10-K 1 f10k2013_calderapharma.htm ANNUAL REPORT f10k2013_calderapharma.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal period ended December 31, 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, Suite B2002
Cambridge, MA, 02139
 (Address of principal executive offices) (Zip Code)
 
(617) 294 - 9697
 (Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange on which registered
(Title of Class)
   
None
   
 
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $0.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨ No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨ No x
 
Indicate by check mark whether the issuer: (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 o No x
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated file, a non-accelerated file, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
 
Large accelerated filer
¨
Accelerated filer
o
 
Non-accelerated filer
¨
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 ¨ No x
 
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2013, was approximately $402,504 based on $0.55, the price at which the registrant’s common stock was last sold, which was December 30, 2011.
 
As of May 30, 2014, the issuer had 4,039,770 shares of common stock outstanding.
 
Documents incorporated by reference: None
 


 
 

 
 
CALDERA PHARMACEUTICALS, INC.
 
FORM 10-K
 
TABLE OF CONTENTS
 
   
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Forward-Looking Statements
 
Many of the matters discussed within this report include forward-looking statements on our current expectations and projections about future events. In some cases you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements.  Such risks and uncertainties include the risks noted under “Item 1A Risk Factors.”  We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Caldera Pharmaceuticals,” refer to Caldera Pharmaceuticals, Inc. and its subsidiaries.
 
Item 1. 
 
Overview
 
The Company uses proprietary x-ray fluorescence technology called XRpro® to deliver ion channel screening, ion channel kinetics and custom screening services to our customers. Our proprietary technology is designed to detect and quantitatively analyze the x-ray signature of each element with an atomic number greater than 10, we combine the flexibility of the analysis with patented sample processing to address a wide range of ion channel and other biological targets. 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.
 
Since inception, 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. 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 operations included herein include the operations of our operating subsidiary, XRpro Corp. We formed XRpro Corp. on July 9, 2010. We have no other operations than those of Caldera Pharmaceuticals, Inc. and XRpro Corp.

To date, we have been granted nineteen (19) contracts from governmental agencies; of which nine (9) were granted from the Department of Defense and ten (10) were granted from the National Institutes of Health. Of such contracts, eighteen (18) have been completed and we received payment in full for all eighteen (18) completed contracts. All the contracts contained standard terms, including termination provisions which allow for the government to terminate the contract, in whole or in part, at any time for convenience. In that event, the government agency concerned will notify us of their intention to terminate, and all costs incurred in our performance of the work terminated will be recoverable and we will have no refund obligations for our research conducted to the date of termination. The contracts also contain Bayh-Dole and related provisions for disposition of intellectual property.  The Bayh-Dole Act allows small businesses, such as ours, to retain title to federally funded inventions if we follow certain procedures, including filing for patent protection and actively pursuing commercialization of the invention, and the U.S. government retains a non-exclusive, non-transferable, paid up irrevocable license, throughout the world, with respect to the invention. In addition, the U.S. government also retains a “march in” right that allows it to license the invention to third parties, without our consent, if it determines that the invention is not being made available to the public on a reasonable basis.  Set forth below are the details of the firm - fixed price contract under which we are continuing to provide services to the National Institutes of Health under which we expect to receive an additional $675,000 for our services.
 
·
Contract 2R44AI079935-03 with the National Institutes of Health; to develop strontium-selective therapies, contract amount:  $3,000,000.00 operative from August 24, 2011 to July 31, 2014, approximately $2,325,000 paid to date, $675,000 remaining in contract. $2,000,000 of the grant was awarded for the period August 24, 2011 to July 31, 2013. An additional $1,000,000 was made available for us to invoice our project time and expenses against on July 9, 2013, expiring on July 31, 2014. To date we have received $325,000 under this contract.
 
 
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XRpro® Drug Discovery Services

We currently derive substantially all of our revenue from the provision of our analytical drug discovery services to the federal government. We have recently expanded our customer base and are performing pilot studies on ion channel testing with two major pharmaceutical companies. The Company believes that due to the unique properties of its technology there is the potential to convert these pilot studies into commercial customers and conduct large-scale research and development in collaboration with these customers.

XRpro® Drug Discovery Instruments

The XRpro® instrument is a high-throughput x-ray fluorescence microscope. In July 2011, we entered into an exclusive contract with a German company engaged in the manufacture and sale of components and systems for micro and nanoanalysis of electron microscopes, to customize its desk top analyzer by incorporating our improvements and intellectual property into its already existing product. The agreement is for an indefinite term but may be terminated by either party without cause upon six months notice or immediately upon the happening of certain events, including bankruptcy, violation of export laws and nonpayment of commitments of $100,000 or more. The agreement includes a non-competition provision specifying that we cannot copy the product manufactured by our equipment supplier and that they will not sell such product to any third party or end user that competes with us.

We have not sold or leased any XRpro® instruments and to date no one other than us has used the XRpro® instruments to perform analytical services. Until such time as we have indications of increased market acceptance of our product and increased financial resources we do not anticipate expending large sums of money on a sales force for our product or marketing efforts. Although we have not shipped XRpro® instruments to the private sector, we believe that use of the XRpro® instrument can demonstrate significant cost savings by allowing pharmaceutical companies to combine multiple safety and efficacy tests in the drug discovery process at a price substantially lower than current industry standards without the need to modify the drug, protein, or cell, or use expensive reagents.

New Drug Candidates

Often when we conduct our chemical analysis of molecules for safety and efficacy in accordance with government funded research, we discover new drug candidates.   We have developed new molecules including new MRI contrast agents, radiopharmaceuticals, anti-infectives, and therapies for heavy metal toxicity. These chemicals have been developed using our XRpro® technology and have been tested using in vitro safety and efficacy models. We plan to further develop these molecules as far as possible using Federal contracts and grants that pay for substantially all the research and development costs and either sell them or license them to third parties who will apply for FDA approval of such drugs. We obtained a $3,000,000 grant in August 2011 from the National Institutes of Health/ National Institute for Allergies and Infectious Diseases to conduct animal trials for one of our drug candidates, which is a therapy for exposure to radioactive strontium. The grant was awarded for the period August 24, 2011 to July 31, 2014, depending on the availability of government funds and satisfactory progress on the project and to date we have received $325,000 under this grant.
 
Our Analysis Technology

Our XRpro® technology quantifies drug/protein interactions without the need to modify the drug, protein, or cell, or use expensive reagents.  Many technologies require that expensive reagents (substances that are added to a system in order to bring about a chemical reaction or is added to see if a reaction occurs) or “labels” be used to measure the properties of drug candidates during the drug discovery process. These reagents are expensive, and can introduce experimental errors, wasting billions of dollars each year. Label-free technologies are particularly sought by the pharmaceutical industry because it is believed that they provide superior data at lower cost. Our high-throughput XRpro® technology measures approximately 2,000,000 compounds per month. Our technology measures multiple parameters for both drugs and proteins. This allows, for example, the ability to measure multiple interactions between a single drug and multiple proteins in a single measurement. We therefore measure on-target (i.e., efficacy) and off-target (i.e.  side effects/toxicity) properties simultaneously.

Our high-throughput XRpro® technology does not require the use of expensive reagents, chemical dyes or radiological labels, which are commonly required for competing techniques. The use of a reagent in the analysis process, for a typical high-throughput campaign, can typically cost $0.50 or more per compound. Based on such costs, we believe that our XRpro® technology saves the customer approximately $500,000 per month for a typical high-throughput screening rate of 1,000,000 compounds per month.
 
 
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We believe that our ability to provide our services in a cost and time efficient manner will allow us to profitably offer and expand our XRpro® drug discovery services to biotech and pharmaceutical companies as well as to cost-effectively continue our development of new drug candidates.
 
History

Caldera was founded by Dr. Benjamin Warner in 2003 at the request of the then director of Los Alamos National Laboratory (“LANL”) for the purpose of commercializing previous work done by Dr. Warner at LANL regarding the use of x-ray fluorescence to measure the chemical composition of pharmaceuticals. Dr. Warner earned his PhD in Chemistry from the Massachusetts Institute of Technology (“MIT”) in 1995. After MIT, Dr. Warner joined LANL where he held various positions including the position of Project Leader for National Security Programs from 2000 until 2004.

While at LANL, Dr. Warner patented through the auspices of the University of California (then the manager of LANL) his improvement to x-ray fluorescence technology that allowed it to be used to measure nanograms of material. This improvement made x-ray fluorescence economically feasible to measure the chemical composition of pharmaceuticals.

Dr. Warner has won numerous awards from Los Alamos National Laboratory for his commercialization and patenting work, including the Distinguished Licensing Award, the Distinguished Entrepreneurial Award, the Distinguished Patent Award, and the Federal Laboratory Consortium Distinguished Service Award. Jointly with LANL, Caldera Pharmaceuticals won the 2007 Federal Laboratory Consortium Award for Excellence in Technology Transfer and an R&D 100 Award. Caldera has won multiple Technology Ventures Corporation awards for top technology companies in New Mexico.

LANL is a United States Department of Energy national laboratory. LANL is managed and operated by Los Alamos National Security, LLC (LANS), a private limited liability company formed by the University of California, Bechtel, Babcock & Wilcox Technical Services, and URS Energy and Construction. LANL is one of the largest science and technology institutions in the world. It conducts multidisciplinary research in national security, space exploration, renewable energy, medicine, nanotechnology, supercomputing and other disciplines. LANL’s mission is to develop and apply science and technology to ensure the safety, security, and reliability of the U.S. nuclear deterrent; reduce global threats; and solve other emerging national security challenges. LANL is the largest institution in Northern New Mexico with more than 9,000 employees plus approximately 650 contractor personnel and an annual budget of approximately $2.2 billion.

