and the Loan Agreement is to be used as security for the balance of the loan outstanding. The Company made use of the loan to purchase assets amounting to $302,009 during the 2007 financial year. Repayments of the loan commenced on September 21, 2009 at an interest rate of 5% per annum with equal monthly repayments of $3,547, inclusive of interest. The Company owed $225,732 and $241,193 as of June 30, 2013 and December 31, 2012, respectively.
 
 
F-10

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
7.  
LOANS PAYABLE (continued)
 
Los Alamos National Bank
The Company entered into a one year revolving draw loan with Los Alamos National Bank for up to a maximum of $750,000 as of May 23, 2012. The loan bears interest at a coupon of the Wall Street Journal Prime rate plus 1.5% with a floor of 4.75% per annum. This loan is secured by accounts receivable and other rights to payments, instruments, documents and other chattel paper, general intangibles and fixed assets. Interest is payable quarterly. The Company drew $50,000 under this facility on May 23, 2012 to repay a previous and similar facility. An additional $118,000 was drawn down on this facility on July 11, 2012 to settle a liability owing to a supplier. The Company owed $168,770 and $168,827 as of June 30, 2013 and December 31, 2012, respectively.

On May 23, 2013, the revolving draw loan agreement with Los Alamos National Bank was extended to August 23, 2013 and the availability under the facility was reduced to $167,943, the capital balance outstanding as of May 23, 2013. The loan bears interest at a coupon of the Wall Street Journal Prime rate plus 1.5% with a floor of 4.75% per annum. This loan is secured by accounts receivable and other rights to payments, instruments, documents and other chattel paper, general intangibles and fixed assets. Interest is payable quarterly. We are currently in negotiations with the bank to renew this facility, cancel the facility, or agree on a suitable amortization schedule.

The Company entered into a single advance commercial loan agreement with Los Alamos National Bank for $148,500 on June 8, 2012. The purpose of this loan was to acquire a Bruker XRpro instrument. This loan bears interest at the Wall Street Journal Prime rate plus 1.5% with a floor of 6.00% per annum. This loan expires on June 8, 2019. The loan is repayable in 84 monthly installments of $2,169, inclusive of interest, which installment may vary depending on the variable interest rate mentioned above. This loan is secured by accounts receivable and other rights to payments, instruments, documents and other chattel paper, general intangibles and fixed assets. This loan has been advanced to both the Company and XRpro Corp., a wholly owned subsidiary, jointly and severally, and has been guaranteed by Dr. Benjamin Warner and his wife. The Company owed $131,360 and $140,359 as of June 30, 2013 and December 31, 2012.
 
8. 
BRIDGE NOTES PAYABLE
 
The Company entered into a 10% Bridge Note (the “Bridge Notes”) agreement with nine principals for $450,000 between December 18, 2012 and March 29, 2013. On April 2, 2013 an additional principal entered into a 10% Bridge Note agreement for $50,000. The Bridge Notes are issued as part of a unit that includes warrants to purchase 600 shares of the Company’s common stock for each $1,000 of Bridge Note principal, at an exercise price of $3.00 per share, see note 13 below. The Bridge Notes bear interest at 10% per annum compounded and payable quarterly at the Company’s option, until the maturity date which is defined as the earliest of December 31, 2013, or the closing of any subsequent financing transactions, or an event of default as defined in the agreement. The Bridge note agreement also provides for a default interest rate of 15% per annum should any amounts due to the note holders in terms of the agreement be in default.

The Bridge Notes together with any interest due on the Bridge Notes will, at the option of the note holder, convert into securities of the Company’s subsequent financing. The Bridge Note holder also has the option to convert some or all of the principal and interest due on this note into shares of the Company’s common stock at a conversion price of $2.50 per share, unless a default has occurred and is continuing, at which instance the conversion price during the default period shall be $1.50 per share. The option to convert the Bridge Note into common stock has anti-dilutive provisions that will allow the note holder to be placed in the same position as it is prior to a dilution event occurring.
 
On April 19, 2013, six principals converted their Bridge Notes in the aggregate principal amount of $375,000 together with accrued and unpaid interest thereon of $9,160 into 153,664 units of series B preferred units of the Company at a conversion price of $2.50 per unit, each unit consist of one share of series B preferred stock and one seven-year warrant exercisable at a price of $2.50 per share, which price is subject to anti-dilution protection, see note 11 and 13 below.
 
On May 31, 2013, the Bridge notes due to two principals of $100,000 together with accrued and unpaid interest thereon of $1,541were repaid and cancelled.
 
The Bridge Notes included a total discount of $118,232 relating to the fair value of the warrants issued together with those notes. The conversion of the $375,000 and the repayment of $100,000 of the Bridge Notes mentioned above resulted in the immediate amortization of $85,006 of this discount. The Bridge note discount amortized over the three months ended June 30, 2013 was $7,673. The remaining unamortized discount of $6,578 is being amortized at a rate of $1,096 per month over the period ending December 31, 2013 or such earlier date as described above.
 
In the event that the Company receives or is entitled to receive $3 million, in net proceeds, from its various litigation proceedings against the managers of Los Alamos National Laboratories and others, the remaining Bridge Note holder will receive a premium of 30% of the principal amount outstanding, which will be added the original principal amount of the Bridge Note, subject to the premium being limited to such maximum amount allowed under any applicable usury law.

   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
             
Bridge notes payable
 
$
25,643
   
$
250,890
 
Unamortized bridge note discount
   
(6,578
)
   
(16,935)
 
   
$
19,065
   
$
233,955
 
 
9.                NOTES PAYABLE

The Company entered into a 10% Note (the “Notes”) agreement with two principals for $100,000 on March 25, 2013. The Notes bear interest at 10% per annum compounded and payable quarterly at the Company’s option, until the notes are repaid. These notes were utilized to provide temporary funding and were repaid, together with accrued interest on April 4, 2013.
 
 
F-11

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   
10.              DERIVATIVE FINANCIAL LIABILITY
 
The warrants arising from the issue of the Bridge notes (“Bridge Warrants”) disclosed under note 8 above have anti-dilution protection, whereby the exercise price of the warrant will re-price, based on a pre-determined formula, if any securities are sold, exercisable or convertible at a price less than the exercise price of the Bridge Warrants. This gives rise to a derivative financial liability, which was valued at $118,232 as of June 30, 2013 using a Black-Scholes valuation model. The value of this derivative financial liability will be re-assessed at each financial reporting period, with any movement thereon recorded in the statement of income in the period in which it is incurred.
 
The warrants arising from the issue of the series B preferred units (“Series B Shares”), together with the placement agent warrants directly related to that issue, disclosed under note 13 below have anti-dilution protection, whereby the exercise price of the warrant will re-price, based on a pre-determined formula, if any securities are sold, exercisable or convertible at a price less than the exercise price of the series B warrants. This gives rise to a derivative financial liability, which was valued at $1,728,912 and recorded as a deemed dividend expense, as of the date of issuance of the series B shares using a Black-Scholes valuation model. The value of this derivative financial liability will be re-assessed at each financial reporting period, with any movement thereon recorded in the statement of income in the period in which it is incurred.
 
The value of the derivative financial liability was re-assessed as of June 30, 2013 resulting in a net charge to the consolidated statement of operations of $148,571
 
   
June 30,
2013
(Unaudited)
   
December 31,
2012
 
             
Opening balance
 
$
17,539
   
 $
-
 
Derivative financial liability arising on bridge warrants with re-pricing terms
   
100,693
     
17,539
 
Derivative financial liability arising on the issue of warrants relating to Series B shares
   
1,728,912
     
-
 
Fair value adjustments
   
148,571
     
-
 
   
$
1,995,715
   
$
17,539
 
 
The following assumptions were used in the Black-Scholes valuation model:
 
   
Six months ended
June 30,
2013
 
       
Calculated stock price
 
$1.13- $1.27
 
Risk-free interest rate
 
0.04% to 0.07%
 
Expected life of warrants
 
5 Years
 
Expected volatility of the underlying stock
 
157% -164%
 
Expected dividend rate
   
0%
 
 
 
F-12

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
11.              PREFERRED STOCK

Preferred Stock consists of 10,000,000 authorized preferred shares of $0.001 par value each. The articles of Incorporation were amended on April 10, 2012 to change the designation of all of the 10,000,000 preferred shares of $0.001 each, from Series A 8% convertible redeemable preferred shares to 400,000 Series A 8% convertible redeemable preferred shares of $0.001 each. On April 19, 2013, the articles of incorporation were again amended to change the designation of the remaining 9,600,000 preferred shares to 3,000,000 Series B convertible  preferred shares of $0.001 each, with the remaining 6,600,000 preferred shares remaining undesignated.
 
