UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

XRPRO SCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or Organization)

8731

(Primary Standard Industrial Classification Code Number)

20-0982060

(I.R.S. Employer Identification No.)

One Kendall Square, Suite B2002

Cambridge, MA 02139  

(617) 631-8825

(Address and telephone number of principal executive offices)

Richard Cunningham

XRpro Sciences, Inc.

One Kendall Square, Suite B2002

Cambridge, MA 02139

(Name, address and telephone number of agent for service)

Copy to:

Leslie Marlow, Esq.

Hank Gracin, Esq.

Gracin & Marlow, LLP

The Chrysler Building

405 Lexington Avenue, 26th Floor

New York, New York 10174
(212) 907-6457

Approximate Date of Proposed Sale to the Public: From time to time after the date this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act of 1934.

CALCULATION OF REGISTRATION FEE

THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED APRIL 21, 2015

PRELIMINARY PROSPECTUS

XRPRO SCIENCES, INC.

2,069,525 Shares of Common Stock

This prospectus relates to the resale by the investors listed in the section titled “Selling Stockholders”, and we refer to the investors as the Selling Stockholders (the “Selling Stockholders”) of up to 2,069,525 shares of our common stock (the “Shares”), of which 1,555,602 shares of common stock (the “Common Shares”) are currently outstanding shares of our common stock, $0.001 par value (the “Common Stock”), 388,923 shares (the “Private Placement Warrant Shares”) are shares of Common Stock issuable upon exercise of warrants (the “Private Placement Warrants”) issued in our private placement described in the next sentence and 125,000 shares (the “Consultant Shares”) are issuable upon exercise of warrants and options issued to consultants for consulting services (the “Consultant Warrants and Options”). The Common Shares and Private Placement Warrants were acquired by the Selling Stockholders in connection with a private placement offering that was completed in December 2014 and January 2015 (the “Private Placement”). The Consultant Warrants and Options were issued as compensation to consultants. We are registering the resale of the Shares as required by contractual obligations that we have with each of the Selling Stockholders.

The Selling Stockholders may offer and sell or otherwise dispose of the Shares described in this prospectus from time to time through public or private transaction at prevailing market prices, at prices related to such prevailing market prices, at varying prices determined at the time of sale, at negotiated prices, or at fixed prices. See “Plan of Distribution” beginning on page 60 for more information.

We are in the process of applying to have our Common Stock quoted on the OTCQB.

We will not receive any of the proceeds from the Shares sold by the Selling Stockholders. However, we will receive net proceeds of any warrants or options exercised (unless the warrants or options are exercised on a cashless basis.)

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus for more information.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus or the prospectus to which it relates is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is _________, 2015

TABLE OF CONTENTS

ABOUT THIS PROSPECTUS

You should rely only on the information contained or incorporated by reference in this prospectus. Neither we nor the Selling Stockholders have authorized anyone to provide you with information that is different from such information. If anyone provides you with different or inconsistent information, you should not rely on it. The Selling Stockholders are offering to sell the Shares only in jurisdictions where offers and sales are permitted. You should not assume that the information we have included in this prospectus is accurate as of any date other than the date of this prospectus or that any information we have incorporated by reference is accurate as of any date other than the date of the document incorporated by reference. Our business, financial condition, results of operations and prospects may have changed since that date.

The distribution of this prospectus and the issuance of the Shares in certain jurisdictions may be restricted by law. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the issuance of the Common Stock and the distribution of this prospectus outside the United States. This prospectus does not constitute, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy, the Common Stock offered by this prospectus by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation.

It is important for you to read and consider all of the information contained in this prospectus in making your investment decision. To understand the offering fully and for a more complete description of the offering you should read this entire document carefully, including particularly the “Risk Factors” section beginning on page 7. You also should read and consider the information in the documents to which we have referred you in the section entitled “Where You Can Find More Information”.

As used in this prospectus, unless the context requires otherwise, the terms “we”, “us”, “our”, or “the Company” refer to XRpro Sciences, Inc. and its subsidiaries on a consolidated basis. References to “Selling Stockholders” refer to those stockholders listed herein under “Selling Stockholders” and their successors, assignees and permitted transferees.

ABOUT FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act, about the Company and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about our future performance, operations, products and services and of our subsidiaries. We caution our stockholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in the section entitled “Risk Factors” beginning on page 7 of this prospectus and the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2014.

All written or oral forward-looking statements attributable to us or any person acting on our behalf made after the date of this prospectus are expressly qualified in their entirety by the risk factors and cautionary statements contained in and incorporated by reference into this prospectus. Unless legally required, we do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

RISK FACTORS

Investing in our Common Stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below, and the other information in this prospectus when evaluating our company and our business. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our Common Stock could decline and investors could lose all or a part of the money paid to buy our Common Stock.

RISKS RELATING TO OUR BUSINESS

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, 2014 we had a net income of $49,517, primarily due to the settlement of the LANS matter, discussed above, and for the year ended December 31, 2013, we had a net loss of $(3,694,786).  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 lease 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.

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, 2014, the majority of our revenue was generated from government contacts (84%), and the remaining 16% was generated from commercial contracts recently undertaken; and for the year ended December 31, 2013, substantially all of our revenue was derived from two 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 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 different research projects for the same two governmental agencies. As of the date hereof we have two existing contracts 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 (of which we have received $775,000 to date) was made available to us on July 9, 2013 for the period August 1, 2013 to July 2014, recently extended to July 2015, depending on availability of government funding and satisfactory progress made on the project.  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.

We were awarded Contract number 1R43AI091186-01A1 with the National Institutes of Health; to develop Radioactive Cesium decorporation Agents on June 23, 2014 for an amount of $600,000 operative from July 1, 2014 to June 30, 2016. No funds have been received under this contract as work on the project is only expected to commence in 2015.

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 generated a net income of $49,517 for the year ended December 31, 2014 primarily due to the settlement of the LANS matter as discussed above. We incurred a net loss of $(3,694,786) for the year ended December 31, 2013. 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 at least an additional 12 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, 2014 we had approximately $5,523,000 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 50 percentage point change in ownership, in aggregate during any three 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 2034 if unused.

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 leased 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 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 our 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:

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.

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 2006 and since then have developed four enhanced versions of our original instrument; each enhancement was developed over an approximate two year period of time. We enhance our XRpro® instruments on a regular basis, including recent improvements to the throughput capabilities of the instrument, increasing production efficiency. We may also be required to make modifications or enhancements at the request of our customers. Our research and development expense for the year ended December 31, 2014 was approximately $309,747, 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. We have recently increased our financial resources, and intend improving our sales efforts by hiring appropriate resources on our XRpro® products and 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 1,752,403 shares of our Common Stock, representing 27.0% of our outstanding shares of Common Stock. In addition, our directors as a group beneficially own 3,069,288 shares of our Common Stock, representing 43.2% of our outstanding shares of Common Stock. Accordingly, our Chief Scientific Officer alone and together with our directors 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.

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

Our products and services are complex and may at times contain errors, defects and bugs when introduced. If in the future we deliver products or services with errors, defects or bugs, our credibility and the market acceptance and sales of our products would be harmed. Further, if our products or services 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 or services. 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 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.

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.

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 key 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 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:

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.

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: 

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 have claims and lawsuits against us that may result in material adverse outcomes.

On March 16, 2015, the Circuit Court in Cook County, Illinois ruled against us and held that the Estate of Sigmund Eisenschenk owns no less than 88,750 shares of our stock (177,500 shares prior to reverse stock split). The Court further awarded sanctions against us in an amount not yet determined.  The Court has yet to rule on certain other claims made by the Estate, which relate to a further 236,250 shares of our stock (472,500 shares prior to reverse stock split). We are also subject to other claims and other lawsuits in which adverse outcomes could result in significant monetary damages. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

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:

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.