Scientific Advantages of XRpro ®

The pharmaceutical industry uses assays to measure the properties of experimental medicines. XRpro® allows multiple assays to be conducted at significantly lower costs than existing techniques.  XRpro® assays include:
 
Ion Channel Assays, or whether a drug inhibits hERG protein, which is associated with cardiotoxicity.
Functional Assays, or to what extent a drug inhibits a protein target;
Binding Assays, or whether a drug binds to a protein;
Cell Assays, such as whether a drug acts upon a cell model for a disease;
 
Some of the key features of XRpro® are the following:
 
Price of the instrument - XRpro® is priced similar to other instruments that have large monthly reagent or label costs;
Monthly costs - XRpro® dramatically reduces costs by eliminating the need for reagents, antibodies and labels, allowing savings of approximately $500K per month;
Fast -. XRpro® currently runs at a rate of 2,000,000 measurements per month;
Sensitive - XRpro® measures nanograms of material, which has allowed us to reduce protein consumption tenfold in some cases;
Precise - XRpro® has demonstrated Z-Factors, which are a common measurement of assay precision, above 0.8. This is roughly equivalent to 12 standard deviations between an assay and a blank;
Durable - XRpro® allows samples to be read dry, months after assay, in contrast to most competing assays which must be read wet, and shortly after the assay was run; and
Data Rich - XRpro® allows simultaneous on-target and cross-target functional assays, which gives an estimate of both safety and toxicity.

The underlying science of XRpro® is similar to the more commonly used optical fluorescence. In optical fluorescence, light having energy of 2-3 electron volts (eV) is shone on a sample, which then emits another wavelength of light. The amount of light that is emitted and its wavelength provide information about what chemicals are present, and in what quantities.  In optical fluorescence, the fluorophore, or portion of the molecule that emits light, is large and often expensive.
 
 
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XRpro®, on the other hand, uses x-rays, which have different properties than the light used in optical fluorescence. The most important of these properties is that the portion of the molecule that emits photons is an atom. XRpro® directly quantifies atoms that are present in many drugs, proteins, and functional assays. This feature is what produces the huge cost savings of XRpro®.

Corporate Information.

We were incorporated in the State of Delaware on November 12, 2003.  Our principal executive offices are located at One Kendall Square, Suite B2002, Cambridge, Massachusetts, 02139 our telephone number is (617) 294-9697.

Recent Events
 
On March 6, 2014, the Company and Dr. Benjamin Warner entered into a confidential settlement  agreement with Los Alamos National Security LLC (“LANS”), The Regents of the University of California, the UChicago Argonne, LLC and certain individuals (“the Parties”) relating to the following:

(i)
a lawsuit, Caldera Pharmaceuticals, Inc. v. The Regents of the University of California, et al., Case No. CGC-07-470554, brought in the Superior Court of the State of California, County of San Francisco;
(ii)
a lawsuit, Caldera Pharmaceuticals, Inc. v. Los Alamos National Security, LLC, et al., Case No. 1:10-cv-06347, brought in the United States District Court for the District of New Mexico; and
(iii)
a lawsuit, Caldera Pharmaceuticals, Inc. v. The Regents of the University of California, et al., Case No. 2011-L-9329, brought in the Circuit Court of Cook County, Illinois, County Department – Law Division and dismissed without prejudice on or about July 26, 2013 (collectively the “Actions”).
 
The agreement called for the Parties to:
 
(i)
mutually release each other from all existing, past, present or future claims, counter-claims, demands and causes of action;
(ii)
amend the Company’s license agreement with Los Alamos National Security LLC, to include rights to certain issued and pending patents;
(iii)
return of 157,500 shares of the Company’s Common stock; and
(iv)
pay the Company $7,000,000, which resulted in a net cash settlement of approximately $5,852,000 after the deduction of legal expenses.
 
On July 5, 2013, the Company entered into a fee agreement with Dentons US LLP (“Dentons”), our previous legal counsel, which called for a payment of 50% of any settlement up to $6 million and 5% thereafter.  The agreement also called for Dentons to cooperate with the Company by making its partners and/or employees available to furnish information or reasonable assistance in connection with any future disqualification proceedings, as reasonably requested by the Company. Subsequent to signing the agreement the Company determined that Dentons had egregiously breached this cooperation clause.  As a result, the Company has suffered significant harm.  The Company further believes that due to Dentons breach of its contract with the Company, Dentons is not owed any amount under the breached agreement and the Company is also considering its legal remedies in regard to the harm it has suffered.
 
There is no certainty as to how Dentons will respond to the Company's claims or to the ultimate amount that the Company may collect from or have to pay to Dentons.
 
The proceeds received of $7,000,000 and any additional proceeds we may receive or any additional expenditure incurred on this matter will be recognized as income or expense in future periods. No liability to Dentons has been recorded by the Company.

Employees
 
As of May 30, 2014, we employed eight full time employees. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. None of our employees are covered by collective bargaining agreements, and management considers relations with our employees to be good.
 
Available Information
 
Additional information about Caldera Pharmaceuticals is contained at our website, www.xrpro.com. Information on our website is not incorporated by reference into this report. We make available on our website, www.calderapharmaceuticals.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after those reports are filed with the SEC. Our phone number is (617) 294-9697 and our facsimile number is (302) 347-1326.
 
Item 1A.
 
Investing in our common stock involves a high degree of risk. In addition to the risks related to our business set forth in this Form 10-K and the other information included and incorporated by reference in this Form 10-K, you should carefully consider the risks described below before purchasing our common stock. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to the Company

We have a history of losses and there can be no assurance that we will generate or sustain positive earnings.

For the year ended December 31, 2013 and 2012, we had a net loss of $(3,694,786) and $(792,061), respectively.  We cannot be certain that our business strategy will ever be successful. Future revenues and profits, if any, will depend upon various factors, including the success, if any, of our expansion plans for the sale of our instruments and services to biotechnical and pharmaceutical customers, marketability of our instruments and services, our ability to maintain favorable relations with manufacturers and customers, and general economic conditions. There is no assurance that we can operate profitably or that we will successfully implement our plans. There can be no assurance that we will ever generate positive earnings.
 
 
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Substantially all of our net revenue has been generated from services provided to governmental agencies.  If such agencies were to terminate their existing agreement with us or no longer continue to use our services, our net revenue and results of operations would be adversely affected.

To date we have derived substantially all of our revenue from services we performed for two governmental agencies. For the year ended December 31, 2013, substantially all of our revenue was derived from two (2) different research projects for the same two governmental agencies. For the year ended December 31, 2012 substantially all of our revenue was derived from three (3) different research projects for the same two governmental agencies. For the year ended December 31, 2011, ninety six percent (96%) of our revenue was derived from six (6) different research projects for the same two governmental agencies. As of the date hereof we have one existing contract with the National Institutes of Health (“NIH”) pursuant to which we are continuing to perform services.  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, a further $1,000,000 was made available to us on July 9, 2013 for the period August 1, 2013 to July 2014, depending on availability of government funding and satisfactory progress made on the project and to date we have received $325,000 under the grant.  However, under NIH policies the contracts can be terminated in whole or in part by the government for convenience at any time and in such case we would be entitled to payment of our costs incurred in the performance of the work terminated. If there were to be a decline in the demand for our services from governmental agencies, or the two governmental agencies from which we have received funding were required to reduce spending, our net revenue would be significantly impacted, which would negatively affect our business, financial condition and results of operations and may affect our ability to continue operations.
 
If we cannot establish profitable operations, we will need to raise additional capital to fully implement our business plan, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment.

We incurred a net loss for the year ended December 31, 2013 of $(3,694,786) and for the year ended December 31, 2012 of $(792,061). Achieving and sustaining profitability will require us to increase our revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations at their current level and in order to fully implement our business plan. We do not have any commitments in place for additional funds. If needed, additional funds may not be available on favorable terms, or at all. As of the date hereof, we expect that our current cash and revenues generated from services, our private placement financings and the settlement of the LANS litigation will provide us with enough funds to continue our operations at our current level for an additional eighteen months. Unless we raise additional funds or increase revenues we will be forced to curtail our operations, limit our marketing expenditures and concentrate solely on our government contracting services. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.
 
We may not be able to utilize our tax net operating loss carry-forwards to offset future taxable income.

At December 31, 2013 the Company had approximately $6,565,000 in tax net operating loss carry-forwards available to offset future taxable income, thereby potentially reducing our future tax expense/liabilities.  However, these tax net operating loss carry-forwards may be limited in accordance with IRC Section 382 following a more than fifty (50) percentage point change in ownership, in aggregate during any three (3) year look-back period.  This potential limitation on our ability to use our tax net operating loss carry-forwards to offset future taxable income could result in increased tax expense/liabilities and decreased net earnings.  These loss carry-forwards expire through 2033 if unused.
 
 
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There is uncertainty as to market acceptance of our technology and products.

Our business has been solely dependent upon revenue derived from government agencies for services performed by us. We have derived only minimal revenue from the provision of our analyses services to biotech and pharmaceutical companies and there can be no assurance that the future revenue received from these customers will increase. Although our XRpro® instruments is commercially available, we have not yet sold our XRpro® instruments to third parties nor have any drug candidates that we discover while conducting our chemical analyses been approved by the FDA or commercialized from our technology.  There can be no assurance that our XRpro® instruments will be accepted in the market or that our commercialization efforts will be successful.