Series A 8% Convertible, Redeemable Preferred Stock (“Series A Stock”)
Series A Stock consists of 400,000 authorized shares of $0.001 par value each, 105,000 and 341,607 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.

On April 30, 2013, the holders of 341,607 Series A Stock entered into an agreement to exchange their Series A Stock into 778,860 series B preferred shares of the Company. The number of series B preferred shares issued was derived at by dividing the total dollar investment made in the Company by each Series A stockholder by $2.50. In addition to this a further 83,423 series B preferred shares of $2.50 each were issued to the Series A stockholders in lieu of dividends due as of April 30, 2013.

On May 20, 2013, in terms of a legal settlement agreement entered into with Joel Bellows (Refer note 18 below), 105,000 Series A Stock was issued in exchange for his 105,000 common shares held in the Company. The Series A Stock issued to Joel Bellows was valued at $133,350 using a Black Scholes valuation model, the assumptions which are disclosed under note 10 above.
 
Conversion
The Series A Stock will convert to common stock of the Company at a price of $5.70 per share of Common Stock subject to adjustment for stock splits, stock dividends and any further recapitalizations. The Series A Stock is subject to voluntary conversion at the option of the stockholder at any time and is mandatory convertible at the option of the Company provided the Company’s common stock is trading on a recognized stock exchange or Over the Counter Bulletin Board and the volume weighted average price of the Company’s common stock is at least $10 per share, subject to stock splits, stock dividends and recapitalizations. 

Warrants
The original holders of Series A Stock had received warrants to purchase 341,607 shares of the Company’s common stock at an exercise price of $5.70 per share. The warrants expire five years after date of issuance. In terms of the exchange agreement entered into with the Company on April 30, 2013, these warrants remain in place. These warrants are not transferable without the consent of the Company and an opinion of Counsel satisfactory to the Company.
 
Redemption
Should the Company receive net proceeds of at least $3 million from litigation proceedings against the Regents of the University of California and Los Alamos National Security (see note 18); the remaining Series A stockholders will have the option to redeem the Series A Stock equal to 130% of the initial investment in the Company by the stockholder, which amounted to $210,000. This value differs from the carrying value of the Series A Stock of $133,350 which was valued using the Black-Scholes valuation model at the time of exchanging common stock for Series A Stock (Refer note 18 below). The Company also has the option to redeem the Series A Stock at a price equal to 130% of the initial investment in the Company by the stockholder at any time after giving the investors notice and allowing them to exercise their conversion rights into common stock 30 days after notice has been received. The Company is not obligated to pursue the litigation against Los Alamos National Laboratory but is doing so based on its belief that it will have a successful outcome.
 
Liquidation
The liquidation rights of the Series A Stock is the greater of $5.70 per share plus any unpaid dividends or an amount that would have been payable had all shares of Series A Stock converted into common stock immediately prior to liquidation.

Dividends
The Series A Stock carries an 8% cumulative, non-compounded dividend payable on January 31st, each year in cash or in kind at the option of the Series A stockholder. For any other dividends or distributions, the Series A Stock is treated on an as- converted basis.
 
An accrual for Series A Stock dividends of $5,425 and $156,873 was made at June 30, 2013 and December 31, 2012 respectively
 
 
F-13

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
11.              PREFERRED STOCK (continued)
 
Series B Convertible Preferred Stock (“Series B Stock”)
Series B Stock consists of 3,000,000 authorized shares of $0.001 par value each and 2,119,947 shares issued and outstanding as of June 30, 2013.
 
In connection with the terms of the recent private placement:
 
 
Six principals converted their Bridge Notes of $375,000 together with accrued and unpaid interest thereon of $9,160 into 153,664 Series B preferred units of the Company at a conversion price of $2.50 per unit, each unit consists of one share of Series B Stock and one seven-year common stock purchase warrant exercisable at a price of $2.50 per share, see note 13 below.
 
New, qualified investors, acquired 1,104,000 Series B preferred units of the Company at a price of $2.50 per unit, each unit consisting of one share of Series B Stock and one seven-year common stock purchase warrant at an exercise price of $2.50 per share, for net proceeds of $2,477,500 after deducting placement agent fees of $282,500 based on the Series B preferred units issued to new investors and the conversion of the Bridge Notes mentioned above.
 
In terms of exchange agreements entered into with the holders of 341,607 Series A shares, 778,860 shares of Series B Stock of $2.50 each were issued to the Series A stockholders by dividing their initial dollar investment in the Series A Stock by $2.50. In addition to this a further 83,423 shares of Series B Stock of $2.50 each was issued to the Series A shareholders in lieu of dividends accrued and due to the Series A shareholders as of April 30, 2013.
 
Subsequent to the six months ended June 30, 2013 a further 14,000 Series B preferred units of the Company were issued to new investors at $2.50 per unit, each unit consisting of one Series B Stock and one seven-year common stock purchase warrant for net proceeds of $31,850 after deducting placement agent fees of $3,150.
 
The following is a summary of material provisions of the Series B Stock as set forth in the Certificate of Designations.

Dividends
Series B Stock accrue dividends at the rate per annum equal to (i) 8% of the sum of (x) the Stated Value and (y) the amount of accrued and unpaid dividends payable, out of funds legally available for payment, on January 31st of each year, if paid in cash, or (ii) 10% of the sum of (x) the Stated Value and (y) the amount of accrued and unpaid dividends payable, out of funds legally available for payment, on January 31st of each year, if paid in shares of Common Stock, based upon a price of $2.50 per share of Common Stock. The Company shall have the option, to pay any such dividends in cash or shares of Common Stock. Such dividends shall be in preference and priority to any payment of any dividend on Common Stock, or any other class of preferred stock. Dividends are cumulative.
 
Conversion
Subject to adjustment as more fully described herein, each Series B Stock is currently convertible at the option of the holder into one share of Common Stock. Each Series B Stock (together with any accrued but unpaid dividends thereon) is convertible into shares of Common Stock at the option of the holder at any time at a conversion price per share equal to the sum of the Stated Value and any accrued but unpaid dividends thereon through the date of notice of conversion divided by the Conversion Price, subject to adjustment as described below. The initial Conversion Price shall be equal to the Stated Value. If the Company merges or sells its assets, holders of Series B Stock will be entitled to receive on conversion the securities or property (including cash) of the successor corporation that they would have received as a result of that merger or sale if they had converted immediately beforehand. At any time after the Common Stock is listed on a national securities exchange as defined in the Securities Exchange Act of 1934, the Company may cause the conversion of the Series B Stock, plus accrued but unpaid dividends into shares of Common Stock, each Series B Stock convertible into such number of shares of Common Stock as shall equal the sum of the Stated Value plus any accrued but unpaid dividends through the date of conversion divided by the lower of the then conversion price and the market price of the Company’s Common Stock. Market Price is defined as the average of the reported closing sales price of the Common Stock for each of the five trading days for which a closing sales price is reported immediately preceding the day prior to the conversion.

Liquidation
In the event of a liquidation, dissolution or winding up of the Company and other Liquidation Events as defined in the Certificate of Designations, holders of Series B Stock are entitled to receive from proceeds remaining after distribution to the Company’s creditors and prior to the distribution holders of Common Stock or any other class of preferred stock the (x) Stated Value (as adjusted for any stock splits, stock dividends, reorganizations, recapitalizations and the like) held by such holder and (y) all accrued but unpaid dividends on such shares.

Anti-Dilution
If the Company issues Common Stock or securities convertible, exercisable or exchangeable into Common Stock for a purchase price of less than $2.50 per share then the holders of the Series B Stock will be entitled to a weighted-average” adjustment in the number of common shares that their Series B Stock can be converted into; provided, however, that there will be no adjustment to the number of shares of Common Stock that the Series B Stock can be converted into for (i) issuance or sale of Common Stock or options or other awards under the Corporation’s equity incentive plans or programs not to exceed 2,000,000 shares of Common Stock; (ii) issuance or sale of preferred stock or Common Stock issuable upon conversion, exchange or exercise of the Series A Stock or Series B Stock, the Bridge Notes, the Warrants issued in connection with the exchange of the Bridge Notes, the Warrants issued in connection with the issuance of the Series B Stock to the holders thereof, any Warrants issued to the Placement Agent or its designees in connection with the issuance of the Series B Stock or as an advisory fee or any other convertible securities or warrants outstanding on the date hereof; (iii) issuance of equity securities or rights to purchase equity securities issued in connection with commercial property or lease transactions that are approved by the Board of Directors; (iv) issuance of equity securities or rights to purchase equity securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board of Directors; (v) issuance of securities to an entity as a component of any business relationship with such entity primarily for the purpose of (A) joint venture, technology or licensing development activities; (B) distribution, supply or manufacture of the Company’s products or services; or (C) any other arrangements involving corporate partners primarily for purposes other than raising capital, the terms of which business relationship with such entity are approved by the Board of Directors; and (vi) issuance of stock pursuant to a stock dividend or stock split.
 