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, as amended (the “Exchange Act”). 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 effective 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 6,373,707 shares of our Common Stock outstanding. All of such shares are eligible for resale under Rule 144; however, 2,679,378 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.

We do not expect to pay dividends on our Common Stock in the foreseeable future.

We do not expect to pay dividends on our Common Stock for the foreseeable future, and we 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. Our Series A Preferred stockholders are entitled to an annual dividend of $0.46 for each share of Series A Preferred, payable in cash or Common Stock, at the election of the holder, on January 31 of each year. We currently intend to retain any future earnings other than those paid as dividends to the Series A Preferred Stock or any other class of preferred stock to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our Common Stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business or dividends on their Series A Preferred Stock. At the present time there is no trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our 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. 

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 no shares of Series B Preferred Stock and 105,000 shares of Series A Preferred Stock outstanding.  Holders of Series A Preferred Stock are entitled to a dividend of $0.46 per share each year payable in cash or stock at the option of the holder and Series A Preferred stock are entitled to a preference upon our liquidation, dissolution or winding up.

The Series A Preferred Stock 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 $20.00 per share. The holders of the Series A Preferred Stock and the shares of Common Stock and warrants issued in our private placement offering that was consummated in January 2015 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 us, 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 and therefore no public market for our Common Stock exists. Accordingly, investors will have great difficulty selling any of our securities. Even if our Common Stock becomes traded on a securities exchange, we cannot predict the extent to which investors’ interests will lead to an active trading market for our Common Stock or whether the market price of our Common Stock will be volatile or exceed the price paid by investors for the Common Stock or the exercise price of our Warrants outstanding. If an active trading market does not develop, investors will continue to have difficulty selling any of our Common Stock. 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.

If our Common Stock becomes traded on a securities market or exchange, 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.

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.

We effected a 1-for-2 reverse stock split of our outstanding Common Stock on March 25, 2015. However, the reverse stock split may not increase our stock price sufficiently once the stock is trading and we may not be able to list our Common Stock on a national securities exchange.

We expect that the reverse stock split of our outstanding Common Stock will increase the market price of our Common Stock once our stock is trading and enable us to meet the minimum market price requirement of the listing rules of a national securities exchange. However, the effect of a reverse stock split upon the market price of our Common Stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. It is possible that the market price of our Common Stock following the reverse stock split will not increase sufficiently for us to be in compliance with the minimum market price requirement of a national securities exchange, or if it does, that such price will be sustained. If we are unable to meet the minimum market price requirement, we may be unable to list our shares on a national securities exchange, in which case such an offering may not be completed.

Even if the reverse stock split achieves the requisite increase the market price of our Common Stock, there can be no assurance that we will be approved for listing on a national securities exchange or able to comply with other continued listing standards of a national securities exchange.

Even if the market price of our Common Stock increases sufficiently so that we comply with the minimum market price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to be approved for listing on a national securities exchange or maintain a listing of our Common Stock on such exchange. Our failure to meet these requirements may result in our Common Stock being delisted from a national securities exchange.

The reverse stock split may decrease the liquidity of the shares of our Common Stock.

The liquidity of the shares of our Common Stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following the reverse stock split. In addition, the reverse stock split may increase the number of shareholders who own odd lots (less than 100 shares) of our Common Stock, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty affecting such sales.

USE OF PROCEEDS

All of the Shares covered by this prospectus are being sold by the Selling Stockholders. See “Selling Stockholders” on page 40. We will not receive any proceeds from these sales of shares of our Common Stock. A portion of the Shares covered by this prospectus are issuable upon exercise of the Private Placement Warrants to purchase our Common Stock. Upon any exercise of the Private Placement Warrants for cash, the Selling Stockholders would pay us the exercise price of the Warrant. Cash received from exercise of Warrants will be used for general corporate purposes. Additionally, the Private Placement Warrants are exercisable on a cashless basis. If the Private Placement Warrants are exercised on a cashless basis, we would not receive any cash payment from such Selling Stockholders upon any exercise of the Private Placement Warrants.

OUR BUSINESS

Overview

We use proprietary x-ray fluorescence technology called XRpro® to deliver ion channel screening, transporter 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 12, 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 revenue will be derived from (i) provision of our analytical drug discovery services to commercial customers as well as United States governmental agencies; (ii) leasing of our technology and sale of our consumables; and (iii) commercialization 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, revenue derived from our analytical services that we have performed for United States governmental agencies and settlement of legal matters. We expect to continue to seek to obtain our required capital through the private sale of securities and revenue derived for the services we provide. To date, we have been granted twenty (20) contracts from United States governmental agencies; of which nine (9) were granted from the Department of Defense and eleven (11) 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 would 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 $825,000 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 $2,775,000 paid to date, $225,000 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, initially expiring on July 31, 2014 and recently extended until July 31, 2015. To date we have received $775,000 under this contract and we have $225,000 remaining under the contract.

Contract number 1R43AI091186-01A1 with the National Institutes of Health; to develop Radioactive Cesium decorporation Agents, contract amount of $600,000 operative from July 1, 2014 to June 30, 2016. No funds have been received under this contract as work on the project is only expected to commence in 2015.

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 and transporter testing with several large and specialty pharmaceutical companies. We believe that due to the unique properties of our technology there is the potential to convert these pilot studies into sustainable, long term commercial customers and conduct large-scale analytical services projects in collaboration with these customers to support their research and development programs.

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, and initial in vivo 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, was recently extended until July 31, 2015 depending on the availability of government funds and satisfactory progress on the project and to date we have received $775,000 under this grant and we have $225,000 remaining under the contract. We do not plan to be a pharmaceutical company but to provide analytical services. We will continue to capitalize on our technology to commercialize drug candidates from government work where appropriate.

Our Analysis Technology

Our XRpro® technology quantifies drug/protein interactions without the need to modify the drug, protein, or cell, or use expensive reagents.  We apply this technology to assay a variety of cellular processes and enzymatic functions. Cellular processes include ion channel and transporters, which we assay to determine whether a drug is safe and effective as modeled by certain cellular processes, which are typically specified by our customers.  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, toxic, subject to regulatory oversight and can introduce experimental errors. Label-free technologies are particularly sought by the pharmaceutical industry because it is believed that they provide superior data at lower cost. Our current installed capacity of our high-throughput XRpro® technology typically measures between approximately 500,000 and 2,000,000 compounds per month, depending on the assays. Our technology measures multiple parameters for both drugs and proteins, including chemical and biochemical binding and functional assays. 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 (e.g., efficacy) and off-target (e.g. side effects/toxicity) properties.

Our high throughput XRpro® technology allows us to perform assays that were previously unavailable or unacceptably expensive when performed using other technologies. Significant advantages of XRpro® according to customers include the ability to perform measurements in challenging matrices, such as serum, and the ability to conduct assays of non-electrogenic transporters.

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 appropriate biotech and pharmaceutical companies.

Scientific Advantages of XRpro ®

The pharmaceutical industry uses assays to measure the properties of experimental medicines. XRpro® allows previously unavailable or unacceptably expensive assays to be performed at high-throughput scales at a price that is acceptable to customers and premium relative to other high throughput assays.  XRpro® assays include:

Some key features of XRpro® include:

Our XRpro® technology uses advances in X-ray fluorescence. Each chemical element emits X-ray photons with a characteristic energy. We exploit this effect and have applied it to drug discovery. By taking a single spectrum, within a few seconds we can simultaneously measure all elements with an atomic number greater than 12 (Al and higher). This enables us to qualitatively and quantitatively interrogate many aspects of cell biology:

History

XRpro, formerly known as 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 LANL 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, XRpro won the 2007 Federal Laboratory Consortium Award for Excellence in Technology Transfer and an R&D 100 Award. XRpro 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.