The life sciences research instrumentation market is characterized by rapid technological change and frequent new product introductions. Our future success may depend on our ability to enhance our current products and to develop and introduce, on a timely basis, new products that address the evolving needs of our customers. We may experience difficulties or delays in our development efforts with respect to new products and the provision of our services, and we may not ultimately be successful in developing or commercializing them, which would harm our business. Any significant delay in releasing products or providing services could cause our revenues to suffer, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, our future success depends on our continued ability to develop new applications for our existing products and continuing to provide our current services. If we are not able to complete the development of these applications, or if we experience difficulties or delays, we may lose our current customers and may not be able to attract new customers, which could seriously harm our business and our future growth prospects.

We rely heavily on a single source for a major part of our product, and the partial or complete loss of this supplier could cause customer supply or production delays and a substantial loss of revenues.

We rely on one outside vendor to manufacture substantial portions of critical hardware that will be used with or included in our XRpro® instruments. We have an agreement with our equipment supplier for an indefinite period of time to develop a product that incorporates our technology with a product already produced by them. Our agreement provides that we will not develop, manufacture, or distribute products that compete directly or indirectly with the product that is supplied by them and incorporated into the XRPro® instruments during the term of the agreement and for a period of three years subsequent to the termination of the agreement if we should terminate the agreement for any reason. Our agreement may be terminated by either party without cause upon six (6) months prior written notice.  Our supplier is located in Berlin, Germany and its ability to perform the agreement will be affected by the quality controls in Germany, which may be different than those in the United States, as well as the regional or worldwide economic, political or governmental conditions.  Disruptions in international trade and finance or in transportation may have a material adverse effect on our business, financial condition and results of operation.  Any significant disruption in the Company’s operations for any reason, such as regulatory requirements, scheduling delays, quality control problems, loss of certifications, power interruptions, fires, hurricanes, war or threats of terrorism, labor strikes, contract disputes, could adversely affect our sales and customer relationships. There can be no assurances that a third party contract manufacturer will be able to meet the design specifications of our technology.
 
Our reliance on one manufacturer is expected to continue and involve several other risks including limited control over the availability of components, delivery schedules, pricing and product quality. We may experience delays, additional expenses and lost sales because of our dependency upon a single manufacturer. Although we have no reason to believe that our supplier will be unable to supply us with needed products, if they were to be unable to supply us with adequate equipment in a timely manner, or if we are unable to locate a suitable alternative supplier or at favorable terms, our business could be materially adversely impacted.  While we believe alternative manufacturers exist, we have not specifically identified any alternative manufacturer and may not be able to replace our equipment supplier if we need to in a timely fashion.

Our reliance on a sole supplier involves several risks, including the following:

our supplier of required parts may cease or interrupt production or otherwise fail to supply us with an adequate supply of required parts for a number of reasons, including contractual disputes with our supplier or adverse financial developments at or affecting the supplier;
we have reduced control over the pricing of third party-supplied materials, and our supplier may be unable or unwilling to supply us with required materials on commercially acceptable terms, or at all;
we have reduced control over the timely delivery of third party-supplied materials; and
our supplier may be unable to develop technologically advanced products to support our growth and development of new systems.

In addition, in the event of a breach of law by our equipment supplier or a breach of a contractual obligation that has an adverse effect upon our operations, we will have little or no recourse because all of our manufacturer’s assets are located in Germany. In addition, it may not be possible to effect service of process in Germany and uncertainty exists as to whether the courts in Germany would recognize or enforce judgments of U.S. courts obtained against a German company.
 
 
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We must expend a significant amount of time and resources to develop new products, and if these products do not achieve commercial acceptance, our operating results may suffer.

We expect to spend a significant amount of time and resources to develop new products and refine existing products, and have spent significant time and money developing our XRpro® instruments. We commenced development of our XRpro® instruments in the year 2000 and since then have developed four enhanced versions of our original instrument; each enhancement was developed over an approximate two year period of time. Although we do not intend to enhance our XRpro® instruments in the near future, we may be forced to do so if customers request any modifications or enhancements. Our research and development expense for the year ended December 31, 2013 was approximately $194,222, most of which was used to develop assays for commercial applications. In light of the long product development cycles inherent in our industry, any developmental expenditure will typically be made well in advance of the prospect of deriving revenues from the sale of new products. Our ability to commercially introduce and successfully market new products will be subject to a wide variety of challenges during this development cycle that could delay introduction of these products. In addition, since our potential customers are not expected to be obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. Our products may also be priced higher than competitive products, which may impair commercial acceptance. We cannot predict whether new products that we expect to introduce will achieve commercial acceptance.

Our limited marketing capability may limit our ability to gain commercial acceptance of our XRpro® instrument and cause our future operating results to suffer.
 
Our future operating results will suffer if our products do not achieve commercial acceptance. Our ability to gain commercial acceptance of our XRpro® product will be limited by our marketing capability. Until such time as we have increased financial resources, we do not anticipate expending large sums of money on a sales force for our XRpro® products or our marketing efforts. We have not sold or leased any XRpro® instruments and to date no one other than us has used the XRpro® instrument to perform analytical services.
 
Our Chief Scientific Officer beneficially owns a substantial portion of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company.
 
The concentration of ownership of our stock could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. Our Chief Scientific Officer beneficially owns 3,445,768 shares of our common stock, representing 80.2% (and 40.8% of the total voting power, based on the Series B entitlement of two for one votes on the number of Series B shares outstanding) of our outstanding shares of common stock on a fully diluted basis. Accordingly, our Chief Scientific Officer would have significant influence over the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our securities, you may have no effective voice in the management of our Company. Such significant influence over control of our Company may adversely affect the price of our common stock. Our principal stockholder may be able to significantly influence matters requiring approval by our stockholders, including the election of directors, as well as mergers or other business combinations which require the vote of a majority of our outstanding shares. Such significant influence may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
 
 
7

 
 
If we deliver products with defects, our credibility will be harmed and the sales and market acceptance of our products will decrease.

Our products are complex and may at times contain errors, defects and bugs when introduced. If in the future we deliver products with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We may agree to indemnify our customers in some circumstances against liability arising from defects in our products. In the event of a successful product liability claim, we could be obligated to pay significant damages.

Most of our potential customers are from the pharmaceutical and biotechnology sector and are subject to risks faced by those industries.

We expect to derive a significant portion of our future revenues from sales to customers in the pharmaceutical and biotechnology sector, which includes the governments and private companies. As a result, we will be subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as availability of capital and reduction and delays in research and development expenditures by companies in these industries, pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, and the uncertainty resulting from technological change.

In addition, our future revenues may be adversely affected by the ongoing consolidation in the pharmaceutical and biotechnology industries, which would reduce the number of our potential customers. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies that may be our customers will not develop their own competing products or capabilities, or choose our competitors’ technology instead of our technology.

We may need to depend on credit terms and lines of credit from our contract manufacturer.

We do not currently have any credit facilities or lines of credit with our third party contract manufacturer of our XRpro® instruments. In order for us to achieve our business plan, we believe we may require lines of credit and credit terms with such third party contract manufacturer. If we are unable to secure lines of credit and credit terms with our third party contract manufacturer we will have significant difficulties manufacturing and marketing our XRpro® instruments and achieving our business plan.

Many of our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products and services.

We operate in a highly competitive industry and face competition from companies that design, manufacture and market instruments for use in the life sciences research industry, from genomic, pharmaceutical, biotechnology and diagnostic companies and from academic and research institutions and government or other publicly-funded agencies, both in the United States and elsewhere. We may not be able to compete effectively with all of these competitors. Many of these companies and institutions have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our potential customers are large companies that require global support and service, which may be easier for our larger competitors to provide.

We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new products and provide quality, cost-effective products and services that meet customers’ needs. We cannot assure you, however, that we will be able to successfully develop new products or that our existing or new products and services will adequately meet our potential customers’ needs.

Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our products. To remain competitive, we may be required to develop new products and periodically enhance our existing products in a timely manner. We may face increased competition as new companies enter the market with new technologies that compete with our products and future products, and our services and future services. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies products or services that are more effective or commercially attractive than our products or future products, or our services or future services, or that would render our technologies and products obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the launch of our new products or the provision of our services may result in loss of market share due to our customers’ purchases of competitors’ products or services during any delay.
 
 
8

 
 
We depend on our key personnel, the loss of whom would impair our ability to compete.

We are highly dependent on the employment services of Dr. Benjamin Warner, our Chief Scientific Officer. The loss of Dr. Warner’s services could adversely affect us. We are also dependent on the other members of our management, engineering and scientific staff. The loss of the service of any of these persons could seriously harm our product development and commercialization efforts. In addition, research, product development and commercialization will require additional skilled personnel in areas such as chemistry and biology, and software and electronic engineering and recruitment and retention of personnel, particularly for employees with technical expertise, is uncertain. If we are unable to hire, train and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced. The inability to retain and hire qualified personnel could also hinder the planned expansion of our business and may result in us relocating some or all of our operations.

We are dependent on our licensed technology from the Los Alamos National Security LLC.