 
F-14

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

11.              PREFERRED STOCK (continued)

Series B Convertible Preferred Stock (“Series B Stock”) (continued)

Voting
Except as otherwise required by law and except as set forth below, holders of Series B Stock will, on an as-converted basis, vote together with the Common Stock as a single class. Each holder of Series B Stock is entitled to cast the number of votes equal to two times the number of shares of Common Stock into which such shares of Series B Stock could be converted at the record date for determining stockholders entitled to vote at the meeting. The approval by holders of a majority of the Series B Stock, voting separately as a class, will be required for the creation of any class or series of preferred stock ranking senior to or pari passu with the Series B Stock as to payments of dividends or upon the liquidation of the Company.

Financials
As soon as practicable after the filing of the Company’s Quarterly Report on Form 10-Q and its Annual Report on Form 10-K, the Holders of the Series B Stock shall be entitled to receive, upon request, a consolidated balance sheet of the Company, if any, as of the end of such fiscal year or quarter, and consolidated statements of operations and consolidated statements of cash flows and stockholders’ equity of the Company, if any, for such year or quarter, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail.
 
12.              COMMON STOCK

Common stock consists of 50,000,000 authorized shares of $0.001 each, 4,851,270 and 4,956,270 shares issued and 4,197,270 and 4,302,270 shares outstanding as of June 30, 2013 and December 31, 2012, respectively. 

On May 20, 2013, in terms of a legal settlement agreement entered into with Joel Bellows (See note 18 below), 105,000 common shares were exchanged for 105,000 Series A Stock. The common shares exchanged were cancelled and are available for reissue. 

During the year ended December 31, 2012 a further 10,650 shares of common stock were issued at $5.70 per share for a total of $60,705 in lieu of Series A Stock dividends which were due at January 31, 2012.
 
13.             WARRANTS

In connection with the terms of the recent private placement:

  
Warrants to purchase 153,664 shares of common stock at a purchase price of $2.50 per shares were issued to Bridge Note holders upon conversion of their Bridge Notes into series B units as disclosed in note 11 above. These warrants have a seven-year term and are exercisable at the option of the holder. These warrants may be exercised for shares of common stock in lieu of cash by applying the number of warrants to the formula whereby the exercise price of the warrants is deducted from the closing price of the common stock on a quoted market divided by the closing price of the common stock on a quoted market. These warrants also have dilution protection in certain instances.

  
Warrants to purchase 1,104,000 shares of common stock at a purchase price of $2.50 per shares were issued to new qualified investors in series B units as disclosed in note 11 above. These warrants have a seven-year term and are exercisable at the option of the holder. These warrants may be exercised for shares of common stock in lieu of cash by applying the number of warrants to the formula whereby the exercise price of the warrants is deducted from the closing price of the common stock on a quoted market divided by the closing price of the common stock on a quoted market. These warrants also have dilution protection in certain instances.
 
  
Warrants to purchase 285,400 shares of common stock at a purchase price of $2.75 per share and a further 40,000 warrants to purchase shares of common stock at $0.01 per share were issued to the placement agent as placement agent fees and advisory fees. These warrants have a seven-year term and are exercisable at the option of the holder. These warrants may be exercised for shares of common stock in lieu of cash by applying the number of warrants to the formula whereby the exercise price of the warrants is deducted from the closing price of the common stock on a quoted market divided by the closing price of the common stock on a quoted market. These warrants also have dilution protection in certain instances.
 
In terms of Bridge Note agreements entered into with certain principals during the six months ended June 30, 2013 and the year ended December 31, 2012 warrants for the purchase of 300,000 shares of common stock at an exercise price of $3.00 per share were issued to Bridge Note holders in conjunction with the Bridge notes disclosed in note 8 above. These warrants have a five-year term and are exercisable at the option of the holder. These warrants may be exercised for shares of common stock in lieu of cash by applying the number of warrants to the formula whereby the exercise price of the warrants is deducted from the closing price of the common stock on a quoted market divided by the closing price of the common stock on a quoted market. These warrants also have dilution protection in certain instances.

During the year ended December 31, 2012 warrants for the purchase of 10,088 shares of common stock at an exercise price of $5.70 per share were issued to investors in conjunction with the issuance of 10,088 shares of Series A Stock. These warrants have a five-year term and are exercisable at the option of the holder.
 
 
F-15

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
13.              WARRANTS (continued)

The fair value of these warrants was determined using the Black-Scholes model. The following assumptions were used:
 
   
Six months ended
June 30,
2013
   
Year ended
December 31,
2012
 
             
Calculated stock price
  $ 1.13- $1.27    
$ 0.55
 
Risk-free interest rate
 
0.04% to 0.07%
   
0.01% to 0.15%
 
Expected life of warrants
 
5 - 7 Years
   
5 Years
 
Expected volatility of the underlying stock
 
157% - 164%
   
157%
 
Expected dividend rate
 
0%
   
0%
 

A fair market value of $1,728,912, determined using the Black-Scholes valuation model with the assumptions listed above, for the 1,257,664 warrants issued in conjunction with the Series B Stock offering and the 325,400 warrants issued as placement agent and advisory fees for that offering, was recorded as a deemed preferred stock dividend during the six months ended June 30, 2013.

The additional 300,000 warrants issued during the six months ended June 30, 2013 and December 2012 in conjunction with the Bridge notes were valued using the Black-Scholes model with the assumptions listed above and a discount of $100,693 and $17,539, respectively was applied to the Bridge Notes and is being amortized over the period ending December 31, 2013 or earlier, see note 8 above.

A fair market value for the 10,088 warrants issued in conjunction with the Series A Stock of $2,857 was recorded as a deemed preferred stock dividend during the 2012 year.
 
At June 30, 2013, outstanding warrants to purchase shares of common stock are as follows:

Warrants
 
Exercise Price
 
Expiration Date
         
22,272
 
$
5.70
 
March 2016
108,983
 
$
5.70
 
April 2016
86,404
 
$
5.70
 
May 2016
35,000
 
$
5.70
 
June 2016
40,000
 
$
5.70
 
July 2016
35,088
 
$
5.70
 
September 2016
46,572
 
$
5.70
 
October 2016
15,000
 
$
2.00
 
October 2016
10,088
 
$
5.70
 
January 2017
150,000
 
$
3.00
 
December 2017
120,000
 
$
3.00
 
March 2018
30,000
 
$
3.00
 
April 2018
623,664
 
$
2.50
 
April 2020
634,000
 
$
2.50
 
May 2020
285,400
 
$
2.75
 
June 2020
40,000
 
$
0.01
 
June 2020
           
2,282,471
         
 
Subsequent to the six months ended June 30, 2013, a further 14,000 seven-year warrants were issued to new qualified investors for series B units purchased at an excise price of $2.50 per share and a further 1,400 seven-year warrants were issued to the placement agent at $2.75 per share as a placement agent fee.
 
 
F-16

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
14.              STOCK BASED COMPENSATION

In October 2005, the Company's Board of Directors adopted the Caldera Pharmaceuticals, Inc. 2005 Stock Option Plan (the "Plan"), which permits awards of incentive and nonqualified stock options and other forms of incentive compensation to employees and non-employees such as directors and consultants. The Board has set aside 3,000,000 shares of common stock for issuance upon exercise of grants made under the Plan. Options granted under the Plan vest either immediately or over a period of up to two years, and expire 1 year to 10 years from the grant date. At June 30, 2013, 1,870,596 shares were available for future grant under the Incentive Plan.
 
Stock option based compensation expense totaled $229,259 and $40,573 for the six months ended June 30, 2013 and 2012, respectively. The Company expenses the value of stock options on a straight line basis over the life of the options. The fair value of the options granted is determined using the Black-Scholes option-pricing model.

The following weighted average assumptions were used:

   
Six months ended
June 30,
2013
   
Year ended
December 31,
2012
 
             
Calculated stock price
 
$1.13 to $1.27
   
$0.55
 
Risk-free interest rate
 
0.04% to 0.07%
   
0.01% to 0.15%
 
Expected life of options
 
5 Years
   
5 Years
 
Expected volatility of the underlying stock
 
 157 - 164%
   
128%
 
Expected dividend rate
 
0%
   
0%
 

As noted above, the fair value of stock options is determined by using the Black-Scholes option-pricing model. For all options granted since October 1, 2005 the Company has generally used option terms of between 1 to 10 years. The volatility of the common stock is estimated using historical data of companies similar in size and in the same industry as Caldera Pharmaceuticals.  The risk-free interest rate used in the Black-Scholes option-pricing model is determined by reference to historical U.S. Treasury constant maturity rates with short-term maturities of no more than three months. An expected dividend yield of zero is used in the option valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. At June 30, 2013, the Company does not anticipate any awards will be forfeited in the calculation of compensation expense due to the limited number of employees that receive stock option grants.