On December 2, 2014, we filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to change our name to XRpro Sciences, Inc. effective December 4, 2014. On March 25, 2015, we effected a 1-for-2 reverse stock split of our Common Stock.

PROPERTIES

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 original lease expired May 31, 2014. The monthly rental amounts were $15,118. The lease is under renewal arrangements for a period of eighteen months terminating on December 31, 2015 and the monthly rental amounts are approximately $16,291.

We entered into a corporate apartment lease agreement in Cambridge, Massachusetts effective June 4, 2013. The monthly rental amounts were $3,325 and the term of the lease expired June 3, 2014. The lease was not renewed and instead we entered into a new one year lease on August 1, 2014 with monthly rental amounts of $2,500. We entered into a second corporate apartment lease agreement in Cambridge Massachusetts, effective February 1, 2014. This lease was terminated early during September 2014 with the payment of early settlement penalties of $4,346. We entered into a further apartment lease agreement effective October 10, 2014 and terminating on July 6, 2015. The monthly rental amounts to $3,351.

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.

Employees

As of March 31, 2015, we employed nine 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.

Corporate Structure and Information

Our principal offices are located at One Kendall Square, Suite B2002, Cambridge, Massachusetts 02139, and our telephone number at that office is (617) 631-8825. Our website address is www.xrpro.com. The information contained on our website or that can be accessed through our website does not constitute part of this document.

Dividend Policy

We have not paid any dividends on our Common Stock and do not anticipate paying any such dividends in the near future. Instead, we intend to use any earnings for future acquisitions and expanding our business. Nevertheless, at this time there are not any restrictions on our ability to pay dividends on our Common Stock.

Our Common Stock Listing and Holders

Our Common Stock is not currently traded on any established market. We are in the process of applying to have our Common Stock quoted on the OTCQB. We currently have approximately 260 holders of our Common Stock, no holders of our Series B Preferred Stock and one holder of our Series A Preferred Stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information about the securities authorized for issuance under our equity compensation plans for the fiscal year ended December 31, 2014.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited consolidated financial statements and related notes that appear elsewhere in this filing.

Cautionary Note Regarding Forward-Looking Statements

Some of the statements made in this section of our report are forward-looking statements. These forward-looking statements generally relate to and are based upon our current plans, expectations, assumptions and projections about future events. Our management currently believes that the various plans, expectations, and assumptions reflected in or suggested by these forward-looking statements are reasonable. Nevertheless, all forward-looking statements involve risks and uncertainties and our actual future results may be materially different from the plans, objectives or expectations, or our assumptions and projections underlying our present plans, objectives and expectations, which are expressed in this section.

In light of the foregoing, prospective investors are cautioned that the forward-looking statements included in this filing may ultimately prove to be inaccurate—even materially inaccurate. Because of the significant uncertainties inherent in such forward-looking statements, the inclusion of such information should not be regarded as a representation or warranty by XRpro Sciences, Inc. or any other person that our objectives, plans, expectations or projections that are contained in this filing will be achieved in any specified time frame, if ever. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The risks discussed in the Item 1A of this filing should be considered in evaluating our prospects and future performance. Those risks and uncertainties include:

Overview and Financial Condition

We use 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 12, 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; (ii) sale of instruments and consumables; and (iii) commercialization 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, revenue derived from our analytical services that we have performed for United States governmental agencies and settlement of legal matters. We expect to continue to seek to obtain our required capital through the private sale of securities and revenue derived for the services we provide. To date, we have been granted twenty (20) contracts from United States governmental agencies; of which nine (9) were granted from the Department of Defense and eleven (11) 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 would 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 $825,000 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 $2,775,000 paid to date, $225,000 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, initially expiring on July 31, 2014 and recently extended until July 31, 2015. To date we have received $775,000 under this contract and we have $225,000 remaining under the contract

Contract number 1R43AI091186-01A1 with the National Institutes of Health; to develop Radioactive Cesium decorporation Agents, contract amount of $600,000 operative from July 1, 2014 to June 30, 2016. No funds have been received under this contract as work on the project is only expected to commence in 2015.

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 XRpro Sciences, Inc. and XRpro Corp.

Recent Events

Financing

On January 31, 2015, in accordance with the terms of the Series B Preferred Stock Exchange Agreements entered into between us, and the holders of our outstanding Series B Preferred Stock, each holder of Series B Preferred Stock  exchanged all of their shares of Series B Preferred Stock for the number of shares of our Common Stock, determined by dividing the sum of the amount of the holder’s initial investment in the Series B Preferred Stock, plus all accrued and unpaid dividends owed to the holder, by $1.75. All 2,133,947 outstanding shares of our Series B Preferred Stock, including accrued and unpaid dividends thereon, were exchanged for approximately 1,803,803 shares of the Common Stock, after the reverse stock split, resulting in no shares of Series B Preferred Stock remaining outstanding.

In addition, on January 31, 2015, we entered into: (i) the Series B Preferred Stock and Warrant Exchange Agreements with the holders of the Existing Series B Warrants to exchange both Series B Preferred Stock for Common Stock and their Existing Series B Warrants, (ii) the Bridge Warrant Exchange Agreements with the Bridge Warrant Holders of its warrants that were issued in connection with the Existing Bridge Warrants, and (iii) the Placement Agent Exchange Agreements with the Placement Agent Warrant Holders that were issued warrants as compensation for the placement agent services provided in connection with the Existing Placement Agent Warrants. Pursuant to the terms of the Bridge Warrant Exchange Agreements, the Series B Preferred Stock and Warrant Exchange Agreements and the Placement Agent Exchange Agreements, the Existing Bridge Warrants, the Existing Series B Warrants and the Existing Placement Agent Warrants were exchanged for the Series B Exchange Warrants, the Bridge Exchange Warrants and the Placement Agent Exchange Warrants, which have substantially similar terms to the Existing Warrants except that: (i) the exercise price of the Series B Exchange Warrants, the Bridge Exchange Warrants and the Placement Agent Exchange Warrants are 30% less than the exercise price of the Existing Warrants for which they were exchanged (such that: (x) the Bridge Exchange Warrants have an exercise price of $4.20 ($2.10 prior to the reverse stock split); (y) the Placement Agent Exchange Warrants have an exercise price of $3.85 ($1.925 prior to the reverse stock split); and (z) the Series B Exchange Warrants have an exercise price of $3.50 ($1.75 prior to the reverse stock split); (ii) the Bridge Exchange Warrants, the Series B Exchange Warrants and the Placement Agent Exchange Warrants do not contain anti-dilution price protection for issuances of securities at per share prices that are lower than the exercise price; (iii) the Bridge Exchange Warrants, the Series B Exchange Warrants and the Placement Agent Exchange Warrants are assignable by their holders; and (iv) the Bridge Exchange Warrants, the Series B Exchange Warrants and the Placement Agent Exchange Warrants provide for certain buy-in-rights in the event that we fail to deliver shares of Common Stock underlying the warrant in a timely manner.

On December 31, 2014, we  sold in the Private Placement 716,981 units at a per unit price of $7.00, each unit (the “Units”) consisting of four shares of Common Stock, prior to the reverse stock split and a five year warrant to acquire one half of one share of Common Stock (post-split) at an exercise price of $3.50 ($1.75 pre-split) per share, to accredited investors for aggregate cash proceeds of $5,018,867 pursuant to a master purchase agreement entered into with the investors. On January 7, 2015, we consummated the second closing in the Private Placement and sold an additional 548,019 Units for additional aggregate cash proceeds of $3,836,133. The aggregate total number of Units sold in both closings was 1,265,000 Units, prior to the reverse stock split, for total gross proceeds of $8,855,000. The aggregate number of shares of Common Stock issued and Private Placement Warrants issued in the Private Placement resulted in the issuance of approximately 2,530,000 shares of Common Stock and warrants exercisable for 632,531 shares of Common Stock, after rounding up each fractional share or warrant and after giving effect to the reverse stock split. In connection with the Private Placement, we have agreed to prepare and file a registration statement with the SEC for the resale by the purchasers of all of the Common Stock and the Common Stock underlying the Private Placement Warrants and all shares of Common Stock issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect thereto.  In addition, we agreed to register the shares of Common Stock underlying the Placement Agent Warrants. 

