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ARYC > SEC Filings for ARYC > Form 10-Q on 19-Nov-2013All Recent SEC Filings

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Form 10-Q for ARRAYIT CORP


19-Nov-2013

Quarterly Report


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 nine months ended September 30, 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.

Results of Operations

Comparison of Operating Results -Three Months Ended September 30, 2013 and 2012

Gross revenues for the three months ended September 30, 2013 and 2012 were $829,201 and $547,233, respectively, representing a 51.5% increase in gross revenues for the period. The Company shipped more laboratory instruments, including a TissueMax Microarray Printer, and increased sales of SuperEpoxy 3 Substrates during the three months ended September 30, 2013. The Company also increased sales of commodity chemicals by 74% over the third quarter of 2012.

The cost of sales for the three months ended September 30, 2013 and 2012 were $522,211 and $252,003, respectively resulting in gross profit for the period of $306,990 and $295,230, respectively. The Company's cost of sales is dependent upon product mix. During the third quarter of 2013, the gross margin was 37% versus 54% for the third quarter of 2012. The Company sold more commodity chemicals in the third quarter of 2013, which have a lower gross margin percentage than the microarray manufacturing instruments and consumables that were sold in the third quarter ended September 30, 2012.


Selling, general and administrative expenses for the three months ended September 30, 2013 and 2012 were $259,885 and $297,745, respectively. The decrease of $37,860 is largely attributable to a reduction in consulting fees incurred during the three months ended September 30, 2013 versus the three months ended September 30, 2012.

Legal expenses of $15,566 for the three months ended September 30, 2013 were mostly attributable to litigation with Baker Hughes against our subsidiary TeleChem International, Inc. and Arrayit Corporation, and to legal review of the new lease agreement. Legal expenses of $8,331 for the three months ended September 30, 2012 were mostly attributable to litigation with Baker Hughes. Baker Hughes judgment against TeleChem International, Inc. and Arrayit Corporation was settled on October 24, 2013 and the Company expects to record a gain on extinguishment of debt in the fourth quarter 2013.

Net income from operations was $22,605 for the three months ended September 30, 2013, compared with a net loss from operations of $11,617 for the three months ended September 30, 2012. The Company raised $175,000 of working capital during the last few weeks of the quarter, which allowed the Company to purchase manufacturing raw materials and begin fulfilling backorders.

Interest expense was $57,086 for the three months ended September 30, 2013, compared to $27,859 for the three months ended September 30, 2012. The increase in interest costs was the result of accruing additional legal judgment interest and to accruing third party and related party notes payable.

Other income for the three months ended September 30, 2013 includes gain on extinguishment of liabilities of $6,168.

Comparison of Operating Results -Nine Months Ended September 30, 2013 and 2012

Gross revenues for the nine months ended September 30, 2013 and 2012 were $2,374,789 and $1,850,935, respectively, representing a 28% increase in gross revenues for the period. The Company was able to fulfill some backorders, and attributes the increase in gross revenues to fulfilling orders for instruments, in particular TissueMax Tissue Microarrayer, SpotBot and SpotBot Extreme Microarray Printers and SpotWare Colorimetric Scanners. The Company also increased sales for substrates and commodity chemicals.

The cost of sales for the nine months ended September 30, 2013 and 2012 were $1,354,619 and $966,185, respectively resulting in gross profit for the period of $1,020,170 and $884,750, respectively. The Company's cost of sales is dependent upon product mix. During the nine months ended September 30, 2013, the gross margin was 43% versus 48% for the nine months ended September 30, 2012. Gross margin decreased slightly over the three periods as the Company's higher sales of more high-throughput instruments during the first three months of 2013 were offset by higher sales of commodity chemicals in the second quarter of 2013, which have a lower gross margin percentage.

Selling, general and administrative expenses for the nine months ended September 30, 2013 and 2012 were $744,475 and $2,037,425, respectively. The decrease of $1,280,982 is largely attributable to a reduction in consulting fees incurred during the nine months ended September 30, 2013.

Legal expenses of $53,473 for the nine months ended September 30, 2013 were mostly attributable to litigation with Baker Hughes against our subsidiary TeleChem International, Inc. and Arrayit Corporation, and to patent maintenance expenses. Legal expenses of $51,917 for the nine months ended September 30, 2012 were mostly attributable to litigation with Baker Hughes. Baker Hughes judgment against TeleChem International, Inc. and Arrayit Corporation was released on October 25, 2013 and the Company expects to record a gain on extinguishment of debt in the fourth quarter 2013.


Net income from operations was $134,736 for the nine months ended September 30, 2013, compared with a net loss from operations of $1,353,171 for the nine months ended September 30, 2012. The increase in net operating income is due primarily to an increase in sales and a large decrease in consulting fees.

Interest expense was $249,039 for the nine months ended September 30, 2013, compared to $122,358 for the nine months ended September 30, 2012. The increase in interest costs was the result of additional interest accrued related to judgment settlements and third party and related party notes payable.

Other income for the nine months ended September 30, 2013 includes gain on extinguishment of liabilities of $171,702.

Liquidity and Capital Resources

Cash flows used in operations were $91,052 for the nine months ended September 30, 2013, and cash provided by operations was $88,922 for the nine months ended September 30, 2012. As of September 30, 2013, we had a working capital deficiency of $7,294,933 and an accumulated deficit of $24,180,850. 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.

At September 30, 2013, the Company was working on a private placement memorandum, but had no commitments, understandings or arrangements for additional working capital. On October 18, 2013, Arrayit Corporation raised $1,000,000 of working capital from a group of accredited investors. The sale and issuance of the securities discussed above were determined to be exempt from registration in reliance on Rule 506(b) of Regulation D. We are not aware of any other events or uncertainties that have a material impact upon our short-term or long-term liquidity.

We estimate that we may require approximately $2 million 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 nine months ended September 30, 2013, the Company raised $175,000 of working capital from an accredited investor, and also relied upon short term loans and extended terms from its creditors to finance its operations.

On October 18, 2013, Arrayit Corporation raised $1,000,000 of working capital from a group of accredited investors. The sale and issuance of the securities discussed above were determined to be exempt from registration in reliance on Rule 506(b) of Regulation D.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.


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.

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