No options were exercised for the six months ended June 30, 2013 and the year ended December 31, 2012.

We canceled options exercisable for 16,750 and 59,291 shares of common stock for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively, held by employees whose service to our company terminated during those respective periods. The shares underlying such options were returned to and are available for re-issuance under the 2005 Plan pursuant to the terms described above.

During the six months ended June 30, 2013 and the year ended December 31, 2012, all awards granted under the Plan were incentive stock options. A summary of all of our option activity during the period January 1, 2012 to June 30, 2013 is as follows:
 
   
 
Shares
   
Exercise
price per
share
   
Weighted
average
exercise price
 
                   
Outstanding January 1, 2012
   
518,445
   
$
2.00 - 5.71
   
$
3.54
 
Granted
   
47,000
     
0.20 - 5.71
     
1.97
 
Forfeited/Cancelled
   
(59,291
)
   
1.10 - 5.71
     
5.71
 
Exercised
   
-
     
-
     
-
 
Outstanding December 31, 2012
   
506,154
   
$
0.20 - 5.71
   
$
3.14
 
Granted
   
640,000
     
1.50 – 5.71
     
1.60
 
Forfeited/Cancelled
   
(16,750
)
   
4.00 -5.71
     
5.10
 
Exercised
   
-
     
-
     
-
 
Outstanding June 30, 2013
   
1,129,404
   
$
0.20 - 5.71
   
$
2.24
 
 
Stock options outstanding as of June 30, 2013 and December 31, 2012, as disclosed in the above table, have an intrinsic value of $33,325 and $0, respectively.
 
 
F-17

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
14.              STOCK BASED COMPENSATION (continued)
 
The following tables summarize information about stock options outstanding as of June 30, 2013:
 
       
Options Outstanding
   
Options Exercisable
 
Exercise Price    
Number of
shares
 
Weighted
average
remaining
contractual
years
   
Weighted
Average
Exercise Price
   
Number of
Shares
   
Weighted
Average
exercise Price
 
                                 
$
0.20
   
30,000
   
8.84
             
23,750
         
$
1.10
   
220,000
   
7.67
             
220,000
         
$
1.50
   
625,000
   
9.71
             
156,252
         
$
2.00
   
30,000
   
1.27
             
30,000
         
$
5.71
   
224,404
   
5.44
             
219,404
         
                                         
       
1,129,404
   
8.22
   
$
2.24
     
649,406
   
$
2.76
 
 
The weighted-average grant-date fair values of options granted during the six months ended June 30, 2013 and the year ended December 31, 2012 was $752,313 ($1.18 per option) and $5,777 ($0.12 per option), respectively. As of June 30, 2013 there were unvested options to purchase 479,998 shares of common stock. Total expected unrecognized compensation cost related to such unvested options is $525,523, which is expected to be recognized over a period of 18 months.

Subsequent to the six months ended June 30, 2013, options over 514,900 shares were issued to a newly appointed Chief Executive Officer, see note 19 below.
 
15.              NET LOSS PER COMMON SHARE
 
Basic loss per share is based on the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares as determined above plus the incremental shares that would be issued upon the assumed exercise of in-the-money stock options and warrants using the treasury stock method. The computation of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share. For the three months and six months ended June 30, 2013 and 2012 all stock options, warrants and convertible preferred stock were excluded from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding stock instruments and which were not included in the calculation because their affect would have been anti-dilutive are as follows:
 
   
Six months ended
June 30,
2013
(Shares)
   
Six months ended
June 30,
2012
(Shares)
 
             
Options to purchase shares of common stock
   
1,129,404
     
555,445
 
Series A convertible, redeemable preferred stock
   
105,000
     
341,607
 
Series B convertible preferred stock
   
2,119,947
     
-
 
Warrants
   
2,282,471
     
399,407
 
                 
     
5,636,822
     
1,296,459
 
 
16.              RELATED PARTY TRANSACTIONS
 
The majority of the common shares in the Company are owned by Dr. Benjamin Warner, the Chief Executive Officer. As at June 30, 2013 and December 31, 2012, Dr. Benjamin Warner owned 76.0% and 74.1%, respectively of the issued and outstanding shares of common stock on an un-diluted basis.

Effective March 15, 2013 the Company entered into a five year employment agreement with Dr. Warner to continue to serve as the Company’s Chief Executive Officer (“CEO”) and President (the “Employment Agreement”). The Employment Agreement replaces his prior agreement.  Pursuant to the Employment Agreement, Dr. Warner will be entitled to an annual base salary of $250,000 and will be eligible for discretionary performance and transactional bonus payments as well as certain other specified benefits. Additionally, Dr. Warner was granted options to purchase 185,000 shares of the Company’s common stock with an exercise price equal to $1.50 per share. These options will vest pro rata, on a monthly basis over twelve months, with 15,417 vesting each month commencing April 1, 2013. The Employment Agreement also includes confidentiality obligations and inventions assignments by Dr. Warner.
 
Effective April 30, 2013, Dr. Benjamin Warner entered into an Exchange Agreement whereby 25,035 shares of Series A Stock and accrued and unpaid dividends up until April 30, 2013 of $15,300 were converted into 63,201 shares of Series B Stock, see note 11 above.

Subsequent to June 30, 2013, a new CEO and President of the Company was appointed, see note 19 below, and Dr. Benjamin Warner relinquished his position as CEO and President and accepted the appointment as Chief Scientific Officer. The terms of his Employment Agreement remain unchanged.
 
 
F-18

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
17.              OPERATING LEASES

The Company entered into a laboratory and office lease agreement for 2,813 square feet in Cambridge, Massachusetts effective June 1, 2013. The term of the lease is for a twelve month period terminating on May 31, 2014. The monthly rental amounts to 15,118. Rental expense for the six months ended June 30, 2013 amounted to $15,118.

The Company entered into a corporate apartment lease agreement in Cambridge, Massachusetts effective June 4, 2013. The term of the lease is for a twelve month period terminating on June 3, 2014. The monthly rental amounts to $3,325. Rental expense for the six months ended June 30, 2013 amounted to $3,325.
 
The Company extended its existing office lease in New Mexico effective November 1, 2010. The monthly rent amounts to $5,075 per month and the lease terminates in October 2013. Rental expense for the six months ended June 30, 2013 and 2012 was $30,452 and $29,566, respectively.
 
Future annual minimum payments required under operating lease obligations as of June 30, 2013, are as follows:
 
   
Amount
 
       
2013
 
$
130,959
 
2014
   
92,214
 
   
$
223,173
 
 
18.              LITIGATION

Suit against The Regents of the University of California, Los Alamos National Security, et al.
 
The Company filed suit against the Regents of the University of California (the “Regents”) and Los Alamos National Security LLC (“LANS”) in California Superior Court in San Francisco in December 2007. This suit alleges (i) breach of contract and (ii) fraud in connection with an exclusive Patent Licensing Agreement (the “Agreement”) originally entered into between the Company and the Regents in September 2005, and assigned to LANS in April 2006. The Company alleges the defendants made false representations that were critical to its decision to enter into the Agreement including: (i) the Regents was the lawful owner of the patent rights covered by the Agreement; and (ii) the Regents would prosecute and maintain these patent rights and notify the Company if it decided to abandon them. The Company also alleges that the Regents and LANS improperly competed with the Company in violation of the exclusivity provision of the Agreement.  The Company is seeking relief for compensatory damages potentially in excess of $600 million, as well as exemplary and punitive damages, interest, and costs. This suit was dismissed for reason of lack of subject matter jurisdiction by the California Superior Court in 2010.  On April 24, 2012, the trial Court’s dismissal for lack of subject matter jurisdiction was reversed in full by the California Court of Appeal. The defendants unsuccessfully attempted to appeal this decisions to the California Supreme Court and, subsequently, to the Supreme Court of the United States. On February 25, 2013, the Supreme Court denied defendants’ petition for certiorari and the matter was remitted to California Superior Court.  On March 22, 2013, The Regents and LANS moved to re-file certain counterclaims against the Company and Benjamin Warner that had been dismissed voluntarily without prejudice after the matter was dismissed for lack of subject matter jurisdiction in 2010.   The motion was granted in May 2013 and, shortly thereafter, the Regents and LANS filed cross- and counter-claims against the Company and Dr. Warner.  The Company believes these counterclaims to be wholly without merit, and intends to vigorously defend against them.  No assurance can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these counterclaims it would have a material adverse effect on the pending litigation, the Company and its operations. On August 5, 2013, the Company filed a demurrer against certain of the causes of action against the Company. Dr. Warner filed a motion to quash service for a lack of personal jurisdiction. The court set a trial date for July 14, 2014. Merits discovery in the California matter has re-commenced.
 