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

The agreement called for the Parties to:

On July 5, 2013, we entered into a fee agreement with 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 us 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 us. Subsequent to signing the agreement, we determined that Dentons had egregiously breached this cooperation clause.  As a result, we have suffered significant harm.  We further believe that due to Dentons breach of its contract with us, Dentons is not owed any amount under the breached agreement and we are also considering our legal remedies in regard to the harm we have suffered.

Results of Operations for the year ended December 31, 2014 and the year ended December 31, 2013.

Revenues

We had revenues totaling $541,794 and $708,273 for the years ended December 31, 2014 and 2013, respectively, a decrease of $166,479 or 23.5%. Substantially all of our revenues have been from federal government contracts. Our revenue is dependent on the number of contracts we have in operation and the progress we have made on these contracts to date. We have an order backlog in the form of firm fixed price government contracts. We were awarded a $1,000,000 grant from the NIH on August 24, 2011 which was fully utilized and expired on July 31, 2012. An additional $1,000,000 was made available for us to invoice our project time and expenses against on August 2, 2012, which was fully utilized and expired on July 31, 2013 with a further $1,000,000 (of which we have received $775,000 to date) made available for us to invoice our project time and expenses against on July 9, 2013, initially expiring on July 31, 2014, and recently extended to July 31, 2015, 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. 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. We have been awarded a further Contract with the National Institutes of Health; to develop Radioactive Cesium decorporation Agents, the contract amount of $600,000 was awarded for the period July 1, 2014 to June 30, 2016. No funds have been received under this contract as work on the project is only expected to commence in 2015.

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 $608,050 and $507,766 for the years ended December 31, 2014 and 2013, respectively, an increase of $100,284 or 19.8%. Our cost of goods sold is dependent on the progress made on each project to date. Cost of goods sold 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, 2014 and 2013 respectively was $232,180 and $236,451, a decrease of $4,271 or 1.8% due to a slight decrease in man hours spent on Government contracts, particularly during the last quarter of 2014. For additional information regarding salary expense reference is made to the discussion of total salary expense in selling, general and administrative expenses below. Included in cost of sales for the year ended December 31, 2014 and 2013, respectively was laboratory supplies and direct materials of $238,813 and $246,078, a decrease of $7,265 or 3.0%, the use of laboratory supplies is dependent on the amount of supplies used in developing assays for significant pharmaceutical customers. During the prior year we incurred slightly higher laboratory supply costs whilst setting up the Cambridge laboratory. During the year ended December 31, 2014 and 2013, respectively, outside contractors costs amounted to $122,368 and $22,237, an increase of $100,131, outside contractors were primarily hired during the last quarter of the prior year and continued during the current year to improve our technical skills in the laboratory.

Gross (loss)/profit

Gross (loss)/profit was $(66,256) and $200,507 for the years ended December 31, 2014 and 2013, respectively, a decrease of $266,763, or 133.0%. The decrease in gross profit is directly related to the reduction in higher margin recoverable machine time earned in the prior year. The gross profit percentage earned may not be indicative of anticipated future results due to our plan to diversify its source of revenues into the provision of services or usage arrangements. 

Selling, general and administrative expenses

Selling, general and administrative expenses totaled $4,502,353 and $4,395,805 for the years ended December 31, 2014 and 2013, respectively, an increase of $106,548 or 2.4%.

The major expenses making up selling, general and administrative expenses included the following:

* In excess of 1,000%

Marketing and selling expenses for the year ended December 31, 2014, primarily consisted of website design and development expenses to increase the relevancy and the clarity of the message we are delivering to prospective customers. The marketing and selling expense in the prior year was primarily a once off professional promotional activity.

Total salary expenses are allocated to the various expense categories detailed below depending on the level of activity of our employees on government and commercial projects, internal research and development expenses and administrative activities. An increase in activity on projects will result in an increase in salary expense charged to cost of sales with a corresponding decrease in salary expense charged to selling, general and administrative expenses. A comparison of salary expenses is presented below.

Total salary expenditure for the year ended December 31, 2014 and 2013, respectively is included in the following expense categories:

* In excess of 1,000%

The increase in total salary expenditure for the year ended December 31, 2014 of $502,699 is primarily due to the severance pay paid to Gary Altman of $327,276 as of September 30, 2014 as well as the salary paid to Gary Altman while employed as our CEO, effective July 1, 2013, resulting in an increased expense of $77,727 for the year ended December 31, 2014, the employment of a VP of business development at an increased cost of $120,180 for the year ended December 31, 2014 offset by the resignation of our controller, resulting in a saving of $39,393 and a decrease in our sick and vacation pay accrual or $22,585 due to the reduction in the number of days owed to employees for the year ended December 31, 2014. In addition, a new Senior Scientist was employed in September 2013, resulting in an increased cost in the 2014 year of $97,387.

The salary expense included in cost of sales for the year ended December 31, 2014 decreased by $4,271 or 1.8%. 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, 2014 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, 2014.

The salary expense charged to Selling, general and administrative expenses for the year ended December 31, 2014 increased by $73,117 or 10.6% due to the employment of a VP of business development whose expense is primarily recorded as administrative expenses, offset by the resignation of our controller. We employed a new CEO, Richard Cunningham on November 24, 2014 to replace our previous CEO, Gary Altman.

Research and development salaries for the year ended December 31, 2014 increased due to the employment of a new senior scientist and the allocation of more scientific time from existing employees to develop products for commercial applications and lower levels of activity on our government contracts.

Bonus expense increased by $310,137 primarily due to a once-off discretionary bonus paid to certain consultants and our Chief Scientific Officer for their extraordinary efforts in connection with the settlement of the legal matter disclosed in note 17 to the consolidated financial statements. In the prior year, a discretionary bonus, approved by the Board of Directors, of $50,000 was paid to our Chief Scientific Officer.

Directors’ fees increased by $146,250 due to the introduction of directors’ fees paid to certain non-executive directors of $25,000 per annum, per director, commencing on April 1, 2014. This amounted to a charge of $56,250 in the 2014 year. In addition to this, an agreement was reached with Mr. Timothy Tyson whereby he would serve as our non-executive chairman with effect from April 1, 2014 for a monthly fee of $10,000, resulting in an increase in expenditure of $90,000. 

The increase in the stock option compensation charge of $41,832 was primarily due to the acceleration of the vesting of the 514,900 stock options granted to Gary Altman in terms of his severance agreement, 489,900 of these options have subsequently expired and are available for re-issue. In the prior year, 650,000 options were issued to members of management and certain key consultants. These options were fully vested in March 2014.

Legal fees decreased by $1,102,570 over the prior year due to the conclusion of substantially all of the legal proceedings in the LANS matter, partially offset by the increase in legal fees incurred on patents registered both locally and internationally. For additional information on our legal matters, see Legal Proceedings.  The legal expenses incurred on the LANS and Bellows matters are not connected with our regular business activities and should be viewed as non-operating expenses. 

The increase in consulting fees of $34,567 is primarily due to an investor relations consulting arrangement entered into during the second quarter of the prior year and the resumption of a management consulting arrangement which was originally terminated in the first quarter of the prior year

The decrease in audit fees and taxation services of $16,060 is due to the payment of 2012 audit fees of $25,000 and the accrual of 2013 audit fees of $25,000 in the 2013 year. The current year accrual amounts to $25,000, included in the charge in the current year is an additional accrual for taxation preparation fees of $10,000 and the under provision of taxation preparation fees of $4,300 for the 2013 tax year.