Our success will depend in part upon the use of patents, pending patents, and technology licensed from the managers of the Los Alamos National Laboratory (“LANL”), which is currently managed by Los Alamos National Security LLC (“LANS”) pursuant to an exclusive Patent License Agreement (the “Agreement”). Under this agreement, we have the exclusive rights to a set of issued and pending patents. The agreement imposes royalty payment requirements, reporting requirements, commercialization milestones and other obligations upon us, and there is no assurance that we will be able to operate sufficiently to satisfy these royalty payments, commercialization milestones and other obligations, which could result in loss of license rights to the technology. Our license to the technology is terminable by the managers of LANL upon written notice to us in the event of the failure by us to meet any of our royalty payment or reporting obligations or in the event of any breach by us of any material term of the license agreement.
 
In addition to patents and patent applications that we have licensed from the managers of LANL, we have pending patent applications that have been assigned to us from our current and former employees as inventors. There can be no assurances that the patents will ever be issued for our applications, or that any patents that do get issued will be upheld.
 
 
9

 
 
We have initiated and may in the future need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market.

Our success will depend in part upon protecting our technology from infringement, misappropriation, duplication and discovery, and avoiding infringement and misappropriation of third party rights. We intend to rely, in part, on a combination of patent and contract law to protect our technology in the United States and abroad.

The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;
the claims of any patents which are issued may not provide meaningful protection;
we may not be able to develop additional proprietary technologies that are patentable;
the patents licensed or issued to us or our customers may not provide a competitive advantage;
other companies may challenge patents licensed or issued to us or our customers;
patents issued to other companies may harm our ability to do business;
other companies may independently develop similar or alternative technologies or duplicate our technologies; and
other companies may design around the technologies we have licensed or developed.

There can be no assurance that any of our patent applications or licensed patent applications will issue or that any patents that may issue will be valid and enforceable. We may not be successful in securing or maintaining proprietary patent protection for our products and technologies that we develop or license. In addition, our competitors may develop products similar to ours using methods and technologies that are beyond the scope of our intellectual property protection, which could reduce our anticipated sales. While some of our products have proprietary patent protection, a challenge to these patents can subject us to expensive litigation. Litigation concerning patents, other forms of intellectual property, and proprietary technology is becoming more widespread and can be protracted and expensive and distract management and other personnel from performing their duties.

We also rely upon trade secrets, unpatented proprietary know-how, and continuing technological innovation to develop a competitive position.   If these measures do not protect our rights, third parties could use our technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries and our trade secrets may become known through other means not currently foreseen by us. We cannot assure you that others will not independently develop substantially equivalent proprietary technology and techniques or otherwise gain access to our trade secrets and technology, or that we can adequately protect our trade secrets and technology.

There can be no assurance that third parties will not assert infringement or other claims against us with respect to rights to any of our products. Litigation to protect and defend the rights to our licensed technology or to determine the validity of any third party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. If we determine that additional rights are necessary for the development of our product(s) and further determine that a license to additional third party rights is needed, there can be no assurance that we can obtain a license from the relevant party or parties on commercially reasonable terms, if at all. We could be sued for infringing patents or other intellectual property that purportedly cover products and/or methods of using such products held by persons other than us. Litigation arising from an alleged infringement could result in removal from the market, or a substantial delay in, or prevention of, the introduction of our products, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
 
 
10

 
 
Additionally, in order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:

assert claims of infringement;
enforce our patents;
protect our trade secrets or know-how; or
determine the enforceability, scope and validity of the proprietary rights of others.

Lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would put our licensed patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We may also provoke third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. If initiated, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these suits, there could be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors were to perceive any of these results to be negative, our stock price could decline.

We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.

We could be the subject of complaints or litigation from customers alleging product quality or operational concerns. Litigation or adverse publicity resulting from these allegations could materially and adversely affect our business, regardless of whether the allegations are valid or whether we are liable. We currently do not have product liability insurance coverage, and even if there was such coverage, there would be no assurance that such coverage would be sufficient to properly protect us. Further, claims of this type, whether substantiated or not, may divert our financial and management resources from revenue generating activities and the business operation.

We may be subject to the risks of doing business internationally.

Although we have not successfully sold any of our products yet, we currently offer our products both in the United States and outside of the United States, and we intend to manufacture products at our equipment suppliers’ facility in Germany once we receive purchase orders. Because we intend to do so, our business is subject to risks associated with doing business internationally, including:

trade restrictions and changes in tariffs;
the impact of business cycles and downturns in economies outside of the United States;
unexpected changes in regulatory requirements that may limit our ability to export our products or sell into particular jurisdictions;
import and export license requirements and restrictions;
difficulties in maintaining effective communications with employees and customers due to distance, language and cultural barriers;
disruptions in international transport or delivery;
difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States;
difficulties in enforcing agreements through non-U.S. legal systems;
longer payment cycles and difficulties in collecting receivables; and
potentially adverse tax consequences.

If any of these risks materialize, our international sales could decrease and our foreign operations could suffer.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could remain an emerging growth company until the earliest of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii)  the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement which has not yet occurred; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer.  We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
 
11

 

Under Section 107(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

As a result of our being a public company, we are subject to additional reporting and corporate governance requirements that require additional management time, resources and expense.

We are obligated to file with the SEC annual and quarterly information and other reports that are specified in the Securities Exchange Act of 1934. We are also subject to other reporting and corporate governance requirements under the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder, all of which impose significant compliance and reporting obligations upon us.

Our internal controls over financial reporting are not effective which could have a significant and adverse effect on our business and reputation.

As a public reporting company, we are in a continuing process of developing, establishing, and maintaining internal controls and procedures that allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act of 2002. Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company. Our management is required to report on our internal controls over financial reporting under Section 404. If we fail to achieve and maintain the adequacy of our internal controls, we would not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Our Management has determined that the adequacy of our internal controls is not as effective as they could be and is therefore unable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, that must be performed may reveal other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate any material weaknesses identified, or if other material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our internal controls over financial reporting from our independent registered public accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline.
 
Future sales of our common stock by our existing shareholders could cause our stock price to decline.

We currently have 4,039,770 shares of our common stock outstanding. All of such shares are eligible for resale under Rule 144; however, 3,307,945 are held by affiliates and are subject to certain volume limitations.  If our shareholders sell substantial amounts of our common stock in the public market at the same time, the market price of the Common Stock could decrease significantly due to an imbalance in the supply and demand of our common stock. Even if they do not actually sell the stock, the perception in the public market that our shareholders might sell significant shares of the Common Stock could also depress the market price of the Common Stock.
 
A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause you to lose part or all of your investment in our shares of common stock.
 
 
12

 
 
We do not expect to pay dividends on our common stock in the foreseeable future.
 
The Company does not expect to pay dividends on its common stock for the foreseeable future, and it may never pay dividends.  Consequently, the only opportunity for common stockholders to achieve a return on their investment may be if a trading market develops and common stockholders are able to sell their shares for a profit or if our business is sold at a price that enables common stockholders to recognize a profit. The Company’s holders of Series B Preferred stockholders are entitled to an annual dividend of 8% if paid in cash or 10% if paid in common stock, at the election of the Company, on January 31 of each year. Our Series A Preferred Stockholders are entitled to an annual dividend of $0.46 for each share of Series A Preferred Stock, payable in cash or common stock, at the election of the holder, on January 31 of each year. The Company currently intends to retain any future earnings other than those paid as dividends to the Series A and Series B Preferred Stock or any other class of preferred stock to support the development and expansion of its business and does not anticipate paying cash dividends for the foreseeable future. The Company’s payment of any future dividends will be at the discretion of its Board of Directors after taking into account various factors, including but not limited to its financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that it may be a party to at the time. In addition, the Company’s ability to pay dividends on its common stock may be limited by state law. Accordingly, the Company cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of the Company’s business or dividends on their Series A and Series B Preferred Stock. At the present time there is no trading market for the Company’s shares. Therefore, holders of the Company’s securities may be unable to sell them. The Company cannot assure investors that an active trading market will develop or that any third party will offer to purchase its business on acceptable terms and at a price that would enable its investors to recognize a profit.
 
Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director.

Our certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director or officer, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director or officer for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director or officer.

We are responsible for the indemnification of our officers and directors.

Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our certificate of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
 
 
13

 
 
The rights of our preferred stock could negatively affect holders of common stock and make it more difficult to effect a change of control.

Our board of directors is authorized by our charter to create and issue preferred stock. Certain of the rights of holders of preferred stock take precedence over the rights of holders of common stock. We are authorized to issue 10,000,000 shares of preferred stock, of which 3,000,000 are designated as Series B Preferred Stock and 400,000 are designated as Series A Preferred Stock. We currently have 2,113,947 shares of Series B and 105,000 shares of Series A preferred stock outstanding. The holders of the Series B Preferred Stock are entitled to a dividend of 8%, if paid in cash or 10% if paid on common stock, at the option of the Company. Series A preferred stock are entitled to a dividend of $.46 per share each year payable in cash or stock at the option of the holder and both Series B Preferred stock and Series A Preferred stock are entitled to a preference upon our liquidation, dissolution or winding up.

The Series B shares are convertible voluntarily at the election of the holder. The Series A Preferred shares are convertible voluntarily at the election of the holder or automatically ten trading days after delivery to the holder by us of a notice that the volume-weighted average closing price of our common stock over the ten trading days immediately preceding the date of notice is at least $10.00 per share. The holders of the Series B and Series A Preferred stock are also entitled to registration rights with respect to such shares.   We may issue additional shares of Series B or Series A Preferred Stock in addition to other preferred stock. As future tranches of capital are received by the Company, additional preferred stock may be issued which such terms and preferences as are determined in the sole discretion of our board of directors. The rights of future preferred stockholders could delay, defer or prevent a change of control, even if the holders of common stock are in favor of that change of control, as well as enjoy preferential treatment on matters like distributions, liquidation preferences and voting.
 
