10-Q 1 arrayit10qmay2013.htm

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

_________________

 þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 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 ______

_________________

ARRAYIT CORPORATION

(Exact name of registrant as specified in its charter) 

_________________

Nevada 000-16381 76-0600966
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation or Organization) File Number) Identification No.)

524 East Weddell Drive, Sunnyvale, CA 94089
(Address of Principal Executive Offices) (Zip Code)

(408) 744-1331
(Registrant’s telephone number, including area code)

N/A
(Former name or former address and former fiscal year, if changed since last report)

_________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  o     No  þ

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  o     No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  þ    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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  þ     No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q.     Yes  o     No  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  o Accelerated filer  o Non-accelerated filer  o Smaller reporting company  þ

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of May 8, 2013, there were 28,289,101 shares of common stock outstanding.

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Form 10-Q

For the Quarterly Period Ended March 31, 2013

 

 

 

TABLE OF CONTENTS

  

                 
        Page
                 
PART I. FINANCIAL INFORMATION
  Item 1.     Consolidated Financial Statements        
        Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012(audited)     4  
        Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)     5  
        Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (unaudited)     6  
        Notes to Consolidated Financial Statements     7  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     16  
  Item 3.     Quantitative and Qualitative Disclosure About Market Risk     18  
  Item 4.     Controls and Procedures     18  
 
PART II. OTHER INFORMATION
  Item 1.     Legal Proceedings     19  
  Item 1A.     Risk Factors     19  
  Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds     19  
  Item 3.     Defaults Upon Senior Securities     19  
  Item 4.     Removed and Reserved     19  
  Item 5.     Other Information     19  
  Item 6.     Exhibits     19  
         Signatures     20  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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This report contains trademarks and trade names that are the property of Arrayit Corporation and its subsidiaries, and of other companies, as indicated.

  

FORWARD-LOOKING STATEMENTS

 

Portions of this Form 10-Q, including disclosure under “Management’s Discussion and Analysis of Financial Position and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements are subject to risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. You should not unduly rely on these statements. Forward-looking statements involve assumptions and describe our plans, strategies, and expectations. You can generally identify a forward-looking statement by words such as may, will, should, expect, anticipate, estimate, believe, intend, contemplate or project. Factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, among others,

 

· our ability to raise capital,
· our ability to obtain and retain customers,

 

· our ability to provide our products and services at competitive rates,
· our ability to execute our business strategy in a very competitive environment,

 

· our degree of financial leverage,
· risks associated with our acquiring and integrating companies into our own,

 

· risks related to market acceptance and demand for our services,
· the impact of competitive services, and

 

· other risks referenced from time to time in our SEC filings.

 

With respect to any forward-looking statement that includes a statement of its underlying assumptions or bases, we caution that, while we believe such assumptions or bases to be reasonable and have formed them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material depending on the circumstances. When, in any forward-looking statement, we or our management express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis, but there can be no assurance that the stated expectation or belief will result or be achieved or accomplished. All subsequent written and oral forward-looking statements attributable to us, or anyone acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We do not undertake any obligations to publicly release any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect unanticipated events that may occur.  

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PART I – FINANCIAL INFORMATION

ITEM 1.

ARRAYIT CORPORATION

CONSOLIDATED BALANCE SHEETS

   03/31/2013 (unaudited)  12/31/2012
ASSETS      
Current Assets:      
      Cash  $518   $518 
      Accounts receivable   238,293 [1]    227,743 [2] 
      Inventory   183,945    316,807 
      Prepaid expenses   11,321    2,250 
      Total current assets {sum}   434,077    547,318 
           
      Deposits   18,365    18,365 
      Total assets {sum}  $452,442   $565,683 
           
  Liabilities and Stockholders' Deficit          
    Current liabilities:          
      Accounts payable and accrued liabilities  $6,311,189   $6,567,136 
      Bank overdraft   37,528    129,495 
      Due to related parties   556,033    577,033 
      Customer deposits   47,164    4,895 
      Notes payables, current portion including related parties   907,195    929,269 
      Total current liabilities {sum}   7,859,109    8,207,828 
      Notes payable, long term   0    0 
      Total liabilities {sum}   7,859,109    8,207,828 
           
