UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q


(Mark One)





þ

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





For the quarterly period ended June 30, 2012





OR


o

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


For the transition period from to .




Commission file number000-54059





VIROLAB, INC.


(Exact name of registrant as specified in its charter)





Delaware

(State or other jurisdiction of incorporation)

27-2787170

(IRS Employer Identification No.)





1840 Gateway Drive, Suite 200, Foster City, California 94404


(Address of principal executive offices)





(650) 283-2653


(Registrant’s telephone number, including area code)





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes þ No o




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


Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company þ





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





Indicate the number of shares outstanding of each of the issuer’s classes of the common stock, as of the latest practicable date: Common Stock, $0.0001 par value: 25,350,000 shares outstanding as of August 28, 2012.










PART I — FINANCIAL INFORMATION





Item 1. Financial Statements








VIROLAB, INC.(A Development Stage Company)BALANCE SHEETSJune 30,


March 31,2012

(unaudited)


2012

(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
8


$
40TOTAL ASSETS


8



40LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccrued expenses due to founder


94,295



81,295Other accounts payable


1,880



1,880TOTAL LIABILITIES


96,175



83,175STOCKHOLDERS' DEFICIT:Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued or outstandingCommon stock, $0.0001 par value; 100,000,000 shares authorized; 25,350,000 shares issued and outstanding


2,535



2,535Additional paid-in capital


2,674,913



2,150,850Deficit accumulated during the development stage


(2,773,615
)


(2,236,520
)TOTAL STOCKHOLDERS' DEFICIT


(96,167
)


(83,135)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
8


$
40





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





2








VIROLAB, INC.


(A Development Stage Company)


STATEMENT OF OPERATIONS


(unaudited)




Three months ended June 30, 2012


Three months ended June 30, 2011


May 4, 2010 (Inception) Through June 30, 2012Revenues


-



-



-Operating expenses:General and administrative

$
537,095


$
357,400


$
2,773,615Operating loss

$
537,095


$
357,400


$
2,773,615Net loss

$
(537,095
)

$
(357,400
)

$
(2,773,615
)Basic and diluted net loss per share

$
(0.11
)

$
(0.01
)Basic earnings (loss) per share - Basic and dilutedWeighted average number of common shares outstanding


25,350,000



7,022,741





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




3







VIROLAB, INC.


(A Development Stage Company)


STATEMENT OF STOCKHOLDERS’ DEFICIT


(Unaudited)




Three Months Ended

June 30,

2012


Three Months Ended

June 30,

2011


Inception

(May 4, 2010) through

June 30,

2012

(Cumulative)OPERATING ACTIVITIES:Net loss

$
(537,095
)

$
(357,400)


$
(2,773,615)Adjustments to reconcile net loss to net cash used in operating activities:Increase in accrued expenses due to founder


13,000



8,400



94,295Stock-based compensation


524,063



349,000



2,673,063Increase in other accounts payable


----



----



1,880Net cash used in operating activities


(32
)


---



(4,377
)FINANCING ACTIVITIES:Proceeds from the issuance of common stock


—



---



4,385Net increase (decrease) in cash and cash equivalents


(32
)


---



8Cash and equivalents at beginning of period


40



200



0Cash and equivalents at end of period

$
8


$
200


$
8




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




4


VIROLAB, INC.


(A Development Stage Company)


STATEMENT OF CASH FLOWS








June 30,

2012


June 30,

2011


Inception

(May 4, 2010) through

March 31,

2012

(Cumulative)OPERATING ACTIVITIES:Net loss

$
(537,095
)

$
(357,400)


$
(2,773,615)Adjustments to reconcile net loss to net cash used in operating activities:Increase in accrued expenses due to founder


13,000



8,400



94,295Stock-based compensation


524,063



—



2,673,063Increase in other accounts payable


----







1,880Net cash used in operating activities


(32)



---



(4,377)FINANCING ACTIVITIES:Proceeds from the issuance of common stock


—



---



4,385Net increase (decrease) in cash and cash equivalents


(32)



---



(32)Cash and equivalents at beginning of period


40



200



40Cash and equivalents at end of period

$
8


$
200


$
8





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


5


VIROLAB, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS


June 30, 2011


(Unaudited)


(Tabular amounts in thousands, except per share amounts, percentages and years)








1. Background Information





Virolab, Inc. (“the Company”) was incorporated in the state of Delaware on May 4, 2010 under the name Accelerated Acquisitions X, Inc. The Company was formed as a “shell company” with no operations while it sought new business opportunities.  On  March 8, 2011, we entered into a   Licensing Agreement,   pursuant to which the Company received an exclusive, non-transferrable worldwide license to specified technology, patents, intellectual property, know-how, trade secret information, clinical trial protocols and data, as well as commercial rights to:





·
an investigational therapeutic vaccine for the human papillomavirus (“HPV”) and HPV-related cancers and


·
a diagnostic blood test for HPV.





As a result of entering into the licensing agreement and undertaking efforts into the research and development its product candidates, the Company ceased to be a shell company. The Company changed its name to Virolab, Inc. on April 5, 2011. The Company operates in one reportable business segment, the development and commercialization of products to improve human healthcare.





The Company is currently in the development stage. All activities of the Company to date relate to its organization and acquiring rights to its product candidates. None of the Company’s product candidates have been approved for sale in any countries.








2. Stock-Based Compensation




The Company recognizes stock-based compensation expense in its statement of operations based on estimates of the fair value of employee stock option and stock grant awards as measured on the grant date. For stock options, the Company uses the Black-Scholes option pricing model to determine the value of the awards granted. The Company amortizes the estimated value of the options as of the grant date over the stock options’ vesting period, which is generally four years.





During the three months ended June 30, 2012, the Company did not enter into any agreements under which it agreed to grant stock-based compensation to any employees or any others. During the year ended March 31, 2012, the Company entered into employment agreements under which it agreed to grant options to purchase 2,550,000 shares of common stock to its officers. Pursuant to the terms of each of the employment agreements, the options will vest over approximately four years from the date each of the officers commenced employment and will have an exercise price of $0.10 per share. The Company granted options to these officers at the $0.10 per share exercise price, in part, because the employment agreements do not provide for the officers to receive any cash compensation until the Company secures at least $5 million in financing.





The Company has estimated the value of common stock into which the options are exercisable at $4 per share for financial reporting purposes. This amount was determined based on the minimum stock price required for listing on any Nasdaq market, and the amount also approximates a $100 million valuation for the entire Company, which is considered “micro-cap” by most equity analysts. The stock based compensation expense is an estimate and significant judgment was involved in attempting to determine the value of common stock. Virolab common stock has never traded publicly, and no stock has traded in private markets either, except for privately negotiated sales to the founder of the company and the founder of the technology from which the company subsequently licensed rights. No common stock has been sold in any transactions since Virolab emerged from its shell-company status. The Company does not have any offers for purchase of its common stock in any stage, and no stock is registered for resale with the Securities and Exchange Commission.





The Company believes the only material estimate used in estimating the value stock options was the estimated fair value of the common stock, and that assumed volatility, term, interest rate and dividend yield changes would be not result in material differences in stock option valuations. Based on the assumed value of common stock, the grant-date fair value of options granted during the year ended March 31, 2012 was $9,945,000. The Company recognized stock-based compensation expense of $2,149,000 for the year ended March 31, 2012, respectively, and $524,063 for the three months ended June 30, 2012 which was all included in general and administrative expenses. As of June 30, 2012, there was $6,236,000 of total unrecognized compensation cost related to unvested stock-based compensation awards and takes in to consideration the 400,000 options that expired March 31, 2012, which is expected to be recognized over the weighted average remaining vesting period of approximately 3.3 years.


6








The Company has reserved a total of 5,962,500 shares of common stock for issuance under its stock award plan, and issued 2,550,000 as of December 31, 2011 and per our Company’s Stock Plan the plan re-triggers to 25% of the total outstanding shares on January 1, 2012, therefore as of June 30, 2012 the Company has a reserve of 5,962,500 shares of common stock for issuance under its stock award plan.





Going Concern





The accompanying financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company has a deficit accumulated during the development stage of $2,773,615, accrued expenses to its founder of $94,295 and cash of only $8 as of June 30, 2012. The Company’s ability to continue as a going concern is dependent upon its ability to obtain financing necessary for it to meet its obligations, develop the products that it has licensed, and ultimately generate revenues from the sale of these products. The Company’s founder has agreed to fund certain administrative operating expenses of the Company until the Company succeeds in raising additional funds. Management’s plans include raising additional funds through an equity financing or licensing transaction in order to meet the Company’s obligations and develop its product candidates, but funding may not be available and the Company may be unsuccessful in raising additional capital of any type. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might arise as a result of this uncertainty.








3. Significant Accounting Policies





The significant accounting policies followed are:





USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





CASH AND CASH EQUIVALENTS - All cash, other than held in escrow, is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits.  Temporary cash investments with an original maturity of three months or less are considered to be cash equivalents.





RESEARCH AND DEVELOPMENT EXPENSES - Expenditures for research, development, and engineering of products are expensed as incurred.





COMMON STOCK - The Company records common stock issuances when all of the legal requirements for the issuance of such common stock have been satisfied.





REVENUE AND COST RECOGNITION - The Company has no current source of revenue; therefore the Company has not yet adopted any policy regarding the recognition of revenue or cost.


ADVERTISING COSTS - The Company's policy regarding advertising is to expense advertising when incurred.





INCOME TAXES - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.





The Company adopted the provisions of FASB ASC 740-10 "Uncertainty in Income Taxes" (ASC 740-10), on January 1, 2007. The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.


7





EARNINGS (LOSS) PER SHARE - Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. At June 30, 2012, the Company did not have any potentially dilutive common shares.





FINANCIAL INSTRUMENTS - In September 2006, the Financial Accounting Standards Board (FASB) introduced a framework for measuring fair value and expanded required disclosure about fair value measurements of assets and liabilities.  The Company adopted the standard for those financial assets and liabilities as of the beginning of the 2008 fiscal year and the impact of adoption was not significant. FASB Accounting Standards Codification (ASC) 820 "Fair Value Measurements and Disclosures" (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).  The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:





·
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.





·
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.





·
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.





Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2012. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include accounts receivable, other current assets, accounts payable, accrued compensation and accrued expenses. The fair value of the Company's notes payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.





On January 1, 2011, the Company applied ASC 820 for all non-financial assets and liabilities measured at fair value on a non-recurring basis. The adoption of ASC 820 for non-financial assets and liabilities did not have a significant impact on the Company's financial statements.





RECENT ACCOUNTING PRONOUNCEMENTS





Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB Accounting Standards CodificationTM (“ASC”) is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company.  Management has reviewed the aforementioned rules and releases and believes any effect will not have a material impact on the Company's present or future financial statements.




8




4. Equity Transactions





Preferred Stock





The Company has authorized 10,000,000 shares of preferred stock, with a par value of $0.0001 per share. The Company’s Board of Directors has the ability to determine the rights and preferences of any series of preferred stock issued. There are no shares of preferred stock currently issued or outstanding.





Common Stock





The Company has authorized 100,000,000 shares of common stock, with a par value of $0.0001 per share.





At inception (May 4, 2010), the Company issued 5,000,000 shares of common stock to Accelerated Venture Partners, LLC (“AVP”) for $2,000.





On February 27, 2011, AVP tendered 3,500,000 shares to the Company for cancellation. Also on February 27, the Company granted AVP an option to purchase 1,500,000 shares of common stock at par value in exchange for certain consulting services, and AVP immediately exercised this option. The Company has the option to repurchase the shares exercised under the option at par value if the below milestones are not met within a specified time:





·
Milestone 1 – Company’s right of repurchase will lapse with respect to 60% of the shares upon securing $5 million in available cash from funding;·
Milestone 2 – Company’s right of repurchase will lapse with respect to 40% of the Shares upon securing $10 million in available cash (inclusive of any amounts attributable to Milestone 1).





On February 27, 2011, the Company issued 22,350,000 shares of common stock to Virolab S de RL de CV (“Virolab Mexico”) at par value.





On March 31, 2012 there were 49,998 employee stock options that expired and are considered non-issued.





As of March 31, 2012, there were 25,350,000 shares issued and outstanding and 5,962,500 shares of common stock were reserved for issuance under the Company’s Stock Option Plan and 5,962,500 of these shares remained available for future issuance as of June 30, 2012. There were 68,687,500 shares of common stock available for future issuance.
  9





5. Income Taxes





The Company has not recognized an income tax benefit for its operating losses generated based on uncertainties concerning its ability to generate taxable income in future periods.  The tax benefit for the periods presented is offset by a valuation allowance established against deferred tax assets arising from the net operating losses and other temporary differences, the realization of which could not be considered more likely than not.  In future periods, tax benefits and related deferred tax assets will be recognized when management considers realization of such amounts to be more likely than not.  As of June 30, 2012 the Company had a loss and for the period May 4, 2010 (date of inception) through June 30, 2012.   The net operating losses resulting from operating activities result in deferred tax assets of approximately $96,159 at the effective statutory rates which will expire by the year 2031.  The deferred tax asset has been off-set by an equal valuation allowance.


There are no current or deferred income tax expense or benefit recognized for the period ended June 30, 2012.








6. License Agreement





On March 8, 2011, we entered into a Licensing Agreement,  pursuant to which the Company received an exclusive, non-transferrable worldwide license to specified technology, patents, intellectual property, know-how, trade secret information, clinical trial protocols and data, as well as commercial rights to:




·
an investigational therapeutic vaccine for the human papillomavirus (“HPV”) and HPV-related cancers and


·
a diagnostic blood test for HPV.





The license agreement covers a term of thirty (30) years, provided that the Company is not in breach or default of any of the terms or conditions contained in the agreement.  The continuation of the license is conditioned on the Company generating net revenues in the normal course of operations or the funding by the Company of specified amounts for qualifying research, development and commercialization expenses related to the licensed technology, as described in Note 8. The Company is required to fund certain specified expenses related to the commercialization of the licensed technology.  There are additional customary commercialization requirements covered in the licensing agreement.








7. Related Party Transactions





The Managing Partner of AVP is Timothy Neher, a director of the Company and the only officer of the Company prior to February 27, 2011. From inception through March 31, 2012, the Company paid $4,385 cash to AVP and accrued $94,295 for expenses due to AVP. See Note 4 for a description of the stock transactions involving AVP. See Note 8 for a description of commitments to AVP.





The President and majority stockholder of Virolab Mexico is Ricardo Rosales, a director of the Company and also an officer from February 27, 2011 through June 30, 2012. Dr. Rosales was the principal inventor of the technology licensed by the Company on February 27, 2011. Dr. Rosales is the only stockholder of Virolab Nevada LLC, the licensor of the technology, which acquired all rights to the technology directly from Virolab Mexico. See Note 4 for a description of the stock transaction involving Virolab Mexico. See Note 6 for a description of the license agreement with Virolab Nevada. Also see Note 8 for a description of commitments to Virolab Nevada under the license agreement.


10





8. Commitments and Contingencies





Under the terms of the license agreement under which the Company acquired the rights to its product candidates, in order to retain its rights to the licensed technology the Company must receive revenues or fund a minimum of $2 million in qualified research, development and commercialization expenses before March 8, 2014 (at least $0.5 million of which must be before March 8, 2012 and at least $1million before March 8, 2013). If the Company or a sublicense is successful in commercializing the therapeutic vaccine candidate or diagnostic test, the Company will be obligated to pay the licensor two percent (2%) of any royalties received if the Company grants any third parties royalty-bearing licenses to the licensed technology. In addition, the Company has agreed to pay the licensor a royalty of one quarter of one percent (0.25%) of all gross revenue resulting from use of the technology licensed by the Company. Although the Company did not spend the $0.5 million additional funds per the Licensing Agreement before March 8, 2012, we have not received a default letter and as of June 30, 2012, the Company was in negotiations to extend the terms of the Agreement.





On February 27, 2011, the Company entered into a Consulting Services Agreement with AVP.  The agreement requires AVP to provide the Company with certain advisory services that include reviewing the Company’s business plan, identifying and introducing prospective financial and business partners, and providing general business advice regarding the Company’s operations and business strategy. Cash compensation of $400,000 is due upon the Company securing $5 million in available cash from funding, and an additional $400,000 is due upon the Company securing $10 million in available cash from funding (inclusive of the first $5 million). The cash compensation is to be paid to AVP at the rate of $66,667 per month. The total cash compensation to be received by AVP is not to exceed $800,000 unless the Company receives an amount of funding in excess of $10 million. If the Company receives equity or debt financing that is an amount less than $5 million, in between $5 million and $10 million, or greater than $10 million, the cash compensation earned by the AVP under its consulting services agreement will be prorated. The Company has the option to make a lump sum payment to AVP in lieu of the monthly cash payments.





As permitted under Delaware law and in accordance with its Bylaws, Virolab indemnifies its officers and directors for certain expenses incurred from legal or other proceedings that arise as a result of the director or officer’s service to the Company. There is no limitation on the term of the indemnification and the maximum amount of potential future indemnification is unlimited. The Company currently does not have a directors and officers insurance policy that could limit its exposure and enable it to recover a portion of any future amounts paid. The Company believes the fair value of these officer and director indemnification agreements is minimal, and, accordingly, has not recorded any liabilities for these agreements as of March 31, 2012.





From time to time, Virolab may be involved in claims and other legal matters arising in the ordinary course of business. Management is not currently aware of any matters that it believes are likely to have a material adverse effect on its financial position or results of operations.





11


7. Subsequent Events
 
 On July 12, 2012, The Company entered into a modified Licensing Agreement that was originally signed on March 8, 2011, pursuant to which the Company received an exclusive, non-transferrable worldwide license to specified technology, patents, intellectual property, know-how, trade secret information, clinical trial protocols and data, as well as commercial rights to:
 
 ·
an investigational therapeutic vaccine for the human papillomavirus (“HPV”) and HPV-related cancers and
 ·
a diagnostic blood test for HPV.


The license agreement covers a term of thirty (30) years, provided that the Company is not in breach or default of any of the terms or conditions contained in the agreement.  The continuation of the license is conditioned on the Company generating net revenues in the normal course of operations or the funding by the Company of specified amounts for qualifying research, development and commercialization expenses related to the licensed technology, Under the terms of the license agreement under which the Company acquired the rights to its product candidates, in order to retain its rights to the licensed technology the Company must receive revenues or fund a minimum of $2 million in qualified research, development and commercialization expenses before July 12, 2015 (at least $0.5 million of which must be before July 12, 2013 and at least $1million before July 12, 2014). If the Company or a sublicense is successful in commercializing the therapeutic vaccine candidate or diagnostic test, the Company will be obligated to pay the licensor two percent (2%) of any royalties received if the Company grants any third parties royalty-bearing licenses to the licensed technology. In addition, the Company has agreed to pay the licensor a royalty of one quarter of one percent (0.25%) of all gross revenue resulting from use of the technology licensed by the Company. There are additional customary commercialization requirements covered in the licensing agreement.





On August 5, 2012, the Company received a letter of resignation from James A. D. Smith, its Chief Executive Officer and Director, effective as of August 5, 2012.





On August 21, 2012 the Company received a letter of resignation from Matthew Loar, its Chief Financial Officer, effective as of August 21, 2012.





On August 22, 2012 the Board of Directors appointed the Chairman of the Company Ricardo Rosales as the Chief Executive Officer of the Company.







12


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





Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Current Report on Form 10-Q are forward-looking statements that involve risks and uncertainties. The Company’s Annual Report on Form 10-K, filed with the SEC on August 24, 2012, provides examples of risks, uncertainties and events that may cause our actual results to differ materially from those implied or projected in this Current Report on Form 10-Q. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.





Overview





We are a development-stage biopharmaceutical company that recently licensed the exclusive development and commercialization rights to a therapeutic vaccine for treatment of pre-cancerous lesions of the cervix and infections with the human papillomavirus, or HPV, virus. We also have an exclusive license to a blood-based diagnostic test for HPV infections. Before we licensed the rights for these two HPV product candidates we were a “blank check” company and had no operations. Shares of our common stock are not registered for resale, and accordingly there is no public trading market for our common stock. We have a very limited amount of cash and will have to raise significant funds in order to further develop our product candidates.





Plan of Operation





We believe that the HPV therapeutic vaccine which we plan to develop has the potential to be the first therapeutic to clear pre-cancerous and cancerous lesions of the cervix along with the underlying HPV viral infection. This belief is based on the results of two phase 2 clinical trials and one phase 3 clinical conducted in Mexico in which cancerous and pre-cancerous cervical lesions were eliminated or regressed in 88% to 97% of the patients. In addition, detectable HPV virus was eliminated from approximately 50% of the 1,246 patients treated in the three trials. All studies showed the vaccine candidate to be well tolerated, although headaches and other flu-like symptoms appeared in some of the patients.





In addition to the therapeutic vaccine candidate, Virolab has licensed rights to a specific blood-based diagnostic test for HPV. Currently, diagnosis of an infection with HPV requires a gynecological examination as well as a cervical tissue sample. We believe that a diagnosis from a simple blood draw will be less expensive and more convenient for patients.





We are evaluating our options to commercialize the HPV therapeutic vaccine candidate and the HPV diagnostic test. These product candidates have not been approved for commercial sale anywhere in the world, and each country has different requirements for approval, so the commercialization process is likely to be lengthy and complex. We may employ different strategies in different areas of the world, such as sublicensing development and commercialization rights for some territories while retaining rights for other territories. Based on the historical work of Virolab S de RL de CV, or Virolab Mexico, (which is the company that conducted the development work prior to its licensing of development and commercialization rights to us through Virolab Nevada, LLC, or Virolab Nevada) in the country of Mexico, we believe that the path to obtain government approval may be shorter in the Latin America countries.





We will not be able to commercialize our therapeutic vaccine candidate or our diagnostic test without additional capital. We are evaluating various means of raising this capital, including through the sale of equity securities, licensing agreements or other means. If we do not raise additional funds of at least $2 million for the advancement of our technology before July 12, 2015, we will lose our rights to the technology (including at least $0.5 million of which must be raised before July 12, 2013, and $1 million of which must be raised before July 12, 2014). We plan to seek at least $10 million of capital within the next 12 months, and plan to use these funds to determine the FDA’s requirements for approval of our therapeutic vaccine candidate, begin working on these requirements, file patents on our technology, broaden our pipeline of investigational drugs, vaccines and/or diagnostics, establish a biotechnology laboratory, and/or continue the process of seeking approval of our therapeutic vaccine candidate and diagnostic test outside of the United States.


13




Going Concern











Critical Accounting Policies and Use of Estimates





Our significant accounting policies are more fully disclosed in Note 1 to the financial statements we included in our Annual Report on Form 10-K for the period ended March 31, 2012, filed with the SEC on August 24, 2012. However, some of our accounting policies may be more particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. To date, due to our limited operations, we believe the only accounting policy which has required significant judgment or use of estimates, other than our assumption that we will continue as a going concern, is our estimated charge for stock-based compensation. Our accounting for stock-based compensation does not impact our current financial position, but does have a major impact on our statement of operations.





Stock-Based Compensation





We account for stock awards granted to recipients using an estimate of the fair value of the stock award on the date that the award is granted. This estimated fair value of the stock award is recognized as an expense in the statement of operations on a straight-line basis over the vesting period of the underlying stock award, which is generally four years for stock options granted to employees. There is a high degree of subjectivity involved in estimating the input values needed to estimate the fair value of stock options and other awards. For Virolab in particular, our stock has never traded and therefore it is difficult to determine the underlying fair value of our common stock on each date a stock award is made. Changes in the estimated value of the underlying stock will materially affect the resulting estimates of the fair values of the awards that are granted. Also, the expenses recorded for stock-based compensation in our financial statements may differ significantly from the actual value realized by the recipients, and these expenses are not adjusted to the actual amounts, if any, realized. Users of the financial statements should also understand that the expenses we recognize for stock-based compensation do not result in payments of cash by us.





Recent Accounting Pronouncements




We do not believe that there are any recently issued accounting pronouncements that we have not adopted which are likely to have a material impact on our financial position, results of operations or other disclosures.





Results of Operations





During the three months ended June 30, 2012, which was the first quarter of our fiscal year ending March 31, 2013, we had no revenue and incurred general and administrative expenses of $537,095. Our net loss was $537,095, due to general and administrative expenses. General and administrative expenses for the first quarter of fiscal 2012 consisted of $524,063 for the estimated value of stock-based compensation to our Chief Executive Officer and our Chief Financial Officer, and $13,000 for administrative support, which mostly consisted of document preparation and EDGAR filing with the SEC.


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The estimated value of stock based compensation for our two executive officers was based on the employment agreements with James A.D. Smith, our Chief Executive Officer, and Matthew M. Loar, our Chief Financial Officer, which provide for 1,250,000 and 900,000 stock options, respectively, each vesting over approximately four years beginning April 15, 2011 and May 23, 2011, respectively. The stock based compensation expense is an estimate and significant judgment was involved in attempting to determine the value of the company, Virolab, Inc., for which the options are exercisable. The actual value of our common stock may turn out to be much higher or lower than estimated amount, due to the lack of any reliable data on the Company’s current valuation. Virolab common stock has never traded publicly, and no stock has traded in private markets either, except for privately negotiated sales to the founder of the company and the founder of the technology from which the company subsequently licensed rights. No common stock has been sold in any manner since Virolab emerged from its shell-company status. The Company does not have any offers for purchase of its common stock in any stage, and no stock is registered with the Securities and Exchange Commission; therefore if any stock were to be sold the Company would need to do so under an effective registration statement or under an applicable exemption from registration. With the limited data points available to the Company and its board of directors regarding the Company’s valuation, we have estimated the value of common stock at $4 per share for financial reporting purposes. This amount was determined based on the minimum stock price required for listing on any Nasdaq market, and it closely approximates a $100 million valuation for the entire Company (considered “micro-cap” by most equity analysts), which we do not believe unreasonable for a development stage company with phase 3 data for an underserved medical condition. Each $1 change in estimated per-share value of our common stock would change the estimated stock-based compensation expense as reported for the quarter ending June 30, 2012 by approximately $131,015, so that a $3 estimated value for Virolab, Inc. common stock ($1 less per share) would result in general and administrative expenses of approximately $393,047 instead of the reported $524,063, likewise a $5 estimated value for Virolab, Inc. common stock would result in general and administrative expenses of approximately $655,078. Due to the low exercise price offered to our executive offers in their employment contracts ($0.10 per share, since they are currently not receiving any cash compensation) as compared to the estimated value for financial reporting purposes, the stock price volatility, stock option term and interest rate assumptions do not have a significant impact on the estimated value of the options as they would if the options were granted at market price. As noted above, the actual value of our common stock may turn out to be much higher or lower than the amount estimated for financial reporting purposes, due to the current lack of any reliable data on the Company’s current valuation.





General and administrative expenses were higher in the fiscal period ended in June 30, 2012 compared to the period ended June 30, 2011 because:





●
We were no longer a shell company for the fiscal 2012 period,●
We incurred higher costs to prepare and file our current and periodic reports with the SEC in the fiscal 2012 period, and





●
We incurred much higher costs for stock based compensation, as noted above, compared to no stock-based compensation in the fiscal 2011 period.


To date, our general and administrative expenses, which in most other cases are paid in cash by the reporting companies, have been funded by Accelerated Venture Partners, LLC, or AVP. Expenses include legal fees, accounting fees, costs associated with SEC filings and preparation of documents.





We expect that, if we are successful in securing additional capital, future general and administrative expenses will increase significantly as compared to the period ended June 30, 2011. In addition, we expect to incur research and development expenses as we seek to advance our product candidates.





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Liquidity and Capital Resource





As of June 30, 2012, we had a cash balance of only $8. There were no other assets, and accrued expenses were approximately $2,773,615, of which 94,295 was due to AVP, a related party. We had a stockholders’ deficit of approximately $96,167 and no means to pay the liabilities in excess of our assets. AVP has agreed to fund certain administrative operating expenses of Virolab until the Company succeeds in raising additional funds, at which point the administrative operating expenses will be due. However, AVP may seek to force earlier payment of the amounts which we owe, or AVP may decide in the future not to continue funding costs on behalf of Virolab, although we are not aware of any plans for them to do so. If we are not successful in raising additional capital, we may not be able to pay our liabilities and may have to cease operations.





We plan to seek to raise at least $10 million of capital through the sale of equity or other means that could dilute existing shareholders within the next 12 months, and plan to use these funds to determine the FDA’s requirements for approval of our therapeutic vaccine candidate, begin working on these requirements, file patents on our technology, broaden our pipeline of investigational drugs, vaccines and/or diagnostics, establish a biotechnology laboratory, and continue the process of seeking approval of our therapeutic vaccine candidate and diagnostic test outside of the United States. We are not presently able to determine the specific costs for our plans because we do not yet know the requirements for approval of either our therapeutic vaccine candidate or our diagnostic test.





We have a consulting agreement with AVP under which AVP has agreed to provide us with certain advisory services that include reviewing our business plan, identifying and introducing prospective financial and business partners, and providing general business advice regarding our operations and business strategy. Under the consulting agreement, cash compensation of $400,000 is due to AVP upon our securing $5 million in available cash from funding, and an additional $400,000 is due upon our securing $10 million in available cash from funding (inclusive of the first $5 million). The cash compensation is to be paid to AVP at the rate of $66,667 per month. The total cash compensation to be received by AVP under the consulting agreement is not to exceed $800,000 unless we receive an amount of funding in excess of $10 million. If we receive equity or debt financing that is an amount less than $5 million, in between $5 million and $10 million, or greater than $10 million, the cash compensation earned by the AVP under its consulting services agreement will be prorated. We have the option to make a lump sum payment to AVP in lieu of the monthly cash payments.





If we do not raise additional funds of at least $2 million for the advancement of our technology before July 12, 2015, we will lose our rights to the HPV technology that we recently licensed; at least $0.5 million of these additional funds must be raised before July 12, 2013, and at least $1 million must be raised before July 12, 2014.





If we or a sublicense is successful in commercializing our therapeutic vaccine candidate or diagnostic test, we will be obligated to pay the licensor two percent (2%) of any royalties received if we grant any third parties royalty-bearing licenses to the technology. In addition, we have agreed to pay the licensor a royalty of one quarter of one percent (0.25%) of all gross revenue resulting from use of the licensed technology.





We plan to measure our future liquidity primarily by the cash and working capital available to fund our operations, if we are ever able to raise capital. To date we have not raised any capital and, accordingly; do not have any capital available to fund our operations, as stated above. We will not be able to commercialize either our therapeutic vaccine candidate or our diagnostic test without additional capital. We are evaluating various means of raising our initial capital, including through the sale of equity securities, licensing agreements or other means. We expect to incur losses for at least several years into the future as we develop our investigational therapeutic vaccine and diagnostic test, and we are unable to estimate when, if ever, we will receive revenue or have a positive cash flow.





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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





We do not currently believe we are currently subject to any material interest rate risk, foreign currency exchange rate risk, or commodity price risk. Our ability to fund operations in the future will be subject to our ability to raise capital, which may be through the sale of equity securities. While we believe the sale of equity securities is unlikely to expose us to any material loss, we may not be able to continue operations if we are unable to agree with a buyer on a future price for our equity securities.








ITEM 4. CONTROLS AND PROCEDURES.





Evaluation of Disclosure Controls and Procedures


Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive and Financial Officers concluded that our disclosure controls and procedures were effective as of June 30, 2012, the end of the period covered by this report.





Changes in Internal Control over Financial Reporting


There were no changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.








PART II — OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS.





We are not currently party to any material legal proceedings, although from time to time we may be named as a party to lawsuits in the normal course of business.








ITEM 1A. RISK FACTORS.





There are no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, as filed with the U.S. Securities and Exchange Commission on August 24, 2012.








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





None.








ITEM 3. DEFAULTS UPON SENIOR SECURITIES.





None.








ITEM 4. (REMOVED AND RESERVED).





Not applicable.


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ITEM 5. OTHER INFORMATION.





None.








ITEM 6. EXHIBITS





Exhibit No.

Description31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document*101.INS*

XBRL Instance Document101.SCH*

XBRL Taxonomy Extension Schema Document101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document101.LAB*

XBRL Taxonomy Extension Label Linkbase Document101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document





*
To be filed by amendment








SIGNATURE





Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





VIROLAB, INC.Dated: August 28, 2012

/s/ Ricardo RosalesRicardo RosalesChief Executive Officer(Principal Executive Officer and Financial and Accounting Officer))







18