Our common stock is not currently traded on any market, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
 
The Common Stock is not currently traded on any market. We cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock once trading commences or whether the market price of our common stock will be volatile following this offering. If an active trading market does not develop, investors may have difficulty selling any of our common stock that they buy. There may be limited market activity in our stock and we are likely to be too small to attract the interest of many brokerage firms and analysts. .If we trade on OTC markets, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds as well as individual investors, follow a policy of not investing in OTC stocks and certain major brokerage firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
 
The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

As long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
 
 
14

 
 
We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. 

If a trading market develops for our common stock it will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. However, security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock, which may adversely affect the market price of our common stock. If equity research analysts do provide research coverage of our common stock, the price of our common stock could decline if one or more of these analysts downgrade our common stock or if they issue other unfavorable commentary about us or our business. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
 
 
Not applicable.

Item 2. 
 
New Mexico
We lease approximately 5,160 square feet at 278 DP Road, Suite D, Los Alamos, New Mexico 87544, where one of our laboratories is located under the terms of two leases. Each lease is on a month to month basis until we determine our future need for these premises. The leases provide for an aggregate annual rent of approximately $60,900 or $5,075 per month excluding utilities and property taxes. We believe these facilities are in good condition and adequate to meet our current requirements.

Cambridge
We lease approximately 2,813 square feet at One Kendall Square, Suite B2002, Cambridge, Massachusetts 02139 where our main laboratory and corporate head office is located. The term of the lease is for a twelve month period terminating on May 31, 2014. The monthly rental amounts to $15,118. The lease has recently been renewed for a period of twenty four months terminating on May 31, 2016.

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. The renewal of this lease is currently being negotiated.

The Company entered into a second corporate apartment lease agreement in Cambridge Massachusetts, effective 1 February 2014. The term of the lease is for a fourteen month period terminating on March 31, 2015. The monthly rental amounts to $2,987.
 
 
15

 

Item 3. 
 
Suit against the Regents of the University of California, Los Alamos National Security, et al.
 
On March 6, 2014, the Company and Dr. Benjamin Warner entered into a confidential settlement  agreement with Los Alamos National Security LLC (“LANS”), The Regents of the University of California, the UChicago Argonne, LLC and certain individuals (“the Parties”) relating to the following:
 
(i)
a lawsuit, Caldera Pharmaceuticals, Inc. v. The Regents of the University of California, et al., Case No. CGC-07-470554, brought in the Superior Court of the State of California, County of San Francisco;
(ii)
a lawsuit, Caldera Pharmaceuticals, Inc. v. Los Alamos National Security, LLC, et al., Case No. 1:10-cv-06347, brought in the United States District Court for the District of New Mexico; and
(iii)
a lawsuit, Caldera Pharmaceuticals, Inc. v. The Regents of the University of California, et al., Case No. 2011-L-9329, brought in the Circuit Court of Cook County, Illinois, County Department – Law Division and dismissed without prejudice on or about July 26, 2013 (collectively the “Actions”).
 
The agreement called for the Parties to:
 
(i)
mutually release each other from all existing, past, present or future claims, counter-claims, demands and causes of action;
(ii)
amend the Company’s license agreement with Los Alamos National Security LLC, to include rights to certain issued and pending patents;
(iii)
return of 157,500 shares of the Company’s Common stock; and
(iv)
pay the Company $7,000,000, which resulted in a net cash settlement of approximately $5,852,000 after the deduction of legal expenses.
 
On July 5, 2013, the Company entered into a fee agreement with Dentons US LLP (“Dentons”), our previous legal counsel, which called for a payment of 50% of any settlement up to $6 million and 5% thereafter.  The agreement also called for Dentons to cooperate with the Company by making its partners and/or employees available to furnish information or reasonable assistance in connection with any future disqualification proceedings, as reasonably requested by the Company. Subsequent to signing the agreement the Company determined that Dentons had egregiously breached this cooperation clause.  As a result, the Company has suffered significant harm.  The Company further believes that due to Dentons breach of its contract with the Company, Dentons is not owed any amount under the breached agreement and the Company is also considering its legal remedies in regard to the harm it has suffered.
 
There is no certainty as to how Dentons will respond to the Company's claims or to the ultimate amount that the Company may collect from or have to pay to Dentons.
 
The proceeds received of $7,000,000 and any additional proceeds we may receive or any additional expenditure incurred on this matter will be recognized as income or expense in future periods. No liability to Dentons has been recorded by the Company.
 
Joel Bellows Suit

In October 2008, Seddie Bastanipour and Joel Bellows filed suit against the Company, 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 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 above mentioned 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.   On April 30, 2013, these 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 had 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 was heard on September 25, 2013 and denied. On October 24, 2013, the Company and Dr. Benjamin Warner filed a notice of appeal.
 
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. On October 4, 2013, this suit was dismissed with prejudice and a settlement agreement was entered into, in terms of this settlement agreement the Company received a net $30,000 cash settlement.
 
 
Not applicable.
 
16

 
 
 
 
Our common stock is not currently trading on any established market. 
 
As of May 15, 2014, there were 70 holders of our common stock, 79 holders of Series B Preferred Stock and 1 holder of Series A Preferred Stock.
 
Dividend Policy
 
We have never paid any cash dividends on our common stock to date, and do not anticipate paying such cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Delaware corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.
 
Equity Compensation Plan Information
 
See Item 11 – Executive compensation for equity compensation plan information.
 
Recent Sales of Unregistered Securities
 
None.
 
Selected Financial Data
 
Not applicable because we are a smaller reporting company.
 
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. 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.
 
 
17

 
 
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 uses proprietary x-ray fluorescence technology called XRpro® to deliver ion channel screening, ion channel kinetics and custom screening services to our customers. Our proprietary technology detects and quantitatively analyzes the x-ray signature of each element with an atomic number greater than 10, we combine the flexibility of the analysis with patented sample processing to address a wide range of ion channel and other biological targets. 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.
 
 
18

 
 
Results of Operations for the year ended December 31, 2013 and the year ended December 31, 2012.
 
Revenues

We had revenues totaling $708,273 and $1,904,044 for the years ended December 31, 2013 and 2012, respectively, a decrease of $1,195,771 or 62.8%. Substantially all of our revenues have been from federal government contracts. The decrease over the previous year is due to the timing of work performed on our government contracts during the 2012 year where significant work was performed on the NIH contract during the first and second half of 2012, limited work was performed on the NIH contract during the first half of 2013 with an increase in activity in the last quarter of 2013. In the 2012 year, we billed a significantly higher amount of recoverable expenses which we incurred on our government contracts. 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 with a further $1,000,000 made available for us to invoice our project time and expenses against on July 9, 2013, expiring on July 31, 2014, of which we have received $325,000 to date, depending on availability of government funding and satisfactory progress made on the project. We believe that these are firm orders as there are no indications that funding will not be available and we believe that we have made satisfactory progress on the project to date. However, we do not know how or if the federal government’s recent spending cuts, known as sequestration, will affect our current contract or 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 XRpro® equipment and 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 and industrial sectors; 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 $507,766 and $656,641 for the years ended December 31, 2013 and 2012, respectively. The decrease of $148,875 or 22.7% is primarily due to the decreased revenue earned in the current year. The percentage reduction in cost of sales is not equal to the percentage reduction in sales as significant revenue from equipment usage was generated in the prior year, the current year cost of sales included proportionately more laboratory supply expense and direct material expense than in the prior year. 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 year ended December 31, 2013 and 2012 respectively was $236,451 and $557,092. For additional information regarding salary expense reference is made to the discussion of total salary expense in Selling, general and administrative expenses below.
 
Gross Profit
 
Gross profit was $200,507 and $1,247,403 for the years ended December 31, 2013 and 2012, respectively. The gross margin percentages were 28.3% and 65.5%, 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 and equipment sales or usage arrangements.  The decrease in our gross profit percentage is primarily due to the reduction in billing for equipment usage in the current year which is significantly more profitable than billing of direct materials and labor costs.
 
Selling, general and administrative expenses
 
Selling, general and administrative expenses totaled $4,511,078 and $2,011,212 for the years ended December 31, 2013 and 2012, respectively, an increase of $2,499,866 or 124.3%.
 
 
19

 
 
The major expenses making up selling, general and administrative expenses included the following:
 
   
Year ended
December 31,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
                                 
Marketing and selling expenses 
 
$
24,942
   
$
89,441
   
$
(64,499
)
   
(72.1
)%
  
                               
Salary expenses 
   
740,600
     
211,378
     
529,222
     
250.4
%
  
                               
Research and development salaries 
   
194,222
     
32,403
     
161,819
     
499.4
%
  
                               
Stock option compensation charge 
   
660,468
     
45,769
     
614,699
     
1,343.0
%
  
                               
Legal fees 
   
1,700,668
     
810,040
     
890,628
 
   
109.9
%
                                 
Consulting fees 
   
340,631
     
248,603
     
92,028
     
37.0
%
  
                               
Audit fees 
   
72,160
     
26,700
     
45,460
     
170.3
%
                                 
Rental expense
   
199,070
     
63,609
     
135,461
     
213.0
%
                                 
Legal settlement expense
   
115,273
     
257,972
     
(142,699
)
   
(55.3
)%
   
$
4,048,034
   
$
1,785,915
    $
2,262,119
         
 
Marketing and selling expenses decreased over the prior year due to professional promotional activities that commenced in the third quarter of 2011 and was concluded in the second quarter of 2012 to promote our XRpro equipment. The current year expenditure consisted primarily of website development costs.
 