    Commitments and contingencies   0    0 
           
  Stockholders' Deficit          
    Preferred stock,  $0.001 par value; 20,000,000 shares authorized;          
    Preferred stock, Series A, 22,034 shares outstanding   22    22 
    Preferred stock, Series C,$0.001 par value; 88,574 and 88,888 shares outstanding   92    92 
    Common stock, $0.001 par value; 480,000,000 shares authorized, 28,289,101 and 28,179,096 issued and outstanding   28,098    27,988 
    Additional paid-in capital   16,645,232    16,645,342 
    Accumulated deficit   (24,080,111)   (24,315,589)
    Total stockholders’ deficit) {sum}   (7,406,667)   (7,642,145)
      Total liabilities and stockholders' deficit  {sum}  $452,442   $565,683 
[1] Accounts receivable, net of allowance for doubtful accounts of $133,000          
[2] Accounts receivable, net of allowance for doubtful accounts of $133,000          

The accompanying notes are an integral part of these consolidated financial statements

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ARRAYIT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Statement of Operations   For the  Three Months Ended March 31, 2013    For the  Three Months Ended March 31, 2012 
  Total Revenues  $942,916   $568,275 
  Cost of Sales   455,512    352,323 
    Gross Margin {sum}   487,404    215,952 
           
  Selling, General and Administrative   250,520    1,344,651 
  Research and Development   0    450 
  Legal Expense   30,215    27,427 
    Income (loss) from operations {sum}   206,669    (1,156,576)
           
  Interest expense   (118,574)   (42,403)
  Gain on extinguishment of liabilities   142,071    0 
  Bad debt recovery   5,312    0 
           
  Net income (loss)   235,478   (1,198,979)
           
  Less: Net loss attributable to the non-controlling interest   0    (360,852)
           
  Net Income (Loss) attributable to common stockholders {sum}   235,478    (838,127)
           
  Income (Loss) per share - basic  $.01   ($0.03)
  Income (Loss) per share – diluted  $.00   ($0.03)
           
  Basic weighted average number of common shares   28,286,629    26,717,726 
  Diluted weight average number of common shares   59,294,580    26,717,726 

The accompanying notes are an integral part of these consolidated financial statements

 

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ARRAYIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

           For the Three Months  Ended
March 31
          2013   2012
Cash flows from operating activities:        
  Net income (loss)      $ 235,478    $ (1,198,980)
  Adjustments to reconcile net income (loss)      
       to net cash provided by operating activities:      
    Depreciation   0   3,500
    Stock paid for services 0   36,150      
    Gain on extinguishment of liabilities (142,071)   0
    Bad debt recovery (5,312)   0
    Increase in non-controlling interest 0   1,000,000
  Changes in operating assets and liabilities      
    Accounts receivable   (5,238)   217,291
    Inventory     132,862   4,608
    Prepaids      (9,071)   0
    Accounts payable and accrued liabilities (113,876)   93,662
    Bank overdraft   (91,967)   (85,409)
    Due to related parties   (21,000)   (10,000)
    Accrued interest   20,348   0
    Customer deposits   42,269   0
               
Net cash provided by operating activities 42,422   60,822
         
Cash flows from financing activities:        
  Repayment of notes payable   (42,422)   (41,639)
  Net cash used in financing activities   (42,422)   (41,639)
           
Net increase in cash     0   19,183
               
Cash, beginning of period     518   1,519
               
Cash, end of period       518   20,702
               
Supplemental cash flow information:        
               
  Cash paid for interest   32,149   31,369
               
  Cash paid for income taxes   0   0   
               
Noncash Transaction:          
               
  Conversion of accrued interest to notes payable 20,348   11,034
               
  Conversion of preferred stock   110   110
The accompanying notes are an integral part of these consolidated financial statements

 

 