In October 2010, the Company filed suit against LANS and seven other co-defendants in the United States District Court For the Northern District of Illinois Eastern Division alleging the following: (i) breach of contract; (ii) fraud; (iii) intentional interference with contractual relations; and (iv) conspiracy and other related claims in connection with the September 2005 Agreement that was assigned to LANS in April 2006.  The Company alleges the defendants made false representations that were critical to its decision to enter into the Agreement including: (i) the Regents was the lawful owner of the patent rights covered by the Agreement and (ii) the Regents would prosecute and maintain these patent rights and notify the Company if it decided to abandon them.  The Company also alleges that LANS and other co-defendants improperly competed with the Company.  The Company is seeking relief including compensatory damages in excess of $600 million, as well as exemplary and punitive damages, interest, and costs.  In January 2012, this case was ordered to be transferred to Federal Court in New Mexico.  In February 2012, the case was transferred to Federal Court in New Mexico.  On May 4, 2012 LANS filed counterclaims in New Mexico Federal Court against the Company and Dr. Warner making various claims of ownership to the Company’s existing intellectual property and seeking unspecified damages.  The Company believes these counterclaims to be wholly without merit, and intends to vigorously defend against them.  No assurance can be given as to the ultimate outcome of these actions or their effect on the Company.  If the Company is not successful in its defense of these counterclaims it would have a material adverse effect on the pending litigation, the Company and its operations.  This matter is currently stayed. After the Regents and LANS exhausted their appeal in the California action, and the California action was remitted to California state court, on July 24, 2013, the Company moved to have the New Mexico district court action, including cross- and counter-claims, dismissed for lack of subject matter. The court has not yet ruled on the Company’s motion.
 
 
F-19

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
18.              LITIGATION (continued)

Suit against The Regents of the University of California, Los Alamos National Security, et al. (continued)
 
In September 2011, the Company filed suit against the Regents and LANS in the Circuit Court of Cook County, Illinois (“Cook County Action”).   The Company's complaint alleges the following: (i) breach of contract; (ii) breach of the implied covenant of good faith; (iii) fraud; and (iv) fraudulent inducement, in connection with the September 2005 Agreement with the Regents assigned to LANS in April 2006.  The Company alleges the defendants breached a License Agreement, and made false representations that were critical to the Company's decision to enter into the Agreement.  The Company also alleges that the Regents and LANS improperly competed with the Company in violation of the exclusivity provision of the Agreement.  The Company is seeking relief for compensatory damages in excess of $600 million, as well as exemplary and punitive damage, interest, and costs. LANS removed the case to the United States District Court for the Northern District of Illinois Eastern Division, Case # 11-CV-07259.  In March 2012, the Company filed a motion to remand the case to the Circuit Court of Cook County, and on May 11, 2012 the case was remanded to the Circuit Court of Cook County.  The Company then amended the complaint in October 2012 to include claims against UChicago Argonne and Liaohai Chen, a manager and scientist at Argonne, for intentional interference with contractual relations and related claims.  The Company also added conspiracy claims against all defendants.  Argonne removed the case to United States District Court for the Northern District of Illinois Eastern Division on October 22, 2012.  The Company moved to remand the action back to the Circuit Court of Cook County and on February 1, 2013, the matter was remanded.  On April 24, 2013, the Company filed a Second Amended Complaint alleging essentially the same causes of action.  After the Regents and LANS exhausted their appeal in the California action, and the Californai action was remitted to California state court, the Company moved to have the Cook County matter dismissed. On July 26, 2013, the court entered entered an order dismissing the action, in its entirety, without prejudice.
 
Joel Bellows Suit
 
In October 2008, Seddie Bastanipour and Joel Bellows filed suit against the Company, our Chief Executive Officer, Dr. Benjamin Warner, and a former consultant to the Company, Sigmund Eisenchenk. Joel Bellows provided legal services to the Company through his legal firm, Bellows and Bellows P.C. The suit was filed in the Circuit Court of Cook County, Illinois and alleged the following: (i) Violation of Illinois Securities Act of 1953; (ii) Violation of Illinois Consumer Fraud Act; and (iii) Common Law Fraud, in connection with aggregate investments of $218,000 in the Company’s common stock claimed by Bastanipour and Bellows. They are seeking compensatory damages, costs and expenses.
 
In March, 2010, the Company filed suit against Joel Bellows and Bellows and Bellows P.C. in the United States District Court for the District of New Mexico alleging the following: (i) Breach of Contract; (ii) Negligence; (iii) Breach of Fiduciary Duty; (iv) Fraud; and (v) Tortious Interference with Contract. The aforementioned complaints relate to legal services provided by Bellows and Bellows P.C. for the Company. The Company is seeking compensatory damages, punitive damages, interest, costs and fees. This case is set for trial in October 2013.
 
In December 2010, the Company filed suit against Seddie Bastanipour and Peter Baltrus for breach of contract and negligence when they were performing accounting services on behalf of the Company that resulted in an IRS penalty.
 
In December 2011, the Company completed an amicable settlement with Bastanipour with respect to the October 2008 and December 2010 suits that is subject to confidentiality restraints and she is no longer party to either suit. The settlement did not have a material impact on our financial position.  
 
In February 2013 a settlement agreement was entered into between the Company, Joel Bellows and Peter Baltrus, with respect to the October 2008 and December 2010 suits, which requires the exchange of 105,000 common shares for 105,000 shares of Series A Stock or Series B Stock and a cash payment of $240,000, together with interest thereon at 6% per annum, over a three-year period.  An accrual of $257,972 had been recorded to deal with this matter as of December 31, 2012. A further legal settlement expense of $115,273 was recorded to reflect the fair market value of the Series A Stock issued to Mr. Bellows during the six months ended June 30, 2013.
 
On April 30, 2013, the October 2008 and the December 2010 suits were dismissed, with prejudice.  In terms of this settlement agreement, the Company paid the first cash installment of $80,000 during March 2013 and on May 20, 2013, issued 105,000 shares of Series A Stock to Joel Bellows, in exchange for his 105,000 common shares. The Company and Dr. Benjamin Warner have filed post-settlement motions for the Judge in the matter to reconsider his May 16, 2013 ruling wherein the Company and Dr Benjamin Warner were compelled to comply with a disputed version of the settlement agreement which entitled Bellows to a prejudicial conversion formula of his Series A Stock into Series B Stock which is contrary to our settlement intentions. The motion has been briefed and the matter is set for hearing on September 18, 2013.
 
19.              SUBSEQUENT EVENTS

Subsequent to June 30, 2013, during July 2013, the Company entered into an employment agreement to appoint Mr. Gary Altman as the Chief Executive Officer and President of the Company. The employment agreement is for a term of four years, pursuant to which Mr. Altman will be entitled to an annual base salary of $300,000, increasing to $325,000 on the first anniversary of the employment agreement and will also entitle Mr. Altman to discretionary performance and transactional bonus payments as well as certain other specified benefits. Additionally, Mr. Altman was granted options to purchase 514,900 shares of the Company’s common stock at an exercise price of $2.50 per share. These options will vest as to 64,360 six months after the effective date of the contract and the remaining options will vest equally over the following forty-two month period. The Employment Agreement also includes confidentiality obligations and inventions assignments by Mr. Altman.

Subsequent to the six months ended June 30, 2013, on July 18, 2013, a further 14,000 Series B units were issued to new investors at a price of $2.50 per unit and a further 1,400 seven-year warrants were issued to the placement agent at $2.75 per share as a placement agent fee.

Other than disclosed above, the Company has evaluated subsequent events through the date the financial statements were issued, and has concluded that no such events or transactions took place that would require disclosure herein.
 
 
F-20

 
 
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated.  The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the risk factors and the financial statements and the other information set forth in our Annual Report on Form 10-K for the year ended December 31, 2012. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
 
Cautionary Note Regarding Forward-Looking Statements
 
This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions.  Statements that are not historical facts are forward-looking statements.  Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.  Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made.  Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.
 
Overview and Financial Condition
 
The Company is a drug discovery and pharmaceutical services company that is based on a proprietary x-ray fluorescence technology, called XRpro®. We offer what we believe to be uniquely broad and simple technologies to evaluate drug molecules, which increases the efficiency of analyzing and evaluating drug molecules for safety and efficacy at an early and less expensive stage of drug development. We currently offer our current and prospective customers analytical services using our technology to evaluate drug candidates for safety and efficacy. We believe that our technology can reduce the cost of drug discovery by detecting safety and efficacy issues at an early stage of development. To date, substantially all of our revenue has been derived from our analytical services that we have performed for United States governmental agencies. However, we expect that our future revenue will be derived from: (i) provision of our analytical drug discovery services to commercial customers as well as United States governmental agencies; and, (ii)  to a lesser extent, sales of new drug candidates that we identify using the XRpro® drug discovery instruments.
 
To date, we have financed our operations primarily through private sales of our securities and revenue derived from our analytical services that we have performed for United States governmental agencies and we expect to continue to seek to obtain the required capital in a similar manner. We cannot provide any assurance that we will be able to achieve profitability on a sustained basis, if at all.

Discussions with respect to our Company’s operations included herein include the operations of our operating subsidiary, XRpro Corp. Our Company formed XRpro Corp. on July 9, 2010. We have no other operations than those of Caldera Pharmaceuticals, Inc. and XRpro Corp.
 
 
1

 
 
Recent Developments
 
During the period April 23, 2013 to May 10, 2013, we sold an aggregate of 1,104,000 series B preferred units at a per unit price of $2.50 and on July 18, 2013 a further 14,000 series B preferred units were sold at a price per unit of $2.50, each unit consisting of one share of Series B Preferred Stock (the “Series B Shares”) and a seven-year warrant to acquire one share of the Company’s common stock, par value, $0.001 per share (“Common Stock”) at an exercise price of $2.50 per share, for aggregate cash proceeds of $2,760,000 and $35,000, respectively, pursuant to separate purchase agreements entered into with each investor.  The Company intends to use the net proceeds of the above-described offering (the “Offering”) for working capital and general corporate purposes, including without limitation, to repay certain bridge loans and retention of new officers. The sale was part of a private placement offering in which the Company offered for sale on a “best efforts–all or none” basis up to 550,000 units (gross proceeds of $1,375,000, including the principal amount of bridge notes exchanged for Units, and on a “best efforts” basis the remaining 1,450,000 units for a maximum of 2,000,000 units (gross proceeds of $5,000,000).   The Offering has been extended until August 31, 2013.
 
The Company retained Taglich Brothers, Inc. as the exclusive Placement Agent for the Offering. In connection therewith, the Company agreed to pay the Placement Agent a 9% commission from the gross proceeds of the Offering, to date this commission totaled $285,300, and reimbursed approximately $35,000 in respect of out of pocket expenses, FINRA filing fees and related legal fees incurred by the Placement Agent in connection with the Offering. The Placement Agent will also receive warrants to purchase an aggregate of 126,800 shares of Common Stock, to date, representing 10% of the shares of Common Stock into which the Series B Preferred Shares issued in connection with the Offering are convertible (the “Placement Agent Warrants”), exercisable at $2.75 per share of Common Stock for a period of seven years. The Placement Agent Warrants contain cashless exercise provisions and customary anti-dilution protection and registration rights. The Placement Agent will also be entitled to receive cash compensation and warrants upon the sale of additional units in the private placement. In addition, as an advisory fee, the Placement Agent will receive warrants to purchase 160,000 shares of Common Stock at an exercise price of $2.75 and warrants to purchase 40,000 shares of Common Stock at an exercise price of $.01. In terms of its right to appoint two members to the Board of Directors of the Company, Taglich Brothers have appointed Mr. Michael Taglich and Vincent Palmieri as their representatives. The board member appointments became effective 10 days after the filing of a Schedule 14-F Information Statement on May 16, 2013.
 
Each holder of Series A Preferred Stock had also been offered the opportunity to exchange all of such holder’s shares of Series A Preferred Stock and any accrued but unpaid dividends up to and including April 30, 2013, for a number of Series B Shares, determined by dividing the amount of such holder’s initial investment in the securities of the Company plus any accrued and unpaid dividends outstanding as of April 30, 2013, by $2.50 per share. All of the Series A shareholders as of April 30, 2013, exercised their rights to conversion and 341,607 shares of Series A Preferred Stock, including accrued and unpaid dividends thereon, exchanged such shares for 862,283 Series B Shares,
 
On December 18, 2012 and during March and April 2013 we received $500,000 in gross proceeds from the issuance of ten convertible bridge notes in the aggregate principal amount of $500,000, of which notes in the aggregate principal amount of $375,000, together with interest thereon of $9,160 were converted into 153,664 Series B units and notes in the aggregate principal amount of $100,000, together with accrued interest thereon, were repaid on May 31, 2013. The remaining note in the aggregate principal of $25,000, together with accrued interest thereon, remains outstanding. The notes were issued as part of a unit that included warrants to purchase 600 shares of our common stock for each $1,000 of note principal at an exercise price of $3.00. The notes bear interest at 10% per annum compounded and payable quarterly at our option, until the maturity date which is defined as the earliest of December 31, 2013, or the closing of a subsequent financing transaction, or an event of default as defined in the notes. The notes also provides for a default interest rate of 15% per annum should any amounts due to the note holders in terms of this agreement, be in default. If we receive net proceeds of at least $3,000,000 from various litigation proceedings, the note holders receive a premium equal to thirty percent (30%) of the principal amount. The notes convert, at the option of the note holder, into securities of a subsequent financing at a conversion price equal to the purchase price of the securities in the subsequent financing. The note holders also have the option to convert some or all of the principal and interest due on the notes into shares of our common stock at a conversion price of $2.50 per share, unless a default has occurred and is continuing, at which instance the conversion price during the default period shall be $1.50 per share. The notes contain certain dilutive protective provisions.

During July 2013, the Company entered into an employment agreement to appoint Mr. Gary Altman as the Chief Executive Officer and President of the Company. The employment agreement is for a term of four years, pursuant to which Mr. Altman will be entitled to an annual base salary of $300,000, increasing to $325,000 on the first anniversary of the employment agreement and will also entitle Mr. Altman to discretionary performance and transactional bonus payments as well as certain other specified benefits. Additionally, Mr. Altman was granted options to purchase 514,900 shares of the Company’s common stock at an exercise price of $2.50 per share. These options will vest as to 64,360 six months after the effective date of the contract and the remaining options will vest equally over the following forty-two month period. The Employment Agreement also includes confidentiality obligations and inventions assignments by Mr. Altman.

Results of Operations for the three months ended June 30, 2013 and the three months ended June 30, 2012.
 
Revenues
 
We had revenues totaling $82,881 and $493,288 for the three months ended June 30, 2013 and 2012, respectively, a decrease of $410,407 or 83.2%. Substantially all of our revenues have been derived from federal government contracts. Our revenue is dependent on the number of contracts we have in operation and the progress we have made on these contracts to date. We have an order backlog in the form of firm fixed price government contracts. We were awarded a $1,000,000 grant from the NIH on August 24, 2011 which was fully utilized and expired on July 31, 2012. An additional $1,000,000 was made available for us to invoice our project time and expenses against on August 2, 2012, which was fully utilized and expired on July 31, 2013. The final $1,000,000 was made available for us to invoice our project expenses against with effect from August 1, 2013 expiring on July 31, 2014. However, we do not know how or if the federal government’s recent spending cuts, known as sequestration, will affect our ability to obtain future contracts.  The funds available under this grant are earned by us on a percentage-of-completion basis, based on the costs we incur as a measure of the progress made on the project.
 
Going forward, based on financing, we plan to market our analytical services and educate potential customers concerning the advantages and value propositions of the XRpro® technology. While we are optimistic about our prospects, since this is a relatively new product offering with significantly different characteristics compared with existing equipment on the market (and we have not recognized significant revenues to date), there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for us to be profitable.
 
We are pursuing several leads for the use of our technology by several significant companies within the pharmaceutical sector; however there can be no assurance that such leads will be successful and result in revenue.
 
 
2

 
 
Cost of goods sold
 
Cost of goods sold totaled $99,624 and $174,488 for the three months ended June 30, 2013 and 2012, respectively, a decrease of $74,864 or 42.9%. Our cost of goods sold is dependent on the progress made on each project to date. Cost of goods sold for the three months ended June 30, 2013 includes $6,250 paid to third parties to fund animal trials on the NIH contract mentioned above. Cost of sales is primarily comprised of direct expenses related to providing our services under our contracts.  These expenses include salary expenses directly related to research contracts, recoverable expenses incurred on contracts, the cost of outside consultants, and direct materials used on our contracts. The salary expense included in cost of sales for the three months ended June 30, 2013 and 2012 respectively was $36,804 and $148,979, a decrease of $112,175 or 75.3% due to lower activity on Government contracts. For additional information regarding salary expense reference is made to the discussion of total salary expense in selling, general and administrative expenses below. Included in cost of sales for the three months ended June 30, 2013 and 2012, respectively was laboratory supplies of $54,715 and $20,492. The increase in laboratory supplies used during the current period was due to experiments run for prospective customers.
 
Gross (loss)/profit
 
Gross (loss)/profit was $(16,743) and $318,800 for the three months ended June 30, 2013 and 2012, respectively. The gross (loss)/margin as a percentage of sales were (20.2)% and 64.6%, respectively and relate primarily to our Federal government contracts and may not be indicative of anticipated future results due to the Company’s plan to diversify its source of revenues into the provision of services or usage arrangements. The decrease in our gross profit is primarily due to the labor costs incurred on prospective customers and the increase in our laboratory supply expenses used to run experiments for these prospective customers.
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses totaled $926,945 and $597,547 for the three months ended June 30, 2013 and 2012, respectively, an increase of $329,398 or 55.1%.
 
The major expenses making up selling, general and administrative expenses included the following:
 
   
Three months ended
June 30,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
                                 
Marketing and selling expenses 
 
$
2,150
   
$
27,669
   
$
(25,519
   
(92.2
)%
  
                               
Salary expenses 
   
138,525
     
52,396
     
86,129
     
164.4
%
  
                               
Research and development salaries 
   
39,972
     
5,184
     
34,788
     
671.1
%
  
                               
Stock option compensation charge 
   
185,326
     
20,279
     
165,047
     
813.9
  
                               
Legal fees 
   
211,266
     
338,656
     
(127,390
   
(37.6
)%
                                 
Consulting fees 
   
101,876
     
69,544
     
32,332
     
46.5
%
  
                               
Audit fees
   
7,560
     
9,200
     
(1,640
)
   
(17.8
)%
 
                               
Legal Settlement accrual
   
115,273
     
-
     
115,273
     
-
 
   
$
801,948
   
$
522,928
   
$
279,020 
     
53.4
 %

Marketing and selling expenses, in the prior period, included professional promotional activities to promote our XRpro equipment and services. This expense was a once-off expense that was incurred in the prior year.
 
Total salary expenses are allocated to the various expense categories detailed below depending on the level of activity of our employees on government and commercial projects, internal research and development expenses and administrative activities. An increase in activity on projects will result in an increase in salary expense charged to cost of sales with a corresponding decrease in salary expense charged to selling, general and administrative expenses. A comparison of salary expenses is presented below.
 
 
3

 
 
Total salary expenditure for the three months ended June 30, 2013 and 2012, respectively is included in the following expense categories:
 
   
Three months ended
June 30,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
Cost of sales
 
$
36,804
   
$
148,979
   
$
(112,175
   
(75.3
)%
                                 
Selling, general and administrative expenses
   
138,525
     
52,396
     
86,129
     
164.4
%
                                 
Research and development salaries
   
39,972
     
5,184
     
34,788
     
671.1
%
  
                               
   
$
215,301
   
$
206,559
   
$
8,742
     
4.2
%
 
The increase in total salary expenditure for the three months ended June 30, 2013 of $8,742 is due to the employment of an additional scientist who has subsequently resigned, offset by the termination of our in-house legal counsel in the prior year.
 
The salary expense included in cost of sales for the three months ended June 30, 2013 decreased by $112,175 or 75.3%. The lower salary expense in the current year was due to the substantial completion of current Government contracts. The decrease of salary expense charged to cost of sales for the three months ended June 30, 2013 resulted in a corresponding increase in salary expense charged to Selling, general and administrative expenses and research and development salaries for the three months ended June 30, 2013.
 
The salary expense charged to Selling, general and administrative expenses for the three months ended June 30, 2013 increased by $86,129 or 164.4% due to the decrease in salary expense charged to cost of sales and the increase in total salary expense as discussed above.
 
Research and development salaries for the three months ended June 30, 2013 increased due to scientific employees having time available to conduct research experiments and to develop consumables for the XRpro® equipment.
 
The stock option compensation charge increased over the prior year due to 625,000 options issued to certain members of management and consultants to the Company in connection with a fund raising exercise that was substantially completed during the three months ended June 30, 2013.
 
Legal fees decreased by $127,390 over the prior period due to increased activity on the Bellows matter in the prior year and legal expenses incurred on the S-1 Filing which was completed in the prior year, partially offset by increased legal expenses in connection with the private placement recently undertaken by the Company. For additional information on our legal matters, see Item 3- Legal Proceedings.  The legal expenses incurred on the LANS and Bellows matters are not connected with our regular business activities and while still ongoing should be viewed as non-operating expenses. 
 
The increase in consulting fees over the prior period is primarily due to the employment of Gary Altman as a consultant to the Company. Mr. Altman has subsequently been appointed as the CEO and President of the Company during July 2013.
 
The decrease in audit fees is due to the prior year including fees for the completion of our S-1 filing during that period.

The increase in the legal settlement accrual expense of $115,273 relates to the valuation of series A shares issued to Mr. Bellows in terms of a legal settlement agreement reached with him. This is a once off cost that was determined using a Black Scholes valuation model and is not expected to recur.

Depreciation and Amortization
 
We recognized depreciation expenses of $28,044 and $19,932 for the three months ended June 30, 2013 and 2012, respectively, the increase in the depreciation charge is primarily due to the addition of an XRpro® instrument in the third quarter of the prior year. The depreciation expense is primarily made up of depreciation of our laboratory equipment, which makes up the vast majority of our capital equipment. 
 
Amortization expenses were $12,921 for each of the three months ended June 30, 2013 and 2012.  Amortization expenses relates to the amortization of license fees paid to Los Alamos National Laboratories for the use of certain patents.
 
Interest  expense
 
Interest expense totaled $119,794 and $4,392 for the three months ended June 30, 2013 and 2012, respectively. The increase in interest expense is primarily due to the following; i) interest incurred and the non-cash amortization of discount on the Bridge notes issued to investors during the last quarter of the prior year and the six months of the current year amounting to $109,681, ii) interest incurred on the commercial loan entered into in June 2012 increased by $1,576, iii) interest incurred on the LANB line of credit increased by $1,217 over the prior period due to the increase in the principal balance outstanding from $50,000, in the prior year to $168,000 in the current year, and iv) interest accrued on the legal settlement reached with Joel Bellows in February 2013 amounted to $3,200. 
 
 
4

 
 
Change in derivative liabilities
 
The fair value of derivative liabilities was re-assessed at June 30, 2013 using a Black Scholes valuation model resulting in the reduction of the liability by $59,728 due to a change in the underlying valuation assumptions.
 
Net loss
 
Net loss totaled ($1,044,155) and ($315,853) for the three months ended June 30, 2013 and 2012, respectively. The increased loss is primarily due to the lower revenues and lower margins earned, increased expenditure and the increase in interest expense as discussed above.
 
Results of Operations for the six months ended June 30, 2013 and the six months ended June 30, 2012.
 
Revenues
 
We had revenues totaling $320,295 and $871,025 for the six months ended June 30, 2013 and 2012, respectively, a decrease of $550,730 or 63.2%. Substantially all of our revenues have been derived from federal government contracts. Our revenue is dependent on the number of contracts we have in operation and the progress we have made on these contracts to date. We have an order backlog in the form of firm fixed price government contracts. We were awarded a $1,000,000 grant from the NIH on August 24, 2011 which was fully utilized and expired on July 31, 2012. An additional $1,000,000 was made available for us to invoice our project time and expenses against on August 2, 2012, which was fully utilized and expired on July 31, 2013. The final $1,000,000 was made available for us to invoice our project expenses against with effect from August 1, 2013 expiring on July 31, 2014. However, we do not know how or if the federal government’s recent spending cuts, known as sequestration, will affect our ability to obtain future contracts.  The funds available under this grant are earned by us on a percentage-of-completion basis, based on the costs we incur as a measure of the progress made on the project.
 
Going forward, based on financing, we plan to market our analytical services and educate potential customers concerning the advantages and value propositions of the XRpro® technology. While we are optimistic about our prospects, since this is a relatively new product offering with significantly different characteristics compared with existing equipment on the market (and we have not recognized significant revenues to date), there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for us to be profitable.
 
We are pursuing several leads for the use of our technology by several significant companies within the pharmaceutical sector; however there can be no assurance that such leads will be successful and result in revenue.
 
Cost of goods sold
 
Cost of goods sold totaled $271,723 and $352,124 for the six months ended June 30, 2013 and 2012, respectively, a decrease of $80,401 or 22.8%. Our cost of goods sold is dependent on the progress made on each project to date. Cost of goods sold for the six months ended June 30, 2013 includes $62,500 paid to third parties to fund animal trials on the NIH contract mentioned above. Cost of sales is primarily comprised of direct expenses related to providing our services under our contracts.  These expenses include salary expenses directly related to research contracts, recoverable expenses incurred on contracts, the cost of outside consultants, and direct materials used on our contracts. The salary expense included in cost of sales for the six months ended June 30, 2013 and 2012 respectively was $117,744 and $290,202, a decrease of $172,458 or 59.4% due to lower activity on Government contracts. For additional information regarding salary expense reference is made to the discussion of total salary expense in selling, general and administrative expenses below. Included in cost of sales for the six months ended June 30, 2013 and 2012, respectively was laboratory supplies of $85,004 and $50,622. The increase in laboratory supplies used during the current period was due to experiments run for prospective customers.
 
Gross profit
 
Gross profit was $48,572 and $518,901 for the six months ended June 30, 2013 and 2012, respectively. The gross margin as a percentage of sales were 15.2% and 59.6%, respectively and relate primarily to our Federal government contracts and may not be indicative of anticipated future results due to the Company’s plan to diversify its source of revenues into the provision of services or usage arrangements.   The decrease in our gross profit is primarily due to the labor costs incurred on running experiments for prospective customers and the increase in our laboratory supply expenses used to run experiments for these prospective customers and the cost of third parties used to conduct animal trials on our NIH contract, as discussed above.
 
 
5

 
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses totaled $1,489,991 and $1,076,038 for the six months ended June 30, 2013 and 2012, respectively, an increase of $413,953 or 38.5%.
 
The major expenses making up selling, general and administrative expenses included the following:
 
   
Six months ended
June 30,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
                                 
Marketing and selling expenses 
 
$
10,011
   
$
79,897
   
$
(69,886
   
(87.5
)%
  
                               
Salary expenses 
   
261,325
     
125,202
     
136,123
     
108.7
%
  
                               
Research and development salaries 
   
75,403
     
23,049
     
52,354
     
227.1
%
  
                               
Stock option compensation charge 
   
229,259
     
40,573
     
188,686
     
465.1
  
                               
Legal fees 
   
394,219
     
521,536
     
(127,317
   
(24.4
)%
                                 
Consulting fees 
   
160,876
     
112,051
     
48,825
     
43.6
%
  
                               
Audit fees
   
36,760
     
26,700
   
$
10,060
     
37.7
%
 
                               
Legal settlement accrual
   
115,273
     
-
   
$
115,273
     
100.0
%
   
$
1,283,126
   
$
929,008
     
354,118 
     
38.1
%
 
Marketing and selling expenses, in the prior period, included professional promotional activities to promote our XRpro equipment and services. This expense was a once-off expense that was incurred in the prior year.
 
Total salary expenses are allocated to the various expense categories detailed below depending on the level of activity of our employees on government and commercial projects, internal research and development expenses and administrative activities. An increase in activity on projects will result in an increase in salary expense charged to cost of sales with a corresponding decrease in salary expense charged to selling, general and administrative expenses. A comparison of salary expenses is presented below.
 
Total salary expenditure for the six months ended June 30, 2013 and 2012, respectively is included in the following expense categories:
 
   
Six months ended
June 30,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
Cost of sales
 
$
117,744
   
$
290,202
   
$
(172,458
   
(59.4
)%
                                 
Selling, general and administrative expenses
   
261,325
     
125,202
     
136,123
     
108.7
%
                                 
Research and development salaries
   
75,403
     
23,049
     
52,354
     
227.1
%
  
                               
   
$
454,472
   
$
438,453
   
$
16,019
     
3.7
%
 
The increase in total salary expenditure for the six months ended June 30, 2013 of $16,019 is due to the employment of an additional scientist who has subsequently resigned, offset by the termination of our in-house legal counsel in the prior year.
 
The salary expense included in cost of sales for the six months ended June 30, 2013 decreased by $172,458 or 59.4%.  The lower salary expense in the current year was due to the substantial completion of current Government contracts with extended contracts expected to commence in August 2013. The decrease of salary expense charged to cost of sales for the six months ended June 30, 2013 resulted in a corresponding increase in salary expense charged to Selling, general and administrative expenses and research and development salaries for the six months ended June 30, 2013.
 
The salary expense charged to Selling, general and administrative expenses for the six months ended June 30, 2013 increased by $136,123 or 108.7% due to the decrease in salary expense charged to cost of sales and the increase in total salary expense as discussed above.
 
Research and development salaries for the six months ended June 30, 2013 increased due to scientific employees having time available to conduct research experiments and to develop consumables for the XRpro® equipment.
 
The stock option compensation charge increased over the prior year due to 625,000 options issued to certain members of management and consultants to the Company in connection with a fund raising exercise that was substantially completed during the last fiscal quarter.
 
Legal fees decreased by $127,317 over the prior period due to increased activity on the LANS and Bellows matters in the prior year and legal expenses spent on the S-1 filing by the Company in the prior year. For additional information on our legal matters, see Item 3- Legal Proceedings.  The legal expenses incurred on the LANS and Bellows matters are not connected with our regular business activities and while still ongoing should be viewed as non-operating expenses. 
 
 
6

 

The increase in consulting fees over the prior period is primarily due to an increase in financial support provided to us to meet the ongoing public reporting requirements and for capital raising expertise and the employment of Gary Altman as a consultant to the Company during the current period. Mr. Altman has subsequently been appointed as the CEO and President of the Company during July 2013.
 
The increase in audit fees is due to the completion of the 2012 year-end audit during the six month period.
 
Depreciation and Amortization
 
We recognized depreciation expenses of $55,650 and $39,024 for the six months ended June 30, 2013 and 2012, respectively, the increase in the depreciation charge is primarily due to the addition of an XRpro® instrument in the third quarter of the prior year. The depreciation expense is primarily made up of depreciation of our laboratory equipment, which makes up the vast majority of our capital equipment. 
 
Amortization expenses were $25,842 for each of the six months ended June 30, 2013 and 2012.  Amortization expenses relates to the amortization of license fees paid to Los Alamos National Laboratories for the use of certain patents.
 
Interest  expense
 
Interest expense totaled $139,701 and $7,838 for the six months ended June 30, 2013 and 2012, respectively. The increase in interest expense is primarily due to the following; i) interest incurred and the amortization of discount on the Bridge notes issued to investors during the last quarter of the prior and the current year amounting to $121,840, ii) increase in interest expense incurred on the commercial loan entered into in June 2012 of $3,606, iii) interest incurred on the LANB line of credit increased by $3,045 over the prior period due to the increase in the balance outstanding from $50,000 to $168,000, and iv) interest accrued on the legal settlement reached with Joel Bellows in February 2013 amounted to $3,200.
 
Change in derivative liabilities
 
The fair value of derivative liabilities was re-assessed at June 30, 2013 using a Black-Scholes valuation model resulting in an additional liability of $148,571 due to a change in the underlying valuation assumptions.
 
Net loss
 
Net loss totaled ($1,810,498) and ($629,347) for the six months ended June 30, 2013 and 2012, respectively. The increased loss is primarily due to the lower revenues and lower margins earned, increased expenditure, increased interest expense and the change in the fair value of derivative liabilities as discussed above.
 
Liquidity and Capital Resources
 
We have a history of annual losses from operations since inception and we have primarily funded our operations through sales of our unregistered equity securities and cash flows generated from government contracts and grants. As of June 30, 2013 our Company had cash totaling $1,690,490, other current assets totaling $231,157, and total assets of $2,914,894. We had total current liabilities of $3,029,386, including a derivative financial liability of $1,995,715, and a net working capital deficit of $1,107,739. Total liabilities were $3,417,268 and the Series A convertible redeemable preferred stock totaled $133,350 resulting in a stockholders’ deficit of ($635,724).
 
During April 2013 we received $100,000 from certain note holders to provide temporary funding to the business; these funds together with interest thereon were repaid in April 2013. We received $250,000 in gross proceeds from the issuance of seven convertible bridge notes in the aggregate principal amount of $250,000, of which $100,000 of these proceeds were used to repay the $100,000 notes on April 4, 2013. The Bridge notes were issued as part of a unit that included warrants to purchase 600 shares of our common stock for each $1,000 of note principal. During April 2013, $375,000, together with interest thereon of $9,160, of the $500,000 bridge notes outstanding, converted their notes into 153,664 Series B Preferred units, at $2.50 per unit. Each unit consists of a Series B Stock and a warrant to purchase a share of common stock at $2.50 per share. During May 2013, $100,000 of the remaining Bridge Notes, together with interest thereon, was repaid to the Bridge note holders. The remaining Bridge note of $25,000 including interest thereon remains outstanding and may be repaid out of available cash balances.
 
During the period April to June 2013, we issued 1,104,000 Series B preferred units to investors for gross proceeds of $2,760,000 at $2.50 per unit, to fund future operations.  In addition to this, we paid the placement agents, Taglich Brothers, a fee of $282,150 out of the gross proceeds realized, representing 9% of the gross proceeds raised, including the proceeds of any Bridge notes which converted in