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.
 
 
20

 
 
Total salary expenditure for the year ended December 31, 2013 and 2012, respectively is included in the following expense categories:
 
   
Year ended
December 31,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
Cost of sales
 
$
236,451
   
$
557,092
   
$
(320.641
)
   
(57.6
)%
                                 
Selling, general and administrative expenses
   
740,600
     
211,378
     
529,222
     
250.4
%
                                 
Research and development salaries
   
194,222
     
32,403
     
161,819
     
499.4
%
  
                               
   
$
1,171,273
   
$
800,873
   
$
370,400
     
46.2
%
 
The increase in total salary expenditure for the year ended December 31, 2013 of $370,400 is primarily due to; i) the employment of Mr. Gary Altman as Chief Executive Officer of the company at an annual salary of $300,000 per annum, accounting for $150,000 of the increase in the current year; ii) the employment of an additional senior scientist in our Cambridge laboratory at an annual cost of $125,000 per annum, resulting in an increase of $41,606 for the current year; iii) the increase in salary paid to our Chief Scientific officer of $50,000 per annum, resulting in an additional cost of $41,667 for the current year, as well as a discretionary bonus of $50,000 paid to our Chief Scientific officer during the current year; iv) the employment of a public relations representative, who has subsequently left the Company, for eight months resulting in a salary expense of $31,800, and v) the increase in our leave pay provision of $58,250 for the current year, offset by the resignation of our in house legal counsel during the prior year.
 
The salary expense included in cost of sales for the year ended December 31, 2013 decreased by $320,641 or 57.6% The lower salary expense charged to cost of sales in the current year was primarily due to the lower level of activity on our government contracts in the current year, primarily due to the timing of when work is performed on these contracts. The decrease in salary expense charged to cost of sales for the year ended December 31, 2013 resulted in a corresponding increase in salary expense charged to Selling, general and administrative expenses and research and development salaries for the year ended December 31, 2013.

The salary expense charged to Selling, general and administrative expenses for the year ended December 31, 2013 increased by $529,222 or 250.4% due to the decreased salary expense charged to cost of sales and the increase in total salary expense as discussed above.

Research and development salaries for the year ended December 31, 2013 increased due to employees allocating their time to research work done on the development of commercial assays for two significant pharmaceutical companies.
 
The stock option compensation charge increased by $614,699 over the prior year due to the issue of 1,184,900 options during the current year, primarily to members of management and certain key consultants. These options were valued at $1,296,119 at the time of issue and are being amortized over their vesting periods which range from one to four years.
 
Legal fees increased by $890,628 over the prior year due to an increase in the legal activity on the LANS matter as we prepared for settlement negotiations during the current year. The legal fees on the Bellows matter decreased as the matter has for the most part been settled, other than a minor dispute on the settlement agreement wording enforced by the judge. The LANS matter is in the process of being settled, the details of which are confidential. 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. Based on our recent settlement of the LANS matter, we do not anticipate legal expenses of this magnitude in future.
 
21

 
 
The increase in consulting fees of $92,028 is primarily due to consulting fees paid to Gary Altman, our CEO during the months of May and June of $46,402, prior to his appointment as CEO, Public relations fees of approximately $40,500 paid during the current year, partially offset by the reduction in management consulting fees of $36,000 during the current year, and consulting fees of $13,165 incurred on the LANS legal matter discussed above.
 
The increase in audit fees of $45,460 is primarily due to an accrual of $27,500 made for the 2013 audit and the review fees of our quarterly SEC filings of $4,200 per quarter.
 
The increase in our rental expense is primarily due to the establishment of a second laboratory and the relocation of our main operating office to Cambridge, Massachusetts during June 2013. In addition to this we leased a corporate apartment in Cambridge, Massachusetts for our executive officers.
 
The legal settlement expense represents the net charge for the settlement arrangements entered into with Joe Bellows in our Illinois legal actions. This expense is not expected to recur in the future.
 
Depreciation and Amortization
 
We recognized depreciation expenses of $118,227 and $94,280 for the years ended December 31, 2013 and 2012, respectively, this depreciation is primarily depreciation on our laboratory equipment, which makes up the vast majority of our capital equipment. 
 
Amortization expenses were $51,684 for each of the years ended December 31, 2013 and 2012.  Amortization expenses relates to the amortization of license fees paid to Los Alamos National Laboratories for the use of certain patents.
 
Other income
 
Other income for the year ended December 31, 2013 of $30,120 consists primarily of net proceeds of $30,000 received on a settlement agreement entered into on the Joel Bellows matter in the New Mexico legal jurisdiction. The other income of $140,880 in the prior year consisted primarily of insurance proceeds of $10,000 received to fund our legal expenses incurred on the LANS matter and a further $130,880 from an agreement entered into with one of our suppliers of legal services whereby they agreed to reduce the amount of liability owing to them by 50% of the original invoiced amount.
 
Interest expense
 
Interest expense totaled $165,635 and $23,949 for the years ended December 31, 2013 and 2012, respectively. The increase of $141,686 is primarily made up of bridge note discount of $117,629, bridge note interest of $11,193 and interest on the legal settlement due to Joel Bellows of $8,000.
 
Net loss
 
Net loss totaled $(3,694,786) and $(792,061), representing a net loss per share (applicable to common stock) of $(1.39) and $(0.22) per share for the years ended December 31, 2013 and 2012, respectively. The increase in loss is primarily due to the decrease in revenues and gross margins and the increased level of expenditure 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 December 31, 2013 our Company had cash totaling $519,733, other current assets totaling $140,072, and total assets of $1,681,400. We had total current liabilities of $3,737,185, including a non-cash derivative financial liability of $944,121, and a net working capital deficit of $3,077,380. Total liabilities were $3,915,038 and the Series A convertible redeemable preferred stock totaled $133,350 resulting in a stockholders’ deficit of $(2,366,988).
  
During April 2013 we received $600,000 from certain note holders to provide temporary funding to the business; $100,000 in the form of temporary notes payable and $500,000 in Bridge notes payable. The temporary notes together with interest thereon were repaid in 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 $100,000 of these proceeds were used to repay the $100,000 temporary 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 and August 2013, $125,000 of the bridge Notes, together with interest thereon, was repaid to the bridge note holders.
 
During the period April to July 2013, we issued 1,118,000 Series B preferred units to investors for gross proceeds of $2,795,000 at $2.50 per unit, to fund future operations.  In addition to this, we paid the placement agent, Taglich Brothers, a fee of $285,300 out of the gross proceeds realized, representing 9% of the gross proceeds raised, including the proceeds of any Bridge notes which converted into Series B Preferred units.
 
Subsequent to year end, on March 6, 2014, we settled the litigation with LANS resulting in a net cash inflow to the Company of $5,852,000, this amount may be reduced substantially based on discussions with our previous attorneys on this matter.
 
Should we not achieve our forecasted operating results or should strategic opportunities present themselves such that additional financial resources would present attractive investing opportunities for our Company, we may decide in the future to issue debt or sell our Company’s equity securities in order to raise additional cash. We cannot provide any assurances as to whether we will be able to secure any additional financing, or the terms of any such financing transaction if one were to occur.
 
 
22

 
 
The terms of the commercial loan facility and the revolving funding facility from Los Alamos National Bank were renegotiated and on September 16, 2013 the Company concluded a new term loan agreement with LANB to replace the revolving draw loan and the commercial loan. The Company paid a combined $26,886 against the revolving draw line and the commercial loan and LANB advanced a new term loan to the Company of $267,392, the proceeds of which were used to settle the remaining balance, inclusive of interest, of the revolving draw line and the commercial loan. This loan bears interest at the Wall Street Journal Prime rate plus 2.0% with a floor of 7.00% per annum. This loan expires on September 16, 2016. The loan is repayable in 36 monthly installments of $8,256, inclusive of interest, which installment may vary depending on the variable interest rate mentioned above. The loan is secured by accounts receivable and other rights to payments, instruments, documents and other chattel paper, general intangibles and fixed assets. The loan is personally guaranteed by Benjamin Warner, our Chief Scientific Officer and majority common shareholder. The loan agreement provides that we cannot incur, permit or assume (i) any debt except: existing debt as of the date the loan agreements were executed, debts subordinate to the loan or accounts payable incurred in the ordinary course of business or (ii) any liens other than inconsequential liens incurred in the ordinary course of business. These restrictions may limit our ability to raise debt financing in the future. The lender can demand payment in full upon an event of default which includes an insolvency or bankruptcy, business termination through merger dissolution or reorganization, a default under any of the loan documents with the bank or any other agreement with the bank. As of December 31, 2013 we owed $247,912 in accordance with the term loan agreement.
 
Subsequent to year end on April 11, 2014, the term loan, together with interest thereon was repaid for a consideration totaling $227,717. There are no further obligations under this term loan and the guarantees provided by Dr. Benjamin Warner and his wife has been released.
 
As of December 31, 2013, we owed $209,923 in accordance with the terms of a Project Participation Agreement with the Incorporated County of Los Alamos that we entered into in September 2006. The loan bears interest at a rate of 5% per annum, is for a thirteen year term, with monthly repayments of $3,547 that commenced on September 21, 2009.
 