Repairs and maintenance expense increased by $5,725 over the prior year, this movement includes the amortization of a maintenance contract purchased for the X-ray fluorescence equipment located in Los Alamos and the replacement of an x-ray tube for our x-ray fluorescence equipment located in Cambridge at a cost of $19,571.

Rent has increased by $139,694 due to the establishment of a second laboratory in Cambridge at a monthly cost of approximately $15,100 from 1 June 2013, which subsequently increased to approximately $16,300 from June, 1, 2014, resulting in a net increase of approximately $83,900. An apartment was leased in Cambridge with effect from June 1, 2013 for $3,325 per month, this apartment lease was terminated in June 2014 and a new lease was entered into on 1 July 204 for a monthly rental of $2,500 per month, resulting in a net increase in cost of $10,850 over the prior year. In addition to this a second apartment was leased in Cambridge for nine months at an additional cost of $26,620, which was subsequently terminated in October 2014 and a third apartment was leased at an additional cost of $11,304 with effect from October 10, 2014.

Travel expenses increased by $20,304 over the prior year due to increased travel undertaken by our VP of Business Development, our CSO and CEO whilst attending trade conferences both locally and abroad to promote our product and increase our visibility.

Depreciation and Amortization

We recognized depreciation expenses of $114,156 and $118,227 for the year ended December 31, 2014 and 2013, respectively, the slight decrease in our depreciation expense is due to the disposal of two vehicles we no longer require and the full depreciation of two significant laboratory equipment assets in the prior year, partially offset by new laboratory equipment assets acquired for the Cambridge laboratory. The depreciation expense is primarily made up of depreciation of our laboratory equipment, which makes up the vast majority of our capital equipment. 

Amortization expenses were $51,683 and $51,684 for the year ended December 31, 2014 and 2013.  Amortization expenses relates to the amortization of license fees paid to Los Alamos National Laboratories for the use of certain patents. These patents has now been assigned to us by the Licensor, however we will continue amortizing these costs as an amortization of acquired patents.

Other income/(expense)

Other income of $7,177,522 relates to the $7,000,000 cash settlement received from the Los Alamos National Security (“LANS”) matter disclosed in note 17 to the consolidated financial statements and the recognition of fair value income of $177,522 upon the return of 78,750 (157,500 common shares prior to reverse stock split) common shares originally issued to LANS as consideration for the license agreement we had entered into, disclosed under note 4 to the consolidated financial statements. 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.

Other expense of $490,625 in the current year, relates to the estimated liability we expect to incur in proceedings related to the administration of the estate of the late Sigmund Eisenschenk as fully described in note 17 to the consolidated financial statements. The $115,273 in the prior year relates to the valuation of series A shares issued to Mr. Bellows in terms of a legal settlement agreement reached with him. 

Interest expense

Interest expense totaled $14,852 and $165,635 for the year ended December 31, 2014 and 2013, respectively. The interest expense in the current year consisted primarily of interest on the Los Alamos County loan and the prior year included interest on the Los Alamos County loan; bridge note discount of $117,629; bridge note interest of $11,193 and interest on the Joel Bellows legal settlement of $8,000.

Change in fair value of derivative liabilities

The fair value of derivative liabilities was re-assessed at December 31, 2014 using a Black Scholes valuation model resulting in the increase of the liability by $1,881,181 as compared to a reduction in the liability of $919,948 in the prior year, the movement in liability is dependent upon external market factors. Subsequent to year end, on January 31, 2015, the warrants subject to derivative liability were exchanged for new warrants which are no longer afforded price protection. The derivative liability on warrants that are no longer price protected is no longer required and has been applied to additional paid in capital as of December 31, 2014.

Net income (loss)

Net income totaled $49,517 and net loss totaled $(3,694,786) for the year ended December 31, 2014 and 2013, respectively. The increase to a net income position during the current period is primarily due to the litigation settlement included in other income and other movements discussed above, offset by the net movement of $2,801,129 in the derivative liability 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. The settlement of the Los Alamos National Security (“LANS”) matter has resulted in a gross cash injection of $7,000,000 (net cash injection of $5,502,000 after legal expenses and discretionary bonus payments). The closing of the Private placement on December 31, 2014 resulted in a gross cash injection of $5,018,867 and net proceeds of $4,579,858 after placement agent fees and expenses.

Subsequent to year end, a further closing of the private placement took place on January 7, 2015, resulting in a further cash injection of $3,836,133 and net proceeds of $3,529,242 which should be sufficient to fund operations for at least the next 12 months, dependent upon the outcome of settlement discussions we are having with Denton’s, as described in note 17 to our consolidated financial statements. Should we be unsuccessful in our discussions or not generate anticipated revenue, we may need to raise additional funding through equity issues to fulfill our commercialization objectives.

As of December 31, 2014 we had cash totaling $6,472,392, other current assets totaling $159,200 and total assets of $7,630,465. We had total current liabilities of $2,353,952, and a net working capital of $4,277,641. Total liabilities were $2,496,454 and the Series A convertible redeemable preferred stock totaled $133,350 resulting in a stockholders’ equity of $5,000,661.

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 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.

We repaid in full the term loan provided by Los Alamos National Bank on April 11, 2014 with a payment of $227,717.

As of December 31, 2014, we owed $177,054 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, 2014 and 2013 is provided below:

Net cash generated by/(used in) operating activities was $1,825,257 and $(2,195,268) for the year ended December 31, 2014 and 2013, respectively. The increase in cash generated by operating activities was primarily due to the following:

* Greater than 1,000%

The increase in net income is discussed under net income/(loss) in the results of operations for the year ended December 31, 2014 and 2013, respectively and includes net legal settlement proceeds of $5,502,000, an accrual for estimated judgment liability expenses of $490,625 in the proceedings related to the administration of the estate of the late Sigmund Eisenschenk, offset by an increase in the derivative liability of $2,801,129 and a decrease in legal expenses of $1,102,570.

The change in adjustments for non-cash items is primarily due to the increase in the derivative liability charge of $2,808,129 over the prior year, which is dependent on market factors affecting the volatility and the underlying assumptions in our valuation methodology, offset by the non-cash gain of $177,522 on the cancellation of the shares issued to LANS as described under other income above, the amortization of the Bridge note discount of $117,629 in the prior year, and the increase in the judgment/legal settlement accrual of $373,352 over the prior year.

The decrease in operating assets and liabilities is primarily due to the payment of primarily legal bills accrued on the LANS matter under accounts payable resulting in a net reduction in payables balances of $2,490,199 and the repayment of promissory notes owing to Joel Bellows of $166,800 during the current year resulting in a decrease in our other payables balance.

Net cash used in investing activities was $142,653 for the year ended December 31, 2014 compared to $206,483 for the prior year and consists primarily of laboratory equipment purchased for our new Cambridge laboratory.  

Net cash provided by financing activities was $4,270,056 and $2,542,841 for the years ended December 31, 2014 and 2013, respectively and is made up as follows:

The movement in borrowings from banks and third parties in the current year included the repayment of the LANB Term loan of $247,201 and repayments on the Los Alamos County loan of $32,826. In the prior year, the borrowings from Los Alamos National Bank were restructure and the Commercial loan and the revolving draw line advanced by Los Alamos National bank were settled for $307,832 and a new term loan of $267,392 was advanced to us, repayments of $20,191 were made against the term loan.

In the prior year, net bridge borrowings of $125,000 were received, these borrowings were subsequently converted into Series B Preferred Stock.

Net proceeds from stock issued included the sale of 716,981 Common Stock units at $7.00 per unit, each unit consisting of four common shares and a warrant to purchase a common share at an exercise price of $3.50 per share. ($1.75 per share prior to the reverse stock split). After the reverse stock split on March 25, 2015, the number of shares and warrants issued on the sale of the units mentioned above was 1,433,962 and 358,512, after rounding up for fractional shares and warrants. Share issue expenses, including placement agents’ fees of $439,010 were incurred on this issuance. In the prior year, Series B Preferred Stock was sold to new investors for net proceeds of $2,509,700 after deducting share issue expenses of $286,300.

A dividend of $29,774 ($0.46 per share) was paid to the Series A stockholder in terms of the certificate of designations governing those shares. 

Capital Expenditures

Our current plan 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.

Critical Accounting Policies

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.

Revenue recognition

Revenue sources consist of government grants, government contracts and commercial development contracts.

We account for our long-term Firm Fixed Price Government contracts and grants associated with the delivery of research on drug candidates and the development of drug candidates using the percentage-of-completion accounting method. Under this method, revenue is recognized based on the extent of progress towards completion of the long-term contract.

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

When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined.

To a much lesser extent, we enter into fixed fee commercial development contracts that are not associated with the delivery of feasible research on drug candidates and the development of drug candidates. Revenue under such contracts is generally recognized upon delivery or as the development is performed.

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, 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.

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 year ended December 31, 2014 and 2013 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 income/(loss) per Share

Basic net income/(loss) per share is computed on the basis of the weighted average number of Common Stock outstanding during the period.

Diluted net income/(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 income/(loss) per share are excluded from the calculation.

Dilution is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” 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 us but which will only be resolved when one or more future events occur or fail to occur. Our 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 us or unasserted claims that may result in such proceedings, our 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 our 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)    Patents and License Agreements

Patents and License agreements acquired by us 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 patents and license agreement is twenty years which is the term of the patents and patents supporting the underlying license agreements

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:

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, 2014, 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

We evaluate and accounts for conversion options embedded in our convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.

Professional standards generally provide 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”.

We account for convertible instruments (when we have 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, we record, 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. We also record 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.

Recent accounting pronouncements

For discussion of recently issued and adopted accounting pronouncements, please see Note 2 to the XRpro Sciences consolidated financial statements included herein.

Off Balance Sheet Arrangements

None.

Contractual Obligations

None.

Inflation

The effect of inflation on our operating results was not significant.

Legal Proceedings

Suit against The Regents of the University of California, Los Alamos National Security, et al.

On March 6, 2014, our 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:

The agreement called for the Parties to:

On July 5, 2013, we 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 us by making our partners and/or employees available to furnish information or reasonable assistance in connection with any future disqualification proceedings, as reasonably requested by us. Subsequent to signing the agreement the Company determined that Dentons had egregiously breached this cooperation clause.  As a result, we have suffered significant harm.  We further believe that due to Dentons breach of its contract with us, Dentons is not owed any amount under the breached agreement and we are also considering its legal remedies in regard to the harm it has suffered.

There is no certainty as to how Dentons will respond to our claims or to the ultimate amount that we 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 us.

Joel Bellows Suit

On January 18, 2014, we reached a settlement agreement with Bellows during a pre-trial settlement conference. Subsequent to the pre-trial settlement conference, the parties were unable to agree to terms relating to the conversion of shares of Series A Preferred Stock to yet-to-be issued shares of Series B Preferred Stock. On April 30, 2013, the Circuit Court of Cook County, Illinois, compelled us to execute a version of the settlement agreement proposed by Bellows incorporating a conversion formula that we expressly rejected. The Circuit Court also dismissed Bellows’ lawsuit against us pursuant to the settlement agreement. We have, thus far, performed the terms of the Court ordered settlement agreement under protest and reservation of rights. We have paid Bellows $240,000 pursuant to the disputed settlement agreement, together with interest thereon. We have also issued 105,000 shares of Series A Preferred Stock to Joel Bellows, in exchange for his 52,500 (105,000 shares of common stock prior to the reverse stock split) shares of Common Stock under protest and reservation of rights. Our motion for reconsideration of the April 30, 2013, order was heard on September 25, 2013 and denied. On December 5, 2013, our Company and Dr. Benjamin Warner filed a notice of appeal in the First District Appellate Court of Illinois. On December 26, 2014, the First District Appellate Court of Illinois dismissed our appeal as moot. 

Dividend Litigation

On July 15, 2014, Joel Bellows filed a complaint against us and our Board of Directors in the Law Division of the Circuit Court of Cook County, Illinois. In the complaint, Bellows alleges that we are obligated, pursuant to the terms of a private placement memorandum, to pay him a dividend of $0.46 for each share of Series A Preferred Stock on January 1 of each year (subject to pro rations for any short year) in (i) cash; or (ii) fully paid and non-assessable shares of our Common Stock at a price of $11.40 ($5.70 per common share prior to the reverse stock split) per common share, at his option. Bellows alleges that we violated his rights under the private placement memorandum by willfully refusing to pay him his dividend. Bellows also alleges that we have a continuing obligation to pay him an annual dividend under the terms of the court ordered settlement that is the subject of a pending appeal in the First District Appellate Court of Illinois. Bellows alleges that our refusal to pay his dividends is also a breach of the settlement agreement.

Bellows also alleges that members of our Board of Directors breached their duties of loyalty, good faith and fair dealing to Bellows by knowingly refusing to distribute dividends to Bellows to which he was entitled. Bellows contends that he has been injured in his business and property and irreparably harmed in that he has not received the true value of his equity ownership in our Company.

Bellows seeks the following relief against us: (1) an award of compensatory damages in the amount of $48,300.00; (2) prejudgment interest; (3) all costs and reasonable attorneys’ fees incurred by Bellows; (4) such other relief as may be just and proper. Bellows seeks the following relief against our Board of Directors: (1) an award of compensatory damages exceeding $48,300.00; (2) an award of punitive damages in an amount not less than $50,000.00; (3) costs and expenses; (4) attorneys’ fees; and (5) such other relief as may be just and equitable.

On October 3, 2014, our Company and our Board of Directors filed a motion to disqualify Bellows Law Group, P.C. pursuant to Rules 1.9 and 1.10 of the Illinois Code of Professional Conduct. On December 2, 2014, Bellows Law Group PC voluntarily withdrew as counsel for Joel Bellows. Joel Bellows is now represented by attorney Cary Goldberg.

On January 9, 2015, our Company and our Board of Directors filed a motion to dismiss Counts I of the complaint pursuant to 735 ILCS 5/2-619(a)(9) and to dismiss Counts II and III of the complaint pursuant to 735 ILCS 5/2-615. Bellows filed a response to the motion to dismiss on February 4, 2015.

On February 23, 2015, Bellows filed a motion for leave to file a first amended complaint. On February 23, 2015, Bellows’ was granted leave to file his first amended complaint. Bellows filed his first amended complaint on February 23, 2015.

In his first amended complaint, Bellows alleges that we are obligated, pursuant to the terms of a private placement memorandum, to pay him a dividend of $0.46 for each share of Series A Preferred Stock on January 1 of each year (subject to pro rations for any short year) in (i) cash; or (ii) fully paid and non-assessable shares of Common Stock of the corporation at a price of $11.40 per share ($5.70 prior to reverse stock split), at his option. Bellows alleges that we paid him a partial dividend of $29,773.97 after he filed his original complaint. He alleges that we continue to violate his rights under the private placement memorandum by willfully refusing to pay him the remainder of the dividends due in the alleged amount of $16,144.00, interest on the late dividends due and interest on the unpaid dividends. Bellows also alleges that we have a continuing obligation to pay him an annual dividend under the terms of a court ordered settlement. Bellows alleges that our refusal to pay his dividends is also a breach of the settlement agreement. He alleges that our breach entitles him to attorneys’ fees.

Bellows also alleges that certain members of our Board of Directors breached their duties of loyalty, good faith and fair dealing to Bellows by knowingly refusing to distribute the remaining dividends to Bellows to which he was entitled. Bellows contends that he has been injured in his business and property and irreparably harmed in that he has not received the true value of his equity ownership in our Company.

Bellows also alleges that a judgment conveyed to him by us under the terms of a court ordered settlement agreement was fictitious. He contends that his acceptance of the purported asset as part of the settlement was secured by the fraud of our Company and Benjamin Warner, acting in concert with Michael Lyon and Richard Lane.

In his amended complaint, Bellows seeks the following relief against us on his allegations of breach of contract: (1) an award of compensatory damages of no less than $30,000.00; (2) prejudgment interest; (3) all costs and reasonable attorneys’ fees incurred by Bellows; (4) such other relief as may be just and proper. Bellows seeks the following relief against our Board of Directors on his allegations of breach of fiduciary duty: (1) an award of compensatory damages of no less than $30,000.00; (2) an award of punitive damages in an amount not less than $60,000.00; (3) costs, expenses and interest; (4) attorneys’ fees; and (5) such other relief as may be just and equitable. Bellows also seeks the following relief against our Company and Benjamin Warner on his allegations of fraud and deceit: (1) compensatory damages of no less than $50,000.00, and (2) punitive damages as a multiple of compensatory damages.

On March 16, 2015, we filed a second motion to disqualify the Bellows Law Group, P.C and Bellows & Bellows, P.C.

We believe that the litigation is entirely without merit as the declaration of any cash dividends was not permissible under Delaware law due to the financial condition of our Company at the time. Due the improvement in the financial condition of our Company subsequent to March 6, 2014, the dividend owing to the shareholders of Series A Preferred Stock has subsequently been declared and the amount due to Mr. Bellows has been paid to him. Our response to the amended complaint is due March 23, 2015.

Redemption Litigation

On August 25, 2014, Joel Bellows filed a complaint against our Company and Benjamin Warner in the Chancery Division of the Circuit Court of Cook County, Illinois. In the complaint, Bellows alleges that he is entitled to redeem his cumulative Series A Preferred Stock at a price of $7.41 pursuant to the terms of our June 24, 2011, private placement memorandum. Bellows alleges that we violated his rights under the private placement memorandum by unreasonably and vexatiously denying his request for redemption.

In the complaint, Bellows alleges that an actual controversy exists between the parties whether Bellows is entitled to immediate redemption of his cumulative Series A Preferred Stock. Bellows seeks a declaration and order that we are immediately obligated to redeem all 105,000 shares of his cumulative Series A Preferred Stock for a total price of $778,050.00. Bellows alleges that our refusal to redeem his cumulative Series A Preferred Stock is a breach of the court ordered settlement. Bellows also alleges that our refusal to redeem his cumulative Series A Preferred Stock is a breach of the June 24, 2011 private placement memorandum. Bellows also asserts that Benjamin Warner, as our officer and director, breached his duties of loyalty, care, independence, and good faith and fair dealing to Bellows by knowingly failing to have us redeem his shares of Series A Preferred Stock, failing to provide him with information concerning his redemption rights, and putting his interests ahead of Bellows’ rights. Bellows alleges that he suffered damages, as a result, of at least $778,050.00.

Bellows seeks the following relief against us: (1) a declaration that we are immediately obligated to redeem all 105,000 shares Series A Preferred Stock for $778,050.00; (2) actual damages of $778,050.00; (3) prejudgment interest; (4) reasonable attorneys’ fees and costs; (5) such other relief as may be just and equitable. Bellows seeks the following relief against Benjamin Warner: (1) actual damages of $778,050.00; (2) an award of punitive damages of at least $2,000,000.00; (3) reasonable attorney’s fees and costs; and (4) such other relief as may be just and equitable.

On October 7, 2014, we and Benjamin Warner filed a motion to disqualify Bellows Law Group, P.C. and Bellows & Bellows, PC, pursuant to Rules 1.9 and 1.10 of the Illinois Code of Professional Conduct. On December 2, 2014, Bellows Law Group PC voluntarily withdrew as counsel for Joel Bellows. Joel Bellows is now represented by attorney Cary Goldberg.

On November 4, 2014, Bellows sought, and was granted, a substitution of judges as of right and the case was reassigned to Judge David Atkins.

On December 30, 2014, we and Benjamin Warner filed a motion to dismiss Counts I, II and IV of the complaint pursuant to 735 ILCS 5/2-615 and to dismiss Counts I and III of the complaint pursuant to 735 ILCS 5/2-619(a)(9). Bellows filed a response to the motion to dismiss on February 4, 2015. We filed our reply brief on March 13, 2015. A hearing is scheduled for April 29, 2015.

We believe that this litigation is without merit as net proceeds received on the settlement of the LANS matter has not been finalized due to the uncertainty regarding the fee agreement entered into with Dentons LLP. The resolution of our fee agreement with Dentons LLP could substantially reduce the net settlement proceeds received and thereby affect Bellows right to redemption at this time.

Citation to Recover Property filed against the Company and others

On June 14, 2014, in a proceeding to probate the estate of Sigmund Eisenschenk (“Estate”) pending in the Circuit Court of Cook County, Illinois, a claimant, QTM Ventures, LLC (“Claimant”) was granted leave to file a Petition for Citation to Recover Property against us, Aaron Crane and Gregg Ryzepcynski.

In the Petition for Citation to Recover Property, the Claimant alleges that we; i)  breached our fiduciary duties to the deceased by wrongfully repurchasing 236,250 shares of our Common Stock (472,500 shares of our common stock prior to the reverse stock split) held by the deceased in our Company at a nominal value based upon the false assertion that the deceased breached a financing agreement; ii) conspired with Aaron Crane to divest the Estate of assets, and not protect the Estates assets; iii) committed  fraud by failing to properly notify the deceased  of our repurchase of the 236,250 shares of our common stock (472,500 shares of our common stock prior to the reverse stock split), at a nominal value, held by the deceased; and iv) converted the deceased’s shares by repurchasing the shares to prevent them from being acquired by the creditors to the Estate.

The Claimant seeks the following relief:

On July 11, 2014, we removed the Petition for Citation to Recover to the Northern District of Illinois.  On August 12, 2014, QTM filed a motion to remand the petition to the state court. After considering the written submissions of the parties, Judge Harry Leinenweber entered an order remanding the Petition to state court and denying QTM’s request for attorney fees.   

On February 18, 2015, a Claimant, American Milling LP (“American Milling”) filed a motion to vacate two orders entered on November 26, 2014, allowing Michael T. Lyon and Richard Lane’s claims (“Claims”) against the Estate. American Milling contends that the Claims were fraudulently filed by Lyon and Lane who had no interest in the underlying judgments. American Millings also contends that the judgments were partially satisfied and the Claims should not have been allowed for the full amount of the judgments. On February 18, 2015, American Milling also filed a motion for sanctions against us and Crane pursuant to Illinois Supreme Court Rule 137 alleging that our Company and Crane convinced Lyon and Lane to file the allowed claims in an attempt to improperly recover under a judgment that was partially satisfied. On February 18, 2015, American Milling also filed a motion for partial summary judgment of the citation to recover against us seeking a finding that the Estate owns at least 88,750 shares of our Common Stock (177,500 shares of our common stock prior to the reverse stock split), which represents a portion of our shares at issue in the citation proceedings.

On March 4, 2015, we and Crane filed a response to American Millings motion to vacate asking the Court to vacate the allowed Claims but not for the reasons claimed by American Milling. We and Crane also filed briefs in opposition to the request for sanctions and in opposition to summary judgment.

On March 16, 2015, in a proceeding to administer the estate of the late Sigmund Eisenschenk, the Circuit Court in Cook County, Illinois (the “Court”) heard arguments relating to American Millings motion to vacate, motion for Rule 137 sanctions, and motion for partial summary judgment. The Court ruled against us as follows: (i) finding that Sigmund Eisenschenk’s rights in our stock were not collected, recalled, or cancelled pursuant to an August 17, 2010, Judgment Order entered by the Honorable Amy J. St. Eve in the U.S. District Court for the Northern District of Illinois, Case No. 08  C 754, the October 28, 2010 Assignment of Judgment and Settlement Agreement, or otherwise by us, and therefore the Estate of Sigmund Eisenschenk owns no less than 88,750 shares of our Common Stock (177,500 shares of our Common Stock prior to the reverse stock split and which shares were previously held by Sigmund Eisenschenk having a current value of $3.50 per share, after the reverse stock split); ii) partially vacating Michael T Lyon or the Michael T Lyon Profit Sharing Plan and Richard Lane’s claims against the Estate and finding that a portion of these claims were partially satisfied by Eisenschenk during his life through collection of Eisenschenk’s interest in certain real estate; and iii) allowing the recovery of Rule 137 sanctions against us, Michael T Lyon or the Michael T Lyon Profit Sharing Plan, Richard Lane and Aaron Crane, the previous administrator of the Estate, based upon the Court’s finding that the October 9, 2012 claims filed against the Estate by Michael Lyon, Richard Lane and Aaron Crane, for the collection on the Judgment Order in the United States District Court, Northern District of Illinois, Eastern Division, in No. 08 C 754 (the “Claims”), were not well grounded in fact and not warranted by existing law, or a good faith argument for the extension, modification or reversal of existing law as the Judgment Order had already been partially satisfied by Michael Lyon and Richard Lane’s collection of certain real estate property owned by the late Sigmund Eisenschenk. The Court further found that Michael Lyon, Richard Lane, Aaron Crane’s and our testimony, in support of the Claims, constituted misrepresentations upon the Court, that the Claims were brought for an improper purpose, that we and Crane operated without candor to the Court, misrepresented facts, and failed to disclose conflicts to the Court. The amount of the sanctions to be assessed against them and us for expenses, attorney’s fees and costs associated with this matter are yet to be determined. Claims for attorney’s fees, expenses and costs are required to be filed with the Court on April 1, 2015. We will be given an opportunity to respond to the claims. The case is scheduled for a status on the claims on April 6, 2015.  We are currently considering our options and have charged other expense and accrued a liability of $490,625 in our financial statements for the year ended December 31, 2014 relating to these court orders.

Suit against Peter J. Schmiedel, Administrator of the estate of Sigmund Eisenschenk

We instituted litigation in the First Judicial District Court for Los Alamos County, New Mexico on September 12, 2013, to obtain declaratory relief against the Estate of the late Sigmund Eisenschenk (“Eisenschenk”), seeking a declaration of the status of certain vested and unvested shares of our Common Stock that were repurchased by us in 2010 and transferred to us in 2011. Eisenschenk and others were party to a 2005 formation agreement and had executed a financing term sheet with us whereby Eisenschenk was to contribute capital to us and that Eisenschenk would also receive shares of our Common Stock based on his capital contribution and successful completion of a capital raising for us. We seek a declaratory judgment stating that Eisenschenk did not satisfy the terms of the financing term sheet and that all non-vested shares which were granted to Eisenschenk were repurchased by us. In addition, we acquired a judgment against Eisenschenk from third parties and in partial satisfaction of that judgment, any vested shares owned by Eisenschenk or his controlled entities were acquired by assignment and transfer to us and that Eisenschenk owns no capital stock or options to acquire our capital stock of nor has any rights thereto.

The administrator of the Eisenschenk estate filed a motion to dismiss the matter on a forum of non conveniens arguing that the proceedings mentioned above in The Citation to recovery Property against us and others, was the appropriate forum to adjudicate our claims. This motion was denied, which was responded to by an answer contesting the allegations made by us and asserting a continued interest of Eisenschenk in our capital stock. This matter is tentatively scheduled for a trial on the merits on June 15, 2015. There is a possibility that the Illinois court in The Citation to recovery Property against us and others may make a ruling before the New Mexico trial is completed.

DETERMINATION OF OFFERING PRICE

The Selling Stockholders will determine at what price they may sell the offered Shares, and such sales may be made at prevailing market prices, or at privately negotiated prices.

SELLING STOCKHOLDERS

We have prepared this prospectus to allow the Selling Stockholders or their successors, assignees or other permitted transferees to sell or otherwise dispose of, from time to time, up to 2,069,525 Shares of Common Stock. This prospectus covers the offer and disposition by the Selling Stockholders identified below, or their transferee(s), of a total of 2,069,525 Shares of Common Stock of which 1,555,602 shares of Common Stock are currently outstanding, 388,923 Private Placement Warrant Shares are issuable upon exercise of the Private Placement Warrants issued in our private placement and 125,000 Consultant Shares are issuable upon exercise of the Consultant Warrant and Options. The Common Shares and Private Placement Warrants were acquired by the Selling Stockholders in connection with a private placement offering that was completed in December 2014 and January 2015 (the “Private Placement”). The Consultant Warrant and Options were issued as compensation to a consultant. We are registering the resale of the Shares as required by contractual obligations that we have with each of the Selling Stockholders. All of the securities were sold pursuant to an exemption from registration provided by Rule 506 of Regulation D under the Securities Act

The securities upon which the Shares may be issued were sold to the Selling Stockholders in the private financing pursuant to an exemption from registration provided by Rule 506 of Regulation D under the Securities Act. In connection with the private financing, entered into a registration rights agreement with the Selling Stockholders pursuant to which we agreed to file a registration statement to register the Shares. The Selling Stockholders made to us certain representations, warranties, covenants, and conditions customary for private placement investments to accredited investors.

The table below presents information regarding the Selling Stockholders and the Shares that they may sell or otherwise dispose of from time to time under this prospectus. The table is based on information supplied to us by the Selling Stockholders and reflects holdings as of April 1, 2015. Percentages of beneficial ownership are based upon 6,373,707 shares of Common Stock outstanding as of April 1, 2015. Beneficial ownership is determined under Section 13(d) of the Exchange Act and generally includes voting or investment power with respect to securities and including any securities that grant the Selling Stockholders the right to acquire Common Stock within 60 days of April 1, 2015. The Selling Stockholders have sole voting and investment power with respect to the Shares, subject to community property laws where applicable.

We do not know when or in what amounts the Selling Stockholders may sell or otherwise dispose of the Shares covered hereby. We currently have no agreements, arrangements or understandings with the Selling Stockholders regarding the sale of any of the Shares by their other than the registration rights agreements described below. The Selling Stockholders might not sell any or all of the Shares covered by this prospectus or may sell or dispose of some or all of the Shares other than pursuant to this prospectus. Because the Selling Stockholders may not sell or otherwise dispose of some or all of the Shares covered by this prospectus and because there are currently no agreements, arrangements or understandings with respect to the sale or other disposition of any of the Shares, we cannot estimate the number of the Shares that will be held by the Selling Stockholders after completion of the offering.

Each Selling Stockholder has indicated that neither the Selling Stockholders nor any of his, her or its affiliates has held any position or office or had any other material relationship with us in the past three years except as described in the footnotes to the table.

The Shares being offered under this prospectus may be offered for sale from time to time during the period the registration statement of which this prospectus is a part remains effective, by or for the accounts of the Selling Stockholders named below.

The Selling Stockholders, or their partners, pledgees, donees, transferees or other successors that receive the Shares and their corresponding registration in accordance with the registration rights agreement to which the Selling Stockholders are party, may sell up to all of the Shares shown in the table below under the heading “Total Shares Offered By Selling Stockholders in the Offering Covered by this Prospectus” pursuant to this Prospectus in one or more transactions from time to time as described below under “Plan of Distribution.” However, the Selling Stockholders is not obligated to sell any of the Shares offered by this prospectus.

Information about the Selling Stockholders may change from time to time. Any changed information with respect to which we are given notice will be included in prospectus supplements.