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ARRAYIT CORPORATION

NOTES TO CONSOLIDATED UNAUDITED STATEMENTS

March 31, 2013

 

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

 Arrayit Corporation (the “Company” or “Arrayit”) is a Nevada “C” Corporation that entered into the life sciences industry in 1996.  Arrayit is a leading edge developer, manufacturer and marketer of next-generation life science tools and integrated systems for the large scale analysis of genetic variation, biological function and diagnostics. Using Arrayit’s proprietary and patented technologies, the Company provides a comprehensive line of products and services that currently serve the sequencing, genotyping, gene expression and protein analysis markets, and the Company expects to enter the market for manufacturing molecular diagnostics.

Arrayit has earned respect as a leader in the health care and life sciences industries with its proven expertise in three key areas: the development and support of microarray tools and components, custom printing and analysis of microarrays for research, and the identification and development of diagnostic microarrays and tools for early detection of treatable disease states. As a result, Arrayit has provided tools and services to thousands of the leading genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, government agencies and biotechnology companies worldwide.

Arrayit has a December 31 year end.

Arrayit’s principal office is in Sunnyvale, California. Arrayit presently has nine employees.

 

Interim financial statements

 The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Arrayit’s Annual Report filed with the SEC on Form 10-K/A. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for fiscal year 2012 as reported in Form 10-K/A, have been omitted.

 

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN

 

Basis of Presentation

 

The following includes a description of subsidiaries and percentage ownership at March 31, 2013:

 

       
Subsidiary Date of Incorporation Business of Entity Ownership
TeleChem International, Inc. November 1, 1993 Import, export, manufacturing and distribution of wholesale industrial chemicals 100% owned by Arrayit Corporation
Arrayit Scientific Solutions, Inc. October 15, 2009 Markets a test for Parkinson’s Disease incorporating the technology and equipment developed by Arrayit Corporation 98% owned by Arrayit Corporation and 2% owned by the former President of Arrayit Scientific Solutions, Inc.
Avant Diagnostics, Inc. June 2, 2009 Markets a test for Ovarian Cancer incorporating the technology and equipment developed by Arrayit Corporation 47% owned by Arrayit Corporation

 

The Company had previously consolidated the financial statements of Avant Diagnostics, Inc. as a majority owned subsidiary and this is reflected in the unaudited consolidated financial statements for the three months ended March 31, 2012. On December 31, 2012, Avant Diagnostics, Inc. issued additional shares of its common stock which reduced the Company’s ownership interest in Avant Diagnostics, Inc. so that the Company no longer had a controlling financial interest. In accordance with FASB ASC 810-10-40, “Deconsolidation of a Subsidiary or Derecognition of a Group of Assets”, as of December 31, 2012, the Company deconsolidated its majority ownership interest and recognized a non-cash, net gain on the transaction. Thus, the Company’s March 31, 2013 unaudited financial statements do not include the effect of the financial statements of Avant Diagnostics, Inc.

 On December 12, 2011, Arrayit Corporation signed an Agreement and Plan of Distribution with its subsidiary, Avant Diagnostics, Inc., whereby 19,350,000 shares of common stock of Avant Diagnostics (47% of the total outstanding) owned by Arrayit Corporation will be distributed ratably to the shareholders of Arrayit Corporation on the record date which will occur upon approval by the SEC of the Form S-1 registration statement to be submitted by Avant Diagnostics, Inc. Avant Diagnostics plans to submit the Form S-1 registration statement to the SEC during the second quarter of 2013.

Summary of Significant Accounting Policies

 Financial Reporting:

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. Revenues and expenses are reported on the accrual basis, which means that income is recognized as it is earned and expenses are recognized as they are incurred. Inventories are stated at the lower of cost or market, cost determined on the basis of FIFO. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

 Management acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented.

Non-Controlling Interest:

Arrayit Corporation is the controlling interest of an affiliated group, since it maintains investments in each of its operating entities. Effective December 12, 2011, Arrayit Corporation, signed an Agreement and Plan of Distribution with its subsidiary, Avant Diagnostics, Inc., whereby 19,350,000 shares of common stock of Avant Diagnostics (47% of the total outstanding) owned by Arrayit Corporation will be distributed ratably to the shareholders of Arrayit Corporation on the record date which occur upon approval by the SEC of the Form S-1 registration statement to be submitted by Avant Diagnostics, Inc. The shares of Arrayit Corporation entitled to participate in the “spin-off” shares will include shares of Arrayit Corporation issuable on the record date upon conversion of outstanding securities and exercise of outstanding warrants and options.

 The Company accounts for the non-controlling interest in its subsidiaries under ASC 810-10-45-16, Non-controlling Interest in a Subsidiary. This standard defines a non-controlling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The standard requires, among other items, that a non-controlling interest be included in the consolidated statement of financial position within equity separate from the parent's equity; consolidated net income to be reported at amounts inclusive of both the parent's and non-controlling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and non-controlling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. Additionally, the standard defines a non-controlling interest as a financial instrument issued by a subsidiary that is classified as equity in the subsidiary's financial statements. A financial instrument issued by a subsidiary that is classified as a liability in the subsidiary's financial statements based on the guidance in other standards is not a controlling interest because it is not an ownership interest.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

Income/Loss per Common and Common Equivalent Share

The computation of basic income/loss per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from their exercise using the treasury stock method and the average market price per share during the year.  The Company determined that the effect of common stock equivalents (Stock Options, Stock Warrants and convertible Series “C” Preferred Shares) outstanding at March 31, 2013 should be included in diluted earnings per common share. The effect of common stock equivalents outstanding at March 31, 2012 were anti-dilutive.

 

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NOTE 3 – GOING CONCERN

 The accompanying consolidated financial statements of the Company were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has large working capital and accumulated deficits. At March 31, 2013, Arrayit had a working capital deficit of $7,425,032 and an accumulated deficit of $24,080,111.  Management believes that current available resources will not be sufficient to fund the Company’s planned expenditures over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, among other things, raising additional capital or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to raise such additional funding from various possible sources, including its parent company, the public equity market, private financings, sales of assets, collaborative arrangements and debt. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies or products that it might otherwise seek to retain. There can be no assurance that the Company will be able to raise additional funds, or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to delay or reduce the scope of its operations, and the Company may not be able to pay off its obligations, if and when they come due.

 These factors create substantial doubt about Arrayit’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities or other adjustments that may be necessary should the Company not be able to continue as a going concern.

 The ability of Arrayit to continue as a going concern is dependent on Arrayit generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance Arrayit will be successful in these efforts.

 

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NOTE 4 – ACCOUNTS RECEIVABLE

 

Accounts receivable are shown net of an Allowance for Doubtful Accounts. As more fully explained in Note 5 below, accounts receivable has been reduced by Accounts Receivable loans sold with recourse.

 

    March 31, 2013     December 31, 2012  
Gross accounts receivable   $ 649,247     $ 590,449  
Less:                
  Allowance for doubtful accounts     (133,000 )     (133,000 )
  Loan value of receivables sold with recourse (see note 5)     (277,954 )     (229,706 )
Total   $ 238,293     $ 227,743  

 

NOTE 5 – ACCOUNTS RECEIVABLE SOLD WITH RECOURSE

 

Pursuant to an agreement dated July 5, 2007, the Company has sold some of its Accounts Receivable to a financial institution with full recourse. The financial institution retains a 15% portion of the proceeds from the receivable sales as reserves, which are released to the Company as the Receivables are collected. The maximum commitment under this facility is $450,000, and is limited to receivables that are less than 31 days outstanding. The facility bears interest at 16% at March 31, 2013, and is secured by an unconditional guarantee of the Company and a first charge against the Accounts Receivable. At March 31, 2013, the balance outstanding under the recourse contracts was $277,954 net of a hold back reserve of $201,583 (December 31, 2012, $229,706 net of a hold back reserve of $86,984). Because of the Company’s credit policies, repossession losses and refunds in the event of default have not been significant and losses under the present recourse obligations are not expected to be significant, it is at least reasonably possible that the Company’s estimate will change within the near term.

 

NOTE 6 – FIXED ASSETS

 

Property and equipment consisted of the following:

 

    March 31, 2013     December  31, 2012  
Fixed Assets – Cost   $ 311,157     $ 311,157  
Less:                
  Accumulated Depreciation     (311,157 )     (311,157 )
Total   $ 0     $ 0  

 

Depreciation expense totaled $0 and $3,500, respectively, for the three months ended March 31, 2013 and 2012. 

 

 

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NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities, consisted of the following:

 

  March 31, 2013     December 31, 2012  
ACCOUNTS PAYABLE          
Trade Vendors $            1,153,529     $ 1,488,622  
Professional Advisors   3,038,976       3,059,594  
      Total Accounts Payable   4,192,505         4,548,216  
               
ACCRUED LIABILITIES              
Accrued salaries and wages   1,143,159       1,127,089  
Judgment Interest   566,098         482,404  
Other   409,427       409,427  
    Total Accrued Liabilities   2,118,684       2,018,920  
      TOTAL $ 6,311,189        $ 6,567,136  
     

 

 

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NOTE 8 – DEBT

 

  March 31, 2013   December  31, 2012
       
NOTES PAYABLE - ARRAYIT CORP.          
Notes payable, interest at 10%, which was due August 10, 2010 and is now past due, secured by 1,000,000 shares out of the Company's common stock, pledged to the private lender without compensation by the Company's Chairman.  Interest is being accrued at 25% default rate.  The terms also called for the lender to withhold proceeds of $20,000 as a debt origination fee and the issuance of 200,000 warrants issuable for shares of common stock at $1.00 per share.   $  281,875    $ 275,000
Note payable, 0% interest, due on demand together with 75,000 shares in the form of common stock warrants   15,000     15,000
Notes payable, interest at 8%, unsecured due on demand from Arrayit creditors   31,367     30,749
Notes payable, interest at rates varying from 8% to 10%, unsecured due on demand from the former TeleChem shareholders and their families.   578,953     608,520
Total notes payable, including related parties $  907,195    $ 929,269
           
Short Term Debt $ 907,195   $ 929,269
Long Term Debt   0     0

 

 
 

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NOTE 9 – WARRANTS AND OPTIONS

 

 
The following table summarizes options and warrants outstanding at March 31, 2013:  
    Number of Options and Warrants   Weighted Average Exercise Price Per Share  
Outstanding at December 31, 2012    1,915,000   $0.08  
Granted   -   -  
Cancelled/forfeited   -   -  
Expired   1,550,000   $.05  
Exercised   -   -  
Outstanding at March 31, 2013   365,000   $0.23  

  

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NOTE 10 – ROYALTY OBLIGATIONS

 

The Parkinson’s Institute – ARRAYIT SCIENTIFIC SOLUTIONS, INC.

Pursuant to an agreement dated February 9, 2009 between the Company, and The Parkinson's Institute, a California Corporation, Arrayit Scientific Solutions, Inc. is obligated to make payments, of 5% of gross earnings generated from Research derived from the biological specimens from Parkinson's disease patients and control patients provided by the Parkinson's Institute.

There were no revenues generated during the fiscal periods ended March 31, 2013 and hence no obligation to pay any royalties to the Parkinson’s Institute.

 

 NOTE 11 – STOCK-BASED COMPENSATION

The Company adopted ASC 718 and ASC 505, "Share-Based Payment", to account for its stock options and similar equity instruments issued. Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period. ASC 718 and ASC 505 requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

Operations for the periods ended March 31, 2013 and March 31, 2012 include $0 and $36,151 of stock-based compensation, arising from the granting of 0 and 106,325 unregistered common shares, respectively. Restricted shares were issued in exchange for services related to website consulting and investor relations. The Company relied upon the exemption under Section 4(2) of the Securities Act.

 

 

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NOTE 12 – CONVERTIBLE PREFERRED STOCK

Convertible Preferred Stock

The Series A Preferred Stock has no stated dividend rate and has a liquidation preference of $.001 per share. The Series A Preferred Stock also has voting rights that entitle the preferred shareholders to vote with the common shareholders as if the preferred stock had converted to common. Both the conversion ratio of the preferred into common and the number of shares outstanding is subject to revision upon reverse stock dividends or splits that reduce the total shares outstanding.

The Series C Preferred Stock has no stated dividend rate. The Series C Preferred Stock also has voting rights that entitle the preferred shareholders to vote with the common shareholders as if the preferred stock had converted to common. The conversion ratio of the preferred into common is not subject to revision upon reverse stock dividends or splits that reduce the total shares outstanding. The 103,143 Series C Preferred Stock was issued on February 21, 2008. These Series C Preferred shares are convertible into 36,100,000 common shares at the rate of 350:1. On August 15, 2008 the articles of designation for the Series C Preferred Stock were amended to limit the conversion to common shares to 10% of the holders’ original holdings in any quarter. During the three months ended March 31, 2013 and March 31, 2012, respectively, 314 Series C Preferred Stock shares were converted into 110,005 shares of common stock.

NOTE 13 – STOCKHOLDER’S EQUITY

  TOTAL ARRAYIT CORPORATION STOCKHOLDERS' EQUITY (DEFICIENCY)
              Additional    
  Preferred Series A Preferred Series C Common Stock Paid In  Retained  
Description Number Dollar Number Dollar Number Dollar Capital Earnings Total
                   
Balance, December 31, 2012 22,034 $22 88,888 $92 28,179,096 $27,988 16,645,342 (24,315,589) (7,642,145)
                   
Convert Preferred C to Common     (314) 110,005 110 (110)
                   
Net income for the three months                
   ended March 31, 2013               235,478 235478
                   
Balance, March 31, 2013 (unaudited) 22,034 $22 88,574 $92 28,289,101 $28,098 16,645,232 (24080111) (7,406,667)

 

 

 

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NOTE 14 – INCOME TAXES

 

At March 31, 2013 and December 31, 2012, the Company had net operating loss (NOL) carry-forwards available to offset future taxable income of approximately $24 million. The utilization of the NOL carry-forwards is dependent upon the tax laws in effect at the time the NOL carry-forwards can be utilized. It is likely that utilization of the NOL carry-forwards are limited based on changes in control. A valuation allowance of approximately $9.4 million and $9.5 million has been recorded against the deferred tax asset as of March 31, 2013 and December 31, 2012, respectively, due to the uncertainty surrounding its realization caused by the Company’s recurring losses. The valuation allowance changed by $0.1 million during the quarter ended March 31, 2013. The NOL carry-forwards will fully expire in 2032.

 

 

NOTE 15 - COMMITMENTS AND CONTINGENCIES

 

Long Term Lease Commitments

 

The Company leases its office facility in Sunnyvale, California under operating leases that expire November 30, 2013. Future minimum lease payments as of March 31, 2013 are as follows:

 

YEAR ENDING

2013 $82,800

Rent expense was $37,012 and $32,516 for the three months ended March 31, 2013 and 2012, respectively.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

 For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three months ended March 31, 2013, this “Management’s Discussion and Analysis” should be read in conjunction with the Consolidated Unaudited Financial Statements, including the related notes, appearing in Item 1 of this Quarterly Report, as well as the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2012. The preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results reported in the future will not differ from those estimates or that revisions of these estimates may not become necessary in the future.

 Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, includes statements that constitute “forward-looking statements.”  These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to the Company's (i) expectation that certain of its liabilities listed on the balance sheet under the headings "Accounts Payable," "Accrued Liabilities" and "Note Payable" will be retired by issuing stock versus cash during the next 24 months; (ii) expectation that it will continue to devote capital resources to fund continued development of the Arrayit technology; (iii) anticipation that it will incur significant capital expenditures to further its deployment of the Arrayit offerings; and (iv) anticipation of a significant increase in operational and SG&A costs as it accelerates the development and marketing of the Arrayit operations.

Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those to be identified in our Annual Report on Form 10-K/A for the year ended December 31, 2012 in the section titled “Risk Factors,” as well as other factors that we are currently unable to identify or quantify, but may exist in the future.

In addition, the foregoing factors may generally affect our business, results of operations and financial position.  Forward-looking statements speak only as of the date the statement was made.  We do not undertake and specifically decline any obligation to update any forward-looking statements.

 

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Results of Operations

 Comparison of Operating Results –Three Months Ended March 31, 2013 and 2012 

Gross revenues for the three months ended March 31, 2013 and 2012 were $942,916 and $568,275, respectively, representing a 66% increase in gross revenues for the period. The Company was able to fulfill some of its backlog of orders, and attributes the increase in gross revenues to fulfilling orders for high-throughput instruments, in particular NanoPrint LM60, SpotBot Titan and InnoScan 710AL. The current backlog of orders for the period ending March 31, 2013 is approximately $270,549 and the backlog of orders was approximately $95,183 for the period ending March 31, 2012.

The cost of sales for the three months ended March 31, 2013 and 2012 were $455,512 and $352,323, respectively resulting in gross profit for the period of $487,404 and $215,952, respectively. The Company’s cost of sales is dependent upon product mix. During the first quarter of 2013, the gross margin was 52% versus 38% for the first quarter of 2012. The Company sold more high-throughput instruments in the first quarter of 2013, which has a higher gross margin percentage than the entry level instruments and consumables that were sold in the quarter ended March 31, 2012.

Selling, general and administrative expenses for the three months ended March 31, 2013 and 2012 were $250,520 and $1,344,651, respectively. The decrease of $1,094,131 is largely attributable to consulting fees incurred during the three months ended March, 31, 2012.

Legal expenses of $30,215 for the three months ended March 31, 2013 were mostly attributable to litigation with Baker Hughes against our subsidiary TeleChem International, Inc. and Arrayit Corporation, and were also attributable to litigation with Recap Marketing and Consulting LLP against Arrayit Corporation, and to patent maintenance expenses. Legal expenses of $27,427 for the three months ended March 31, 2012 were mostly attributable to settling the lawsuit between Pediatrix and Arrayit’s wholly owned subsidiary, TeleChem International, Inc.

Net income from operations was $235,478 for the three months ended March 31, 2013, compared with a net loss from operations of $1,198,979 for the three months ended March 31, 2012. The increase in net income is due to the increase in revenues over the same period of the prior year, and due to deconsolidation of the financial reporting of Avant Diagnostics, Inc.

Interest expense was $118,574 for the three months ended March 31, 2013, compared to $42,403 for the three months ended March 31, 2012. The interest costs for 2013 and 2012 include the amortized cost of debt arrangement fees and warrants issued in connection with financing. The increase in interest costs was the result of additional interest accrued related to judgment settlements.. Other income for the three months ended March, 31, 2013 includes gain on extinguishment of liabilities of $142,071 and bad debt recovery of $5,312.

 

Liquidity and Capital Resources 

Cash flows provided by operations were $42,422 for the three months ended March 31, 2013, and $60,822 for the three months ended March 31, 2012. As of March 31, 2013, we had a working capital deficiency of $7,425,032 and an accumulated deficit of $24,080,111. The working capital deficiency, in addition to amounts payable in the normal course of business, is primarily attributable to accrued legal expenses, deferred compensation, and judgment interest.

We currently have no commitments, understandings or arrangements for any additional working capital. If we are unable to secure additional financing to cover our operating losses until breakeven operations can be achieved we may not be able to continue as a going concern. We are not aware of any trends, events or uncertainties that have a material impact upon our short-term or long-term liquidity.

We estimate that we may require approximately $1,800,000 over the next twelve (12) months to meet our expenses and to expand current operations to meet customer demands for our products and services.  We may require additional funds over the next eighteen (18) months to assist in realizing our business objectives and for continuing research and development.  The amount and timing of additional funds required will be dependent on a variety of factors and cannot be determined at this time.  The Company has been successful in paying its operating costs and funding its development from operations supplemented by short term borrowings from officers and third parties.   We cannot be certain that we will be able to raise any additional capital to fund our ongoing operations.

Even if we cannot raise additional capital, we believe that we will be able to continue operations for the next 12 months, based on the funding currently provided and revenues that we anticipate generating in the near future.   Our investors should assume that any additional funding may cause substantial dilution to current stockholders. In addition, we may not be able to raise additional funds on favorable terms, if at all.

 

Source of Liquidity

 During the three months ended March 31, 2013, the Company relied upon short term loans and extended terms from its creditors to finance its operations.

 Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements. 

 

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Forward-Looking Statements

 

This document contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 Not required for smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 (a) Evaluation of disclosure controls and procedures

 Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls also are designed with an objective of ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely consideration regarding required disclosures.

The evaluation of our disclosure controls by our chief executive officer, who is also our acting chief financial officer, included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our chief executive officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on this review and evaluation as of the end of the period covered by this Form 10-Q, and subject to the inherent limitations all as described above, our chief executive officer, who is also our acting chief financial officer, has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) contain material weaknesses and are not effective.

A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

The material weaknesses we have identified are the direct result of a lack of adequate staffing in our accounting department. Currently, our chief executive officer and a controller have sole responsibility for receipts and disbursements. We do not employ any other parties to prepare the periodic financial statements and public filings. Reliance on these limited resources impairs our ability to provide for a proper segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures. As we grow, and as resources permit, we project that we will hire such additional competent financial personnel to assist in the segregation of duties with respect to financial reporting, and Sarbanes-Oxley Section 404 compliance.

 

(b) Changes in internal control over financial reporting

 There were no changes in our internal control over financial reporting that occurred during the quarter.

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On February 29, 2013, Plaintiffs Baker Hughes, Inc. filed a Notice of Motion and Motion to Amend Judgment in Case No. 106 CV 075502 against the Company’s subsidiary, Defendant TeleChem International, Inc., seeking to include other subsidiaries and name changed corporate parent as judgment debtors. The Company’s counsel defended this action at the Santa Clara County Municipal Court on April 18, 2013. On April 18, 2013, the judge of the Superior Court granted the motion to include Arrayit Corporation as a judgment debtor, and denied the motion to include other subsidiaries (Arrayit Scientific Solutions, Inc. and Avant Diagnostics, Inc.) as judgment debtors. Although previous attempts at settlement have been unsuccessful, Arrayit Corporation and TeleChem International, Inc. will continue attempts to reach a settlement agreement with Baker Hughes, Inc.

On March 13, 2013, Plaintiffs Recap Marketing and Consulting LLP sued Defendants Arrayit Corporation in Fort Bend County Texas Case No. 13-DCV-204747for breach of contract with regard to warrants to purchase common stock. Recap seeks damages or specific performance, exemplary damages, costs of court and reasonable attorney’s fees. On April 16, 2013, the Company’s counsel submitted an unopposed motion to transfer venue to Harris County Texas and, subject to the motion to transfer venue, original answer denying the allegations and offered the affirmative defences of failure of condition precedent and expiration of contract, estoppel, failure of consideration and waiver, and in the alternative that the number of shares is incorrect. The parties await the court’s response.

There are no other legal proceedings, although we may, from time to time, be party to certain legal proceedings and other various claims and lawsuits in the normal course of our business, which, in the opinion of management, are not material to our business or financial condition.

 

ITEM 1A – RISKS FACTORS

Not required for smaller reporting companies.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 NONE

  

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

NONE

 

ITEM 4 – REMOVED AND RESERVED

 NONE

 

ITEM 5 – OTHER INFORMATION

 NONE

 

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ITEM 6 – EXHIBITS

Exhibit No. Description
31.1              Certification of Chief Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)
   
32.1              Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

 

 

 

SIGNATURES

 


 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Arrayit Corporation
   
Dated: May 15, 2013 By: /s/ RENE A. SCHENA
  Rene A. Schena
  Chairman and Director

 

 

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