An analysis of our cash flows from operating, investing and financing activities for the years ended December 31, 2013 and 2012 is provided below:
 
   
Year ended
December 31,
 2013
 
Year ended
December 31,
 2012
 
             
Net cash used by operating activities
 
$
(2,195,268
)
 
$
(615,035
)
                 
Net cash used in investing activities
   
(206,483
)
   
(243,484
)
                 
Net cash provided by financing activities
   
2,542,841
     
558,862
 
                 
Net increase/(decrease) in cash and cash equivalents
 
$
141,090
   
$
(299,657
)
 
 
23

 
 
Net cash used in operating activities was $2,195,268 and $615,035 for the year ended December 31, 2013 and 2012, respectively. The decrease in cash used in operating activities was primarily due to the following:
 
   
Year ended
December 31,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
                         
Net loss
 
$
(3,694,786
)
 
$
(792,061
)
 
$
(2,902,725
)
   
(366.5
)%
                                 
Adjustments for non-cash items
   
172,664
     
193,787
     
(21,123
)
   
(10.9
)%
                                 
Changes in operating assets and liabilities
   
1,326,854
     
(16,761
)
   
1,343,615
     
*
%
                                 
Net cash used in operating activities
 
$
(2,195,268
)
 
$
(615,035
)
 
$
(1,580,233
)
   
(256.9
)%
 
* Greater than 1,000%
  
The increase in net loss is discussed under net loss in the results of operations for the year ended December 31, 2013 and the year ended December 31, 2012.
 
The adjustments for non-cash items was primarily due to a non-cash stock based compensation charges of $660,468 due to 1,184,900 options issued primarily to management and certain key consultants during the current year, the non-cash movement in the derivative financial liability of $(919,948) which arose on the issue of Bridge notes and warrants issued to series B shareholders during the current year, the amortization of bridge loan discount of $117,025 which arose on bridge loans granted to the Company during the current year and the non-cash increase in the legal settlement accrual of $115,273 incurred on the Bellows settlement, and an increase in the depreciation expense of $23,947 over the prior year.
 
The changes in operating assets and liabilities included: (i) an increase in accounts receivable of $(65,254) which is primarily due to the timing of receipts before or after month end from our primarily government customers; (ii) an increase in our accounts payable balances of $1,336,125 which is primarily due to the increase in our legal bills incurred on the LANS legal matter; and (iii) an increase in other payables of 72,982, primarily due to an increase in the vacation pay accrual, payroll liabilities at year end and an increase in other payables including an audit fee provision of $27,500.
 
Net cash used in investing activities was $206,483 for the year ended December 31, 2013 compared to $243,484 for the prior year and consists primarily of laboratory equipment purchased for our new Cambridge laboratory.  
 
 
24

 
 
Net cash provided by financing activities was $2,542,841 and $558,862 for the years ended December 31, 2013 and 2012, respectively and is made up as follows:
 
   
Year ended
December 31,
   
Increase/
   
Percentage
 
   
2013
   
2012
   
(decrease)
   
change
 
                         
Movement in borrowings from banks and third parties
 
$
(91,859
 
$
278,114
   
$
(369,973
)
   
(133.0
)%
                                 
Movements in bridge note borrowings
   
125,000
     
250,000
     
(125,000
)
   
50.0
%
                                 
Net proceeds from stock issues and repurchases
   
2,509,700
     
57,500
     
2,452,200
     
4,264.7
%
                                 
Dividends paid
   
-
     
(26,752
)
   
26,752
     
100
%
                                 
Net cash provided by financing activities
 
$
2,542,841
   
$
558,862
   
$
1,983,979
     
355.0
%
 
The movement in borrowings from banks and third parties in the current year included a restructure of our borrowings from Los Alamos National Bank. The Commercial loan and the revolving draw line advanced by Los Alamos National bank were settled during the current year for $307,832 and a new term loan of $267,392 was advanced to the Company, repayments of $20,191 were made against the term loan during the current year. In the prior year a cash advance of $168,000 on the revolving letter of credit and an advance on the commercial loan of $148,500 were made by Los Alamos National Bank.

A further net, $125,000 was advanced under Bridge notes during the current year; the bridge note proceeds, net of bridge note repurchases, received during 2012 and 2013 were converted into Series B shares during the current year and were not repaid.
  
The proceeds from Series B Preferred stock issuances in the current year was from the issuance of 1,118,000 Series B units to new investors at an issue price of $2.50 per unit, net of transaction costs of $285,300. The prior year stock issuances was made up of 10,088 series A units at $5.70 per share.

The dividend paid in the prior year represents the payment of dividends due to those preferred stockholders who elected to receive cash dividends at $0.46 per share instead of shares of common stock at $5.70 per share.
 
Capital Expenditures
 
Our current plans, dependent on the successful outcome of a fund raising or proceeds from litigation settlements is to improve the efficiency of our laboratory operations by employing additional scientific personnel and equipment to further automate the processes required in our Assay workflows to meet our customer requirements.
 
 
25

 
 
Critical Accounting Policies
 
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 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 property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and the assumptions used in determining percentage of completion on our long-term contracts.
 
Revenue recognition

Revenue sources consist of government contracts and commercial development contracts.

We account for our long-term Firm Fixed Price Government contracts associated with the delivery of feasible 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.

Research and Development
 
The remuneration of our 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  we make a payment to a third party to acquire the right to use a product formula which has received regulatory approval, that 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 remaining license period or patent life.

 
26

 
 
 
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 years ended December 31, 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.
 
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).
 
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.
 
Intangible assets
 
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.
 

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 straight-line 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
 
 
27

 
 
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.
 
Derivative Liabilities
 
The Company assessed the classification of its derivative financial instruments as of December 31, 2013, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
 
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
 
Convertible Instruments
 
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.
 
Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.  Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt Instrument”.
 
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
 
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
 
 
28

 
 
Recent accounting pronouncements
 
For discussion of recently issued and adopted accounting pronouncements, please see Note 2 to the Caldera Pharmaceuticals financial statements included herein.
 
Off Balance Sheet Arrangements

None.

Contractual Obligations

None.

Inflation

The effect of inflation on the Company's operating results was not significant.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable because we are a smaller reporting company.
 
 
29

 
 
Financial Statements and Supplemental Data
 
 
 
F-1

 
 
 
To the Board of Directors and shareholders
 
Caldera Pharmaceuticals, Inc.
 
We have audited the accompanying consolidated balance sheet of Caldera Pharmaceutical, Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Caldera Pharmaceuticals, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ RBSM LLP
 
May 30, 2014
 
New York, New York
 
 
F-2

 
 

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
2013
   
December 31,
2012
 
ASSETS
           
             
Current assets:
           
Cash
 
$
519,733
   
$
378,643
 
Accounts receivable, net
   
106,019
     
59,849
 
Prepaid expenses
   
34,053
     
17,055
 
                 
Total current assets
   
659,805
     
455,547
 
                 
Non-current assets:
               
Intangible assets, net
   
542,890
     
594,574
 
Plant and equipment, net
   
453,701
     
391,530
 
Investment in certificate of deposit
   
25,004
     
-
 
                 
Total non-current assets
   
1,021,595
     
986,104
 
                 
TOTAL ASSETS
 
$
1,681,400
   
$
1,441,651
 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current liabilities:
               
Accounts payable
 
$
1,710,173
   
$
374,048
 
Other payables and accrued expenses
   
413,892
     
197,307
 
Loans payable
   
280,782
     
218,324
 
Bridge notes payable, net of debt discount
   
-
     
233,955
 
Derivative financial liability
   
944,121
     
17,539
 
Dividends payable
   
389,017
     
156,873
 
                 
Total current liabilities
   
3,737,985
     
1,198,046
 
                 
Non-current liabilities:
               
Loans payable
   
177,053
     
332,055
 
Other payables and accrued expenses
   
-
     
160,000
 
Total non-current liabilities
   
177,053
     
492,055
 
                 
TOTAL LIABILITIES
   
3,915,038
     
1,690,101
 
                 
Convertible Redeemable Preferred Stock
               
Series A Cumulative Convertible Redeemable Preferred Stock, $0.001 par value, 400,000 shares designated, 105,000 and 341,607 shares issued and outstanding as of December 31, 2013 and 2012, respectively, liquidation preference is $5.70 per share.
   
133,350
     
  2,065,392
 
                 
Commitments and contingencies
               
                 
STOCKHOLDERS DEFICIT:
               
Preferred stock, $0.001 par value, 10,000,000 authorized shares, 6,600,000 shares undesignated and unissued.
   
-
     
-
 
Series B Cumulative Convertible Preferred Stock, $0.001 par value, 3,000,000 designated shares, and 2,133,947 shares issued and outstanding as of December 31, 2013, liquidation preference is $2.50 per share.
   
2,134
     
-
 
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 December 31, 2013 and 2012, respectively.
   
4,852
     
  4,957
 
Additional paid in capital
   
10,475,253
     
4,649,109
 
Treasury stock, at cost (654,000 shares of common stock as of December 31, 2013 and 2012)
   
(473
)
   
(473
)
Accumulated deficit
   
(12,848,754
)
   
(6,967,435
)
                 
Total stockholder’s deficit
   
(2,366,988
)
   
(2,313,842
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
 
$
1,681,400
   
$
1,441,651
 
 
See notes to the consolidated financial statements

 
F-3

 
 

CONSOLIDATED STATEMENTS OF OPERATIONS

   
Year ended
December 31,
2013
   
Year ended
December 31,
2012
 
             
Sales
 
$
708,273
   
$
1,904,044
 
                 
Cost of sales
   
507,766
     
656,641
 
                 
Gross profit
   
200,507
     
1,247,403
 
                 
Operating expenses:
               
Selling, general and administrative expenses
   
4,511,078
     
2,011,212
 
Depreciation
   
118,227
     
94,280
 
Amortization
   
51,684
     
51,684
 
Total operating expenses
   
4,680,989
     
2,157,176
 
                 
Operating loss
   
(4,480,482
)
   
(909,773
)
                 
Other income/(expense)
               
Other income
   
30,120
     
140,880
 
Interest income
   
1,263
     
781
 
Interest expense
   
(165,635
)
   
(23,949
)
Change in fair value of derivative financial liabilities
   
919,948
     
-
 
                 
Total other income
   
785,696
     
117,712
 
                 
Net loss
   
(3,694,786
)
   
(792,061
)
                 
Deemed preferred stock dividends
   
(1,745,837
)
   
(2,857
)
Preferred stock dividends
   
(440,696
)
   
(156,873
)
                 
Net loss applicable to common stock
 
$
(5,881,319
)
 
$
(951,791
)
                 
Net loss per common stock: -
               
Basic and diluted
 
$
(1.39
)
 
$
(0.22
)
                 
Weighted average number of common stock outstanding: -
               
Basic and diluted
   
4,237,544
     
4,298,642
 

See notes to the consolidated financial statements
 
 
F-4

 
 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S (DEFICIT)
 
   
Common Stock
    Series B Preferred Stock     Treasury     Additional           Total  
   
Number of
shares
   
 
Amount
   
Number of
shares
   
Amount
   
stock
Amount
   
Paid-in
capital
   
Accumulated
deficit
   
Stockholder’s
(deficit)
 
Balance at December 31, 2011
    4,291,620     $ 4,946           -     $ -     $ (473 )   $ 4,542,646     $ (6,015,644 )   $ (1,468,525 )
                                                                 
Common stock issued in lieu of cash for preferred stock dividend
    10,650       11               -       -       -       60,694       -       60,705  
                                                                 
Fair value of stock options issued to employees
    -       -             -       -       -       45,769       -       45,769  
                                                                 
Net loss
    -       -       -       -       -       -       (792,061 )     (792,061 )
                                                                 
Deemed preferred stock dividend
    -       -         -       -       -       -       (2,857 )     (2,857 )
                                                                 
Preferred stock dividend
    -       -       -       -       -       -       (156,873 )     (156,873 )
                                                                 
Balance at December 31, 2012
    4,302,270       4,957         -       -       (473 )     4,649,109       (6,967,435 )     (2,313,842 )
                                                                 
Series B Preferred stock issued for cash
    -       -         1,118,000       1,118       -       2,793,882       -       2,795,000  
                                                                 
Conversion of Bridge notes and accrued interest into Series B Preferred stock
    -       -           153,664       154       -       384,006       -       384,160  
                                                                 
Series B Preferred stock issued to Series A stockholders in lieu of dividends
        -           -           83,423           83           -           208,475           -           208,558  
                                                                 
Conversion of Series A Preferred stock to Series B Preferred stock
    -       -             778,860       779       -       2,064,613       -       2,065,392  
                                                                 
Share issue expenses related to Series B Preferred stock issuance
    -       -           -       -       -       (285,300 )     -       (285,300 )
                                                                 
Common stock exchanged for Series A preferred shares
    (105,000 )     (105 )         -       -       -       -       -       (105 )
                                                                 
Fair value of stock options issued to employees
    -       -           -       -       -       660,468       -       660,468  
                                                                 
Net loss
    -       -       -       -       -       -       (3,694,786 )     (3,694,786 )
                                                                 
Deemed preferred stock dividend
    -       -         -       -       -       -       (1,745,837 )     (1,745,837 )
                                                                 
Preferred stock dividend
    -       -       -       -       -       -       (440,696 )     (440,696 )
                                                                 
Balance at December 31, 2013
    4,197,270     $ 4,852         2,133,947     $ 2,134     $ (473 )   $ 10,475,253     $ (12,848,754 )   $ (2,366,988 )
 
See notes to the consolidated financial statements
 
 
F-5

 
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year ended
December 31,
2013
   
Year ended
December 31,
2012
 
             
Cash flow from operating activities
           
Net loss
 
$
(3,694,786
)
 
$
(792,061
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
   
118,227
     
94,280
 
Amortization
   
51,684
     
51,684
 
Amortization of bridge loan discount
   
117,629
     
604
 
Stock based compensation
   
660,468
     
45,769
 
Loss on plant and equipment scrapped
   
1,082
     
1,450
 
Series B Preferred stock issued for interest expense on Bridge loan
   
9,165
     
-
 
Gain on change in fair value of derivative financial liability
   
(919,948
)
   
-
 
Increase in legal settlement accrual
   
115,273
     
-
 
Increase in bad debt provision
   
19,084
     
-
 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
   
(65,254
)
   
(29,344
Increase in prepaid expenses
   
(16,999
)
   
(1,439
)
Increase/(decrease) in accounts payable
   
1,336,125
     
(198,667
Increase in other payables and accrued expenses
   
72,982
     
212,689
 
Net cash used in operating activities
   
(2,195,268
)
   
(615,035
)
                 
Cash flow from investing activities
               
Purchase of plant and equipment
   
(181,479
)
   
(243,484
)
Investment in certificates of deposit
   
(25,004
)
   
-
 
Net cash used in investing activities
   
(206,483
)
   
(243,484
)
                 
Cash flow from financing activities
               
Advance on term loan
   
267,392
     
-
 
Proceeds of bridge loan
   
250,000
     
250,000
 
Advance on line of credit
   
-
     
218,000
 
Advance of commercial equipment loan
   
-
     
148,500
 
Repayment of term loan
   
(20,191
)
   
-
 
Repayment of bridge loan
   
(125,000
)
   
-
 
Repayment of line of credit
   
(168,000
)
   
(50,000
)
Repayment of commercial equipment loan
   
(139,832
)
   
(8,668
)
Repayment of Los Alamos County loan
   
(31,228
)
   
(29,718
)
Proceeds of Series A Preferred stock issued
   
-
     
57,500
 
Proceeds of Series B Preferred stock issued
   
2,795,000
     
-
 
Share issue expenses
   
(285,300
)
   
-
 
Series A Preferred stock dividend paid
   
-
     
(26,752
)
Net cash provided by financing activities
   
2,542,841
     
558,862
 
                 
Net increase/(decrease) in cash
   
141,090
     
(299,657
 )
                 
Cash at the beginning of the period
   
378,643
     
678,300
 
                 
Cash at the end of the period
 
$
519,733
   
$
378,643
 
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest
 
$
54,430
   
$
20,463
 
Income taxes
 
$
-
   
$
-
 
                 
Non cash investing and financing activities:
               
Deemed preferred stock dividend relating to warrants issued to preferred stockholders
 
$
1,745,837
   
$
2,857
 
Discount applied to Bridge notes relating to warrants issued
 
$
100,693
   
$
17,539
 
Series A dividends paid in common stock
 
$
-
   
$
60,705
 
Series A dividends paid in preferred stock
 
$
208,558
   
$
-
 
Accrued Preferred stock dividends
 
$
440,696
   
$
156,873
 
Conversion of Bridge notes and accrued interest into Series B Preferred stock
 
$
384,160
   
$
-
 
Conversion of Series A Preferred stock into Series B Preferred stock
 
$
2,065,392
   
$
-
 
Common stock exchanged for Series A Preferred stock
 
$
133,350
   
$
-
 
 
See notes to the consolidated financial statements
 
 
F-6

 
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. 
GENERAL INFORMATION

Caldera Pharmaceuticals, Inc. (“the Company”, “we”, “us”, “our”) 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 uses proprietary x-ray fluorescence technology called XRpro® to deliver ion channel screening, ion channel kinetics and custom screening services to our customers. Our proprietary technology detects and quantitatively analyzes the x-ray signature of each element with an atomic number greater than 10, we combine the flexibility of the analysis with patented sample processing to address a wide range of ion channel and other biological targets.
 
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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
 
All amounts referred to in the notes to the consolidated 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 consolidated 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 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-7

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE 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 consolidated 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.

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

Intangible assets
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.
 
 
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
 
 
F-8

 
 
CALDERA PHARMACEUTICALS, INC.

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

The Company maintains cash with major financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) provides insurance coverage for deposits of corporations, the current limit of coverage is $250,000. As a result of this coverage the Company has cash balances of $101,648 that are not covered by the FDIC as of December 31, 2013.
 
Concentration of major customers
The Company currently derives substantially all of its revenues from Government research contracts.

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:

   
Year ended
December 31,
2013
   
Year ended
December 31,
2012
 
             
National Institutes of Health
 
$
611,155
   
$
1,804,523
 
Department of Defense
   
67,118
     
83,440
 
Commercial customers
   
30,000
     
16,081
 
                 
      Total revenues  
$
708,273
   
$
1,904,044
 
 
 
F-9

 
 
CALDERA PHARMACEUTICALS, INC.

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

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 December 31, 2013 and 2012 was $19,084 and $0, respectively. The amount charged to bad debt provision for the year ended December 31, 2013 and 2012 was $19,084 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 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 years ended December 31, 2013 and 2012 was $194,222 and $32,403, respectively.
 
 
F-10

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE 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 years ended December 31, 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).
 
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-11

 
 
CALDERA PHARMACEUTICALS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS