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EX-32.1 - MultiCell Technologies, Inc. | v175714_ex32-1.htm |
EX-23.1 - MultiCell Technologies, Inc. | v175714_ex23-1.htm |
EX-21.1 - MultiCell Technologies, Inc. | v175714_ex21-1.htm |
EX-31.1 - MultiCell Technologies, Inc. | v175714_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
Annual
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the fiscal year ended November 30,
2009.
|
¨
|
Transition
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the transition period from _________ to
________
|
Commission
File Number: 001-10221
|
|
MultiCell
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
|
|
DELAWARE
(State
or other jurisdiction of incorporation or organization)
|
52-1412493
(I.R.S.
Employer Identification No.)
|
68 Cumberland Street, Suite 301,Woonsocket, RI
02895
(Address
number of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code 401-762-0045
|
|
Securities
registered under Section 12(b) of the Exchange Act: None
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
|
Common Stock, $0.01 par value
per share
|
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
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 x 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 ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, indefinitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
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.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. As of May
31, 2009, the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates of the issuer was $2,804,259.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of February 25, 2010, the issuer
had 327,423,214 shares of issued and outstanding common stock, par value
$0.001.
DOCUMENTS INCORPORATED BY
REFERENCE. None.
MULTICELL
TECHNOLOGIES, INC.
FORM
10-K
TABLE
OF CONTENTS
PAGE
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PART I
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Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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11
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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23
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Item
2.
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PROPERTIES
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23
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Item
3.
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LEGAL
PROCEEDINGS
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23
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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23
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PART II
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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24
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Item
6.
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SELECTED
FINANCIAL DATA
|
24
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Item
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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24
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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29
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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29
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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29
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Item
9A(T).
|
CONTROLS
AND PROCEDURES
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30
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Item
9B.
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OTHER
INFORMATION
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31
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PART III
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||
Item
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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32
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Item
11.
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EXECUTIVE
COMPENSATION
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36
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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39
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Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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41
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Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
42
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PART IV
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||
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
44
|
SIGNATURES
|
44
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
F1
–
F22
|
2
FORWARD
LOOKING STATEMENTS
This
document contains forward-looking statements that are based upon current
expectations within the meaning of the Private Securities Reform Act of
1995. It is our intent that such statements be protected by the safe
harbor created thereby. Forward-looking statements involve risks and
uncertainties and our actual results and the timing of events may differ
significantly from the results discussed in the forward-looking
statements. Examples of such forward-looking statements include, but
are not limited to, statements about or relating to: the initiation, progress,
timing, scope and anticipated date of completion of preclinical research,
clinical trials and development of our drug candidates and potential drug
candidates by ourselves or our partners, including the dates of initiation and
completion of patient enrollment, and numbers of patients enrolled and sites
utilized for clinical trials; the size or growth of expected markets for our
potential drugs; our plans or ability to commercialize drugs, with or without a
partner; market acceptance of our potential drugs; increasing losses, costs,
expenses and expenditures; hiring plans; the sufficiency of existing resources
to fund our operations; expansion of our research and development programs and
the scope and size of research and development efforts; potential competitors;
our estimates of future financial performance; our estimates regarding
anticipated operating losses, capital requirements and our needs for additional
financing; future payments under lease obligations and equipment financing
lines; expected future sources of revenue and capital; our plans to obtain
limited product liability insurance; protection of our intellectual property;
and increasing the number of our employees and recruiting additional key
personnel.
Such
forward-looking statements involve risks and uncertainties, including, but not
limited to, those risks and uncertainties relating to difficulties or delays in
development, testing, obtaining regulatory approval, and undertaking production
and marketing of our drug candidates; difficulties or delays in patient
enrollment for our clinical trials; unexpected adverse side effects or
inadequate therapeutic efficacy of our drug candidates that could slow or
prevent product approval (including the risk that current and past results of
clinical trials or preclinical studies are not indicative of future results of
clinical trials); activities and decisions of, and market conditions affecting
current and future strategic partners; pricing pressures; accurately forecasting
operating and clinical trial costs; uncertainties of litigation and other
business conditions; our ability to obtain additional financing if necessary;
changing standards of care and the introduction of products by competitors or
alternative therapies for the treatment of indications we target; the
uncertainty of protection for our intellectual property or trade secrets,
through patents or otherwise; and potential infringement of the intellectual
property rights or trade secrets of third parties. In addition such
statements are subject to the risks and uncertainties discussed in the “Risk
Factors” section and elsewhere in this document.
3
PART
I
ITEM
1. BUSINESS
About MultiCell
Technologies, Inc.
MultiCell
Technologies, Inc. was incorporated in Delaware on April 28, 1970 as Exten
Ventures, Inc., and subsequently changed its name to Exten Industries, Inc.
(“Exten”). An agreement of merger between Exten and an entity then
called MultiCell Associates, Inc. (“MTI”), was entered into on March 20, 2004
whereby MTI ceased to exist and all of its assets, property, rights and powers,
as well as all debts due it, were transferred to and vested in Exten as the
surviving corporation. Effective April 1, 2004 Exten changed its name
to MultiCell Technologies, Inc. (“MultiCell”). MultiCell operates
three subsidiaries, MCT Rhode Island Corp. (wholly owned), Xenogenics
Corporation (“Xenogenics”) (56.4% owned), and MultiCell Immunotherapeutics, Inc.
(“MCTI”), of which MultiCell holds approximately 67% of the outstanding shares
(on an as if converted basis). As used herein, the “Company” refers
to MultiCell, together with MCT Rhode Island Corp., Xenogenics, and
MCTI. Our principal offices are at 68 Cumberland Street, Suite 301,
Woonsocket, RI 02895. Our telephone number is (401)
762-0045.
Following
the formation of MultiCell Immunotherapeutics, Inc. during September 2005 and
the recent in-licensing of drug candidates, the Company has been pursuing
research and development of therapeutics. Historically, the Company
has specialized in developing primary liver cell immortalization technologies to
produce cell-based assay systems for use in drug discovery. The
Company seeks to become an integrated biopharmaceutical company that will use
its proprietary technologies to discover, develop and commercialize new
therapeutics itself and with strategic partners.
Our Therapeutic
Programs
MultiCell
is pursuing research and development targeting degenerative neurological
diseases, including multiple sclerosis (MS) and cancer.
Until
recently, the development of therapeutics that interacted with our immune system
was focused on finding protective antigens and different ways to present them to
the immune system. The emphasis was on enhancing the human response –
stimulating high antibody production. With a greater understanding of
the immune system, the emphasis has shifted to modulating the immune system by
optimizing its response to infection and diseases such as cancer.
Today, we
know that the immune system is composed of two synergistic
elements: the innate immune system and the adaptive immune
system. Stimulation of the innate immune system, our early warning
system, plays a critical role in triggering the adaptive immune response – the
ability to produce antibodies and to stimulate a cellular immune
response. A stronger, initial innate immune response aids in the
generation of a more robust and longer-lasting adaptive immune
response.
The
innate immune system was once thought to be equivalent to the wall of a
castle. Historically, scientists thought the real action of immunity
and the immune system occurred once the castle wall was breached and the troops
inside, the T and B cells, began to produce antibodies and attack diseased
cells. The innate immune system, however, was found to be composed of
a family of ten receptor molecules, the Toll-like Receptors (TLRs), which act as
sentries to identify invaders and signal the alarm to mobilize the body’s array
of immune defenses. TLRs unleash both the innate and adaptive immune
systems.
Our
therapeutics business addresses significant unmet medical needs for the
treatment of neurological disorders and cancer through modulation of the innate
and adaptive immune response. Our therapeutic development platform is
designed to augment current therapeutic strategies via:
·
|
Modulation
of the noradrenaline-adrenaline neurotransmitter pathway for the treatment
of primary multiple sclerosis-related fatigue (PMSF) affecting over 70% of
all persons with multiple
sclerosis.
|
·
|
Triggering
the adaptive immune response thru Toll-like Receptor 3 (TLR3) signaling of
the innate immune system using double-stranded RNA (dsRNA) to treat
cancer.
|
·
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Enhancement
of antigen presentation to the immune system by targeting antigen delivery
for processing via the Fcg receptor for the
treatment of autoimmune disease and
cancer.
|
·
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In vivo generation and
expansion of specific immune system cells targeted against an autoimmune
response, or infectious agents, or
tumors.
|
Our
therapeutic development platform has several advantages:
·
|
Modulation
of noradrenergic neurons without effecting seratoninergic neurons to
inhibit the reuptake of noradrenaline
(norepinephrine),
|
4
·
|
Our
therapeutic antibody technology, Epitope-based T-cell
Immunotherapy, can effectively deliver epitopes to the immune
system, and can produce positive clinical outcomes in cases where
tolerization is the targeted
response,
|
·
|
Unlike
DNA-based immunostimulatory CpG motifs or antisense and siRNA
technologies, our use of dsRNA signaling thru TLR3 is not species or
sequence-specific, and therefore has the potential to have application in
a broader spectrum of therapeutic applications,
and
|
·
|
Coupling
TLR3 signaling with our therapeutic antibody technology allows for the
delivery of disease-associated epitope peptides in concert with TLR3
signaling, creating more effective anticancer
therapeutics.
|
Our
portfolio of lead drug candidates is in various stages of preclinical and
clinical development:
·
|
MCT-125,
a Phase IIb therapeutic candidate for the treatment of PMSF with
demonstrated efficacy in 138
patients
|
·
|
MCT-465,
a preclinical adjuvant therapeutic candidate for the treatment of TLR3+
cancers
|
·
|
MCT-475,
a preclinical therapeutic candidate for the treatment of TLR3+ breast
cancer
|
Multiple
Sclerosis Therapeutic Program
Multiple
Sclerosis, or MS, is an autoimmune disease in which immune cells attack and
destroy the myelin sheath, which insulates neurons in the brain and spinal
cord. When the myelin is destroyed, nerve messages are sent more
slowly and less efficiently. Scar tissue then forms over the affected
areas, disrupting nerve communication. MS symptoms occur when the
brain and spinal cord nerves cease to communicate properly with other parts of
the body.
Approximately
350,000 individuals have been diagnosed with MS in the United States and more
than one million persons worldwide are afflicted with MS. An
estimated 10,000 new MS cases are diagnosed in the USA
annually. Initial symptoms typically manifest themselves between the
ages of 20 and 40; symptoms rarely begin before 15 or after 60 years of
age. Women are almost twice as likely to get MS as men, especially in
their early years. People of northern European heritage are more
likely to be affected than people of other racial backgrounds, and MS rates are
higher in the United States, Canada, and Northern Europe than in other parts of
the world. MS is very rare among Asians, North and South American
Indians, and Eskimos.
MCT-125
for the treatment of fatigue in patients with multiple sclerosis
Fatigue
is the most common symptom in MS. Overall, greater than 75% of
persons with MS report having fatigue, and 50% to 60% report it as the worst
symptom of their disease. Fatigue can severely affect an individual's
quality of life and functioning, even if the level of disability appears to be
insignificant to the outside observer. Many MS care providers are
unaware that fatigue is also a major reason for unemployment, especially for
those individuals with otherwise minor disability. Moreover, fatigue
in MS has a severe effect on patients' ability to feel as if they have control
over their illness. Perhaps the most dramatic evidence that fatigue
is a distinct symptom of MS comes from the clinical characteristics that have
been recognized by clinicians for years. These characteristics
include the sensitivity of MS fatigue patients to heat as well as the fact that
in about 30% of MS patients, fatigue predates other symptoms of
MS. In addition, clinical observation has shown that MS fatigue
exhibits relapsing-remitting characteristics. Many individuals appear
to have "fatigue relapses".
Individuals
can suffer from weeks of extraordinary fatigue for no apparent reason, then
report feeling not fatigued for a period of time followed by a relapse of
feeling fatigued; these episodes may or may not be associated with the typical
symptoms of an MS relapse. All of these characteristics suggest that
fatigue is not a secondary effect of MS, but is a primary part of the disease
itself.
In
December 2005, MultiCell exclusively licensed LAX-202 from Amarin Neuroscience
Limited (“Amarin”) for the treatment of fatigue in patients suffering from
multiple sclerosis. MultiCell renamed LAX-202 to MCT-125, and will
further evaluate MCT-125 in a pivotal Phase IIb/III clinical
trial. In a 138 patient, multi-center, double-blind placebo
controlled Phase II clinical trial conducted in the UK by Amarin, LAX-202
demonstrated efficacy in significantly reducing the levels of fatigue in MS
patients enrolled in the study. LAX-202 proved to be effective within
4 weeks of the first daily oral dosing, and showed efficacy in MS patients who
were moderately as well as severely affected. LAX-202 demonstrated
efficacy in all MS patient sub-populations including relapsing-remitting,
secondary progressive and primary progressive. Patients enrolled in
the Phase II trial conducted by Amarin also reported few if any side effects
following daily oral dosing of LAX-202. MultiCell intends to proceed
with the anticipated pivotal Phase IIb/III trial of MCT-125 using the data
generated by Amarin for LAX-202 following discussions with the regulatory
authorities.
MCT-465
and MCT-475 for the treatment of cancer
Worldwide,
breast cancer is the second most common type of cancer after lung
cancer. In 2005, breast cancer caused over 500,000 deaths worldwide,
and the number of cases worldwide has significantly increased, partly due to
modern lifestyles in the Western world. North American women have the
highest incidence of breast cancer in the world. Among US women,
breast cancer is the most common cancer and the second-most common cause of
cancer death after lung cancer. In 2007, breast cancer was expected
to cause over 40,000 deaths in the U.S. which is about 7% of deaths related to
cancer in general.
5
MCT-465
and MCT-475 are the first of a family of prospective cancer therapeutics based
on the use of our patented ETI antibody therapeutics technology in concert with
dsRNA TLR3 signaling technology. MCT-465 can be used as an adjuvant
therapy with standard chemotherapeutic agents, or with our MCT-475 antibody
therapeutic for the treatment of breast cancer where TLR3 is over expressed in
the breast cancer cells. MCT-465 and MCT 475 are in early-stage
preclinical development.
Stem
Cells and Cancer
Tumor
tissues are composed of a mixture of cells with some tumor cells exhibiting stem
cell-like properties (“cancer stem cells”). Cancer stem cells are
thought to play a role in a tumor’s resistance to therapy. While
significant progress has been made in developing cancer therapies that result in
cytoreduction and thus tumor regression, the control of cancer over a longer
interval and especially of metastatic disease, remains a key
goal. Cancer stem cells are believed to be responsible for cancer
relapse by being less sensitive to conventional therapies. Cancer
stem cells may offer a unique opportunity to identify and develop a new
generation of more effective anticancer agents (both small molecule therapeutics
and biotherapies).
MultiCell
owns exclusive rights to two issued U.S. patents (6,872,389 and 6,129,911), one
U.S. patent application (U.S. 2006/0019387A1), and several corresponding issued
and pending foreign patents and patent applications related to the isolation and
differentation of liver stem cells. The role of liver stem cells in
the carcinogenic process has recently led to a new hypothesis that
hepatocellular carcinoma arises by maturation arrest of liver stem
cells.
Primary
liver cancer begins in the cells of the liver itself. According to
the National Cancer Institute (NCI), in 2008 there were approximately 21,400 new
cases of primary liver cancer and intrahepatic bile duct cancer in the United
States, and approximately 18,400 of those cases resulted in
death. Hepatocellular carcinoma, resulting from Hepatitis B and
Hepatitis C infection, is the most common cancer in some parts of the world,
with more than 1 million new cases diagnosed each year. The NCI also
reports that hepatocellular carcinoma is associated with cirrhosis of the liver
in 50% to 80% of patients.
Primary
liver cancer is rarely discovered early, and often does not respond to current
treatment. For example, Sorafenib (Nexavar®) was approved by the Food
and Drug Administration in 2007 for use in advanced inoperable liver
cancer. Sorafenib is a targeted therapy designed to interfere with a
tumor’s ability to generate new blood vessels. However, Sorafenib has
been shown to only slow liver cancer from progressing for a few months longer
when compared to no treatment.
MultiCell
recently entered into a cooperative research and development agreement with
Maxim Biotech, Inc. which will initially focus on the development of a family of
life science research reagent tool kits which can be used to isolate liver stem
cells and liver cancer stem cells, and help to elucidate liver stem cell gene
function and their encoded proteins. MultiCell plans to further
leverage this research effort involving liver cancer stem cells to identify
therapeutic targets, and diagnostic and prognostic markers of liver
cancer. MultiCell will also seek to develop and patent therapeutic
product opportunities specifically targeting the treatment of primary liver
cancer and intrahepatic bile duct cancer.
Patents
and Proprietary Technology
Our
success depends in part on intellectual property protection and the ability of
our licensees to preserve those rights.
We use
certain licenses granted to us under various licensing agreements. We
also use trade secrets and proprietary knowledge unprotected by patents that we
protect, in part, by confidentiality agreements. It is our policy to
require our employees, directors, consultants, licensees, outside contractors
and collaborators, scientific advisory board members and other advisors to
execute confidentiality agreements upon the commencement of their relationships
with us. These agreements provide that all confidential information
made known to the individual in the course of the individual's relationship with
the Company be kept as confidential and not be disclosed to third parties except
in specific limited and agreed upon circumstances. We also require
signed confidentiality or material transfer agreements from any company that is
to receive our confidential information. In the case of employees,
consultants and contractors, the agreements generally provide that all
inventions conceived by the individual while rendering services to us shall be
assigned to us as the exclusive property of the Company. There can be
no guarantee that these agreements will not be violated or that we would have
adequate remedies for such violation or that our trade secrets or proprietary
knowledge will not become known by or independently developed by
competitors.
Any
proprietary protection that our Company can obtain and maintain will be
important to our business.
6
On
September 7, 2005, MCTI, entered into an Asset Contribution Agreement (the
“Agreement”) with MultiCell Technologies, Inc., Alliance Pharmaceutical Corp.
("Alliance"), and Astral, Inc. ("Astral," and together with Alliance,
("Transferors"). Pursuant to the Agreement, MCTI issued 490,000
shares of common stock to Alliance in consideration for the acquisition of
certain assets and the assumption of certain liabilities relating to
Transferors' business. The intellectual property acquired by MCTI
includes ten United States and twenty foreign issued and pending patents and
patent applications related to chimeric antibody technology, treatment of Type 1
diabetes, T-cell tolerance, toll-like receptor technology, dendritic cells,
dsRNA technology and immunosuppression.
In
December 2003, we acquired the exclusive worldwide rights to US Patent #
6129911, for Liver Stem Cells from Rhode Island Hospital. We agreed
to pay an annual license fee of $20,000 for the first three years of the
agreement and $10,000 per annum thereafter until a product is
developed. Once a product is developed, if ever, the annual license
fee will end and we will pay Rhode Island Hospital a 5% royalty on net sales of
any product we sell covered by the patent until we pay an aggregate of $550,000
in royalties and a 2% royalty thereafter until the expiration of the
patent. In April, 2005, the Company was granted US Patent # 6872389
for the liver stem cell invention of Dr. Ron Faris, MultiCell’s former Senior
Vice President and Chief Scientific Officer. This patent contains
twenty-four claims to a method of obtaining a population of liver cell clusters
from adult stem cells and is an important enhancement to the Company’s adult
stem cell portfolio. The Company has an exclusive, long-term license
agreement with Rhode Island Hospital for use of the following patents owned by
the hospital related to liver cell lines and Liver Assist Devices
(LADs):
US Patent
#6,017,760, Isolation and Culture of Porcine Hepatocytes, expires October 9,
2015;
US Patent
#6,107,043, Immortalized Hepatocytes, expires February 8, 2019;
US Patent
#6,129,911, Liver Stem Cell, expires October 10, 2017;
US Patent
# 6,858,146 Artificial Liver Apparatus and Method (Sybiol), expires on February
20, 2019; and
US Patent
# 6,872,389 Liver Stem Cell expires on July 8, 2019.
If we
generate revenues and pay royalties, the annual license fee structure does not
apply. Our agreement provides that we would pay a 5% royalty until we
pay Rhode Island Hospital an aggregate of $550,000. After that, the
royalty percentage decreases to 2% for the life of the patents.
On
November 3, 2003, Xenogenics was notified by the United States Patent and
Trademark Office that its patent application for an "Artificial Liver Apparatus
And Method", the Sybiol® Synthetic Bio-Liver Device, will be
allowed. United States patent 6,858,146 was issued in
2005. The Sybiol® trademark
is registered in the United States Patent and Trademark Office, number
2,048,080.
Government
Regulation
The FDA
and comparable regulatory agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the clinical development,
manufacture, marketing and distribution of drugs. These agencies and
other federal, state and local entities regulate research and development
activities and the testing, manufacture, quality control, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of our
drug candidates and drugs.
In the
United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic
Act and implementing regulations. The process required by the FDA
before our drug candidates may be marketed in the United States generally
involves the following:
|
•
|
completion
of extensive preclinical laboratory tests, preclinical animal studies and
formulation studies, all performed in accordance with the FDA’s good
laboratory practice, or GLP,
regulations;
|
|
•
|
submission
to the FDA of an IND application which must become effective before
clinical trials may begin;
|
|
•
|
performance
of adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug candidate for each proposed
indication;
|
|
•
|
submission
of a new drug application, or NDA, to the
FDA;
|
|
•
|
satisfactory
completion of an FDA preapproval inspection of the manufacturing
facilities at which the product is produced to assess compliance with
current GMP, or cGMP, regulations;
and
|
|
•
|
FDA
review and approval of the NDA prior to any commercial marketing, sale or
shipment of the drug.
|
This
testing and approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our drug candidates
will be granted on a timely basis, if at all.
7
Preclinical
tests include laboratory evaluation of product chemistry, formulation and
stability, as well as studies to evaluate toxicity in animals. The
results of preclinical tests, together with manufacturing information and
analytical data, are submitted as part of an IND application to the
FDA. The IND automatically becomes effective 30 days after receipt by
the FDA, unless the FDA, within the 30-day time period, raises concerns or
questions about the conduct of the clinical trial, including concerns that human
research subjects will be exposed to unreasonable health risks. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns
before the clinical trial can begin. Our submission of an IND, or
those of our collaborators, may not result in FDA authorization to commence a
clinical trial. A separate submission to an existing IND must also be
made for each successive clinical trial conducted during product
development. Further, an independent institutional review board, or
IRB, for each medical center proposing to conduct the clinical trial must review
and approve the plan for any clinical trial before it commences at that center
and it must monitor the clinical trial until completed. The FDA, the
IRB or the clinical trial sponsor may suspend a clinical trial at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk. Clinical testing also must
satisfy extensive Good Clinical Practice, or GCP, regulations and regulations
for informed consent.
Clinical
Trials: For purposes of an NDA submission and approval,
clinical trials are typically conducted in the following three sequential
phases, which may overlap:
|
·
|
Phase
I: The clinical trials are initially conducted in a limited population to
test the drug candidate for safety, dose tolerance, absorption,
metabolism, distribution and excretion in healthy humans or, on occasion,
in patients, such as cancer patients. In some cases,
particularly in cancer trials, a sponsor may decide to run what is
referred to as a “Phase Ib” evaluation, which is a second, safety-focused
Phase I clinical trial typically designed to evaluate the impact of the
drug candidate in combination with currently approved
drugs.
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Phase
II: These clinical trials are generally conducted in a limited patient
population to identify possible adverse effects and safety risks, to
determine the efficacy of the drug candidate for specific targeted
indications and to determine dose tolerance and optimal
dosage. Multiple Phase II clinical trials may be conducted by
the sponsor to obtain information prior to beginning larger and more
expensive Phase III clinical trials. In some cases, a sponsor
may decide to run what is referred to as a “Phase IIb” evaluation, which
is a second, confirmatory Phase II clinical trial that could, if positive
and accepted by the FDA, serve as a pivotal clinical trial in the approval
of a drug candidate.
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Phase
III: These clinical trials are commonly referred to as pivotal clinical
trials. If the Phase II clinical trials demonstrate that a dose
range of the drug candidate is effective and has an acceptable safety
profile, Phase III clinical trials are then undertaken in large patient
populations to further evaluate dosage, to provide substantial evidence of
clinical efficacy and to further test for safety in an expanded and
diverse patient population at multiple, geographically dispersed clinical
trial sites.
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In some
cases, the FDA may condition approval of an NDA for a drug candidate on the
sponsor’s agreement to conduct additional clinical trials to further assess the
drug’s safety and effectiveness after NDA approval. Such
post-approval trials are typically referred to as Phase IV clinical
trials.
New Drug
Application. The results of drug candidate development,
preclinical testing and clinical trials are submitted to the FDA as part of an
NDA. The NDA also must contain extensive manufacturing
information. Once the submission has been accepted for filing, by law
the FDA has 180 days to review the application and respond to the
applicant. The review process is often significantly extended by FDA
requests for additional information or clarification. The FDA may
refer the NDA to an advisory committee for review, evaluation and recommendation
as to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee, but it generally follows
such recommendations. The FDA may deny approval of an NDA if the
applicable regulatory criteria are not satisfied, or it may require additional
clinical data or an additional pivotal Phase III clinical trial. Even
if such data are submitted, the FDA may ultimately decide that the NDA does not
satisfy the criteria for approval. Data from clinical trials are not
always conclusive and the FDA may interpret data differently than we or our
collaborators do. Once issued, the FDA may withdraw a drug approval
if ongoing regulatory requirements are not met or if safety problems occur after
the drug reaches the market. In addition, the FDA may require further
testing, including Phase IV clinical trials, and surveillance programs to
monitor the effect of approved drugs which have been
commercialized. The FDA has the power to prevent or limit further
marketing of a drug based on the results of these post-marketing
programs. Drugs may be marketed only for the approved indications and
in accordance with the provisions of the approved label. Further, if
there are any modifications to a drug, including changes in indications,
labeling or manufacturing processes or facilities, we may be required to submit
and obtain FDA approval of a new NDA or NDA supplement, which may require us to
develop additional data or conduct additional preclinical studies and clinical
trials.
Fast Track
Designation. The FDA’s fast track program is intended to
facilitate the development and to expedite the review of drugs that are intended
for the treatment of a serious or life-threatening condition for which there is
no effective treatment and which demonstrate the potential to address unmet
medical needs for the condition. Under the fast track program, the
sponsor of a new drug candidate may request the FDA to designate the drug
candidate for a specific indication as a fast track drug concurrent with or
after the filing of the IND for the drug candidate. The FDA must
determine if the drug candidate qualifies for fast track designation within 60
days of receipt of the sponsor’s request.
8
If fast
track designation is obtained, the FDA may initiate review of sections of an NDA
before the application is complete. This rolling review is available
if the applicant provides and the FDA approves a schedule for the submission of
the remaining information and the applicant pays applicable user
fees. However, the time period specified in the Prescription Drug
User Fees Act, which governs the time period goals the FDA has committed to
reviewing an application, does not begin until the complete application is
submitted. Additionally, the fast track designation may be withdrawn
by the FDA if the FDA believes that the designation is no longer supported by
data emerging in the clinical trial process.
In some
cases, a fast track designated drug candidate may also qualify for one or more
of the following programs:
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Priority
Review. Under FDA policies, a drug candidate is eligible
for priority review, or review within a six-month time frame from the time
a complete NDA is accepted for filing, if the drug candidate provides a
significant improvement compared to marketed drugs in the treatment,
diagnosis or prevention of a disease. A fast track designated
drug candidate would ordinarily meet the FDA’s criteria for priority
review. We cannot guarantee any of our drug candidates will
receive a priority review designation, or if a priority designation is
received, that review or approval will be faster than conventional FDA
procedures, or that FDA will ultimately grant drug
approval.
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Accelerated
Approval. Under the FDA’s accelerated approval
regulations, the FDA is authorized to approve drug candidates that have
been studied for their safety and effectiveness in treating serious or
life-threatening illnesses, and that provide meaningful therapeutic
benefit to patients over existing treatments based upon either a surrogate
endpoint that is reasonably likely to predict clinical benefit or on the
basis of an effect on a clinical endpoint other than patient
survival. In clinical trials, surrogate endpoints are
alternative measurements of the symptoms of a disease or condition that
are substituted for measurements of observable clinical
symptoms. A drug candidate approved on this basis is subject to
rigorous post-marketing compliance requirements, including the completion
of Phase IV or post-approval clinical trials to validate the surrogate
endpoint or confirm the effect on the clinical
endpoint. Failure to conduct required post-approval studies, or
to validate a surrogate endpoint or confirm a clinical benefit during
post-marketing studies, will allow the FDA to withdraw the drug from the
market on an expedited basis. All promotional materials for
drug candidates approved under accelerated regulations are subject to
prior review by the FDA.
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When
appropriate, we and our collaborators intend to seek fast track designation or
accelerated approval for our drug candidates. We cannot predict
whether any of our drug candidates will obtain a fast track or accelerated
approval designation, or the ultimate impact, if any, of the fast track or the
accelerated approval process on the timing or likelihood of FDA approval of any
of our drug candidates.
Satisfaction
of FDA regulations and requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product or disease. Typically, if a drug candidate is intended to
treat a chronic disease, as is the case with some of our drug candidates, safety
and efficacy data must be gathered over an extended period of
time. Government regulation may delay or prevent marketing of drug
candidates for a considerable period of time and impose costly procedures upon
our activities. The FDA or any other regulatory agency may not grant
approvals for new indications for our drug candidates on a timely basis, if at
all. Even if a drug candidate receives regulatory approval, the
approval may be significantly limited to specific disease states, patient
populations and dosages. Further, even after regulatory approval is
obtained, later discovery of previously unknown problems with a drug may result
in restrictions on the drug or even complete withdrawal of the drug from the
market. Delays in obtaining, or failures to obtain, regulatory
approvals for any of our drug candidates would harm our business. In
addition, we cannot predict what adverse governmental regulations may arise from
future United States or foreign governmental action.
Other regulatory
requirements. Any drugs manufactured or distributed by us or
our collaborators pursuant to FDA approvals are subject to continuing regulation
by the FDA, including recordkeeping requirements and reporting of adverse
experiences associated with the drug. Drug manufacturers and their
subcontractors are required to register their establishments with the FDA and
certain state agencies, and are subject to periodic unannounced inspections by
the FDA and certain state agencies for compliance with ongoing regulatory
requirements, including cGMPs, which impose certain procedural and documentation
requirements upon us and our third-party manufacturers. Failure to
comply with the statutory and regulatory requirements can subject a manufacturer
to possible legal or regulatory action, such as warning letters, suspension of
manufacturing, seizure of product, injunctive action or possible civil
penalties. We cannot be certain that we or our present or future
third-party manufacturers or suppliers will be able to comply with the cGMP
regulations and other ongoing FDA regulatory requirements. If our
present or future third-party manufacturers or suppliers are not able to comply
with these requirements, the FDA may halt our clinical trials, require us to
recall a drug from distribution, or withdraw approval of the NDA for that
drug.
9
The FDA
closely regulates the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational activities and
promotional activities involving the Internet. A company can make
only those claims relating to safety and efficacy that are approved by the
FDA. Failure to comply with these requirements can result in adverse
publicity, warning letters, corrective advertising and potential civil and
criminal penalties. Physicians may prescribe legally available drugs
for uses that are not described in the drug’s labeling and that differ from
those tested by us and approved by the FDA. Such off-label uses are
common across medical specialties. Physicians may believe that such
off-label uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of physicians
in their choice of treatments. The FDA does, however, impose
stringent restrictions on manufacturers’ communications regarding off-label
use.
Need
for Government Approval
The use
of immortalized hepatocytes for drug discovery purposes does not require FDA
approval. However, some of our products will be subject to regulation
in the United States by the FDA and by comparable regulatory authorities in
foreign jurisdictions. The Sybiol synthetic bio-liver device will be
classified as a “biologic” regulated under the Public Health Service Act and the
Food, Drug and Cosmetic Act. The use of human immortalized liver
cells for this application will also be regulated by the
FDA. Development of therapeutic products of human use is a multi-step
process. The process required by the FDA before our drug candidates
may be marketed in the United States generally involves the
following:
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completion
of extensive preclinical laboratory tests, preclinical animal studies and
formulation studies all performed in accordance with the FDA’s good
laboratory practice, or GLP,
regulations;
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submission
to the FDA of an IND application which must become effective before
clinical trials may begin;
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performance
of adequate and well-controlled clinical trials to establish the safety
and efficacy of the product candidate for each proposed
indication;
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submission
of a new drug application, or NDA, to the
FDA;
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satisfactory
completion of an FDA preapproval inspection of the manufacturing
facilities at which the product is produced to assess compliance with
current GMP, or cGMP, regulations;
and
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FDA
review and approval of the NDA prior to any commercial marketing, sale or
shipment of the drug.
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The
testing and approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our drug candidates
will be granted on a timely basis, if at all.
Research
and Development
In fiscal
year 2009, our Company spent $195,990 on research and
development. Research and development costs during fiscal year 2008
were $317,130. Cost reductions related to research included lower
salaries, lower consulting fees and other operating
expenses. Further, the decrease in selling, general and
administrative expenses was achieved by reducing administrative and marketing
salaries and expenses.
Historically,
our research and development has also been funded to some extent by the National
Institute of Health (“NIH”) grants, Small Business Innovative Research (“SBIR”)
grants, and other similar grants.
Competition
We
compete in the segments of the pharmaceutical and biotechnology markets that are
highly competitive. We face significant competition from most
pharmaceutical companies as well as biotechnology companies that are also
researching and selling products similar to ours. Many of our
competitors have significantly greater financial, manufacturing, marketing and
drug development resources than we do. Large pharmaceutical companies
in particular have extensive experience in clinical testing and in obtaining
regulatory approvals for drugs. These companies also have
significantly greater research capabilities than we do. In addition,
many universities and private and public research institutes are active in
research, some in direct competition with us. We believe that our
ability to successfully compete will depend on, among other things:
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Our
drug candidates’ efficacy, safety and
reliability;
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The
speed at which we develop our drug
candidates;
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The
completion of clinical development and laboratory testing and obtaining
regulatory approvals for drug
candidates;
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The
timing and scope of regulatory approvals for our drug
candidates;
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Our
ability to manufacture and sell commercial quantities of a drug to the
market;
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Acceptance
of our drugs by physicians and other health care
providers;
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The
willingness of third party payors to provide reimbursement for the use of
our drugs;
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Our
ability to protect our intellectual property and avoid infringing the
intellectual property of others;
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The
quality and breadth of our
technology;
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Our
employees’ skills and our ability to recruit and retain skilled
employees;
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Our
cash flows under existing and potential future arrangements with
licensees, partners and other parties;
and
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The
availability of substantial capital resources to fund development and
commercialization activities.
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Our
competitors may develop drug candidates and market drugs that are less expensive
and more effective than our future drugs or that may render our drugs
obsolete. Our competitors may also commercialize competing drugs
before we or our partners can launch any drugs developed from our drug
candidates.
Other
companies that are early-stage are currently developing alternative treatments
and products that could compete with our drugs. These organizations
also compete with us to attract qualified personnel and potential parties for
acquisitions, joint ventures or other strategic alliances.
Employees
As of
November 30, 2009, we had two employees, both of whom are full-time
employees.
ITEM
1A. RISK FACTORS
Risks
Related To Our Business
Our drug candidates and cellular
systems technologies are in the early stages of clinical testing and we have a
history of significant losses and may not achieve or sustain
profitability.
Our drug
candidates are in the early stages of clinical testing and we must conduct
significant additional clinical trials before we can seek the regulatory
approvals necessary to begin commercial sales of our
drugs. Similarly, some of our cellular systems technologies are in
early stages of development and require further development before they may be
commercially viable. We have incurred a substantial accumulated
deficit since our inception in 1970. As of November 30, 2009, our
accumulated deficit was $39,620,302. Our losses have primarily
resulted from significant costs associated with the research and development
relating to our cellular systems technologies and other operating
costs. We expect to incur increasing losses for at least several
years, as we continue our research activities and conduct development of, and
seek regulatory approvals for, our drug candidates, and commercialize any
approved drugs and as we continue to advance our cellular systems technologies
business. If our drug candidates fail in clinical trials or do not
gain regulatory approval, or if our drugs and cellular systems technologies do
not achieve market acceptance, we will not achieve or maintain
profitability. If we fail to become and remain profitable, or if we
are unable to fund our continuing losses, you could lose all or part of your
investment.
Going
Concern
Our
independent auditors have added explanatory paragraph to their audit opinion
issued in connection with the financial statements for the year ended November
30, 2009, relative to our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Our ability to obtain additional funding
will determine our ability to continue as a going concern. Since
March 2008, the Company has operated on working capital provided by La Jolla
Cove Investors (“LJCI”). Under terms of the agreement, LJCI can convert a
portion of the convertible debenture by simultaneously exercising a warrant at
$1.09 per share. As of February 25, 2010 there are 8,281,959 shares remaining on
the stock purchase warrant and a balance of $82,820 remaining on the convertible
debenture. Should LJCI continue to exercise all of its remaining warrants
approximately $9.0 million of cash would be provided to the Company. The
agreement limits LJCI’s investment to an aggregate ownership that does not
exceed 9.9% of the outstanding shares of the Company. The Company expects that
LJCI will continue to exercise the warrants and convert the debenture over the
next year.
Our
business strategy of focusing on our therapeutic programs and technologies makes
evaluation of our business prospects difficult.
Our
business strategy of focusing on therapeutic programs and technologies is
unproven, and we cannot accurately predict our product development
success. Moreover, we have limited experience developing
therapeutics, and we cannot be sure that any product that we develop will be
commercially successful. As a result of these factors, it is
difficult to predict and evaluate our future business prospects.
11
We
are subject to a variety of general business risks.
We will be subject to the risks inherent in the ownership and operation of a research and development biotechnology venture such as regulatory setbacks and delays, fluctuations in expenses, competition from other biotechnology ventures and pharmaceutical companies, the general strength of regional and national economies, and governmental regulation. The Company’s products may fail to advance due to inadequate therapeutic efficacy, adverse effects, inability to finance clinical trials or other regulatory or commercial setbacks. Because certain costs of the Company will not generally decrease with decreases in financing capital or revenues, the cost of operating the Company may exceed the income there from. No representation or warranty can be made that the Company will be profitable or will be able to generate sufficient working capital.
We will be subject to the risks inherent in the ownership and operation of a research and development biotechnology venture such as regulatory setbacks and delays, fluctuations in expenses, competition from other biotechnology ventures and pharmaceutical companies, the general strength of regional and national economies, and governmental regulation. The Company’s products may fail to advance due to inadequate therapeutic efficacy, adverse effects, inability to finance clinical trials or other regulatory or commercial setbacks. Because certain costs of the Company will not generally decrease with decreases in financing capital or revenues, the cost of operating the Company may exceed the income there from. No representation or warranty can be made that the Company will be profitable or will be able to generate sufficient working capital.
Difficulties
encountered during challenging and changing economic conditions could adversely
affect our results of operations.
Our
future business and operating results will depend to a significant extent on
economic conditions in general. World-wide efforts to cut capital
spending, general economic uncertainty and a weakening global economy could have
a material adverse effect on us a variety of ways, including a scarcity of
financing needed to fund our current and planned operations, and the reluctance
or inability of potential strategic partners to consummate strategic
partnerships due to their own financial hardships. If we are unable to
effectively manage during the current challenging and changing economic
conditions, our business, financial condition, and results of operations could
be materially adversely affected.
If
we do not obtain adequate financing to fund our future research and development
and operations, we may not be able to successfully implement our business
plan.
We have
in the past increased, and plan to increase further, our operating expenses in
order to fund higher levels of research and development, undertake and complete
the regulatory approval process, and increase our administrative resources in
anticipation of future growth. We plan to increase our administrative
resources to support the hiring of additional employees that will enable us to
expand our research and product development capacity. We intend to
finance our operations with revenues from royalties generated from the licensing
of our technology, by selling securities to investors, through the issuance of
debt instruments, through strategic alliances, and by continuing to use our
common stock to pay for consulting and professional services.
We also
anticipate the need for additional financing in the future in order to fund
continued research and development and to respond to competitive
pressures. We anticipate that our future cash requirements may be
fulfilled by potential direct product sales, the sale of additional securities,
debt financing and/or the sale or licensing of our technologies. We
cannot guarantee, however, that enough future funds will be generated from
operations or from the aforementioned or other potential
sources. Although we raised gross proceeds of $1,510,240 and $144,925
during 2009 and 2008 from the exercise of stock warrants and the issuance of
notes payable to related parties, we do not have any binding commitment with
regard to future financing. If adequate funds are not available or
are not available on acceptable terms, we may be unable to pursue our
therapeutic programs, fund expansion of our cellular technologies business,
develop new or enhance existing products and services or respond to competitive
pressures, any of which could have a material adverse effect on our business,
results of operations and financial condition.
We
have never generated, and may never generate, revenues from commercial sales of
our drug and/or therapeutic candidates and we may not have drugs and / or
therapeutic products to market for at least several years, if ever.
We
currently have no drugs or therapeutic products approved by the Food and Drug
Administration, or FDA, or similar regulatory authorities that are available for
commercial sale anywhere in the world, and we cannot guarantee that we will ever
have marketable drugs or therapeutic products available for sale anywhere in the
world. We must demonstrate that our drug or therapeutic product
candidates satisfy rigorous standards of safety and efficacy to the FDA and
other regulatory authorities in the United States and abroad. We and
our partners will need to conduct significant additional research and
preclinical and clinical testing before we or our partners can file applications
with the FDA or other regulatory authorities for approval of our drug candidates
and therapeutic products. In addition, to compete effectively, our
drugs and therapeutic products must be easy to use, cost-effective and
economical to manufacture on a commercial scale, compared to other therapies
available for the treatment of the same conditions. We may not
achieve any of these objectives. We cannot be certain that the
clinical development of our drug candidates in preclinical testing or clinical
development will be successful, that they will receive the regulatory approvals
required to commercialize them, or that any of our other research programs will
yield a drug candidate suitable for entry into clinical trials. We do
not expect any of our drug and therapeutic products candidates to be
commercially available for several years, if at all. The development
of one or more of these drug candidates may be discontinued at any stage of our
clinical trials programs and we may not generate revenue from any of drug
candidates.
Clinical
trials may fail to demonstrate the desired safety and efficacy of our drug and /
or therapeutic candidates, which could prevent or significantly delay completion
of clinical development and regulatory approval.
Prior to
receiving approval to commercialize any of our drug and therapeutic candidates,
we must demonstrate with substantial evidence from well-controlled clinical
trials, and to the satisfaction of the FDA and other regulatory authorities in
the United States and abroad, that such drug candidate is both sufficiently safe
and effective. Before we can commence clinical trials, we must
demonstrate through preclinical studies satisfactory product chemistry,
formulation, stability and toxicity levels in order to file an investigational
new drug application, or IND, (or the foreign equivalent of an IND) to commence
clinical trials. In clinical trials we will need to demonstrate
efficacy for the treatment of specific indications and monitor safety throughout
the clinical development process. Long-term safety and efficacy have
not yet been demonstrated in clinical trials for any of our drug and therapeutic
candidates, and satisfactory chemistry, formulation, stability and toxicity
levels have not yet been demonstrated for our drug candidates or compounds that
are currently the subject of preclinical studies. If our preclinical
studies, clinical trials or future clinical trials are unsuccessful, our
business and reputation will be harmed.
12
All of
our drug and therapeutic candidates are prone to the risks of failure inherent
in drug development. Preclinical studies may not yield results that
would satisfactorily support the filing of an IND or comparable regulatory
filing abroad with respect to our drug candidates, and, even if these
applications would be or have been filed with respect to our drug and
therapeutic candidates, the results of preclinical studies do not necessarily
predict the results of clinical trials. Similarly, early-stage
clinical trials do not predict the results of later-stage clinical trials,
including the safety and efficacy profiles of any particular drug and
therapeutic candidate. In addition, there can be no assurance that
the design of our clinical trials is focused on appropriate disease types,
patient populations, dosing regimens or other variables which will result in
obtaining the desired efficacy data to support regulatory approval to
commercialize the drug and / or therapeutic. Even if we believe the
data collected from clinical trials of our drug and therapeutic candidates are
promising, such data may not be sufficient to support approval by the FDA or any
other United States or foreign regulatory authority. Preclinical and
clinical data can be interpreted in different ways. Accordingly, FDA
officials or officials from foreign regulatory authorities could interpret the
data in different ways than we or our partners do, which could delay, limit or
prevent regulatory approval.
Administering
any of our drug candidates and therapeutic products, or potential drug
candidates that are the subject of preclinical studies to animals may produce
undesirable side effects, also known as adverse effects. Toxicities
and adverse effects that we have observed in preclinical studies for some
compounds in a particular research and development program may occur in
preclinical studies or clinical trials of other compounds from the same
program. Such toxicities or adverse effects could delay or prevent
the filing of an IND or comparable regulatory filing abroad with respect to such
drug candidates or potential drug candidates or cause us to cease clinical
trials with respect to any drug candidate. In clinical trials,
administering any of our drug candidates to humans may produce adverse
effects. These adverse effects could interrupt, delay or halt
clinical trials of our drug candidates and could result in the FDA or other
regulatory authorities denying approval of our drug candidates for any or all
targeted indications. The FDA, other regulatory authorities, our
partners or we may suspend or terminate clinical trials at any
time. Even if one or more of our drug candidates were approved for
sale, the occurrence of even a limited number of toxicities or adverse effects
when used in large populations may cause the FDA to impose restrictions on, or
prevent, the further marketing of such drugs. Indications of
potential adverse effects or toxicities which may occur in clinical trials and
which we believe are not significant during the course of such trials may later
turn out to actually constitute serious adverse effects or toxicities when a
drug has been used in large populations or for extended periods of
time. Any failure or significant delay in completing preclinical
studies or clinical trials for our drug candidates, or in receiving and
maintaining regulatory approval for the sale of any drugs resulting from our
drug candidates, may severely harm our reputation and business.
Clinical trials are expensive, time
consuming and subject to delay.
Clinical
trials are very expensive and difficult to design and implement, in part because
they are subject to rigorous requirements. The clinical trial process
is also time consuming. According to industry sources, the entire
drug development and testing process takes on average 12 to 15
years. According to industry studies, the fully capitalized resource
cost of new drug development averages approximately $800 million; however,
individual trials and individual drug candidates may incur a range of costs
above or below this average. We estimate that clinical trials of our
most advanced drug candidates will continue for several years, but may take
significantly longer to complete. The commencement and completion of
our clinical trials could be delayed or prevented by several factors, including,
but not limited to:
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delays
in obtaining regulatory approvals to commence a clinical
trial;
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delays
in identifying and reaching agreement on acceptable terms with prospective
clinical trial sites;
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slower
than expected rates of patient recruitment and enrollment, including as a
result of the introduction of alternative therapies or drugs by
others;
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lack
of effectiveness during clinical
trials;
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unforeseen
safety issues;
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adequate
supply of clinical trial material;
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uncertain
dosing issues;
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introduction
of new therapies or changes in standards of practice or regulatory
guidance that render our clinical trial endpoints or the targeting of our
proposed indications obsolete;
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inability
to monitor patients adequately during or after treatment;
and
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inability
or unwillingness of medical investigators to follow our clinical
protocols.
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We do not
know whether planned clinical trials will begin on time, will need to be
restructured or will be completed on schedule, if at all. Significant
delays in clinical trials will impede our ability to commercialize our drug
candidates and generate revenue and could significantly increase our development
costs, any of which could significantly and negatively impact our results of
operations and harm our business.
If
we fail to enter into and maintain successful strategic alliances for certain of
our therapeutic products or drug candidates, we may have to reduce or delay our
drug candidate development or increase our expenditures.
Our
strategy for developing, manufacturing and commercializing certain of our
therapeutic products or drug candidates involves entering into and successfully
maintaining strategic alliances with pharmaceutical companies or other industry
participants to advance our programs and reduce our expenditures on each
program. However, we may not be able to maintain our current
strategic alliances or negotiate additional strategic alliances on acceptable
terms, if at all. If we are not able to maintain our existing
strategic alliances or establish and maintain additional strategic alliances, we
may have to limit the size or scope of, or delay, one or more of our drug
development programs or research programs or undertake and fund these programs
ourselves or otherwise reevaluate or exit a particular business. To
the extent that we are required to increase our expenditures to fund research
and development programs or our therapeutic programs or cellular systems
technologies on our own, we will need to obtain additional capital, which may
not be available on acceptable terms, or at all.
Our
proprietary rights may not adequately protect our technologies and drug
candidates.
Our
commercial success will depend in part on our obtaining and maintaining patent
protection and trade secret protection of our technologies and drug candidates
as well as successfully defending these patents against third-party
challenges. We will only be able to protect our technologies and drug
candidates from unauthorized use by third parties to the extent that valid and
enforceable patents or trade secrets cover them. Furthermore, the
degree of future protection of our proprietary rights is uncertain because legal
means afford only limited protection and may not adequately protect our rights
or permit us to gain or keep our competitive advantage.
The
patent positions of life sciences companies can be highly uncertain and involve
complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims
allowed in such companies’ patents has emerged to date in the United
States. The patent situation outside the United States is even more
uncertain. Changes in either the patent laws or in interpretations of
patent laws in the United States or other countries may diminish the value of
our intellectual property. Accordingly, we cannot predict the breadth
of claims that may be allowed or enforced in our patents or in third-party
patents. For example:
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we
or our licensors might not have been the first to make the inventions
covered by each of our pending patent applications and issued
patents;
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we
or our licensors might not have been the first to file patent applications
for these inventions;
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others
may independently develop similar or alternative technologies or duplicate
any of our technologies;
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it
is possible that none of our pending patent applications or the pending
patent applications of our licensors will result in issued
patents;
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our
issued patents and issued patents of our licensors may not provide a basis
for commercially viable drugs, or may not provide us with any competitive
advantages, or may be challenged and invalidated by third parties;
and
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we
may not develop additional proprietary technologies or drug candidates
that are patentable.
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14
We also
rely on trade secrets to protect our technology, especially where we believe
patent protection is not appropriate or obtainable. However, trade
secrets are difficult to protect. While we use reasonable efforts to
protect our trade secrets, our or our strategic partners’ employees,
consultants, contractors or scientific and other advisors may unintentionally or
willfully disclose our information to competitors. If we were to
enforce a claim that a third party had illegally obtained and was using our
trade secrets, our enforcement efforts would be expensive and time consuming,
and the outcome would be unpredictable. In addition, courts outside
the United States are sometimes less willing to protect trade
secrets. Moreover, if our competitors independently develop
equivalent knowledge, methods and know-how, it will be more difficult for us to
enforce our rights and our business could be harmed.
If we are
not able to defend the patent or trade secret protection position of our
technologies and drug candidates, then we will not be able to exclude
competitors from developing or marketing competing drugs, and we may not
generate enough revenue from product sales to justify the cost of development of
our drugs and to achieve or maintain profitability.
If
we are sued for infringing intellectual property rights of third parties, such
litigation will be costly and time consuming, and an unfavorable outcome would
have a significant adverse effect on our business.
Our
ability to commercialize drugs depends on our ability to sell such drugs without
infringing the patents or other proprietary rights of third
parties. Numerous U.S. and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the areas that we are
exploring. In addition, because patent applications can take several
years to issue, there may be currently pending applications, unknown to us,
which may later result in issued patents that our drug candidates may
infringe. There could also be existing patents of which we are not
aware that our drug candidates may inadvertently infringe.
Future
products of ours may be impacted by patents of companies engaged in competitive
programs with significantly greater resources. Further development of
these products could be impacted by these patents and result in the expenditure
of significant legal fees.
If a
third party claims that our actions infringe on their patents or other
proprietary rights, we could face a number of issues that could seriously harm
our competitive position, including, but not limited to:
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infringement
and other intellectual property claims that, with or without merit, can be
costly and time consuming to litigate and can delay the regulatory
approval process and divert management’s attention from our core business
strategy;
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substantial
damages for past infringement which we may have to pay if a court
determines that our drugs or technologies infringe upon a competitor’s
patent or other proprietary rights;
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A
court prohibiting us from selling or licensing our drugs or technologies
unless the holder licenses the patent or other proprietary rights to us,
which it is not required to do; and
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if
a license is available from a holder, we may have to pay substantial
royalties or grant cross licenses to our patents or other proprietary
rights.
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We
may become involved in disputes with our strategic partners over intellectual
property ownership, and publications by our research collaborators and
scientific advisors could impair our ability to obtain patent protection or
protect our proprietary information, which, in either case, would have a
significant impact on our business.
Inventions
discovered under our strategic alliance agreements become jointly owned by our
strategic partners and us in some cases, and the exclusive property of one of us
in other cases. Under some circumstances, it may be difficult to
determine who owns a particular invention, or whether it is jointly owned, and
disputes could arise regarding ownership of those inventions. These
disputes could be costly and time consuming, and an unfavorable outcome would
have a significant adverse effect on our business if we were not able to protect
or license rights to these inventions. In addition, our research
collaborators and scientific advisors have contractual rights to publish our
data and other proprietary information, subject to our prior
review. Publications by our research collaborators and scientific
advisors containing such information, either with our permission or in
contravention of the terms of their agreements with us, may impair our ability
to obtain patent protection or protect our proprietary information, which could
significantly harm our business.
To
the extent we elect to fund the development of a drug candidate or the
commercialization of a drug at our expense, we will need substantial additional
funding.
The
discovery, development and commercialization of drugs is costly. As a
result, to the extent we elect to fund the development of a drug candidate or
the commercialization of a drug at our expense, we will need to raise additional
capital to:
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expand
our research and development and
technologies;
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15
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fund
clinical trials and seek regulatory
approvals;
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build
or access manufacturing and commercialization
capabilities;
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implement
additional internal systems and
infrastructure;
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maintain,
defend and expand the scope of our intellectual property;
and
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hire
and support additional management and scientific
personnel.
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Our
future funding requirements will depend on many factors, including, but not
limited to:
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the
rate of progress and cost of our clinical trials and other research and
development activities;
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the
costs and timing of seeking and obtaining regulatory
approvals;
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the
costs associated with establishing manufacturing and commercialization
capabilities;
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the
costs of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property
rights;
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the
costs of acquiring or investing in businesses, products and
technologies;
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the
effect of competing technological and market developments;
and
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the
payment and other terms and timing of any strategic alliance, licensing or
other arrangements that we may
establish.
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Until we
can generate a sufficient amount of product revenue to finance our cash
requirements, which we may never do, we expect to finance future cash needs
primarily through public or private equity offerings, debt financings and
strategic alliances. We cannot be certain that additional funding
will be available on acceptable terms, or at all. If we are not able
to secure additional funding when needed, we may have to delay, reduce the scope
of or eliminate one or more of our clinical trials or research and development
programs or future commercialization initiatives.
We
have limited capacity to carry out our own clinical trials in connection with
the development of our drug candidates and potential drug candidates, and to the
extent we elect to develop a drug candidate without a strategic partner we will
need to expand our development capacity, and we will require additional
funding.
The
development of drug candidates is complicated, and requires resources and
experience for which we currently have limited resources. To the
extent we conduct clinical trials for a drug candidate without support from a
strategic partner we will need to develop additional skills, technical expertise
and resources necessary to carry out such development efforts on our own or
through the use of other third parties, such as contract research organizations,
or CROs.
If we
utilize CROs, we will not have control over many aspects of their activities,
and will not be able to fully control the amount or timing of resources that
they devote to our programs. These third parties also may not assign
as high a priority to our programs or pursue them as diligently as we would if
we were undertaking such programs ourselves, and therefore may not complete
their respective activities on schedule. CROs may also have
relationships with our competitors and potential competitors, and may prioritize
those relationships ahead of their relationships with us. Typically
we would prefer to qualify more than one vendor for each function performed
outside of our control, which could be time consuming and costly. The
failure of CROs to carry out development efforts on our behalf according to our
requirements and FDA or other regulatory agencies’ standards, or our failure to
properly coordinate and manage such efforts, could increase the cost of our
operations and delay or prevent the development, approval and commercialization
of our drug candidates.
If we
fail to develop additional skills, technical expertise and resources necessary
to carry out the development of our drug candidates, or if we fail to
effectively manage our CROs carrying out such development, the commercialization
of our drug candidates will be delayed or prevented.
16
We
currently have no marketing or sales staff, and if we are unable to enter into
or maintain strategic alliances with marketing partners or if we are unable to
develop our own sales and marketing capabilities, we may not be successful in
commercializing our potential drugs or therapeutic products.
We
currently have no internal sales, marketing or distribution
capabilities. To commercialize our products or drugs that we
determine not to market on our own, we will depend on strategic alliances with
third parties, which have established distribution systems and direct sales
forces. If we are unable to enter into such arrangements on
acceptable terms, we may not be able to successfully commercialize such products
or drugs. If we decide to commercialize products or drugs on our own,
we will need to establish our own specialized sales force and marketing
organization with technical expertise and with supporting distribution
capabilities. Developing such an organization is expensive and time
consuming and could delay a product launch. In addition, we may not
be able to develop this capacity efficiently, or at all, which could make us
unable to commercialize our products and drugs.
To the
extent that we are not successful in commercializing any products or drugs
ourselves or through a strategic alliance, our product revenues will suffer, we
will incur significant additional losses and the price of our common stock will
be negatively affected.
We
have no manufacturing capacity and depend on our partners or contract
manufacturers to produce our products and clinical trial drug supplies for each
of our drug candidates and potential drug candidates, and anticipate continued
reliance on contract manufacturers for the development and commercialization of
our potential products and drugs.
We do not
currently operate manufacturing facilities for clinical or commercial production
of our drug candidates or potential drug candidates that are under
development. We have no experience in drug formulation or
manufacturing, and we lack the resources and the capabilities to manufacture any
of our drug candidates on a clinical or commercial scale. We
anticipate reliance on a limited number of contract
manufacturers. Any performance failure on the part of our contract
manufacturers could delay clinical development or regulatory approval of our
drug candidates or commercialization of our drugs, producing additional losses
and depriving us of potential product revenues.
Our
products and drug candidates require precise, high quality
manufacturing. Our failure or our contract manufacturer’s failure to
achieve and maintain high manufacturing standards, including the incidence of
manufacturing errors, could result in patient injury or death, product recalls
or withdrawals, delays or failures in product testing or delivery, cost overruns
or other problems that could seriously hurt our business. Contract
manufacturers often encounter difficulties involving production yields, quality
control and quality assurance, as well as shortages of qualified
personnel. These manufacturers are subject to ongoing periodic
unannounced inspection by the FDA, the U.S. Drug Enforcement Agency and other
regulatory agencies to ensure strict compliance with current good manufacturing
practices and other applicable government regulations and corresponding foreign
standards; however, we do not have control over contract manufacturers’
compliance with these regulations and standards. If one of our
contract manufacturers fails to maintain compliance, the production of our drug
candidates could be interrupted, resulting in delays, additional costs and
potentially lost revenues. Additionally, our contract manufacturer
must pass a preapproval inspection before we can obtain marketing approval for
any of our drug candidates in development.
If the
FDA or other regulatory agencies approve any of our products or our drug
candidates for commercial sale, we will need to manufacture them in larger
quantities. Significant scale-up of manufacturing may require
additional validation studies, which the FDA must review and
approve. If we are unable to successfully increase the manufacturing
capacity for a product or drug candidate, the regulatory approval or commercial
launch of any related products or drugs may be delayed or there may be a
shortage in supply. Even if any contract manufacturer makes
improvements in the manufacturing process for our products and drug candidates,
we may not own, or may have to share, the intellectual property rights to such
improvements.
In
addition, our contract manufacturers may not perform as agreed or may not remain
in the contract manufacturing business for the time required to successfully
produce, store and distribute our products and drug candidates. In
the event of a natural disaster, business failure, strike or other difficulty,
we may be unable to replace such contract manufacturer in a timely manner and
the production of our products or drug candidates would be interrupted,
resulting in delays and additional costs.
Switching
manufacturers may be difficult because the number of potential manufacturers is
limited and the FDA must approve any replacement manufacturer prior to
manufacturing our products or drug candidates. Such approval would
require new testing and compliance inspections. In addition, a new
manufacturer would have to be educated in, or develop substantially equivalent
processes for, production of our drug candidates after receipt of FDA
approval. It may be difficult or impossible for us to find a
replacement manufacturer on acceptable terms quickly, or at
all.
17
We
expect to expand our development, clinical research and marketing capabilities,
and as a result, we may encounter difficulties in managing our growth, which
could disrupt our operations.
We expect
to have significant growth in expenditures, the number of our employees and the
scope of our operations, in particular with respect to those drug candidates
that we elect to develop or commercialize independently or together with a
partner. To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial systems, expand
our facilities and continue to recruit and train additional qualified
personnel. Due to our limited resources, we may not be able to
effectively manage the expansion of our operations or recruit and train
additional qualified personnel. The physical expansion of our
operations may lead to significant costs and may divert our management and
business development resources. Any inability to manage growth could
delay the execution of our business plans or disrupt our
operations.
The
failure to attract and retain skilled personnel could impair our drug
development and commercialization efforts.
Our
performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel. The employment
of these individuals and our other personnel is terminable at will with short or
no notice. The loss of the services of any member of our senior
management, scientific or technical staff may significantly delay or prevent the
achievement of drug development and other business objectives by diverting
management’s attention to transition matters and identification of suitable
replacements, and could have a material adverse effect on our business,
operating results and financial condition. We also rely on
consultants and advisors to assist us in formulating our research and
development strategy. All of our consultants and advisors are either
self-employed or employed by other organizations, and they may have conflicts of
interest or other commitments, such as consulting or advisory contracts with
other organizations, that may affect their ability to contribute to
us. In addition, we believe that we will need to recruit additional
executive management and scientific and technical personnel. There is
currently intense competition for skilled executives and employees with relevant
scientific and technical expertise, and this competition is likely to
continue. Our inability to attract and retain sufficient scientific,
technical and managerial personnel could limit or delay our product development
efforts, which would adversely affect the development of our products and drug
candidates and commercialization of our products and potential drugs and growth
of our business.
Risks
Related to Our Industry
Our
competitors may develop products and drugs that are less expensive, safer, or
more effective, which may diminish or eliminate the commercial success of any
drugs that we may commercialize.
We
compete with companies that are also developing alternative products and drug
candidates. Our competitors may:
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develop
products and drug candidates and market products and drugs that are less
expensive or more effective than our future
drugs;
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commercialize
competing products and drugs before we or our partners can launch any
products and drugs developed from our drug
candidates;
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obtain
proprietary rights that could prevent us from commercializing our
products;
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initiate
or withstand substantial price competition more successfully than we
can;
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have
greater success in recruiting skilled scientific workers from the limited
pool of available talent;
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more
effectively negotiate third-party licenses and strategic
alliances;
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take
advantage of acquisition or other opportunities more readily than we
can;
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develop
products and drug candidates and market products and drugs that increase
the levels of safety or efficacy or alter other product and drug candidate
profile aspects that our products and drug candidates need to show in
order to obtain regulatory approval;
and
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introduce
technologies or market products and drugs that render the market
opportunity for our potential products and drugs
obsolete.
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18
We will
compete for market share against large pharmaceutical and biotechnology
companies and smaller companies that are collaborating with larger
pharmaceutical companies, new companies, academic institutions, government
agencies and other public and private research organizations. Many of
these competitors, either alone or together with their partners, may develop new
products and drug candidates that will compete with ours, as these competitors
may, and in certain cases do, operate larger research and development programs
or have substantially greater financial resources than we do. Our
competitors may also have significantly greater experience in:
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developing
products and drug candidates;
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undertaking
preclinical testing and clinical
trials;
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building
relationships with key customers and opinion-leading
physicians;
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obtaining
and maintaining FDA and other regulatory
approvals;
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formulating
and manufacturing; and
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launching,
marketing and selling products and
drugs.
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If our
competitors market products and drugs that are less expensive, safer or more
efficacious than our potential products and drugs, or that reach the market
sooner than our potential products and drugs, we may not achieve commercial
success. In addition, the life sciences industry is characterized by
rapid technological change. Because our research approach integrates
many technologies, it may be difficult for us to stay abreast of the rapid
changes in each technology. If we fail to stay at the forefront of
technological change we may be unable to compete effectively. Our
competitors may render our technologies obsolete by advances in existing
technological approaches or the development of new or different approaches,
potentially eliminating the advantages in our drug discovery process that we
believe we derive from our research approach and proprietary
technologies.
The
regulatory approval process is expensive, time consuming and uncertain and may
prevent us from obtaining approvals for the commercialization of some or all of
our products and drug candidates.
The
research, testing, manufacturing, selling and marketing of drug candidates are
subject to extensive regulation by the FDA and other regulatory authorities in
the United States and other countries, which regulations differ from country to
country. We may not market our potential drugs in the United States
until we receive approval of an NDA from the FDA. Obtaining an NDA
can be a lengthy, expensive and uncertain process. In addition,
failure to comply with the FDA and other applicable foreign and United States
regulatory requirements may subject us to administrative or judicially imposed
sanctions. These include warning letters, civil and criminal
penalties, injunctions, product seizure or detention, product recalls, total or
partial suspension of production, and refusal to approve pending NDAs, or
supplements to approved NDAs.
Regulatory
approval of an NDA or NDA supplement is never guaranteed, and the approval
process typically takes several years and is extremely expensive. The
FDA also has substantial discretion in the drug approval
process. Despite the time and expense exerted, failure can occur at
any stage, and we could encounter problems that cause us to abandon clinical
trials or to repeat or perform additional preclinical testing and clinical
trials. The number and focus of preclinical studies and clinical
trials that will be required for FDA approval varies depending on the drug
candidate, the disease or condition that the drug candidate is designed to
address, and the regulations applicable to any particular drug
candidate. The FDA can delay, limit or deny approval of a drug
candidate for many reasons, including:
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a
drug candidate may not be safe or
effective;
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FDA
officials may not find the data from preclinical testing and clinical
trials sufficient;
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the
FDA might not approve our or our contract manufacturer’s processes or
facilities; or
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the
FDA may change its approval policies or adopt new
regulations.
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The use
of immortalized hepatocytes for drug discovery purposes does not require FDA
approval.
The
Sybiol® synthetic bio-liver device will be classified as a "biologic" regulated
under the Public Health Service Act and the Food, Drug and Cosmetic
Act. The use of human immortalized liver cells for this application
will also be regulated by the FDA. We have not yet begun the
regulatory approval process for our Sybiol® biosynthetic liver device with the
FDA. We may, when adequate funding and resources are available, begin
the approval process. If we are able to validate the device design,
then we currently plan to find a partner to take the project
forward. Before human studies may begin, the cells provided for the
system will be subjected to the same scrutiny as the Sybiol
device. We will need to demonstrate sufficient process controls to
meet strict standards for a complex medical system. This means the
cell production facility will need to meet the same Good Manufacturing Practice
("GMP") standards as those pertaining to a pharmaceutical
company.
19
If
we receive regulatory approval, we will also be subject to ongoing FDA
obligations and continued regulatory review, such as continued safety reporting
requirements, and we may also be subject to additional FDA post-marketing
obligations, all of which may result in significant expense and limit our
ability to commercialize our potential drugs.
Any
regulatory approvals that we or our partners receive for our drug candidates may
also be subject to limitations on the indicated uses for which the drug may be
marketed or contain requirements for potentially costly post-marketing follow-up
studies. In addition, if the FDA approves any of our drug candidates,
the labeling, packaging, adverse event reporting, storage, advertising,
promotion and record-keeping for the drug will be subject to extensive
regulatory requirements. The subsequent discovery of previously
unknown problems with the drug, including adverse events of unanticipated
severity or frequency, may result in restrictions on the marketing of the drug,
and could include withdrawal of the drug from the market.
The FDA’s
policies may change and additional government regulations may be enacted that
could prevent or delay regulatory approval of our drug candidates. We
cannot predict the likelihood, nature or extent of adverse government regulation
that may arise from future legislation or administrative action, either in the
United States or abroad. If we are not able to maintain regulatory
compliance, we might not be permitted to market our drugs and our business could
suffer.
If
physicians and patients do not accept our drugs, we may be unable to generate
significant revenue, if any.
Even if
our drug candidates obtain regulatory approval, resulting drugs, if any, may not
gain market acceptance among physicians, healthcare payors, patients and the
medical community. Even if the clinical safety and efficacy of drugs
developed from our drug candidates are established for purposes of approval,
physicians may elect not to recommend these drugs for a variety of reasons
including, but not limited to:
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timing
of market introduction of competitive
drugs;
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clinical
safety and efficacy of alternative drugs or
treatments;
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cost-effectiveness;
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availability
of reimbursement from health maintenance organizations and other
third-party payors;
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convenience
and ease of administration;
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prevalence
and severity of adverse side
effects;
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other
potential disadvantages relative to alternative treatment methods;
and
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insufficient
marketing and distribution support.
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If our
drugs fail to achieve market acceptance, we may not be able to generate
significant revenue and our business would suffer.
The
coverage and reimbursement status of newly approved drugs is uncertain and
failure to obtain adequate coverage and reimbursement could limit our ability to
market any drugs we may develop and decrease our ability to generate
revenue.
There is
significant uncertainty related to the coverage and reimbursement of newly
approved drugs. The commercial success of our potential drugs in both
domestic and international markets is substantially dependent on whether
third-party coverage and reimbursement is available for the ordering of our
potential drugs by the medical profession for use by their
patients. Medicare, Medicaid, health maintenance organizations and
other third-party payors are increasingly attempting to contain healthcare costs
by limiting both coverage and the level of reimbursement of new drugs, and, as a
result, they may not cover or provide adequate payment for our potential
drugs. They may not view our potential drugs as cost-effective and
reimbursement may not be available to consumers or may not be sufficient to
allow our potential drugs to be marketed on a competitive
basis. Likewise, legislative or regulatory efforts to control or
reduce healthcare costs or reform government healthcare programs could result in
lower prices or rejection of coverage for our potential
drugs. Changes in coverage and reimbursement policies or healthcare
cost containment initiatives that limit or restrict reimbursement for our drugs
may cause our revenue to decline.
20
We
may be subject to costly product liability claims and may not be able to obtain
adequate insurance.
If we
conduct clinical trials in humans, we face the risk that the use of our drug
candidates will result in adverse effects. We cannot predict the
possible harms or side effects that may result from our clinical
trials. We may not have sufficient resources to pay for any
liabilities resulting from a claim excluded from, or beyond the limit of, our
insurance coverage.
In
addition, once we have commercially launched drugs based on our drug candidates,
we will face exposure to product liability claims. This risk exists
even with respect to those drugs that are approved for commercial sale by the
FDA and manufactured in facilities licensed and regulated by the
FDA. We intend to secure limited product liability insurance
coverage, but may not be able to obtain such insurance on acceptable terms with
adequate coverage, or at reasonable costs. There is also a risk that
third parties that we have agreed to indemnify could incur
liability. Even if we were ultimately successful in product liability
litigation, the litigation would consume substantial amounts of our financial
and managerial resources and may create adverse publicity, all of which would
impair our ability to generate sales of the affected product as well as our
other potential drugs. Moreover, product recalls may be issued at our
discretion or at the direction of the FDA, other governmental agencies or other
companies having regulatory control for drug sales. If product
recalls occur, such recalls are generally expensive and often have an adverse
effect on the image of the drugs being recalled as well as the reputation of the
drug’s developer or manufacturer.
We
may be subject to damages resulting from claims that our employees or we have
wrongfully used or disclosed alleged trade secrets of their former
employers.
Many of
our employees were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential
competitors. Although no such claims against us are currently
pending, we may be subject to claims that these employees or we have
inadvertently or otherwise used or disclosed trade secrets or other proprietary
information of their former employers. Litigation may be necessary to
defend against these claims. If we fail in defending such claims, in
addition to paying monetary damages, we may lose valuable intellectual property
rights or personnel. A loss of key research personnel or their work
product could hamper or prevent our ability to commercialize certain potential
drugs, which could severely harm our business. Even if we are
successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management.
We
use hazardous chemicals and radioactive and biological materials in our
business. Any claims relating to improper handling, storage or
disposal of these materials could be time consuming and costly.
Our
research and development processes involve the controlled use of hazardous
materials, including chemicals and radioactive and biological
materials. Our operations produce hazardous waste
products. We cannot eliminate the risk of accidental contamination or
discharge and any resultant injury from those materials. Federal,
state and local laws and regulations govern the use, manufacture, storage,
handling and disposal of hazardous materials. We may be sued for any
injury or contamination that results from our use or the use by third parties of
these materials. Compliance with environmental laws and regulations
is expensive, and current or future environmental regulations may impair our
research, development and production efforts.
In
addition, our partners may use hazardous materials in connection with our
strategic alliances. To our knowledge, their work is performed in
accordance with applicable biosafety regulations. In the event of a
lawsuit or investigation, however, we could be held responsible for any injury
caused to persons or property by exposure to, or release of, these hazardous
materials used by these parties. Further, we may be required to
indemnify our partners against all damages and other liabilities arising out of
our development activities or drugs produced in connection with these strategic
alliances.
Risks
Related To Our Common Stock
We
expect that our stock price will fluctuate significantly, and you may not be
able to resell your shares at or above your investment price.
The
market price of our common stock, as well as the market prices of securities of
companies in the life sciences and biotechnology sectors generally, have been
highly volatile and are likely to continue to be highly
volatile. While the reasons for the volatility of the market price of
our common stock and its trading volume are sometimes unknown, in general the
market price of our common stock may be significantly impacted by many factors,
including, but not limited to:
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results
from, and any delays in, the clinical trials programs for our products and
drug candidates;
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delays
in or discontinuation of the development of any of our products and drug
candidates;
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failure
or delays in entering additional drug candidates into clinical
trials;
|
21
|
·
|
failure
or discontinuation of any of our research
programs;
|
|
·
|
delays
or other developments in establishing new strategic
alliances;
|
|
·
|
announcements
concerning our existing or future strategic
alliances;
|
|
·
|
issuance
of new or changed securities analysts’ reports or
recommendations;
|
|
·
|
market
conditions in the pharmaceutical and biotechnology
sectors;
|
|
·
|
actual
or anticipated fluctuations in our quarterly financial and operating
results;
|
|
·
|
the
exercise of outstanding options and warrants, the conversion of
outstanding convertible preferred stock and debt and the issuance of
additional options, warrants, preferred stock and convertible
debt;
|
|
·
|
developments
or disputes concerning our intellectual property or other proprietary
rights;
|
|
·
|
introduction
of technological innovations or new commercial products by us or our
competitors;
|
|
·
|
Issues
in manufacturing our drug candidates or
drugs;
|
|
·
|
market
acceptance of our products and
drugs;
|
|
·
|
third-party
healthcare reimbursement policies;
|
|
·
|
FDA
or other United States or foreign regulatory actions affecting us or our
industry;
|
|
·
|
litigation
or public concern about the safety of our products, drug candidates or
drugs;
|
|
·
|
additions
or departures of key personnel; and
|
|
·
|
volatility
in the stock prices of other companies in our
industry.
|
These and
other external factors may cause the market price and demand for our common
stock to fluctuate substantially, which may limit or prevent investors from
readily selling their shares of common stock and may otherwise negatively affect
the liquidity of our common stock. In addition, when the market price
of a stock has been volatile, holders of that stock have instituted securities
class action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. Such a lawsuit could also divert the
time and attention of our management.
Our common stock is subject to penny
stock regulation, which may affect its liquidity.
Our
common stock is subject to regulations of the Securities and Exchange Commission
(the "Commission") relating to the market for penny stocks. Penny
stock, as defined by the Penny Stock Reform Act, is any equity security not
traded on a national securities exchange or quoted on the NASDAQ National Market
or SmallCap Market that has a market price of less than $5.00 per
share. The penny stock regulations generally require that a
disclosure schedule explaining the penny stock market and the risks associated
therewith be delivered to purchasers of penny stocks and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. The
broker-dealer must make a suitability determination for each purchaser and
receive the purchaser's written agreement prior to the sale. In
addition, the broker-dealer must make certain mandated disclosures, including
the actual sale or purchase price and actual bid offer quotations, as well as
the compensation to be received by the broker-dealer and certain associated
persons. The regulations applicable to penny stocks may severely
affect the market liquidity for our common stock and could limit your ability to
sell your securities in the secondary market.
It
is anticipated that dividends will not be paid in the foreseeable
future.
The
Company does not intend to pay dividends on its common stock in the foreseeable
future. There can be no assurance that the operation of the Company
will result in sufficient revenues to enable the Company to operate at
profitable levels or to generate positive cash flows. Further,
dividend policy is subject to the discretion of the Company's Board of Directors
and will depend on, among other things, the Company's earnings, financial
condition, capital requirements and other factors.
22
Our
common stock is thinly traded and there may not be an active, liquid trading
market for our common stock.
There is
no guarantee that an active trading market for our common stock will be
maintained on the OTCBB or that the volume of trading will be sufficient to
allow for timely trades. Investors may not be able to sell their
shares quickly or at the latest market price if trading in our stock is not
active or if trading volume is limited. In addition, if trading
volume in our common stock is limited, trades of relatively small numbers of
shares may have a disproportionate effect on the market price of our common
stock.
We
have convertible securities outstanding that can be converted into more shares
of common stock then we have currently authorized.
We have
warrants to purchase common stock, stock options, convertible debentures and
convertible preferred stock outstanding that if converted and/or exercised,
according to their terms can result in the requirement that we issue more shares
than we have currently authorized under our Certificate of
Incorporation. This could result in our default under such agreements
and may force us to amend the Certificate of Incorporation to authorize more
shares or seek other remedies. While we intend to redeem and remove
certain agreements in order to reduce the number of convertible securities
outstanding, there is no guarantee that we will be successful.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC
Regulation S-K.
ITEM
2. PROPERTIES
On March
26, 2008, the Company negotiated a lease agreement at 68 Cumberland Street,
Suite 301, Woonsocket RI 02895. The lease was a one year lease
commencing on May 1, 2008 through April 30, 2009. The Company has renewed
the lease through April 30, 2010. The Company agreed to pay $900 per
month. The Company expects to renew the lease when it expires on April 30,
2010. The leased facilities are fully utilized and adequate for our
current operations.
ITEM
3. LEGAL PROCEEDINGS
On May
14, 2008, George Colin filed a lawsuit in Orange County Superior Court against
the Company and W. Gerald Newmin alleging causes of action for breach of written
contract and intentional misrepresentation. In
September 2009, the case was dismissed in its entirety with prejudice
pursuant to a settlement agreement providing for a total payment of $105,000 to
Mr. Colin, of which $100,000 was covered by insurance.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
23
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the OTC Bulletin Board under the symbol
MCET.OB. Our stock is considered a penny stock and is, therefore,
subject to the Securities Enforcement Remedies and Penny Stock Reform Act of
1990. Penny stock is defined as any equity security not traded on a
national stock exchange or quoted on NASDAQ and that has a market price of less
than $5.00 per share. Additional disclosure is required in connection
with any trades involving a stock defined as a penny stock (subject to certain
exceptions); including the delivery, prior to any such transaction, of a
disclosure schedule explaining the penny stock market and the associated
risks. Broker-dealers who recommend such low-priced securities to
persons other than established customers and accredited investors are required
to satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchase
and receive the purchaser's written consent prior to the
transaction.
The table
below gives the range of high and low closing prices of our common stock for the
fiscal years ended November 30, 2009 and November 30, 2008 based on information
provided by the OTC Bulletin Board.
Fiscal
Year Ended November 30, 2009
High
|
Low
|
|||||||
First
quarter
|
$ | .0539 | $ | .004 | ||||
Second
quarter
|
$ | .0175 | $ | .009 | ||||
Third
quarter
|
$ | .034 | $ | .007 | ||||
Fourth
quarter
|
$ | .027 | $ | .013 |
Fiscal
Year Ended November 30, 2008
High
|
Low
|
|||||||
First
quarter
|
$ | .050 | $ | .025 | ||||
Second
quarter
|
$ | .027 | $ | .006 | ||||
Third
quarter
|
$ | .011 | $ | .004 | ||||
Fourth
quarter
|
$ | .020 | $ | .002 |
No cash
dividends have been paid on our common stock for the 2009 and 2008 fiscal years
and no change of this policy is under consideration by the Board of
Directors.
The
payment of cash dividends in the future will be determined by the Board of
Directors in light of conditions then existing, including our Company's
earnings, financial requirements, and opportunities for reinvesting earnings,
business conditions, and other factors. There are otherwise no
restrictions on the payment of dividends. The number of shareholders
of record of our Company's Common Stock on February 24, 2010 was approximately
339, not including any persons who hold their stock in “street
name”.
We did
not repurchase any of our shares during the fourth quarter of the fiscal year
covered by this report.
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC
Regulation S-K.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
Management’s Discussion and Analysis for the years ended November 30, 2009 and
2008 is presented below.
Overview
Following
the formation of MCTI during September 2005 and the recent in-licensing of drug
candidates, the Company is pursuing research and development of
therapeutics. Historically, the Company has specialized in developing
primary liver cell immortalization technologies to produce cell-based assay
systems for use in drug discovery. The Company seeks to become an
integrated biopharmaceutical company that will use its immune system modulation
technologies to discover, develop and commercialize new therapeutics itself and
with strategic partners.
24
On
October 9, 2007, MultiCell executed an exclusive license and purchase agreement
(the “Agreement”) with Corning Incorporated (“Corning”) of Corning, New
York. Under the terms of the Agreement, Corning has the right to
develop, use, manufacture, and sell MultiCell’s Fa2N-4 cell lines and related
cell culture media for use as a drug discovery assay tool, including biomarker
identification for the development of drug development assay tools, and for the
performance of absorption, distribution, metabolism, elimination and toxicity
assays (ADME/Tox assays). Corning paid MultiCell a non-refundable
license fee, purchased certain inventory and equipment related to MultiCell’s
Fa2N-4 cell line business, hired certain MultiCell scientific personnel, and
paid for access to MultiCell’s laboratories during the transfer of the Fa2N-4
cell lines to Corning. MultiCell retained and continues to support
all of its existing licensees, including Pfizer, Bristol-Myers Squibb, and
Eisai. MultiCell retained the right to use the Fa2N-4 cells for use
in applications not related to drug discovery or ADME/Tox
assays. MultiCell also retained rights to use the Fa2N-4 cell
lines and other cell lines to further develop its Sybiol® liver assist device,
to produce therapeutic proteins using the Company’s BioFactories™ technology, to
identify drug targets and for other applications related to the Company’s
internal drug development programs.
We have
operated and will continue to operate by minimizing expenses. Our
largest expenses relate to personnel and meeting the legal and reporting
requirements of being a public company. By utilizing consultants
whenever possible, and asking employees to manage multiple responsibilities,
operating costs are kept low. Additionally, a number of employees and
our Board of Directors receive Company stock in lieu of cash as all or part of
their compensation to help in the effort to minimize monthly cash
flow. With our strategic shift in focus on therapeutic programs and
technologies, however, we expect our future cash expenditures to increase
significantly as we advance our therapeutic programs into clinical
trials.
We intend
to add scientific and support personnel gradually. We want to add
specialists for our key research areas. These strategic additions
will help us expand our product offerings leading us to additional revenues and
profits. Of course as revenues increase, administrative personnel
will be necessary to meet the added workload. Other expenses, such as
sales and customer service, will increase commensurate with increased
revenues. The Company’s current research and development efforts
focus on development of future products and redesign of existing
products. Due to the ongoing nature of this research, we are unable
to ascertain with certainty the total estimated completion dates and costs
associated with this research. As with any research efforts, there is
uncertainty and risk associated with whether these efforts will produce results
in a timely manner so as to enhance the Company’s market
position. Company sponsored research and development costs related to
future products and redesign of present products are expensed as
incurred. For the years ended November 30, 2009 and 2008, research
and development costs were $195,990 and $317,130,
respectively. Research and development costs include such costs as
salaries, legal fees, employee benefits, compensation cost for options issued to
the Scientific Advisory Board, supplies and license fees.
The
Application of Critical Accounting Policies
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.
Research
and Development - Company sponsored research and development costs related to
future products and redesign of present products are expensed as
incurred. Such costs are offset partly by proceeds from research
grants.
Revenue
Recognition – In the years covered by this report on Form 10-K, the Company's
revenues have been generated primarily from license revenue under agreements
with Corning, Pfizer, and Eisai. Management believes such sources of
revenue will be part of the Company's ongoing operations. The Company
recognizes revenue from licensing and research agreements as services are
performed, provided a contractual arrangement exists, the contract price is
fixed or determinable and the collection of the contractual amounts is
reasonably assured. In situations where the Company receives payment
in advance of the performance of services, such amounts are deferred and
recognized as revenue as the related services are performed. Deferred
revenues associated with services expected to be performed within the 12 - month
period subsequent to the balance sheet date are classified as a current
liability. Deferred revenues associated with services expected to be
performed at a later date are classified as non-current
liabilities.
Stock-Based
Compensation –We account for stock based compensation in accordance with
generally accepted accounting principles, which requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values over the
period during which an employee is required to provide service in exchange for
the award (the vesting period), net of estimated forfeitures. The
estimation of fair value of stock options requires management to make estimates
for certain assumptions regarding risk-free interest rates, expected life of the
options, expected volatility of the price of our common stock, and the expected
dividend yield of our common stock.
Long-Lived
Assets - Long-lived assets that do not have indefinite lives, such as property
and equipment, license agreements, and patents are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Impairment losses are recognized
when events or changes in circumstances indicate that the undiscounted cash
flows estimated to be generated by such assets are less than their carrying
value and, accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses for assets to be held and used are
then measured based on the excess, if any, of the carrying amounts of the assets
over their fair values. Long-lived assets to be disposed of in a
manner that meets certain criteria are stated at the lower of their carrying
amounts or fair values less costs to sell and are no longer
depreciated.
25
Results of
Operations
The
following discussion is included to describe our consolidated financial position
and results of operations. The consolidated financial statements and
notes thereto contain detailed information that should be referred to in
conjunction with this discussion.
Year
Ended November 30, 2009 compared to Year Ended November 30, 2008
Revenue. Total revenue for
the year ended November 30, 2009 was $174,240, as compared to revenue of
$209,835 for the same period in the prior fiscal year, a decrease of
$35,595. For the year ended November 30, 2009, revenue consisted of
license revenue totaling $174,240 under agreements with Corning, Pfizer, and
Eisai. For the year ended November 30, 2008, revenue consisted of
license revenue totaling $190,521 under agreements with Corning, Pfizer, Eisai,
and Xenotech, plus revenue of $19,314 from sales of cells and related
media.
Operating Expenses. Total
operating expenses for the year ended November 30, 2009 were $988,969, as
compared to operating expenses of $2,300,818 for the year ended November 30,
2008, representing a decrease of $1,311,849 as compared to the prior fiscal
year. This decrease principally represents the net effect of the
following changes between 2009 and 2008: 1) the reduction in 2009 of
director fees by approximately $150,000 resulting from the change in the
compensation arrangement with directors; 2) a reduction in amortization of
intangibles of approximately $70,000 due to the write off of intangible assets
at November 30, 2008; 3) a reduction in the expense for director and officer
insurance of approximately $40,000; and 4) the write-down of intangible assets
due to impairment in value in 2008 in the approximate amount of
$1,060,000. At November 30, 2008, the Company reviewed its patent
portfolio strategy related to its Toll-like receptor 3 (TLR3) technology
acquired in September 2005 when MultiCell acquired the assets of Astral, Inc.
This intellectual property is the subject of three patent applications, and is
related to the Company's lead drug candidate MCT-465. The Company may decide to
cease further prosecution of the subject patent applications and terminate its
development work related to MCT-465. Accordingly, the Company wrote down the
value of the patent applications directly related to MCT-465 carried on its
balance sheet at November 30, 2008.
Other income/(expense). The
total of other expense, net of other income, increased from $3,953 for the year
ended November 30, 2008 to $29,143 for the year ended November 30, 2009,
representing an increase of $25,190. The principal cause of the
increase is that in the prior year there was a gain on the disposition of
equipment of $29,613 compared to a loss on disposal of $412 in
2009.
Net Loss. Net loss for the
year ended November 30, 2009 was $843,872, as compared to a net loss of
$2,094,936 for the year ended November 30, 2008, representing a decrease in the
net loss of $1,251,064 (60%). The primary reasons for the decrease
are the reductions in operating expenses as described above.
Preferred stock dividends. In
connection with the issuance of the Series B preferred stock and warrants,
commencing on the date of issuance of the Series B preferred stock until the
date a registration statement registering the common shares underlying the
preferred stock and warrants issued is declared effective by the SEC, the
Company will pay on each outstanding share of Series B preferred stock a
preferential cumulative dividend at an annual rate equal to the product of
multiplying (A) $100 per share by the higher of the Wall Street Journal Prime
Rate plus one percent (1%), or nine percent (9%). In no event will
the dividend rate be greater than 12% per annum. The dividend shall
be payable monthly in arrears in cash on the last day of each month based on the
number of shares of Series B preferred stock outstanding as of the first (1st)
day of such month. In the event the Company does not pay the Series B
preferred dividends when due, the conversion price of the Series B preferred
shares will be reduced to eighty-five percent (85%) of the otherwise applicable
conversion price. For the years ended November 30, 2009 and 2008, the
Company paid and/or accrued preferred dividends in the amount of $148,391 and
$149,203, respectively.
26
Liquidity
and Capital Resources
Since our
inception, we have financed our operations primarily through the issuance of
debt or equity instruments. The following is a summary of our key
liquidity measures at November 30, 2009 and November 30, 2008:
November
30, 2009
|
November
30, 2008
|
|||||||
Cash
and cash equivalents
|
$ | 396,554 | $ | 6,022 | ||||
Current
assets
|
$ | 402,996 | $ | 38,876 | ||||
Current
liabilities
|
(1,426,348 | ) | (1,825,606 | ) | ||||
Working
capital deficiency
|
$ | (1,023,352 | ) | $ | (1,786,730 | ) |
The
Company will have to raise additional capital in order to initiate Phase IIb
clinical trials for MCT-125, the Company’s therapeutic product for the treatment
of fatigue in multiple sclerosis patients. Management is evaluating
several sources of financing for its clinical trial
program. Additionally, with our strategic shift in focus to
therapeutic programs and technologies, we expect our future cash requirements to
increase significantly as we advance our therapeutic programs into clinical
trials. Until we are successful in raising additional funds, we may have to
prioritize our therapeutic programs and delays may be necessary in some of our
development programs.
Commencing
is about March 2008, the Company has operated on working capital provided by
LJCI in connection with its exercise of warrants issued to it by the Company
(which LJCI must exercise whenever it wants to convert amounts owning under the
convertible debenture it holds), all as discussed in more detail
below. The warrants are exercisable at $1.09 per share. As
of February 25, 2010 there were 8,281,959 shares remaining on the stock purchase
warrant. Should LJCI continue to exercise all of its remaining
warrants approximately $9.0 million of cash would be provided to the
Company. However, the Debenture Purchase Agreement (discussed below)
limits LJCI’s stock ownership in the Company to 9.99% of the outstanding shares
of the Company. The Company expects that LJCI will continue to
exercise the warrants and convert the debenture over the next year, but cannot
assure that LJCI will do so. We are investigating the possible sale or license
of certain assets that we did not already license to Corning in October
2007. We are presently pursuing discussions with companies operating
in the stem cell research market and the general life science research
market.
On July
14, 2006, the Company completed a private placement of Series B convertible
preferred stock. A total of 17,000 Series B shares were sold to
accredited investors at a price of $100 per share. The Series B
shares are convertible at any time into common stock at a conversion price
determined by dividing the purchase price per share of $100 by $0.32 per share
(the “Conversion Price”). The Conversion Price is subject to
equitable adjustment in the event of any stock splits, stock dividends,
recapitalizations and the like. In addition, the Conversion Price is
subject to weighted average anti-dilution adjustments in the event the Company
sells common stock or other securities convertible into or exercisable for
common stock at a per share price, exercise price or conversion price lower than
the Conversion Price then in effect in any transaction (other than in connection
with an acquisition of the securities, assets or business of another company,
joint venture and employee stock options). The conversion of the
Series B preferred stock is limited for each investor to 9.99% of the Company’s
common stock outstanding on the date of conversion. The Series B
preferred stock does not have voting rights. Commencing on the date
of issuance of the Series B preferred stock until the date a registration
statement registering the common shares underlying the preferred stock and
warrants issued was declared effective by the SEC, the Company paid on each
outstanding share of Series B preferred stock a preferential cumulative dividend
at an annual rate equal to the product of multiplying $100 per share by the
higher of (a) the Wall Street Journal Prime Rate plus 1%, or (b)
9%. In no event will the dividend rate be greater than 12% per
annum. During the fiscal year ended November 30, 2007 the Company
paid $73,800 and redeemed 738 shares of the Series B preferred stock. In the
event the Company does not pay the Series B preferred dividends when due, the
conversion price of the Series B preferred shares will be reduced to 85% of the
otherwise applicable conversion price.
The
Series B preferred stock was formerly redeemable under certain circumstances,
but those redemption provisions expired on July 14, 2008, two years after the
closing date of the placement of the Series B Shares.
In the
event of any dissolution or winding up of the Company, whether voluntary or
involuntary, holders of each outstanding share of Series B preferred stock shall
be entitled to be paid second in priority to the Series I preferred stockholders
out of the assets of the Company available for distribution to stockholders, an
amount equal to $100 per share of Series B preferred stock held plus any
declared but unpaid dividends. After such payment has been made in
full, such holders of Series B preferred stock shall be entitled to no further
participation in the distribution of the assets of the
Company.
27
On
February 28, 2007, we entered into a Debenture Purchase Agreement with La Jolla
Capital Investors (the “Debenture Purchase Agreement”) pursuant to which we sold
a convertible debenture to LJCI in a principal amount of $1,000,000 (receivable
in four payments) with an annual interest rate of 7.75% and maturing on February
28, 2008 (the “Initial Debenture”). The first payment of $250,000 was
received by us on March 7, 2007. We also entered into a Securities
Purchase Agreement with LJCI on February 28, 2007 (the “Securities Purchase
Agreement”) pursuant to which we agreed to sell a convertible debenture in a
principal amount of $100,000 with an annual interest rate of 4.75% and expiring
on February 28, 2012 (the “Second Debenture”, and together with the Initial
Debenture, the “Debentures”). In addition, we issued to LJCI a
warrant to purchase up to 10 million shares of our common stock (the “LJCI
Warrant”) at an exercise price of $1.09 per share, exercisable over the next
five years according to a schedule described in a letter agreement dated
February 28, 2007.
The
Debentures are convertible at the option of LJCI at any time up to maturity at a
conversion price equal to the lesser of the fixed conversion price of $1.00, or
80% of the average of the lowest three daily volume weighted average
trading prices per share of our common stock during the twenty trading days
immediately preceding the conversion date. The Initial Debenture
accrued interest at 7.75% per year prior to being settled in full, as discussed
below. The Second Debenture accrues interest at 4.75% per year
payable in cash or our common stock. Through November 30, 2009,
interest is being paid in cash on a monthly basis. If paid in stock,
the stock will be valued at the rate equal to the conversion price of the
Debentures in effect at the time of payment. For the Initial
Debenture, if the holder elects to convert a portion of the debentures and, on
the day that the election is made the volume weighted average price is below
$0.16, the Company shall have the right to repay that portion of the debenture
that holder elected to convert, plus any accrued and unpaid interest, at 150% of
each amount. In the event that the Company elects to repay that
portion of the debenture, holder shall have the right to withdraw its conversion
notice.
For the
Second Debenture, upon receipt of a conversion notice from the holder, the
Company may elect to immediately redeem that portion of the debenture that
holder elected to convert in such conversion notice, plus accrued and unpaid
interest. After February 28, 2008, the Company, at its sole
discretion, shall have the right, without limitation or penalty, to redeem the
outstanding principal amount of this debenture not yet converted by holder into
Common Stock, plus accrued and unpaid interest thereon.
The
Debentures required the Company to register the shares of common stock into
which the Debentures could be converted by the holder with the
SEC. The Company was unable to obtain SEC approval to register the
subject shares, and consequently, the Company and LJCI agreed to terminate the
Debenture Purchase Agreement and to allow LJCI to sell the common shares pledged
as collateral under the Debenture Purchase Agreement. As of November
30, 2007, LJCI had sold all of the common shares pledged as collateral and
received $202,081 in gross proceeds. Consequently, a balance of
$47,919 remained outstanding and owed to LJCI as a result of the Company’s
initial draw-down of $250,000 under the terms of the Debenture Purchase
Agreement. During the year ended November 30, 2008, LJCI converted
the remaining $47,919 balance into 4,710,250 shares of the Company’s common
stock subject to the terms set forth in the Debenture Purchase
Agreement.
Cash
provided by (used in) operating, investing and financing activities for the
years ended November 30, 2009 and November 30, 2008 is as follows:
November 30, 2009
|
November 30, 2008
|
|||||||
Operating
activities
|
$ | (1,112,064 | ) | $ | (570,607 | ) | ||
Investing
activities
|
17,356 | 20,013 | ||||||
Financing
activities
|
1,485,240 | 144,925 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 390,532 | $ | (405,669 | ) |
Operating
Activities
For the
year ended November 30, 2009, the most significant differences between our net
loss and our net cash used in operating activities are due to changes in working
capital, which included a decrease in accounts payable and accrued liabilities
of $285,704. For the year ended November 30, 2008, the most
significant differences between our net loss and our net cash used in operating
activities are due to non-cash charges included in our net loss for the
write-down of intangible assets due to impairment in value in the amount of
$1,061,365, services that are paid through the issuance of common stock or stock
options in the amount of $106,198, and for depreciation and amortization in the
aggregate amount of $80,255, plus changes in working capital, which included an
increase in accounts payable and accrued liabilities of $233,881.
Investing
Activities
Net cash
provided by investing activities in 2009 was related to the collections of
principal on a note receivable. Net cash provided by investing
activities in 2008 was related to the sale of property and equipment for cash
and collections of principal on a note receivable.
28
Financing
Activities
During
the year ended November 30, 2009, LJCI converted $13,855 of the 4.75%
Convertible Debenture into common stock and exercised warrants to purchase
1,385,541 shares of common stock at a price of $1.09 per
share. Additionally, we repaid short-term notes payable to two
related parties in the amount of $25,000. The remaining $30,000 of
the short-term notes payable to related parties was repaid subsequent to
November 30, 2009. During the year ended November 30, 2008, LJCI
converted $825 of the 4.75% Convertible Debenture into common stock and
exercised warrants to purchase 82,500 shares of common stock at a price of $1.09
per share. Additionally, we issued short-term notes payable to two related
parties in exchange for $55,000. In addition, the remaining balance
of $47,919 of the 7.75% Convertible Debenture was converted into common stock
during the year ended November 30, 2008.
Through
November 30, 2009, a significant portion of our financing has been provided
through private placements of preferred and common stock, the exercise of stock
options and warrants and issuance of convertible debentures. We have
in the past increased, and if funding permits plan to increase further, our
operating expenses in order to fund higher levels of product development,
undertake and complete the regulatory approval process, and increase our
administrative resources in anticipation of future growth. In
addition, acquisitions such as MCTI increase operating expenses and therefore
negatively impact, in the short term, the liquidity position of the
Company.
Commencing
in March 2008, the Company has operated on working capital provided by LJCI.
Under terms of the agreement LJCI can convert a portion of the convertible
debenture by simultaneously exercising a warrant at $1.09 per share. As of
February 25, 2010, there are 8,281,959 shares remaining on the stock purchase
warrant and a balance of $82,820 remaining on the convertible debenture. Should
LJCI continue to exercise all of its remaining warrants approximately $9.0
million of cash would be provided to the Company. The agreement limits LJCI’s
investment to an aggregate ownership that does not exceed 9.99% of the
outstanding shares of the Company. The Company expects that LJCI will continue
to exercise the warrants and convert the debenture over the next year. We
anticipate that our future cash requirements may be fulfilled by potential
direct product sales, the sale of additional equity securities, debt financing
and/or the sale or licensing of our technologies. We also anticipate
the need for additional financing in the future in order to fund continued
research and development and to respond to competitive pressures. We
cannot guarantee, however, that enough future funds will be generated from
operations or from the aforementioned or other potential sources. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to fund expansion, develop new or enhance existing products and
services or respond to competitive pressures, any of which could have a material
adverse effect on our business, results of operations and financial
condition.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC
Regulation S-K.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full
text of the Company's audited consolidated financial statements for the fiscal
years ended November 30, 2009 and 2008 begins on page F-1 of this Annual
Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On
January 15, 2008, MultiCell dismissed J.H. Cohn LLP ("Cohn") as MultiCell's
independent registered public accounting firm. The decision to dismiss Cohn was
approved by the Audit Committee of the Board of Directors of
MultiCell. The reports of Cohn on the financial statements
of MultiCell for the years ended November 30, 2006 and 2005 contained
no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle, but
did include explanatory paragraphs for the effects of a restatement
of the financial statements for the year ended November
30, 2004, the adoption of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" in 2006, and
the Company's ability to continue as a going concern.
During
the years ended November 30, 2006 and 2005 and through January 15, 2008, there
have been no disagreements with Cohn on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Cohn, would have caused
Cohn to make reference thereto in its reports on the financial statements of
MultiCell for such years. As previously reported in MultiCell's
Annual Report on Form 10-KSB filed on March 3, 2006, MultiCell and Cohn
identified errors in connection with the Company’s accounting for stock options
and warrants issued to consultants and scientific advisory board members during
fiscal years 2004 and 2005, which led to the conclusion that MultiCell did not
maintain effective internal controls over accounting for stock options and
warrants as of November 30, 2005. As reported in MultiCell's Annual Report on
Form 10-KSB filed on March 15, 2007, Cohn noted several deficiencies related to
the presentation of the basic financial statements and the accompanying notes to
the financial statements and proposed certain entries that should have been
recorded as part of the normal closing process. MultiCell's internal control
over financial reporting did not detect such matters and, therefore, was
determined to be not effective in detecting misstatements and disclosure
deficiencies as of November 30, 2006.
29
MultiCell
furnished a copy of the above disclosures to Cohn and requested that Cohn
furnish MultiCell with a letter addressed to the Securities and Exchange
Commission stating whether or not it agreed with the above disclosures. A copy
of Cohn’s letter was attached as Exhibit 16.1 to the report on Form
8-K. On January 15, 2008, MultiCell engaged Hansen, Barnett and
Maxwell, P.C. ("Hansen") as its new independent registered public accounting
firm to audit MultiCell’s financial statements for the year ending November 30,
2007 and to review the financial statements to be included in MultiCell's
quarterly report on Form 10-QSB for the quarters ending February 29, 2008, May
31, 2008 and August 31, 2008. Prior to the engagement of Hansen,
neither MultiCell nor anyone on behalf of MultiCell consulted with Hansen during
MultiCell's two most recent fiscal years and through January 15, 2008
in any manner regarding either: (A) the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on
MultiCell's financial statements; or (B) any matter that was the
subject of either a disagreement or a reportable event (as defined in
Item 304(a)(1)(iv) of Regulation S-B).
ITEM
9A(T). CONTROLS AND PROCEDURES
DISCLOSURE
CONTROLS AND PROCEDURES
We
maintain “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we
necessarily are required to apply our judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures.
Our
management, including our principal executive officer and principal financial
officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of November 30, 2009 and concluded that
the disclosure controls and procedures were not effective, because certain
deficiencies involving internal controls constituted material weaknesses as
discussed below. The material weaknesses identified did not result in the
restatement of any previously reported financial statements or any other related
financial disclosure, nor does management believe that it had any effect on the
accuracy of the Company’s financial statements for the current reporting
period.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control
system was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because
of inherent limitations, a system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our
management, including our principal executive officer and principal accounting
officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting using the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on its evaluation, our management concluded
that there is a material weakness in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a timely
basis. As of November 30, 2008 and 2009, the following material weaknesses
existed:
1.
|
Entity-Level
Controls: We did not maintain effective entity-level controls as defined
by the framework issued by COSO. Specifically, we did not effectively
segregate certain accounting duties due to the small size of our
accounting staff, and maintain a sufficient number of adequately trained
personnel necessary to anticipate and identify risks critical to financial
reporting.
|
2.
|
Information
Technology: We did not maintain effective controls over the segregation of
duties and access to financial reporting systems. Specifically, key
financial reporting systems were not appropriately configured to ensure
that certain transactions were properly processed with segregated duties
among personnel and to ensure that unauthorized individuals did not have
access to add or change key financial
data.
|
30
Due to
this material weakness, management has concluded that our internal control over
financial reporting was not effective as of November 30, 2008 and
2009.
In order
to mitigate these material weaknesses to the fullest extent possible, all
financial reports are reviewed by the Chief Financial Officer, who has limited
system access. In addition, regular meetings are held with the Board
of Directors and the Audit Committee. If at any time we determine a
new control can be implemented to mitigate these risks at a reasonable cost, it
is implemented as soon as possible.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
This
report shall not be deemed to be filed for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liabilities of that
section, and is not incorporated by reference into any filing of the Company,
whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended November 30, 2009 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
Item
9B. OTHER INFORMATION
None.
31
PART III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
The
Directors and Executive Officers of the Company
Our
executive officers, key employees and directors are listed in the below table.
There are no family relationships among any of our executive officers, key
employees and directors.
Name
|
|
Age
|
|
Position
|
|
Director since the
below date (1)
|
W. Gerald
Newmin
|
|
72
|
|
Chairman,
Acting Chief Executive Officer, Chief Financial Officer, Secretary and
Director
|
|
December 1, 1995(3)
|
Stephen
Chang
|
|
53
|
|
Director
|
|
June 16,
2004(2)
|
Edward
Sigmond
|
|
48
|
|
Director
|
|
May 17,
2000
|
Thomas A.
Page
|
|
75
|
|
Director
|
|
September 11, 2003
|
Anthony E.
Altig
|
|
52
|
|
Director
|
|
September 15,
2005
|
(1) Each
director serves until the next annual meeting of stockholders.
(2) Resigned
as President and Chief Executive Officer on December 21, 2007.
(3) Elected
as Acting Chief Executive Officer on December 21, 2007.
W. Gerald “Jerry” Newmin joined
the Company as a director in June 1995. He currently serves as the
Chairman, Chief Executive Officer, President, Chief Financial Officer and
Secretary. Mr. Newmin served as Chief Executive Officer of the
Company from June 1995 to May 2006, and was appointed to serve again as Chief
Executive Officer on December 21, 2007. Mr. Newmin is Chairman, Chief
Executive Officer, Secretary and a director of Xenogenics, a partially-owned
subsidiary, Chairman, Chief Executive Officer, Secretary and director of MCT
Rhode Island Corp, a wholly-owned subsidiary of the Company and Chief Executive
Officer, Secretary and a director of MCTI, a partially-owned subsidiary of the
Company. He has managed NYSE and American Stock Exchange Fortune 500 companies.
He has been President of HealthAmerica Corporation, then the nation’s largest
publicly held HMO management company. He was Chief Executive Officer and
President of The International Silver Company, a diversified multi-national
manufacturing company that he restructured. He was Chief Operating Officer of
numerous Whittaker Corporation operating units, including Production Steel
Company, Whittaker Textiles, Bertram Yacht, Trojan Yacht, Columbia Yacht, Narmco
Materials and Anson Automotive. He was instrumental in Whittaker’s entry into
the US and international health care markets. He was Western Regional Vice
President of American Medicorp, Inc, where he managed 23 acute care hospitals in
the Western United States. He retired as Chairman and Chief Executive Officer of
SYS Technologies, Inc., a high-growth defense technology company in
2003. Mr. Newmin has a Bachelor’s degree in Accounting from
Michigan State University.
Stephen Chang, Ph.D. has
served as a director of the Company since June 2004, became President of the
Company in February 2005, and became Chief Executive Officer in May 2006.
Dr. Chang resigned as Chief Executive Officer and President on December
21, 2007. On December 21, 2007, Dr. Chang also resigned as President and
CEO of MultiCell Immunotherapeutics, Inc., a subsidiary of the Company.
Dr. Chang is presently Chief Scientific Officer and Founder of Stemgent,
Inc. Dr. Chang is also President of CURES, a coalition of patient
advocates, biotechnology companies, pharmaceutical companies and venture
capitalists dedicated to ensuring the safety, research and development of
innovative life saving medications. Dr. Chang was chief science officer and vice
president of Canji Inc./Schering Plough Research Institute in San Diego from
1998 to 2004. Dr. Chang earned his doctoral degree in Biological
Chemistry, Molecular Biology and Biochemistry from the University of California,
Irvine. Prior to that he received a bachelor of science in Zoology,
Microbiology, and Cell and Molecular Biology from the University of Michigan and
a USPHS Postdoctoral Fellowship at the Baylor College of Medicine
Edward Sigmond has served as a
director of the Company since May 2000. He has been in sales,
marketing and operations management for the past 20 years. Mr.
Sigmond has served as president of Kestrel Holdings, Inc., a holding company,
since its inception in 1997. Mr. Sigmond served as president of
Kestrel Development, a Texas based real estate development company, from 1993 to
1998 when it was dissolved. He studied Marketing and Chemistry at
Duquesne University.
32
Thomas A. Page has served as a
director of the Company since September 2003. Mr. Page is Director
Emeritus and former Chairman of the Board and CEO of Enova Corporation and San
Diego Gas and Electric Company (now part of Sempra Energy). Prior to
the formation of Sempra Energy Corporation as a holding company in 1996, at
various times Mr. Page was SDG&E’s chairman, president and CEO
and held one or more of these positions until his retirement in
1998. Mr. Page joined SDG&E in 1978 as executive vice president
and COO. In 1981, he was elected president and CEO and added the
chairmanship in 1983. Mr. Page has been active in numerous
industrial, community and governmental associations and has funded medical
research. He is a director of the Coronado First Bank, SYS
Technologies and is an advisory director of Sorrento Ventures. Mr.
Page earned a Bachelor of Science degree in civil engineering, a masters degree
in industrial administration and was awarded a doctorate in management, all from
Purdue University. He has been licensed as an engineer and as a
certified public accountant.
Anthony E. Altig has served as
a director of the Company since September 2005. Mr. Altig serves as the Chair of
the Audit Committee of the Company. Since 2008, Mr. Altig has been
the Chief Financial Officer of Biotix Holdings a manufacturer of laboratory and
clinical disposable products. From 2004 to 2007 Mr. Altig was the
Chief Financial Officer of Diversa Corporation (now Verenium Corporation) a
leader in providing proprietary genomic technologies for the rapid discovery and
optimization of novel protein based products. From 2002 through 2004
Mr. Altig served as the Chief Financial Officer of Maxim Pharmaceuticals, a
public biopharmaceutical company. Prior to joining Maxim, Mr. Altig
served as the Chief Financial Officer of NBC Internet, Inc., a leading internet
portal company, which was acquired by General Electric. Mr. Altig’s
additional experience includes his role as the Chief Accounting Officer at USWeb
Corporation, as well as his experience serving biotechnology and other
technology companies during his tenure at both PricewaterhouseCoopers and
KPMG. Mr. Altig also serves on the Boards of Directors of Optimer
Pharmaceuticals and OccuLogix Corporation. Mr. Altig is a certified
public accountant and is a graduate of the University of
Hawaii.
CORPORATE
GOVERNANCE
General
We
believe that good corporate governance is important to ensure that the Company
is managed for the long-term benefit of our stockholders. This section describes
key corporate governance practices that we have adopted.
Board
of Directors Meetings and Attendance
The Board
of Directors has responsibility for establishing broad corporate policies and
reviewing our overall performance rather than day-to-day operations. The primary
responsibility of our Board of Directors is to oversee the management of our
company and, in doing so, serve the best interests of the company and our
stockholders. The Board of Directors selects, evaluates and provides for the
succession of executive officers and, subject to stockholder election,
directors. It reviews and approves corporate objectives and strategies, and
evaluates significant policies and proposed major commitments of corporate
resources. Our Board of Directors also participates in decisions that have a
potential major economic impact on our company. Management keeps the directors
informed of company activity through regular communication, including written
reports and presentations at Board of Directors and committee
meetings.
We have
no formal policy regarding director attendance at the annual meeting of
stockholders. The Board of Directors held six meetings in 2009, five of which
were telephonic. All five board members were present, either by person or on the
telephone in the case of the telephonic meetings, at all six meetings except for
Mr. Chang, Mr. Page and Mr. Sigmond who each missed one meeting.
Board
Committees
Our Board
of Directors has established an Audit Committee and a Nominating, Corporate
Governance and Compensation Committee. The members of each committee are
appointed by our Board of Directors, upon recommendation of the Nominating
Committee, and serve one-year terms. Each of these committees operates under a
charter that has been approved by the Board of Directors. The charter for each
committee is available on our website. The Audit Committee met five times during
2009. The Nominating, Corporate Governance and Compensation Committee met two
times during 2009.
Audit
Committee
Audit
Committee of the Board of Directors oversees the Company’s corporate accounting
and financial reporting process. For this purpose, the Audit
Committee performs several functions. The Audit Committee evaluates
the performance of and assesses the qualifications of the independent registered
public accounting firm; determines and approves the engagement of the
independent registered public accounting firm; determines whether to retain or
terminate the existing independent registered public accounting firm or to
appoint and engage new independent registered public accounting firm; reviews
and approves the retention of the independent registered public accounting firm
to perform any proposed permissible non-audit services; monitors the rotation of
partners of the independent registered public accounting firm on the Company’s
audit engagement team as required by law; confers with management and the
independent registered public accounting firm regarding the effectiveness of
internal controls over financial reporting; establishes procedures, as required
under applicable law, for the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls or
auditing matters and the confidential and anonymous submission by employees of
concerns regarding questionable accounting or auditing matters; reviews the
financial statements to be included in the Company’s Annual Report on Form 10-K;
and discusses with management and the independent registered public accounting
firm the results of the annual audit and the results of the Company’s quarterly
financial statements. Three directors comprise the Audit Committee:
Anthony Altig (Chairman), Edward Sigmond and Thomas Page.
33
The Board
of Directors annually reviews the NASDAQ listing standards definition of
independence for Audit Committee members and has determined that all members of
the Company’s Audit Committee are independent (as independence is currently
defined in Rule 10A-3 of the Exchange Act of 1934). The Board of Directors
has determined that Anthony Altig and Thomas Page each qualify as “audit
committee financial experts”, as defined in applicable SEC rules. The
Board made a qualitative assessment of Anthony Altig’s and Thomas Page’s level
of knowledge and experience based on a number of factors, including their formal
education and experience as financial experts and their prior experience as
certified public accountants. The Audit Committee met five times
during the fiscal year ended November 30, 2009.
Nominating,
Corporate Governance and Compensation Committee
The
Nominating, Corporate Governance and Compensation Committee provides assistance
to the corporate directors in fulfilling their responsibility to the
shareholders, potential shareholders, and investment community to ensure that
the company's officers, key executives, and board members are compensated in
accordance with the company's total compensation objectives and executive
compensation policy. The committee advises, recommends, and approves
compensation policies, strategies, and pay levels necessary to support
organizational objectives. The committee maintains free and open means of
communication between the board of directors and the chief executive officer of
the corporation.
The
Nominating, Corporate Governance and Compensation Committee responsibilities
include:
|
·
|
Assisting
the organization in defining an executive total compensation policy that
(1) supports the organization's overall business strategy and objectives,
(2) attracts and retains key executives, (3) links total compensation with
business objectives and organizational performance in good and bad times,
and (4) provides competitive total compensation opportunities at a
reasonable cost while enhancing shareholder value
creation.
|
|
·
|
Acts
on behalf of the board of directors in setting executive compensation
policy, administering compensation plans approved by the board of
directors and shareholders, and making decisions or developing
recommendations for the board of directors with respect to the
compensation of key company
executives.
|
|
·
|
Reviews
and recommends to the full board of directors for approval the annual base
salary levels, annual incentive opportunity levels, long-term incentive
opportunity levels, executive prerequisites, employment agreements (if and
when appropriate), change in control provisions/agreements (if and when
appropriate), benefits, and supplemental benefits of the chief executive
officer.
|
|
·
|
Evaluates
annually chief executive officer and other key executives' compensation
levels and payouts against (1) pre-established performance goals and
objectives, and (2) an appropriate peer
group.
|
|
·
|
Keeps
abreast of current developments in executive compensation outside the
company.
|
|
·
|
Meets
regularly and/or as needed to consider the nomination and screening of
board member candidates, evaluate the performance of the board and its
members, as well as termination of membership of board members in
accordance with corporate policy, conflicts of interest, for cause or
other appropriate reasons.
|
|
·
|
Submits
the minutes of all meetings of the Committee to, or discuss the matters
discussed at each committee meeting with, the board of
directors.
|
|
·
|
Administers
the stock incentive plans.
|
The
members of the Nominating, Corporate Governance and Committee are Edward
Sigmond, Chairman, Anthony Altig and Thomas Page. The Committee met two times
during the fiscal year ended November 30, 2009.
34
Director
Candidates
The
process followed by the Nominating, Corporate Governance and Compensation
Committee to identify and evaluate director candidates includes requests to
board members and others for recommendations, meetings from time to time to
evaluate biographical information and background material relating to potential
candidates and interviews of selected candidates by members of the Nominating,
Corporate Governance and Compensation Committee and the Board.
In
considering whether to recommend any particular candidate for inclusion in the
Board's slate of recommended director nominees, the Nominating Committee applies
certain criteria, including:
|
·
|
The
candidate's honesty, integrity and commitment to high ethical
standards,
|
|
·
|
Demonstrated
financial and business expertise and
experience,
|
|
·
|
Understanding
of our company, its business and its
industry,
|
|
·
|
Actual
or potential conflicts of interest,
and
|
|
·
|
The
ability to act in the interests of all
stockholders.
|
The
Nominating, Corporate Governance and Compensation Committee does not assign
specific weights to particular criteria and no particular criterion is a
prerequisite for each prospective nominee. We believe that the backgrounds and
qualifications of our directors, considered as a group, should provide a
significant breadth of experience, knowledge and abilities that will allow our
Board to fulfill its responsibilities.
The
Nominating, Corporate Governance and Compensation Committee will consider
director candidates recommended by stockholders or groups of stockholders who
have owned more than 5% of our common stock for at least a year as of the date
the recommendation is made. Stockholders may recommend individuals to the
Nominating, Corporate Governance and Compensation Committee for consideration as
potential director candidates by submitting their names, together with
appropriate biographical information and background materials and a statement as
to whether the stockholder or group of stockholders making the recommendation
has beneficially owned more than 5% of our common stock for at least a year as
of the date such recommendation is made, to the Nominating, Corporate Governance
and Compensation Committee, c/o Corporate Secretary, MultiCell Technology, Inc.,
86 Cumberland Street, Suite301, Woonsocket, Rhode Island 02895. Assuming that
appropriate biographical and background material have been provided on a timely
basis, the Committee will evaluate stockholder-recommended candidates by
following substantially the same process, and applying substantially the same
criteria, as it follows for candidates submitted by others.
Communicating
with the Directors
The Board
will give appropriate attention to written communications that are submitted by
stockholders, and will respond if and as appropriate. The chair of the Audit
Committee is primarily responsible for monitoring communications from
stockholders and for providing copies or summaries to the other directors as he
considers appropriate.
Communications
are forwarded to all directors if they relate to important substantive matters
and include suggestions or comments that the chair of the Audit Committee
considers to be important for the directors to know. In general, communications
relating to corporate governance and corporate strategy are more likely to be
forwarded than communications relating to ordinary business affairs, personal
grievances and matters as to which we tend to receive repetitive or duplicative
communications.
Stockholders
who wish to send communications on any topic to the Board should address such
communications to the Board of Directors, c/o Corporate Secretary, MultiCell
Technologies, Inc., 68 Cumberland Street, Suite 301, Woonsocket, RI 02895. You
should indicate on your correspondence that you are a MultiCell Technologies,
Inc. stockholder.
Anyone
may express concerns regarding questionable accounting or auditing matters or
complaints regarding accounting, internal accounting controls or auditing
matters to the Audit Committee by calling (401) 762-0045. Messages to the Audit
Committee will be received by the chair of the Audit Committee and our Corporate
Secretary. You may report your concern anonymously or
confidentially.
Section
16(a) Beneficial Ownership Reporting Compliance
The
Company does not have a class of equity securities registered pursuant to
Section 12 of the Exchange Act, is not a closed-end investment company
registered under the Investment Company Act of 1940, and is not a holding
company registered pursuant to the Public Utility Holding Company Act of
1935. Accordingly, its directors, officers and beneficial owners are
not subject to Section 16 of the Exchange Act with respect to the
Company.
35
Code
of Ethics
We have
adopted a code of business conduct and ethics that applies to our directors,
officers (including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions) as well as our employees. A copy of our code of business
conduct and ethics is available on our website at www.multicelltech.com under
"Investor Relations—Leadership & Governance." We intend to post on our
website all disclosures that are required by applicable law, the rules of the
Securities and Exchange Commission or OTCBB listing standards concerning any
amendment to, or waiver from, our code of business conduct and
ethics.
ITEM
11. EXECUTIVE COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
of Executive Compensation Objectives and Philosophy
Our
executive compensation plan’s objectives are to attract and retain highly
competent executives and to compensate them based upon a pay-for-performance
philosophy. With the intent to increase short-term and long-term
stockholder value, we have designed our executive compensation plan to
reward:
|
·
|
Individual
performance as measured against personal goals and objectives that contain
quantitative components wherever possible; such personal goals depend on
the position occupied by our executive officers and can include achieving
technological advances, broadening of our products and services offerings,
or building a strong team; and
|
|
·
|
Demonstration
of leadership, team building skills and high ethical
standards. We design our overall compensation to align the
long-term interests of our executives with those of our
stockholders. Our compensation plan is designed to encourage
success of our executives as a team, rather than only as individual
contributors, by attaining overall corporate
success.
|
Elements
of Executive Compensation
Executive
compensation consists of the following elements:
|
·
|
Base
salary; and
|
|
·
|
Long-Term
Incentives.
|
Base
Salary. The base salary for each executive is initially
established through negotiation at the time the executive is hired, taking into
account his or her scope of responsibilities, qualifications, experience, prior
salary and competitive salary information within our
industry. Year-to-year adjustments to each executive officer’s base
salary are determined by an assessment of her or his sustained performance
against individual goals, including leadership skills and the achievement of
high ethical standards, the individual’s impact on the company’s business and
financial results, current salary in relation to the salary range designated for
the job, experience, demonstrated potential for advancement, and an assessment
against base salaries paid to executives for comparable jobs in the marketplace.
Generally, we believe that executive base salaries should be targeted near the
median of the range of salaries for executives in similar positions with similar
responsibilities at comparable companies.
Long-Term
Incentive Program. Our long-term incentives consist of stock
option awards. The objective of these awards is to align the
longer-term interests of our stockholders and our executive officers and to
complement incentives tied to annual performance. We have
historically elected to use stock options as our primary long-term equity
incentive vehicle. We have not adopted stock ownership
guidelines.
Why
We Chose to Pay Each of the Executive Compensation Elements and How We Determine
the Amount of Each Element
Base
Salary. Base salary is paid to attract and retain our
executives and to provide them with a level of predictable base
compensation. Because base salary, in the first instance, is set at
the time the executive is hired, it is largely market-driven and influenced by
the type of position occupied, the level of responsibility, experience and
training of each executive, and the base salary at his or her prior
employment. Annual adjustments to base salary, if any, are influenced
by the individual’s achievement of individual goals and the company’s
achievement of its financial goals.
36
The base
salaries we paid to our executives in 2009 and 2008 are reflected in the summary
compensation table below.
Long-Term
Incentives. We grant stock
options to our executives and directors as part of our executive compensation
package program to directly link their interests to those of our stockholders,
since stock options will only produce value to executives if the price of our
stock appreciates. We believe that our compensation program must
include long-term incentives such as stock options if we wish to hire and retain
high-level executive talent. We also believe that stock options help
to provide a balance to the overall executive compensation program as base
salary and bonus awards focus only on short-term compensation. In
addition, the vesting period of stock options encourages executive retention and
the preservation of shareholder value. We base the number of stock
options granted on the type and responsibility level of the executive’s
position, the executive’s performance in the prior year and the executive’s
potential for continued sustained contributions to our long-term success and the
long-term interests of our stockholders. The number of stock options
is also dependent on the number of options available in the option pool and the
number of options already granted and vested to each individual
executive.
The
Level of Salary and Bonus in Proportion to Total Compensation
Because
of the congruence of interests by our executives and our stockholders in
sustained, long-term growth of the value of our stock, we seek to keep cash
compensation in line with market conditions and, if justified by the Company’s
financial performance, place emphasis on the use of options as a means of
obtaining significantly better than average compensation.
Summary
Compensation Table
Name and Principal Position(1)
|
Year
|
Salary
($)
|
Option
Awards
($)
|
All Other
Compensation($) (4)
|
Total
($)
|
|||||||||||||
W.
Gerald Newmin, (2)
|
2009
|
$ | 180,000 | $ | 11,000 |
(6)
|
$ | 2,250 |
(5)
|
$ | 193,250 | |||||||
Chairman
of the Board, Chief Executive Officer,
President, Chief Financial Officer,
Treasurer, Secretary and Director
|
2008
|
$ | 180,000 |
(3)
|
$ | 0 | $ | 30,000 |
(4)
|
$ | 210,000 |
(1)
During fiscal years ended November 30 2008 and 2009, the listed person was the
only Principal Executive Officer of the Company and the only person that earned
more than $100,000 during either of such fiscal years.
(2)
Appointed as President and Chief Executive Officer on December 21,
2007.
(3) Of
Mr. Newmin’s salary for the year ended November 30, 2008, $108,681 was unpaid at
November 30, 2008, was included in accrued expenses at November 30, 2008, and
was paid during the year ended November 30, 2009.
(4) This
amount represents fees earned in consideration for attending meetings of our
Board of Directors during fiscal year 2008. Mr. Newmin earned $3,000
for each meeting of the Board of Directors attended during fiscal year
2008. The Company may pay any such fees in cash or capital stock of
the Company, although the Company has traditionally paid such fees in capital
stock of the Company. All of Mr. Newmin’s director fees for the year
ended November 30, 2008 was included in accrued expenses at November 30,
2008. During the year ended November 30, 2009, the Company settled
all of Mr. Newmin’s unpaid director fees from prior years ($39,000) through 1)
the payment of cash in the amount of $6,824, 2) the issuance of 667,105 shares
of common stock, and 3) the grant of options to acquire 333,553 shares of common
stock at an exercise price of $0.019 per share.
(5) This
amount represents fees earned in consideration for attending meetings of our
Board of Directors during fiscal year 2009. Mr. Newmin earned $1,000
for each meeting of the Board of Directors attended in person and $250 for each
meeting attended by teleconference during fiscal year 2009. The
Company’s policy for director fees earned in fiscal year 2009 is to pay one half
of such fees in cash and the other half of such fees in capital stock of the
Company. During the year ended November 30, 2009, the Company issued
59,211 shares of common stock in payment of $1,125 of director fees and the
remaining $1,125 has or will be paid in cash.
(6) In
June 2009, Mr. Newmin was granted an option to acquire 1,000,000 shares of
common stock at an exercise price of $0.011 per share. The option
vests quarterly over one year and expires five years after the grant
date. The weighted average assumptions used in determining the fair
value of the option under the Black-Scholes model for expected volatility,
dividends, expected term, and risk-free interest rate were 157%; 0%; 5 years;
and 2.58%; respectively.
37
Contracts,
Termination of Employment and Change-in-Control Arrangements
Employment Agreement with W. Gerald
Newmin. Mr. Newmin does not have a written employment
agreement with the Company. Mr. Newmin’s base salary is $15,000 per
month.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table shows for the fiscal year ended November 30, 2009, certain
information regarding options granted to, exercised by, and held at year-end by,
the Named Executive Officers:
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number
of Shares
or Units
of Stock
That
Have Not
Vested (#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested ($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
|
||||||||||||||||||||||||
W.
Gerald Newmin
|
250,000 | 750,000 | 0 | $ | 0.011 |
6/25/14
|
0 | 0 | 0 | 0 | |||||||||||||||||||||||
W.
Gerald Newmin
|
333,553 | 0 | 0 | $ | 0.019 |
9/23/14
|
0 | 0 | 0 | 0 |
NON-EMPLOYEE
DIRECTOR COMPENSATION
The
following table details the total compensation of our non-employee directors for
the year ended November 30, 2009.
Name
|
Fees Earned or
Paid in Cash ($) (1)
|
Stock Awards ($)
|
Option Awards
($) (2)
|
Total ($)
|
||||||||||||
Anthony
F. Altig
|
$ | 5,250 | $ | 0 | $ | 11,000 | $ | 16,250 | ||||||||
Stephen
Chang
|
$ | 2,000 | $ | 0 | $ | 11,000 | $ | 13,000 | ||||||||
Thomas
A. Page
|
$ | 3,750 | $ | 0 | $ | 11,000 | $ | 14,750 | ||||||||
Edward
Sigmond
|
$ | 3,500 | $ | 0 | $ | 11,000 | $ | 14,500 |
(1) For
director fees earned in fiscal year 2009, the Company has the option to pay one
half of such fees in cash and the other half of such fees in capital stock of
the Company or may pay such fees entirely in cash.
(2) In
June 2009, each director was granted an option to acquire 1,000,000 shares of
common stock at an exercise price of $0.011 per share. The options
vest quarterly over one year and expires five years after the grant
date. The weighted average assumptions used in determining the fair
value of the option under the Black-Scholes model for expected volatility,
dividends, expected term, and risk-free interest rate were 157%; 0%; 5 years;
and 2.58%; respectively.
Director
Compensation Arrangements
Effective
December 1, 2008, the Board of Directors changed the director compensation
plan. Under the revised plan, each director of the Company earns fees
of $1,000 for each board meeting attended and $250 for each teleconference of
the board. The Chairman of the Audit Committee and the Chairman of
the Nominating, Corporate Governance and Compensation Committee earn $500 for
each Committee meeting, whether attended in person or by
teleconference. Each member of the Nominating, Corporate Governance
and Compensation Committee and each member of the Audit Committee earns $250 per
Committee meeting, whether attended in person or by
teleconference. The members of the Board of Directors are also
eligible for reimbursement for their expenses incurred in attending Board
meetings in accordance with Company policy.
38
Each
director of the Company was also granted an option on June 25, 2009 to purchase
1,000,000 shares of the Company’s common stock. The options have an
exercise price of $0.011, vest quarterly over one year from the grant date, and
expire five years after the grant date. The options granted are
pursuant to our 2004 Equity Incentive Plan. None of the options
granted are incentive stock options, as defined in the Internal Revenue
Code.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Beneficial
Ownership of Directors, Officers and 5% Stockholders
The
following table sets forth, as of February 25, 2010, certain information as to
shares of our common stock owned by (i) each person known to beneficially own
more than 5% of our outstanding common stock or preferred stock, (ii) each of
our directors, and executive officers named in our summary compensation table,
and (iii) all of our executive officers and directors as a
group. Unless otherwise indicated, the address of each named
beneficial owner is the same as that of our principal executive offices located
at 86 Cumberland Street, Suite 301, Woonsocket, Rhode Island,
02895.
Name and Address of Beneficial Owner (1)
|
Number of
Shares of
Common Stock
Beneficially
Owned (2)
|
Percent of
Common Stock
Beneficially
Owned
|
Number of
Shares of
Preferred Stock
Beneficially
Owned
|
Percent of
Preferred Stock
Beneficially
Owned
|
||||||||||||
Monarch
Pointe Fund, Ltd. (3)
|
18,985,228 | 5.49 | % | 13,625 | 61.9 | % | ||||||||||
La
Jolla Cove Investors, Inc. (4)
|
36,339,939 | 9.99 | % | – | – | |||||||||||
Asset
Managers International, Ltd. (5)
|
12,101,819 | 3.59 | % | 4,923 | 22.38 | % | ||||||||||
W.
Gerald Newmin (6)(11)
|
8,350,911 | 2.53 | % | – | – | |||||||||||
Thomas
A. Page (7)(11)
|
3,468,410 | 1.05 | % | – | – | |||||||||||
Stephen
Chang, Ph.D. (8) (11)
|
2,358,812 | * | – | – | ||||||||||||
Edward
Sigmond (9)(11)
|
2,780,446 | * | – | – | ||||||||||||
Anthony
Altig (10)(11)
|
4,180,139 | 1.27 | % | – | – | |||||||||||
All
executive officers and directors as a group (five persons)
|
21,138,718 | 6.28 | % | – | – |
*
|
Represents
less than 1% of the issued and outstanding shares of the applicable class
of equity securities of the Company as of February 25,
2010.
|
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Pursuant to the rules of the Commission, shares of common
stock that each named person and group has the right to acquire within 60
days pursuant to options, warrants, or other rights, are deemed
outstanding for purposes of computing shares beneficially owned by the
percentage ownership of each such person and group. Applicable
percentages are based on 327,423,214 shares of common stock and 21,996
shares of preferred stock outstanding on February 25, 2010 (of which
16,262 are shares of our Series B preferred stock and 5,734 are shares of
our Series I preferred stock), and are calculated as required by rules
promulgated by the SEC.
|
(2)
|
Unless
otherwise noted, all shares listed are owned of record and the record
owner has sole voting and investment power, subject to community property
laws where applicable.
|
(3)
|
Includes
(i) 496,972 shares of common stock held by Monarch Pointe Fund, Ltd.
(“MPF”), (ii) 5,096,203 shares of common stock issuable to MPF upon the
exercise of warrants within 60 days of February 25, 2010, (iii) 2,293,600
shares of common stock issuable to MPF upon conversion of 5,734 shares of
Series I Preferred Stock and (iv) 11,098,453 shares of common stock
issuable to MPF upon conversion of 7,891 shares of Series B Preferred
Stock. According to a
Schedule 13G/A filed with the SEC by MPF on January 14, 2009, MPF
is in liquidation, William Tacon serves as the liquidator of MPF and, as
such, now has control over the securities owned by
MPF.
|
39
(4)
|
Represents
the maximum possible amount of shares of our commons stock (i) held by
LJCI, (ii) issuable to LJCI upon the exercise of a common stock warrant it
holds, and (iii) issuable to LJCI upon the conversion of a 4.75%
convertible debenture its holds, all as of February 25,
2010. Pursuant to the terms of the warrant and convertible
debenture, LJCI may not acquire shares of our commons stock to the extent
such acquisition would cause LJCI to own more than 9.99% of our
outstanding common stock immediately after such
acquisition. Provided the aforementioned 9.99% cap is complied
with, LJCI may in the future exercise or convert into, as applicable, a
significant amount of additional shares of our common stock (e.g. as of February 25,
2010, there are a total of 8,281,959 shares remaining on the stock
purchase warrant and a balance of $82,820 remaining on the convertible
debenture, which is convertible pursuant to the formula set forth in the
debentures listed in the Exhibits section of this
report).
|
(5)
|
Includes
(i) 666,666 shares of common stock held by Asset Managers International,
Ltd. (“AMI”), (ii) 3,177,769 shares of common stock issuable to AMI upon
the exercise of warrants within 60 days of February 25, 2010, (iii)
6,924,051 shares of common stock issuable to AMI upon conversion of 4,923
shares of Series B Preferred Stock, and (iv) 1,333,333 shares of common
stock held by Pentagon Bernini Fund (“PBF”). According to a
schedule 13 G/A filed with the SEC by AMI on February 7, 2007, AMI is
wholly-owned by several feeder funds, Cape Investment Advisors, Ltd. owns
the only voting stock in AMI, and Pentagon Capital Management Plc. (“PCM”)
controls the investments of AMI. The Company has been advised
that PCM is an affiliate of PBF and/or
AMI.
|
(6)
|
Includes
(i) 5,363,997 shares of common stock, (ii) 1,287,065 shares of common
stock issuable to Mr. Newmin upon the exercise of warrants within 60 days
of February 25, 2010, (iii) 1,083,553 shares of common stock
issuable to Mr. Newmin under options exercisable within 60 days of
February 25, 2010, (iv) 396,296 shares of common stock owned by Mr.
Newmin’s spouse, and (v) warrants to purchase 220,000 shares of common
stock issuable upon exercise of warrants owned by Mr. Newmin’s
spouse. Mr. Newmin disclaims beneficial ownership of the
aforementioned stock beneficially owned by Mr. Newmin’s spouse, except to
the extent of his pecuniary interest
therein.
|
(7)
|
Includes
(i) 1,635,676 shares of common stock, (ii) 525,903 shares of common stock
issuable upon the exercise of common stock warrants within 60 days of
February 25, 2010, and (iii) 1,305,921 shares of common stock issuable
under options exercisable within 60 days of February 25,
2010.
|
(8)
|
Includes
(i) 988,163 shares of common stock, (ii) 364,071 shares of common stock
issuable upon the exercise of common stock warrants within 60 days of
February 25, 2010 and (iii) 1,006,578 shares of common stock issuable
under options exercisable within 60 days of February 25,
2010.
|
(9)
|
Includes
(i) 1,560,974 shares of common stock, (ii) 161,577 shares of common stock
issuable upon the exercise of common stock warrants within 60 days of
February 25, 2010 and (iii) 1,057,895 shares of common stock issuable
under options exercisable within 60 days of February 25,
2010.
|
(10)
|
Includes
(i) 2,232,209 shares of common stock, (ii) 172,930 shares of common stock
issuable upon the exercise of common stock warrants within 60 days of
February 25, 2010 and (iii) 1,775,000 shares of common stock issuable
under options exercisable within 60 days of February 25,
2010.
|
(11)
|
Does
not include any shares issuable in connection with unpaid director’s fees
earned by the reporting person as of February 25,
2010.
|
EQUITY
COMPENSATION PLAN INFORMATION
The
following table summarizes the securities authorized for issuance under equity
compensation plans as of November 30, 2009.
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
|
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
|
||||||||||
Equity
compensation plans approved by shareholders (1)
|
9,338,947 | $ | 0.19 | 10,485,266 | ||||||||
Equity
compensation plans not approved by shareholders (2)
|
1,150,000 | $ | 0.48 | |||||||||
10,488,947 | $ | 0.23 |
40
(1)
Pursuant to the 2004 Plan, from 2005 through the Company’s fiscal year end 2013,
the number of shares of common stock authorized for issuance under the Plan is
automatically increased on the first day of each year by the lesser of the
following amounts: (a) 2.0% of the Company’s outstanding shares of common stock
on the day preceding the first day of such fiscal year or (b) 1,500,000 shares
of common stock. Additionally, on June
25, 2009, at a special meeting of stockholders, the stockholders approved an
amendment to the Plan to increase the number of shares of common stock
authorized under the Plan by 25,000,000 shares. The numbers of shares
set forth in this row include all of such previous increases.
(2)
Represents warrants issued to service providers in compensation for services
provided.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Except as
described below, none of the following parties has, in the fiscal year ending
November 30, 2009, had any material interest, direct or indirect, in any
transaction with us or in any presently proposed transaction that has or will
materially affect us, other than as noted in this section:
|
·
|
Any
of our directors or officers,
|
|
·
|
Any
person proposed as a nominee for election as a
director,
|
|
·
|
Any
person who beneficially owns, directly or indirectly, shares carrying more
than 5% of the voting rights attached to our outstanding shares of common
stock,
|
|
·
|
Any
of our promoters, and
|
|
·
|
Any
relative or spouse of any of the foregoing persons who has the same house
as such person.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Since
December 1, 2008, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or are a party in
which the amount involved exceeds the lesser of (1) $120,000 and (2) one percent
of the average of our total assets at year end for the last three completed
fiscal years, in which any director, executive officer or beneficial holder of
more than 5% of any class of our voting securities or members of such person’s
immediate family had or will have a direct or indirect material interest, other
than the transactions described below. All future transactions
between us and any of our directors, executive officers or related parties will
be subject to the review and approval of our Audit Committee.
La
Jolla Cove Investors, Inc.
The
Company also entered into a Securities Purchase Agreement with LJCI on February
28, 2007 pursuant to which the Company agreed to sell a convertible debenture in
the principal amount of $100,000 and maturing on February 28, 2012 (the “Second
Debenture”). The Second Debenture accrues interest at 4.75% per year,
payable at each conversion date, in cash or common stock at the option of
LJCI. The proceeds from the Second Debenture were deposited on March
5, 2007. In connection with the Second Debenture, the Company issued LJCI a
warrant to purchase up to 10 million shares of our common stock (the “LJCI
Warrant”) at an exercise price of $1.09 per share, exercisable over the next
five years according to a schedule described in a letter agreement dated
February 28, 2007. Pursuant to the terms of the LJCI Warrant, upon
the conversion of any portion of the principal amount of the Second Debenture,
LJCI is required to simultaneously exercise and purchase that same percentage of
the warrant shares equal to the percentage of the dollar amount of the Second
Debenture being converted. Therefore, for each $1,000 of the
principal converted, LJCI would be required to simultaneously purchase 100,000
shares under the LJCI Warrant at $1.09 per share.
The
Second Debenture is convertible at the option of LJCI at any time up to maturity
into the number of shares determined by the dollar amount of the Second
Debenture being converted multiplied by 110, minus the product of the Conversion
Price multiplied by 100 times the dollar amount of the Second Debenture being
converted, with the entire result divided by the Conversion
Price. The Conversion Price is equal to the lesser of $1.00 or 80% of
the average of the three lowest volume-weighted average prices during the twenty
trading days prior to the election to convert. During the year ended
November 30, 2009, LJCI converted $13,855 of the Second Debenture into
210,075,223 shares of common stock. Simultaneously with these
conversions, LJCI exercised warrants to purchase 1,385,541 shares of the
Company’s common stock. Proceeds from the exercise of the warrants
were $1,510,240. As of November 30, 2009, the balance of the Second
Debenture was $85,320 and there were remaining warrants to purchase 8,531,959
shares of common stock at $1.09 per share. During the period from
December 1, 2009 through February 25, 2010, LJCI has converted an additional
$2,500 of the Second Debenture into 27,280,710 shares of common
stock. Simultaneously with these additional conversions, LJCI
exercised additional warrants to purchase 250,000 shares of the Company’s common
stock. Proceeds from the additional exercise of warrants were
$272,500. As of February 25, 2010, the balance of the Second
Debenture is $82,820 and there are remaining warrants to purchase 8,281,959
shares of common stock at $1.09 per share.
41
Common
Stock Issued in Settlement of Director Fees
In
September 2009, the Board of Directors approved the settlement of accrued
compensation in the amount of $281,000 payable to our directors for services
rendered prior to the current fiscal year. The amount due to the
directors was settled by 1) the issuance of 4,857,895 shares of
our common stock, valued at $92,300 ($0.019 per share); 2) the
payment of $49,703; and 3) the grant of options to purchase 2,428,947 shares of
our common stock at $0.019 per share, which options vested immediately and have
a term of five years. The settlement was recorded at the amount of
the liability settled, and accordingly, no gain or loss was recognized on the
transaction. Additionally, in September 2009, the Board of Directors
approved the issuance of 427,631 shares of our common stock, valued at $8,125
($0.019 per share), as partial settlement of director fees earned during the
current fiscal year.
Notes
Payable to Members of the Board of Directors
During
the fiscal year ended November 30, 2008, we borrowed $55,000 from two members of
our board of directors to meet working capital needs. The notes
accrue interest at 8.5% per year and are unsecured. The original
notes in the amount of $50,000 and related accrued interest were due in December
2008, but were extended initially to June 2009 and then extended a second time
to December 2009. The note in the amount of $5,000 was due in May
2009. During the year ended November 30, 2009, we repaid $25,000 of
the notes to related parties, leaving a balance of $30,000 as of November 30,
2009. Subsequent to November 30, 2009, the Company has repaid the
balance of these notes to these two directors.
Board
Determination of Independence
The
Company complies with the standards of "independence" prescribed by rules set
forth by the National Association of Securities Dealers ("NASD"). Accordingly, a
director will only qualify as an "independent director" if, in the opinion of
our Board of Directors, that person does not have a material relationship with
our company which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. A director who is, or at any
time during the past three years, was employed by the Company or by any parent
or subsidiary of the Company, shall not be considered independent. Accordingly,
Anthony Altig, Thomas Page and Edward Sigmond meet the definition of
"independent director" under Rule 4200(A)(15) of the NASD Manual; Dr. Chang and
Mr. Newmin do not.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following table summarizes the fees of (i) J.H. Cohn, LLC., our former
independent auditor, and (ii) Hansen, Barnett and Maxwell, our current
independent auditor, billed to us for each of the last two fiscal years for
audit services and billed to us in each of the last two years for other
services:
Fee
Category
|
2009
|
2008
|
||||||
Audit
Fees(1)
|
$ | 35,050 | $ | 67,342 | ||||
Audit-Related
Fees(2)
|
$ | 6,135 | $ | 0 | ||||
Tax
Fees(3)
|
$ | 8,071 | $ | 0 | ||||
All
Other Fees(4)
|
$ | 0 | $ | 0 |
(1) Audit
fees consist of aggregate fees billed for professional services rendered for the
audit of the Company's annual financial statements and review of the interim
financial statements included in quarterly reports or services that are normally
provided by the independent auditor in connection with statutory and regulatory
filings or engagements for the fiscal years ended November 30, 2009 and
2008.
(2) Audit
related fees consist of aggregate fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements and are not reported under "Audit Fees." These
fees include review of registration statements and participation at meetings of
the audit committee.
(3) Tax
fees consist of aggregate fees billed for professional services for tax
compliance, tax advice and tax planning.
(4) All
other fees consist of aggregate fees billed for products and services provided
by the independent auditor, other than those disclosed above. These fees include
services related to certain accounting research and assistance with a regulatory
matter.
42
The
Company's policy is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the audit committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. To the extent that additional
services are necessary beyond those specifically budgeted for, the audit
committee and management pre-approve such services on a case-by-case basis. All
services provided by the independent auditors were approved by the Audit
Committee.
43
PART IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Please
see the Exhibit Index which follows the signature page to this annual report on
Form 10-K and which is incorporated by reference herein.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15D of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized,
MULTICELL
TECHNOLOGIES, INC.
|
||
(Registrant)
|
||
By
/s/ W. Gerald Newmin
|
||
W. Gerald Newmin
|
||
Chairman,
CEO, CFO, President, Treasurer and Secretary
|
||
Dated February 26, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
|||
/s/ |
W. Gerald Newmin
|
Chairman
,CEO, CFO, President,
|
February
26, 2010
|
||
W.
Gerald Newmin
|
Treasurer
and Secretary
|
||||
/s/ |
Stephen Chang
|
Director
|
February
26, 2010
|
||
Stephen
Chang
|
|||||
/s/ |
Edward Sigmond
|
Director
|
February
26, 2010
|
||
Edward
Sigmond
|
|||||
/s/ |
Thomas A. Page
|
Director
|
February
26, 2010
|
||
Thomas A.
Page
|
|||||
/s/ |
Anthony Altig
|
Director
|
February
26, 2010
|
||
Anthony Altig
|
44
EXHIBIT
INDEX
Exhibit
No.
|
Description of Exhibit
|
|
2.1
(1)
|
Asset
Contribution Agreement dated September 7, 2005 by and among Multicell
Technologies, Inc., Astral Therapeutics, Inc., Alliance Pharmaceutical
Corp., and Astral, Inc.
|
|
3.1
(2)
|
Certificate
of Incorporation, as filed on April 28, 1970.
|
|
3.2
(2)
|
Certificate
of Amendment, as filed on October 27, 1986.
|
|
3.3
(2)
|
Certificate
of Amendment, as filed on August 24, 1989.
|
|
3.4
(2)
|
Certificate
of Amendment, as filed on July 31, 1991.
|
|
3.5
(2)
|
Certificate
of Amendment, as filed on August 14, 1991.
|
|
3.6
(2)
|
Certificate
of Amendment, as filed on June 13, 2000.
|
|
3.7
(2)
|
Certificate
of Amendment, as filed May 18, 2005.
|
|
3.8
(2)
|
Certificate
of Correction, as filed June 2, 2005.
|
|
3.9
(2)
|
Bylaws,
as amended May 18, 2005.
|
|
3.10
(2)
|
Specimen
Stock Certificate.
|
|
4.1
(3)
|
Certificate
of Designations of Preferences and Rights of Series I Convertible
Preferred Stock, as filed on July 13, 2004.
|
|
4.2
(4)
|
Certificate
of Designation of Series B Convertible Preferred Stock, as filed on July
14, 2006.
|
|
4.3
(5)
|
Debenture
Purchase Agreement between Multicell Technologies, Inc. and La Jolla Cove
Investors, Inc. dated February 28, 2007
|
|
4.4
(5)
|
Registration
Rights Agreement between Multicell Technologies, Inc. and La Jolla Cove
Investors, Inc. dated February 28, 2007
|
|
4.5
(5)
|
Stock
Pledge Agreement dated February 28, 2007
|
|
4.6
(5)
|
7 ¾
% Convertible Debenture for $1,000,000 issued by Multicell Technologies,
Inc. to La Jolla Cove Investors, Inc.
|
|
4.7
(5)
|
Escrow
Letter dated February 28, 2007 from La Jolla Cove Investors,
Inc.
|
|
4.8
(5)
|
Letter
dated February 28, 2007 from La Jolla Cove Investors,
Inc.
|
|
4.9
(5)
|
Securities
Purchase Agreement between Multicell Technologies, Inc. and La Jolla Cove
Investors, Inc. dated February 28, 2007
|
|
4.10
(5)
|
4 ¾
% Convertible Debenture for $100,000 issued by Multicell Technologies,
Inc. to La Jolla Cove Investors, Inc.
|
|
4.11
(5)
|
Warrant
to Purchase Common Stock dated February 28, 2007
|
|
4.12
(5)
|
Letter
dated February 28, 2007 to Multicell Technologies, Inc. from La Jolla Cove
Investors, Inc.
|
|
4.13
(6)
|
Warrant
for the purchase of 1,572,327 Shares of Common Stock of Multicell
Technologies, Inc. issued to and Fusion Capital Fund II, LLC dated May 3,
2006.
|
|
4.14
(7)
|
Amended
and Restated Registration Rights Agreement, dated as of October 5, 2006,
by and between Multicell Technologies, Inc. and Fusion Capital Fund II,
LLC.
|
|
4.15
(8)
|
Form
of Warrant to Purchase Common Stock (Cashless Exercise) dated July 14,
2006 issued by Multicell Technologies, Inc. to Monarch Pointe Fund, Ltd.,
Mercator Momentum Fund III, L.P., Asset Managers International Ltd. and
Pentagon Special Purpose Fund Ltd.
|
|
4.16
(8)
|
Form
of Warrant to Purchase Common Stock (Cash Exercise), dated July 14, 2006,
issued by Multicell Technologies, Inc. to Monarch Pointe Fund, Ltd.,
Mercator Momentum Fund III, L.P., Asset Managers International Ltd. and
Pentagon Special Purpose Fund Ltd.
|
|
4.17
(8)
|
Form
of Registration Rights Agreement dated July 14, 2006 by and between
Multicell Technologies, Inc. and Monarch Pointe Fund, Ltd., Mercator
Momentum Fund III, L.P., Asset Managers International Ltd. and Pentagon
Special Purpose Fund Ltd.
|
|
4.18
(8)
|
Form
of Shares of Series B Convertible Preferred Stock and Common Stock
Warrants Subscription Agreement dated July 14, 2006 by and between
Multicell Technologies, Inc. and Monarch Pointe Fund, Ltd., Mercator
Momentum Fund III, L.P., Asset Managers International Ltd. and Pentagon
Special Purpose Fund Ltd.
|
|
4.19
(9)
|
Amended
and Restated Warrant to Purchase Common Stock issued to Anthony Cataldo
dated July 25, 2006.
|
|
4.20
(10)
|
Form
of Warrant to Purchase Common Stock dated February 1, 2006 issued by the
Company to Trilogy Capital Partners, Inc.
|
|
4.21
(11)
|
Mutual
Termination Agreement between Multicell Technologies, Inc. and Fusion
Capital Fund II, LLC, dated as of July 18, 2007.
|
|
10.1
(12)
|
Letter
Agreement between Amarin Neuroscience Limited and the Company dated
October 26,
2006.
|
45
10.2
(13)
|
Letter
Agreement between Amarin Neuroscience Limited and the Company dated June
28, 2006.
|
|
10.3
(14)
|
Worldwide
Exclusive License Agreement dated as of December 31, 2005 between
Multicell Technologies, Inc. and Amarin Neuroscience Limited dated
December 31, 2005.
|
|
10.4
(15)
|
License
Agreement between Eisai Co., Ltd. and the Company dated April 20,
2007.
|
|
10.5
(16)
|
License
Agreement between Corning Incorporated and the Company dated October 9,
2007.
|
|
21.1*
|
List
of Subsidiaries
|
|
23.1*
|
Consent
of Hansen, Barnett & Maxwell, P.C.
|
|
31.1*
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
32.1*
|
Certification
of Chief Executive Officer and the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
(1)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on September 8, 2005.
(2)
Incorporated by reference from an exhibit to our Post-Effective Amendment No. 1
to our Registration Statement on Form SB-2 filed on May 6, 2005.
(3)
Incorporated by reference from an exhibit to our Form SB-2 Registration
Statement filed on August 12, 2004.
(4)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on July 19, 2006.
(5)
Incorporated by reference from an exhibit to our Current Report on
Form 8-K/A filed on March 7, 2007.
(6) Incorporated
by reference from an exhibit to our Current Report on Form 8-K filed on May 3,
2006.
(7) Incorporated
by reference from an exhibit to our Current Report on Form 8-K filed on October
5, 2006.
(8)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on July 20, 2006.
(9)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on July 28, 2006.
(10) Incorporated
by reference from an exhibit to our Current Report on Form 8-K filed on
February 6, 2006.
(11) Incorporated
by reference from an exhibit to our Current Report on Form 8-K filed on
July 19, 2007.
(12)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on November 1, 2006.
(13)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on July 5, 2006.
(14)
Incorporated by reference from an exhibit to our Post-Effective Amendment No. 1
to our Registration Statement on Form SB-2 filed on January 12,
2006.
(15)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on April 26, 2007.
(16)
Incorporated by reference from an exhibit to our Current Report on Form 8-K
filed on October 10, 2007.
46
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets – November 30, 2009 and 2008
|
F-3
|
Consolidated
Statements of Operations for the Years Ended November 30, 2009 and
2008
|
F-4
|
Consolidated
Statements of Stockholders’ Deficiency for the Years Ended November 30,
2008 and 2009
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended November 30, 2009 and
2008
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
HANSEN, BARNETT & MAXWELL,
P.C.
A
Professional Corporation
CERTIFIED
PUBLIC ACCOUNTANTS
5
Triad Center, Suite 750
Salt
Lake City, UT 84180-1128
Phone:
(801) 532-2200
Fax:
(801) 532-7944
www.hbmcpas.com
|
Registered
with the Public Company
Accounting
Oversight Board
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Stockholders
MultiCell
Technologies, Inc.
Woonsocket,
Rhode Island
We have
audited the accompanying consolidated balance sheets of MultiCell Technologies,
Inc. and subsidiaries (the Company) as of November 30, 2009 and 2008, and the
related consolidated statements of operations, stockholders' deficiency, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MultiCell Technologies, Inc.
and subsidiaries as of November 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company suffered losses from operations
and had negative cash flows from operating activities during the years ended
November 30, 2009 and 2008 and as of November 30, 2009, the Company had a
working capital deficit and a stockholders’ deficit. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HANSEN,
BARNETT & MAXWELL,
P.C.
|
Salt Lake
City, Utah
February
25, 2010
F-2
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
November 30,
|
November 30,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 396,554 | $ | 6,022 | ||||
Other
current assets
|
6,442 | 32,854 | ||||||
Total
current assets
|
402,996 | 38,876 | ||||||
Property
and equipment, net of accumulated depreciation of $60,753 and $57,146 at
November 30, 2009 and 2008, respectively
|
5,714 | 15,501 | ||||||
Other
assets
|
1,685 | 2,979 | ||||||
Total
assets
|
$ | 410,395 | $ | 57,356 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
||||||||
Current
liabilities
|
||||||||
Notes
payable - related parties
|
$ | 30,000 | $ | 55,000 | ||||
Accounts
payable and accrued expenses
|
1,297,486 | 1,674,221 | ||||||
Current
portion of deferred revenue
|
98,862 | 96,385 | ||||||
Total
current liabilities
|
1,426,348 | 1,825,606 | ||||||
Non-current
liabilities
|
||||||||
Convertible
debentures, net of discount
|
40,320 | 34,175 | ||||||
Deferred
income, net of current portion
|
646,694 | 696,012 | ||||||
Total
non-current liabilities
|
687,014 | 730,187 | ||||||
Total
liabilities
|
2,113,362 | 2,555,793 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
Deficiency
|
||||||||
Undesignated
preferred stock, $0.01 par value; 963,000 shares
authorized
|
- | - | ||||||
Series
B convertible preferred stock, 17,000 shares designated; 16,262 shares
issued and outstanding; liquidation value of $1,870,035
|
1,830,035 | 1,830,035 | ||||||
Series
I convertible preferred stock, 20,000 shares designated; 5,734 shares
issued and outstanding; liquidation value of $573,400
|
573,400 | 573,400 | ||||||
Common
stock, $0.01 par value; 475,000,000 shares authorized; 299,892,504 and
83,146,214 shares issued and outstanding at November 30, 2009 and 2008,
respectively
|
2,998,925 | 831,462 | ||||||
Additional
paid-in capital
|
32,514,975 | 32,894,705 | ||||||
Accumulated
deficit
|
(39,620,302 | ) | (38,628,039 | ) | ||||
Total
stockholders' deficiency
|
(1,702,967 | ) | (2,498,437 | ) | ||||
Total
Liabilities and Stockholders' Deficiency
|
$ | 410,395 | $ | 57,356 |
See
accompanying notes to consolidated financial statements.
F-3
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended
|
||||||||
November 30,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
$ | 174,240 | $ | 209,835 | ||||
Operating
expenses
|
||||||||
Selling,
general and administrative
|
783,604 | 842,067 | ||||||
Research
and development
|
195,990 | 317,130 | ||||||
Depreciation
and amortization
|
9,375 | 80,256 | ||||||
Write-down
of intangible assets due to impairment in value
|
- | 1,061,365 | ||||||
Total
operating expenses
|
988,969 | 2,300,818 | ||||||
Loss
from operations
|
(814,729 | ) | (2,090,983 | ) | ||||
Other
income (expense)
|
||||||||
Interest
expense
|
(29,370 | ) | (35,373 | ) | ||||
Interest
income
|
639 | 1,807 | ||||||
Gain
(loss) on disposition of equipment
|
(412 | ) | 29,613 | |||||
Total
other income (expense)
|
(29,143 | ) | (3,953 | ) | ||||
Net
loss
|
(843,872 | ) | (2,094,936 | ) | ||||
Preferred
stock dividends
|
(148,391 | ) | (149,203 | ) | ||||
Net
loss attributable to common stockholders
|
$ | (992,263 | ) | $ | (2,244,139 | ) | ||
Basic
and Diluted Loss Per Common Share Attributable to Common
Stockholders
|
$ | (0.01 | ) | $ | (0.04 | ) | ||
Basic
and Diluted Weighted-Average Common Shares Outstanding
|
186,830,320 | 63,996,659 |
See
accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
For
the Years Ended November 30, 2008 and 2009
Additional
|
Total
|
|||||||||||||||||||||||||||||||||||
Preferred Stock - Series B
|
Preferred Stock - Series I
|
Common stock
|
Paid in
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Par Value
|
Capital
|
Deficit
|
Deficiency
|
||||||||||||||||||||||||||||
Balance
at November 30, 2007
|
- | $ | - | 12,200 | $ | 1,220,000 | 48,690,777 | $ | 486,908 | $ | 32,145,711 | $ | (36,383,900 | ) | $ | (2,531,281 | ) | |||||||||||||||||||
Common
stock issued for services
|
- | - | - | - | 5,247,807 | 52,478 | 26,772 | - | 79,250 | |||||||||||||||||||||||||||
Issuance
of common stock in payment of liability to stockholders and
affiliates
|
- | - | - | - | 2,527,638 | 25,276 | 176,805 | - | 202,081 | |||||||||||||||||||||||||||
Issuance
of common stock for conversion of 7.75% debentures
|
- | - | - | - | 4,710,250 | 47,102 | 817 | - | 47,919 | |||||||||||||||||||||||||||
Issuance
of common stock for conversion of 4.75% debentures
|
- | - | - | - | 19,384,509 | 193,845 | (193,020 | ) | - | 825 | ||||||||||||||||||||||||||
Issuance
of common stock for exercise of warrants
|
- | - | - | - | 82,500 | 825 | 89,100 | - | 89,925 | |||||||||||||||||||||||||||
Insuance
of common stock for conversion of Series I preferred stock
|
- | - | (6,466 | ) | (646,600 | ) | 2,586,400 | 25,864 | 620,736 | - | - | |||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | - | - | 26,948 | - | 26,948 | |||||||||||||||||||||||||||
Reclassification
of Series B preferred stock to permanent equity
|
16,262 | 1,830,035 | - | - | - | - | - | - | 1,830,035 | |||||||||||||||||||||||||||
Dividends
on Series B preferred stock
|
- | - | - | - | - | - | - | (149,203 | ) | (149,203 | ) | |||||||||||||||||||||||||
Adjustment
of shares issued in prior periods
|
- | - | - | - | (83,667 | ) | (836 | ) | 836 | - | - | |||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (2,094,936 | ) | (2,094,936 | ) | |||||||||||||||||||||||||
Balance
at November 30, 2008
|
16,262 | 1,830,035 | 5,734 | 573,400 | 83,146,214 | 831,462 | 32,894,705 | (38,628,039 | ) | (2,498,437 | ) | |||||||||||||||||||||||||
Issuance
of common stock for conversion of 4.75% debentures
|
- | - | - | - | 210,075,223 | 2,100,752 | (2,086,897 | ) | - | 13,855 | ||||||||||||||||||||||||||
Issuance
of common stock for exercise of warrants
|
- | - | - | - | 1,385,541 | 13,856 | 1,496,384 | - | 1,510,240 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Issuance
of common stock and options in settlement of director fees
|
- | - | - | - | 5,285,526 | 52,855 | 186,567 | - | 239,422 | |||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | - | - | 24,216 | - | 24,216 | |||||||||||||||||||||||||||
Dividends
on Series B preferred stock
|
- | - | - | - | - | - | - | (148,391 | ) | (148,391 | ) | |||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (843,872 | ) | (843,872 | ) | |||||||||||||||||||||||||
Balance
at November 30, 2009
|
16,262 | $ | 1,830,035 | 5,734 | $ | 573,400 | 299,892,504 | $ | 2,998,925 | $ | 32,514,975 | $ | (39,620,302 | ) | $ | (1,702,967 | ) |
See
accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Years Ended
|
||||||||
November 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (843,872 | ) | $ | (2,094,936 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
9,375 | 80,255 | ||||||
Stock-based
compensation for services
|
24,216 | 106,198 | ||||||
Write-down
of intangible assets due to impairment of value
|
- | 1,061,365 | ||||||
Loss
(gain) on disposition of equipment
|
412 | (29,613 | ) | |||||
Interest
expense from amortization of discount on convertible
debentures
|
20,000 | 22,995 | ||||||
Changes
in assets and liabilities
|
||||||||
Accounts
and royalties receivable
|
- | 31,582 | ||||||
Other
current assets
|
10,350 | 43,916 | ||||||
Other
assets
|
- | 21,122 | ||||||
Accounts
payable and accrued liabilities
|
(285,704 | ) | 233,881 | |||||
Deferred
income
|
(46,841 | ) | (47,372 | ) | ||||
Net
cash used in operating activities
|
(1,112,064 | ) | (570,607 | ) | ||||
Cash
flows from investing activities
|
||||||||
Collection
of principal on note receivable
|
17,356 | 15,436 | ||||||
Proceeds
from sale of equipment
|
- | 4,577 | ||||||
Net
cash provided by investing activities
|
17,356 | 20,013 | ||||||
Cash
flows from financing activities
|
||||||||
Proceeds
from the exercise of stock warrants
|
1,510,240 | 89,925 | ||||||
Proceeds
from issuance of notes payable to related parties
|
- | 55,000 | ||||||
Payment
of principal on note payable - related parties
|
(25,000 | ) | - | |||||
Net
cash provided by financing activities
|
1,485,240 | 144,925 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
390,532 | (405,669 | ) | |||||
Cash and
cash equivalents at beginning of year
|
6,022 | 411,691 | ||||||
Cash
and cash equivalents at end of year
|
$ | 396,554 | $ | 6,022 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | 5,104 | $ | 10,922 | ||||
Noncash
Investing and Financing Activities:
|
||||||||
Issuance
of common stock in payment of liability to stockholders and
affiliates
|
- | 202,081 | ||||||
Issuance
of common stock and options in settlement of director fees
|
239,422 | - | ||||||
Issuance
of common stock for conversion of 7.75% debentures
|
- | 47,919 | ||||||
Issuance
of common stock for conversion of 4.75% debentures
|
13,855 | 825 | ||||||
Issuance
of common stock for conversion of Series I preferred stock
|
- | 646,600 | ||||||
Issuance
of note receivable in connection with the sale of
equipment
|
- | 34,665 | ||||||
Accrual
of dividends on Series B preferred stock
|
148,391 | 149,203 |
See
accompanying notes to consolidated financial statements.
F-6
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Note
1 - Organization and Summary of Significant Accounting Policies
Organization
– MultiCell Technologies, Inc. (“MultiCell”), operates three subsidiaries, MCT
Rhode Island Corp., Xenogenics Corporation (“Xenogenics”), and MultiCell
Immunotherapeutics, Inc. (“MCTI”). MCT Rhode Island Corp. (“MCT”), is
a 100%-owned subsidiary that has been inactive since its formation in
2004. (“Xenogenics”), is a 56.4%-owned subsidiary with a focus on the
research and development of Sybiol technology. Xenogenics has not
generated any revenues as of November 30, 2009. MultiCell holds
approximately 67% of the outstanding shares (on an as if converted basis) of
MCTI. As used herein, the “Company” refers to MultiCell, together
with MCT, Xenogenics, and MCTI.
Historically,
the Company has specialized in developing primary liver cell immortalization
technologies to produce cell-based assay systems for use in drug
discovery. The Company seeks to become an integrated
biopharmaceutical company that will use its proprietary cell-based systems and
immune system modulation technologies to discover, develop and commercialize new
therapeutics itself and with strategic partners. Following the
formation of MCTI during September 2005, the Company is pursuing research and
development of therapeutics in addition to continuing to advance its cellular
systems business.
Principles of
Consolidation – The consolidated financial statements include the
accounts of MultiCell Technologies Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Non-controlling interests in consolidated subsidiaries
are recognized as minority interest. Losses from consolidated
subsidiaries are allocated between the Company and the minority interest based
upon the percentages owed. When losses applicable to the minority
interest in a consolidated subsidiary exceed the minority interest in the equity
capital of the subsidiary, such excess and any further losses applicable to the
minority interest are charged against the operations of the
Company.
Cash and Cash
Equivalents – The Company considers all unrestricted highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
Fair Value of
Financial Instruments – The carrying amounts of cash and cash
equivalents, accounts payable, accrued expenses, and notes payable to related
parties approximate fair market value because of the short maturity of those
instruments. The fair value of convertible debentures was
approximately $85,320 and $99,175 at November 30, 2009 and 2008,
respectively.
Credit
Risk – It is the Company’s practice to place its cash equivalents in high
quality money market securities with one major banking
institution. Periodically, the Company maintains cash balances at
this institution that exceeds the Federal Deposit Insurance Corporation
insurance limit of $250,000 per bank. The Company considers its
credit risk associated with cash and cash equivalents to be
minimal. The Company does not require collateral from its
customers. The Company closely monitors the extension of credit to
its customers while maintaining an allowance for potential credit
losses. On a periodic basis, management evaluates its accounts
receivable and, if warranted, adjusts its allowance for doubtful accounts based
on historical experience and current credit
considerations. Typically, accounts receivable consist primarily of
amounts due under contractual agreements.
Revenue
Recognition – In the years covered by these financial statements, the
Company's revenues have been generated primarily from license revenue under
agreements with Corning, Pfizer, and Eisai, as well as the sale of cells or
royalties on the license for the sale of cells through its sale and distribution
agreement with XenoTech, LLC. Management believes such sources of
revenue will be part of the Company's ongoing operations. The Company
recognizes revenue from licensing and research agreements as services are
performed, provided a contractual arrangement exists, the contract price is
fixed or determinable and the collection of the contractual amounts is
reasonably assured. In situations where the Company receives payment
in advance of the performance of services, such amounts are deferred and
recognized as revenue as the related services are performed. Deferred
revenues associated with services expected to be performed within the 12 - month
period subsequent to the balance sheet date are classified as a current
liability. Deferred revenues associated with services expected to be
performed at a later date are classified as non-current
liabilities.
F-7
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Property and
Equipment – Property and equipment are recorded at
cost. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives of the assets, generally
three to ten years.
Intangible
Assets – The Company does not
amortize intangible assets with indefinite useful lives. The Company
amortizes identifiable intangible assets over the estimated useful lives of the
assets. The Company performs its annual intangible asset impairment
tests during the fourth quarter of its fiscal year and more frequently if an
event or circumstance indicates that impairment has occurred. If the
assets were considered to be impaired, the impairment charge would be the amount
by which the carrying value of the assets exceeds the fair value of the
assets.
Impairment of
Long-Lived Assets
– The impairment of long-lived assets that do not have indefinite lives,
such as equipment, patents, and license agreements, is recognized when events or
changes in circumstances indicate that the undiscounted cash flows estimated to
be generated by such assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the
fair value of assets to their carrying amounts. As of November 30,
2008, management tested the carrying value of its intangible assets for
impairment and concluded that they had been impaired. The Company
recognized a charge of $1,061,365 to write off the remaining carrying
value of the intangible assets in the year ended November 30,
2008. (See Note 4).
Stock Based
Compensation –
The Company has stockholder approved stock incentive plans for employees,
directors, officers and consultants. The Company recognizes
compensation expense for stock-based awards to employees expected to vest on a
straight-line basis over the requisite service period of the award, based on
their grant-date fair value. The Company estimates the fair value of
stock options using the Black-Scholes option-pricing model, which requires
management to make estimates for certain assumptions regarding risk-free
interest rate, expected life of options, expected volatility of stock, and
expected dividend yield of stock.
Research and
Development Costs –
Research and development costs are expensed as
incurred. Amounts received for research through grants are accounted
for as an offset to research and development expenses for the year.
Income
Taxes – Deferred income taxes are provided for the estimated tax effects
of temporary differences between income for tax and financial reporting
purposes. A valuation allowance is provided against deferred tax
assets, where realization is uncertain. Assets and liabilities are
established for uncertain tax positions taken or positions expected to be taken
in income tax returns when such positions are judged to not meet the
“more-likely-than-not” threshold based on the technical merits of the positions.
Estimated interest and penalties related to uncertain tax positions are included
as a component of selling, general and administrative expense.
Loss Per Common
Share – Basic loss per common share is computed by dividing the net loss
applicable to common stockholders by the weighted average common shares
outstanding during each period. Since the Company incurred losses
during the years ended 2009 and 2008, the assumed effects of the exercise of
outstanding stock options and warrants, and the conversion of convertible
preferred stock and convertible debentures were anti-dilutive and, accordingly,
diluted per common share amounts equal basic loss per share amounts and have not
been separately presented in the accompanying consolidated statements of
operations. The total number of common shares potentially issuable
upon exercise or conversion excluded from the calculation of diluted loss per
common share for the years ended November 30, 2009 and 2008 was 962,679,580 and
4,524,658,932, respectively.
F-8
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Use of
Estimates – The preparation of consolidated 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 dates of these financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Risks and
Uncertainties – The Company is dependent on continued financing from
investors and obtaining new research grants to sustain the development and other
activities necessary to commercialize new products. Management is
seeking additional financing in order to fund its future
activities. There is no assurance, however, that such financing will
be available, if and when needed, or if available, that such financing will be
completed on commercially favorable terms, or that such development and other
activities in connection with its planned products will be
successful.
Accounting For
Warrants Issued With Convertible Debentures – The Company accounts
for the value of warrants and the intrinsic value of beneficial conversion
rights arising from the issuance of convertible debentures with non-detachable
conversion rights that are in-the-money at the commitment date by allocating an
appropriate portion of the proceeds received from the debt instruments to the
warrants or any other detachable instruments included in the
exchange. The proceeds allocated to the warrants or any other
detachable instruments are recorded as a discount to the debt. The
intrinsic value of the beneficial conversion rights at the commitment date is
recorded as additional paid-in capital and as additional discount to the debt as
of that date. The discount is amortized and charged to interest
expense over the term of the debt instrument.
Subsequent
Events – The Company has
evaluated subsequent events through February 26, 2010, the date these
consolidated financial statements were issued. See Notes 5 and 16 to
these consolidated financial statements for a description of events occurring
subsequent to November 30, 2009.
Recently Enacted
Accounting Standards – In December 2007, the
Financial Accounting Standards Board (FASB) issued new accounting guidance on
business combinations. The new standard retained the underlying
concepts of previous standards in that all business combinations are still
required to be accounted for at fair value under the acquisition method of
accounting, but changed the method of applying the acquisition method in a
number of significant aspects. Acquisition costs will generally be expensed as
incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair
value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. The new standard is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to
December 15, 2008, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. The new standard on
business combinations was effective for the Company as of December 1,
2009. Early adoption was not permitted. The adoption of the new
standards on business combinations did not have any immediate effect on the
Company’s financial statements; however, the revised standard will govern the
accounting for any future business combinations that the Company may enter
into.
In
December 2007, the FASB issued new accounting guidance on noncontrolling
interests in consolidated financial statements. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, with earlier adoption prohibited.
This statement requires the recognition of a noncontrolling interest (minority
interest) as equity or deficit in the consolidated financial statements and
separate from the parent’s equity or deficit. The amount of net income or loss
attributable to the noncontrolling interest will be included in consolidated net
income or loss on the face of the statement of operations. It also amends
certain consolidation procedures for consistency with the requirements of the
new accounting standards on business combinations. This statement also
includes expanded disclosure requirements regarding the interests of the parent
and of its noncontrolling interest. The Company has evaluated the
impact of the new standard on its consolidated financial
statements. The new standard is effective for the Company as of
December 1, 2009 at which date the Company’s consolidated financial statements
will be retroactively restated to reflect the new presentation for
noncontrolling interests in the equity (deficit) section of the consolidated
balance sheets. The Company expects that the restatement will
recognize a equity deficiency for non-controlling interests of approximately
$700,000 and will reduce the Company’s stockholders’ deficiency by a
corresponding amount.
F-9
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
In May
2008, the FASB issued new accounting standards applicable to the accounting for
convertible debt instruments that may be settled in cash upon
conversion. The new standard changes the method of accounting for
convertible debt securities that require or permit settlement in cash either in
whole or in part upon conversion. The standard is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Under the new
guidance, the debt and equity components of convertible debt securities that may
be settled in cash upon conversion will be bifurcated and accounted for
separately in a manner that will result in recognizing interest expense on these
securities at rates reflective of the entity’s borrowing rates for what the
entity would have incurred had it issued nonconvertible debt with otherwise
similar terms. The equity component of such convertible debt securities will be
included in the paid-in-capital section of stockholders’ equity on the
consolidated balance sheet and, accordingly, the initial carrying values of
these debt securities will be reduced. Accretion of the reduced
carrying value of the convertible debt securities will be recognized as
additional non-cash interest expense. The Company has evaluated the
impact of the new standard on its consolidated financial statements and does not
expect the new standard to have a material impact on its consolidated financial
statements.
In June
2008, the FASB ratified accounting guidance for determining whether an
instrument, or an embedded feature, is indexed to an entity's own
stock. The guidance provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. It also clarifies the impact of
foreign currency denominated strike prices and market-based employee stock
option valuation instruments on the evaluation. The guidance is
effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact this pronouncement will have on its consolidated
financial statements.
In June
2009, the FASB issued changes to the accounting for variable interest
entities. These changes require a qualitative approach to identifying
a controlling financial interest in a variable interest entity (VIE), and
requires ongoing assessment of whether an entity is a VIE and whether an
interest in a VIE makes the holder the primary beneficiary of the VIE. These
changes are effective for annual reporting periods beginning after
November 15, 2009. These changes did not have an immediate impact on our
financial statements. However, these changes would impact the
accounting for controlling financial interests in any VIE that the Company may
acquire in the future.
Effective
September 15, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of Generally Accepted Accounting Principles (GAAP).
These changes establish the FASB Accounting Standards Codification
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates. Accounting Standards Updates will not be
authoritative in their own right as they will only serve to update the
Codification. These changes and the Codification itself do not change GAAP.
Other than the manner in which new accounting guidance is referenced, the
adoption of these changes had no impact on our financial
statements.
F-10
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Note
2 - Going Concern
These
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As of November 30, 2009, the
Company has operating and liquidity concerns and, as a result of recurring
losses, has incurred an accumulated deficit of $39,620,302. The
Company will have to raise additional capital in order to initiate Phase IIb/III
clinical trials for MCT-125, the Company’s therapeutic for the treatment of
fatigue in multiple sclerosis patients. Management is evaluating several sources
of financing for its clinical trial program. Additionally, with its
strategic shift in focus to therapeutic programs and technologies,
management expects the Company’s future cash requirements to increase
significantly as it advances the Company’s therapeutic programs into clinical
trials. Until the Company is successful in raising additional funds,
it may have to prioritize its therapeutic programs and delays may be necessary
in some of the Company’s development programs.
Starting
in March 2007, the Company has operated on working capital provided by La Jolla
Cove Investors (LJCI). As further described in Note 7 to these consolidated
financial statements, under terms of the agreement, LJCI can convert a portion
of the convertible debenture by simultaneously exercising a warrant at $1.09 per
share. As of November 30, 2009, there are 8,531,959 shares remaining on the
stock purchase warrant and a balance of $85,320 remaining on the convertible
debenture. Should LJCI continue to exercise all of its remaining warrants,
approximately $9.3 million of cash would be provided to the Company. The
agreement limits LJCI’s investment to an aggregate ownership that does not
exceed 9.9% of the outstanding shares of the Company. The Company expects that
LJCI will continue to exercise the warrants and convert the debenture over the
next year.
These
factors, among others, create an uncertainty about the Company’s ability to
continue as a going concern. There can be no assurance that LJCI will
continue to exercise its warrant to purchase the Company’s common stock, or that
the Company will be able to successfully acquire the necessary capital to
continue its on-going research efforts and bring its products to the commercial
market. Management’s plans to acquire future funding include the
potential sale of common and/or preferred stock, the sale of warrants, and
continued sales of our proprietary media, immortalized cells and primary cells
to the pharmaceutical industry. Additionally, the Company continues
to pursue research projects, government grants and capital
investment. The accompanying consolidated financial statements do not
include any adjustments related to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Note
3– Property and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation, and is
comprised of the following at November 30, 2009 and 2008:
2009
|
2008
|
|||||||
Lab
Equipment
|
$ | 25,893 | $ | 32,073 | ||||
Furniture
and Office Equipment
|
40,574 | 40,574 | ||||||
66,467 | 72,647 | |||||||
Less:
Accumulated depreciation
|
(60,753 | ) | (57,146 | ) | ||||
Property
and Equipment, Net
|
$ | 5,714 | $ | 15,501 |
The
Company recorded depreciation expense of $9,375 and $11,223 for the years ended
November 30, 2009 and 2008, respectively.
Note
4– Intangible Assets
Intangible
assets consisted of patents, patent rights obtained under licensing agreements,
and patent application costs, and were amortized on a straight-line basis over
the estimated useful life which was 18 years. As described in more
detail below, in its annual review for impairment for the year ended November
30, 2008, the Company made the determination that the carrying value of
intangible assets was probably in excess of estimated present value of future
cash flows from the related assets and that there were not probable future cash
flows from these assets.
F-11
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
The Company reviewed its patent portfolio strategy related
to its Toll-like receptor 3 (TLR3) technology acquired in September 2005 when
MultiCell acquired the
assets of Astral, Inc. This intellectual property is the subject of three patent
applications, and is related to the Company's lead drug candidate MCT-465. The
Company may decide to cease further prosecution of the subject patent
applications and terminate its development work related to
MCT-465. Accordingly, the Company wrote down the value of the patent
applications directly related to MCT-465 and recognized an impairment loss
during the quarter ended November 30, 2008 in the amount of $1,061,365, leaving
a carrying value of zero at November 30, 2008 and 2009.
Note
5 – Notes Payable – Related Parties
The
Company issued notes payable totaling $50,000 to two related parties during
August 2008 and an additional $5,000 in November 2008. The notes
accrue interest at 8.5% per year and are unsecured. The original
notes in the amount of $50,000 and related accrued interest were due in December
2008, but were extended initially to June 2009 and then to December
2009. The note in the amount of $5,000 was due in May
2009. During the year ended November 30, 2009, the Company repaid
$25,000 of the notes to related parties, leaving a balance of $30,000 as of
November 30, 2009. Subsequent to November 30, 2009, the Company has
repaid the balance of these notes to related parties.
Note
6 – License Agreements
In
September 2001, the Company completed the purchase of its cell line business
and, as a result, it acquired an exclusive license agreement with Rhode Island
Hospital for the use of four patents owned by the hospital related to liver cell
lines and liver assist devices. The primary patent acquired and being
utilized is for immortalized hepatocytes. As of November 30, 2006,
management tested the carrying value of the license agreement for impairment and
concluded that it had been impaired and reduced the carrying value to
zero. The Company will pay the hospital a 5% royalty on net sales
derived from licenses based upon the patented technology, until it has paid a
total of $550,000. As of November 30, 2009, no significant payments
had been made under this license agreement. After royalties totaling
$550,000 have been paid, the Company pays a 2% royalty instead of a 5% royalty
for the life of the patent.
On
December 31, 2005, the Company entered into a worldwide Exclusive License
Agreement (the “License Agreement”) with Amarin Neuroscience Limited
(“Amarin”). Among other things, the License Agreement provides that
Amarin shall grant to the Company and its affiliates an exclusive worldwide
license with respect to therapeutic or commercial uses of certain technology of
Amarin, including LAX-202 (to be renamed MCT-125), and the Company shall develop
and seek to commercialize products based on such technology. The
initial technology to be developed is Amarin’s LAX-202, which is a potential
treatment for fatigue in patients diagnosed with multiple
sclerosis. The agreement has a term equal to the life of the patents
licensed. The License Agreement provides that the Company will pay
future royalty milestone payments in accordance with the following:
(a)
|
$500,000
upon first filing of a new drug application with Food and Drug
Administration (FDA) or a reasonably similar filing with any regulatory
authority for Active Agent
Product,
|
(b)
|
$1,000,000
upon first FDA approval for sale in the USA for Active Agent
Product,
|
(c)
|
$1,500,000
within twelve calendar months after the first sale in the USA for Active
Agent Product, and
|
F-12
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
(d)
|
$1,000,000
within twelve calendar months after the first sale in the European
Economic Area for Active Agent
Product.
|
If any
milestone payment is not paid when due, and if no payment is received from the
Company within thirty days after the date of receipt of a written notice of such
nonpayment, Amarin shall have the option to either (i) terminate this agreement
or (ii) convert the license under this agreement to a worldwide non-exclusive
license with the right to sublicense, which non-exclusive license shall be
subject to all of the terms and obligations of the agreement. The
Company shall also pay Amarin without set-off or counterclaim a royalty of nine
percent on net sales of Active Agent Product sold by the Company, its
affiliates, or sublicensees and their affiliates. On November 5, 2008
the License Agreement was amended whereby Amarin granted exclusive worldwide
rights to the Company related to the treatment of all chronic fatique and pain
in addition to the treatment of fatigue in multiple sclerosis
patients.
On April
20, 2007, the Company entered into a license agreement with Eisai Co., Ltd
(“Eisai”). According to the agreement, the Company granted Eisai a
nonexclusive license, which permits the use by Eisai of samples and culture
media for the use of this patent and license. Eisai agreed to pay the
Company 65 million yen (approximately US $545,000 based on exchange rates in
effect at the time of the agreement) over a five-year period. The
first payment of 13 million yen was due upon the signing of the agreement with
subsequent four installments on the anniversary dates of the
agreement. The Company has received the first three annual
installments of 13 million yen ($109,070, $121,030, and $127,400 based on
exchange rates in effect at the time of payment, during the years ended November
30, 2007, 2008, and 2009, respectively). On May 1, 2009, Eisai
notified the Company of its plan to terminate the license agreement effective
March 31, 2010. The Company is recognizing the income ratably over
each year of the agreement. The Company has recognized income of
$124,922 and $119,085 for the years ended November 30, 2009 and 2008,
respectively. The balance of deferred revenue from this license is
$49,544 and $47,067 at November 30, 2009 and 2008, respectively. The
deferred revenue will be amortized into revenue through March 31,
2010.
On
October 9, 2007, the Company executed an exclusive license and purchase
agreement (the “Agreement”) with Corning Incorporated (“Corning”) of Corning,
New York. Under the terms of the Agreement, Corning has the right to
develop, use, manufacture, and sell the Company’s Fa2N-4 cell lines and related
cell culture media for use as a drug discovery assay tool, including biomarker
identification for the development of drug development assay tools, and for the
performance of absorption, distribution, metabolism, elimination and toxicity
assays (ADME/Tox assays). The Company retained and will continue to
support all of its existing licensees, including Pfizer, Bristol-Myers Squibb,
and Eisai. The Company retains the right to use the Fa2N-4 cells for
use in applications not related to drug discovery or ADME/Tox
assays. The Company also retains rights to use the Fa2N-4 cell lines
and other cell lines to further develop its Sybiol® liver assist device, to
produce therapeutic proteins using the Company’s BioFactories™ technology, to
identify drug targets and for other applications related to the Company’s
internal drug development programs. In consideration for the license
granted, Corning paid the Company $375,000 upon execution of the Agreement, and
an additional $375,000 upon the completion of a transition period. In
addition, Corning purchased inventory and equipment from the Company and
reimbursed the Company for laboratory costs and other expenses during a
transition period. The Company is recognizing the income ratably over
a 17 year period. The Company recognized $44,118 in income for each
of the years ended November 30, 2009 and 2008. The balance of
deferred revenue from this license is $654,412 and $698,529 at November 30, 2009
and 2008, respectively, and will be amortized into revenue through October
2024.
The
Company has another license agreement with Pfizer, for which revenue is being
deferred. During the years ended November 30, 2009 and 2008, the
Company recognized $5,200 in each year and the balance of the deferred revenue
from this license is $41,600 and $46,800 at November 30, 2009 and 2008,
respectively, and will be amortized into revenue through January
2018.
F-13
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
On March
17, 2009, the Company entered into a cooperative research and development
agreement with Maxim Biotech, Inc. (Maxim) to develop products for the study of
liver stem cells and liver cancer. The cooperative research and
development agreement with Maxim will initially focus on the development of a
family of life science research reagent tool kits which can be used to isolate
liver stem cells, and help to elucidate liver stem cell gene function and their
encoded proteins. During the term of the agreement, the Company will
establish with Maxim annual research budgets to fund specific research projects
related to liver stem cell biology. Maxim has also granted the
Company an option to obtain an exclusive license to any invention resulting from
the subject research program. The terms and conditions of said
exclusive license will be negotiated between the parties at the time the
invention is conceived or is reduced to practice.
Note
7- Convertible Debentures
On
February 28, 2007, the Company entered into a Debenture Purchase Agreement (the
“Debenture Purchase Agreement”) with La Jolla Cove Investors, Inc. (“LJCI”)
pursuant to which the Company sold a convertible debenture to LJCI in the
principal amount of $1,000,000 (receivable in four payments) maturing on
February 28, 2008 (the “Initial Debenture”). The first payment of
$250,000 was received by the Company on March 7, 2007. The Initial Debenture
accrued interest at 7.75% per year, payable monthly in cash or common
stock. Under the terms of this agreement, certain officers, director
and shareholders of the Company pledged 2,527,638 shares of common stock and
guaranteed the repayment of a $250,000 advance against the Initial Debenture. As
of November 30, 2007, LJCI had sold all of the pledged shares, received proceeds
of $202,081, and reduced the amount due on the advance to $47,919. At
November 30, 2007, the proceeds from the sale of the pledged shares was recorded
as a liability in the amount of $202,081 to the stockholders and affiliates who
had pledged their stock as collateral on the Initial Debenture. LJCI
notified the Company that it intended to convert the remaining balance into
shares of the Company’s common stock subject to the terms set forth in the
Debenture Purchase Agreement. During the year ended November 30, 2008, LJCI
converted the remaining $47,919 of the Initial Debenture into 4,710,250 shares
of common stock.
The
Initial Debenture was convertible at the option of LJCI at a conversion price
equal to the lesser of the fixed conversion price of $1.00, or 80% of the
average of the lowest three daily volume weighted average trading prices per
share of the Company’s common stock during the twenty trading days immediately
preceding the conversion date. For the Initial Debenture, if the holders elected
to convert a portion of the debentures and, on the day that the election was
made, the volume weighted average price was below $0.16, the Company would have
the right to repay that portion of the debenture that the holder elected to
convert, plus any accrued and unpaid interest, at 150% of each amount. In the
event that the Company elected to repay that portion of the debenture, holder
would have the right to withdraw its conversion notice.
Based on
the excess of the aggregate fair value of the common shares that would have been
issued if the $250,000 convertible debentures had been converted immediately
over the proceeds allocated to the convertible debentures, the investors
received a beneficial conversion feature for which the Company recorded an
increase in additional paid-in-capital of $62,500, which has been amortized into
interest expense over the term of the Initial Debenture through February 28,
2008.
The
Company also entered into a Securities Purchase Agreement with LJCI on February
28, 2007 pursuant to which the Company agreed to sell a convertible debenture in
the principal amount of $100,000 and maturing on February 28, 2012 (the “Second
Debenture”). The Second Debenture accrues interest at 4.75% per year,
payable at each conversion date, in cash or common stock at the option of
LJCI. The proceeds from the Second Debenture were deposited on March
5, 2007. In connection with the Second Debenture, the Company issued LJCI a
warrant to purchase up to 10 million shares of our common stock (the “LJCI
Warrant”) at an exercise price of $1.09 per share, exercisable over the next
five years according to a schedule described in a letter agreement dated
February 28, 2007. Pursuant to the terms of the LJCI Warrant, upon
the conversion of any portion of the principal amount of the Second Debenture,
LJCI is required to simultaneously exercise and purchase that same percentage of
the warrant shares equal to the percentage of the dollar amount of the Second
Debenture being converted. Therefore, for each $1,000 of the
principal converted, LJCI would be required to simultaneously purchase 100,000
shares under the LJCI Warrant at $1.09 per share. The agreement
limits LJCI’s investment to an aggregate common stock ownership that does not
exceed 9.99% of the outstanding common shares of the Company.
F-14
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
The
Second Debenture is convertible at the option of LJCI at any time up to maturity
into the number of shares determined by the dollar amount of the Second
Debenture being converted multiplied by 110, minus the product of the Conversion
Price multiplied by 100 times the dollar amount of the Second Debenture being
converted, with the entire result divided by the Conversion
Price. The Conversion Price is equal to the lesser of $1.00 or 80% of
the average of the three lowest volume-weighted average prices during the twenty
trading days prior to the election to convert. During the year ended
November 30, 2008, LJCI converted $825 of the Second Debenture into 19,384,509
shares of common stock. Simultaneously with these conversions, LJCI
exercised warrants to purchase 82,500 shares of the Company’s common
stock. Proceeds from the exercise of the warrants were
$89,925. During the year ended November 30, 2009, LJCI converted
$13,855 of the Second Debenture into 210,075,223 shares of common
stock. Simultaneously with these conversions, LJCI exercised warrants
to purchase 1,385,541 shares of the Company’s common stock. Proceeds
from the exercise of the warrants were $1,510,240. As of November 30,
2009, the remainder of the Second Debenture in the amount of $85,320 could have
been converted by LJCI into approximately 900 million shares of common stock,
which would require LJCI to simultaneously exercise and purchase all of the
remaining 8,531,959 shares of common stock under the LJCI Warrant at $1.09 per
share. For the Second Debenture, upon receipt of a conversion notice
from the holder, the Company may elect to immediately redeem that portion of the
debenture that holder elected to convert in such conversion notice, plus accrued
and unpaid interest. After February 28, 2008, the Company, at its sole
discretion, has the right, without limitation or penalty, to redeem the
outstanding principal amount of this debenture not yet converted by the holder
into common stock, plus accrued and unpaid interest thereon.
A
discount representing the value of 10 million warrants issued in the amount of
$73,727 was recorded as a reduction to the note. The discount was calculated
based on the relative fair values of the convertible debenture and the warrants.
The fair value of the warrants used in the above calculation was determined
under the Black-Scholes option-pricing model. Additionally, based on
the excess of the aggregate fair value of the common shares that would have been
issued if the Second Debenture had been converted immediately over the proceeds
allocated to the convertible debenture, the investors received a beneficial
conversion feature for which the Company recorded an increase in additional
paid-in-capital of $26,273 and a corresponding discount to the
debenture. These discounts, in the aggregate amount of $100,000, are
being amortized over the 60-month term of the debenture as a charge to interest
expense. The balance of the unamortized discount was $45,000 and
$65,000 at November 30, 2009 and 2008, respectively.
Pursuant
to the Registration Rights Agreement with LJCI dated February 28, 2007 (the
"Rights Agreement"), the Company agreed to register for resale under the
Securities Act of 1933, as amended, 12,000,000 shares of common stock issuable
upon conversion of the Initial Debenture, and to use commercially reasonable
best efforts to have the Registration Statement declared effective by May 29,
2007. There is no guarantee that the SEC will declare the
Registration Statement effective. In the event that the Registration Statement
is not declared effective by the required dates, then LJCI may claim the Company
is in default on these agreements, and the Company may face certain liquidated
damages in addition to other rights that LJCI may have. As of November 30, 2009,
the Registration Statement had not been declared effective by the SEC and the
Company has not received notice of default from LJCI.
The
liquidation damages of LJCI’s option include a decrease in the discount
multiplier used to calculate the conversion price of the debentures or an
acceleration of maturity. LJCI will not claim, and has not claimed these
damages, however, if the Company used commercially reasonable best efforts to
obtain effectiveness of this Registration Statement or changes in the
Commission's policies or interpretations make the Company unable to obtain
effectiveness of this Registration Statement. The debentures required
the Company to register the shares of common stock into which the debentures
could be converted by the holder with the SEC. The Company was unable to obtain
SEC approval to register the subject shares, and consequently, the Company and
LJCI agreed to terminate the Debenture Purchase Agreement and to allow LJCI to
sell the common shares pledged as collateral under the Debenture Purchase
Agreement.
F-15
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Note
8 – Series B Redeemable Convertible Stock
The
Company’s Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of these
shares of preferred stock. The Board of Directors originally
designated 17,000 shares as Series B convertible preferred stock. The
Series B preferred stock does not have voting rights. On July 14,
2006, the Company completed a private placement of Series B convertible
preferred stock. A total of 17,000 Series B shares were originally
sold to accredited investors at a price of $100 per share. Proceeds
to the Company were $1,660,000, net of $40,000 of issuance costs.
Commencing
on the date of issuance of the Series B preferred stock until the date a
registration statement registering the common shares underlying the preferred
stock and warrants issued is declared effective by the SEC, the Company will pay
on each outstanding share of Series B preferred stock a preferential cumulative
dividend at an annual rate equal to the product of multiplying $100 per share by
the higher of the Wall Street Journal Prime Rate plus 1%, or 9%. In
no event will the dividend rate be greater than 12% per annum. The
dividend will be payable monthly in arrears in cash on the last day of each
month based on the number of shares of Series B preferred stock outstanding as
of the first day of that month. In the event the Company does not pay
the Series B preferred dividends when due, the conversion price of the Series B
preferred shares is reduced to 85% of the otherwise applicable conversion
price. The Company has not paid the required monthly Series B
preferred dividends since November 30, 2006, which, in part, has caused the
conversion price to be reduced. During the years ended November 30, 2009 and
2008, the Company accrued preferred dividends in the amounts of $148,391 and
$149,203, respectively, on the Series B preferred stock.
The
Series B convertible preferred stock was subject to redemption under certain
conditions until July 14, 2008. Until the earlier of (a) two years
after the closing date or (b) the date upon which all of the Series B shares
were converted into common stock, the purchasers had a right of first refusal on
any financing in which the Company was the issuer of debt or equity
securities. If (a) the Company raised debt or equity financing during
the right of first refusal period or (b) the Company’s common stock was trading
below the conversion price of the Series B shares at the time of such financing,
and (c) the purchasers did not exercise their right of first refusal, then the
Company was required, at the option of any purchaser, to use 25% of the net
proceeds from such financing to redeem such purchasers’ shares of Series B
preferred stock or common stock, as determined by such
purchaser. Series B shares so redeemed were to be redeemed at $100
per share, plus accrued and unpaid dividends thereon, and shares of common stock
so redeemed were to be redeemed at a price per share equal to the value weighted
average closing price of the Company’s Common Stock over the immediately
preceding five trading days, plus accrued and unpaid dividends
thereon. Prior to July 14, 2008, the Series B shares were only
conditionally redeemable as described above and were therefore not classified as
a liability. However, redemption of the Series B shares was not under
the control of the Company; therefore, in accordance with the accounting
standards governing the classification and measurement of redeemable securities,
the Series B preferred stock, plus accrued and unpaid dividends, was classified
outside of permanent equity through July 14, 2008. Upon the
expiration of the redemption provisions on July 14, 2008, the carrying value of
the outstanding shares of Series B preferred stock, plus the accrued and unpaid
dividends of $243,835, was reclassified into permanent
equity. Accrued and unpaid dividends for the period subsequent to
July 14, 2008 are included in accrued expenses in the amounts of $205,308 and
$56,917 as of November 30, 2009 and 2008, respectively.
F-16
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
The
Series B shares are convertible at any time into common stock at a conversion
price determined by dividing the purchase price per share of $100 by the
conversion price. The conversion price was originally $0.32 per
share. Upon the occurrence of an event of default (as defined in the
agreement), the conversion price of the Series B shares shall be reduced to 85%
of the then applicable conversion price of such shares. The conversion price is
subject to equitable adjustment in the event of any stock splits, stock
dividends, recapitalizations and the like. In addition, the
conversion price is subject to weighted average anti-dilution adjustments in the
event the Company sells common stock or other securities convertible into or
exercisable for common stock at a per share price, exercise price or conversion
price lower than the conversion price then in effect in any transaction (other
than in connection with an acquisition of the securities, assets or business of
another company, joint venture and employee stock options). As a
result of the Company issuing common stock upon conversion of convertible
debentures and upon the exercise of warrants both at prices lower than the
conversion price, and due to the Company not paying Series B dividends on a
monthly basis, the conversion price of the Series B preferred stock has been
reduced to $0.0762 per share as of November 30, 2009. The conversion
of the Series B preferred stock is limited for each investor to 9.99% of the
Company’s common stock outstanding on the date of conversion.
In the
event of any dissolution or winding up of the Company, whether voluntary or
involuntary, holders of each outstanding share of Series B preferred stock shall
be entitled to be paid second in priority to the Series I preferred stock
holders out of the assets of the Company available for distribution to
stockholders, an amount equal to $100 per share of Series B convertible
preferred stock held plus any declared but unpaid dividends. After
such payment has been made in full, such holders of Series B convertible
preferred stock shall be entitled to no further participation in the
distribution of the assets of the Company.
Note
9 – Series I Convertible Preferred Stock
The
Company’s Board of Directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions of these
shares of preferred stock. The Board of Directors originally
designated 20,000 shares as Series I convertible preferred stock. On
July 13, 2004, the Company completed a private placement of Series I convertible
preferred stock. A total of 20,000 shares were originally sold to
accredited investors at a price of $100 per share.
The
Series I shares are convertible at any time into common stock at 80% of the
average trading price of the lowest three inter-day trading prices of the common
stock for the ten days preceding the conversion date, but at an exercise price
of no more than $1.00 per share and no less than $.25 per share. The
conversion of the Series I preferred stock is limited to 9.99% of the Company’s
common stock outstanding on the date of conversion. During the year
ended November 30, 2008, Series I preferred stockholders converted 6,466 shares
of preferred stock into 2,586,400 shares of the Company’s common
stock.
The
Series I preferred stock does not have voting rights. In the event of
any dissolution or winding up of the Company, whether voluntary or involuntary,
holders of each outstanding share of Series I convertible preferred stock shall
be entitled to be paid first out of the assets of the Company available for
distribution to stockholders, an amount equal to $100 per share of Series I
preferred stock held. After such payment has been made in full, such
holders of Series I convertible preferred stock shall be entitled to no further
participation in the distribution of the assets of the Company.
Note
10 – Common Stock
On
January 31, 2008, the Company issued 2,527,638 shares of its common stock to the
stockholders and affiliates who had pledged their stock as collateral for the
Initial Debenture with La Jolla Cove Investors, Inc. (LJCI). See Note
7 to these consolidated financial statements for further
discussion. This issuance of common stock satisfied the liability in
the amount of $202,081 recorded during the year ended November 30, 2007 when
LJCI sold the pledged shares of common stock and applied the proceeds from the
sale against the balance of the Initial Debenture.
F-17
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
During
the year ended November 30, 2008, the Company issued 5,247,807 shares of common
stock to a consultant in satisfaction of accounts payable for services performed
in the amount of $79,250, or an average of approximately $0.015 per
share.
On June
25, 2009, the Company held a special meeting of stockholders. At this
meeting, the stockholders voted to approve an amendment to the Company’s
articles of incorporation to increase the number of authorized shares of the
Company’s common stock from 200 million to 475 million shares.
In
September 2009, the Board of Directors approved the settlement of accrued
compensation in the amount of $281,000 payable to the Company’s directors for
services rendered prior to the current fiscal year. The amount due to
the directors was settled by 1) the issuance of 4,857,895 shares of the
Company’s common stock, valued at $92,300 ($0.019 per share); 2) the payment of
$49,703; and 3) the grant of options to purchase 2,428,947 shares of the
Company’s common stock at $0.019 per share, which options vested immediately and
have a term of five years. The settlement was recorded at the amount
of the liability settled, and accordingly, no gain or loss was recognized on the
transaction. Additionally, in September 2009, the Board of Directors
approved the issuance of 427,631 shares of the Company’s common stock, valued at
$8,125 ($0.019 per share), as partial settlement of director fees earned during
the current fiscal year.
The
potential issuable common shares as of November 30, 2009 and 2008 are as
follows:
2009
|
2008
|
|||||||
Warrants
|
24,099,321 | 27,052,862 | ||||||
Stock
options
|
9,338,947 | 2,000,000 | ||||||
Series
B Convertible Preferred Stock
|
21,341,207 | 7,659,915 | ||||||
Series
I Convertible Preferred Stock
|
2,293,600 | 2,293,600 | ||||||
LJCI
Second Debenture
|
905,606,505 | 4,485,652,555 | ||||||
962,679,580 | 4,524,658,932 |
The
Company does not currently have sufficient authorized shares of common stock to
meet the commitments entered into under the Second Debenture and the related
LJCI Warrants. As further discussed in Note 7, upon the conversion of
any portion of the remaining $85,320 principal amount of the Second Debenture,
LJCI is required to simultaneously exercise and purchase that same percentage of
the remaining 8,531,959 warrant shares equal to the percentage of the dollar
amount of the Second Debenture being converted. The agreement limits
LJCI’s investment to an aggregate common stock ownership that does not exceed
9.99% of the outstanding common shares of the Company. Furthermore, the Company
has the right to redeem that portion of the Second Debenture that the holder may
elect to convert and also has the right to redeem the outstanding principal
amount of the debenture not yet converted by the holder into common stock, plus
accrued and unpaid interest thereon.
Note
11 – Stock Compensation Plan
Effective
June 16, 2004, the Company adopted the 2004 Equity Incentive Plan (the 2004
Plan) which authorized the granting of stock awards to employees, directors, and
consultants. The purpose of the 2004 Plan is to provide a means by
which eligible recipients of stock awards may be given the opportunity to
benefit from increases in the value of the common stock through granting of
incentive stock options (ISO), non-statutory stock options, stock purchase
awards, stock bonus awards, stock appreciation rights, stock unit awards and
other stock awards. Incentive stock options may be granted only to
employees. The exercise price of each ISO granted under the plan must
equal 100% of the market price of the Company’s stock on the date of the
grant. A 10% stockholder shall not be granted an incentive stock
option unless the exercise price of such option is at least 110% of the fair
market value of the common stock on the date of the grants and the option is not
exercisable after the expiration of five years from the date of the
grant. The Board, in its discretion, shall determine the exercise
price of each nonstatutory stock option. An option’s maximum term is
10 years.
F-18
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
As
originally adopted in 2004, the 2004 Plan provided that the number of shares of
common stock that could be issued pursuant to stock awards could not exceed, in
the aggregate, 5,000,000 shares of common stock plus an annual increase to be
added on the first day of each Company fiscal year, beginning in 2005 and ending
in (and including) 2013, equal to the lesser of the following amounts: (a) 2% of
the Company’s outstanding shares of common stock on the day preceding the first
day of such fiscal year; (b) 1,500,000 shares of common stock; or (c) an amount
determined by the Board. On June 25, 2009, at a special meeting of
stockholders, the stockholders voted to approve an amendment to the 2004 Plan to
effect an increase in the aggregate number of shares of common stock authorized
for issuance under the plan by 25 million shares. There are
10,485,266 shares of common stock available for future awards under the 2004
Plan at November 30, 2009.
Generally
accepted accounting principles for stock options requires the recognition of the
cost of employee services received in exchange for an award of equity
instruments in the financial statements, is measured based on the grant date
fair value of the award, and requires the stock option compensation expense to
be recognized over the period during which an employee is required to provide
service in exchange for the award (the vesting period), net of estimated
forfeitures. The estimation of forfeitures requires significant
judgment, and to the extent actual results or updated estimates differ from the
current estimates, such resulting adjustment will be recorded in the period
estimates are revised. No income tax benefit has been recognized for
stock-based compensation arrangements and no compensation cost has been
capitalized in the balance sheet.
A summary
of the status of stock options at November 30, 2009 and 2008, and changes during
the years then ended is presented in the following table:
Weighted
|
|||||||||||||
Weighted
|
Average
|
||||||||||||
Shares
|
Average
|
Remaining
|
Aggregate
|
||||||||||
Under
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||
Option
|
Price
|
Life
|
Value
|
||||||||||
Outstanding
at November 30, 2007
|
2,210,000 | $ | 1.09 |
2.3
years
|
$ | - | |||||||
Granted
|
- | - | |||||||||||
Exercised
|
- | - | |||||||||||
Expired
|
(210,000 | ) | 0.51 | ||||||||||
Outstanding
at November 30, 2008
|
2,000,000 | $ | 1.16 |
1.4
years
|
$ | - | |||||||
Granted
|
7,818,947 | 0.01 | |||||||||||
Exercised
|
- | - | |||||||||||
Expired
|
(480,000 | ) | 1.28 | ||||||||||
Outstanding
at November 30, 2009
|
9,338,947 | $ | 0.19 |
4.0
years
|
$ | 10,060 | |||||||
Exercisable
at November 30, 2009
|
5,182,280 | $ | 0.34 |
3.6
years
|
$ | 2,510 |
For
grants during the year ended November 30, 2009, the Company’s weighted average
assumptions used in determining fair value under the Black-Scholes model for
expected volatility, dividends, expected term, and risk-free interest rate were
161%; 0%; 5 years; and 2.51%; respectively. Expected volatility is
based on the historical volatility of the Company’s common stock. The
expected term of options is estimated based on historical exercise
patterns. The risk-free rate is based on U.S.Treasury yields for
securities in effect at the time of grant with terms approximating the expected
term until exercise of the option. The weighted average grant date
fair value of options granted during the year ended November 30, 2009 was
$0.0135. There were no options granted during the year ended November
30, 2008.
F-19
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
For the
years ended November 30, 2009 and 2008, the Company reported stock-based
compensation expense for services related to stock options of $24,216 and
$26,948, respectively. As of November 30, 2009, there is
approximately $38,000 of unrecognized compensation cost related to stock-based
payments that will be recognized over a weighted average period of approximately
0.9 years.
Note
12 – Warrants
Since the
Company’s inception, it has financed its operations primarily through the
issuance of debt or equity instruments, which have often included the issuance
of warrants to purchase the Company’s common stock.
As
further described in Note 7 to these consolidated financial statements, the
Company also entered into a Securities Purchase Agreement with La Jolla Cove
Investors (LJCI) on February 28, 2007 pursuant to which the Company agreed to
sell a convertible debenture in the principal amount of $100,000. In connection
with this debenture, the Company issued LJCI a warrant to purchase up to 10
million shares of our common stock at an exercise price of $1.09 per share,
exercisable over the next five years according to a schedule described in a
letter agreement dated February 28, 2007. Pursuant to the terms of
this warrant, upon the conversion of any portion of the principal amount of the
related debenture, LJCI is required to simultaneously exercise and purchase that
same percentage of the warrant shares equal to the percentage of the dollar
amount of the debenture being converted. Therefore, for each $1,000
of the principal converted, LJCI would be required to simultaneously purchase
100,000 shares under the warrant at $1.09 per share. During the year
ended November 30, 2008, LJCI exercised warrants to purchase 82,500 shares of
the Company’s common stock, resulting in proceeds to the Company of
$89,925. During the year ended November 30, 2009, LJCI exercised
warrants to purchase 1,385,541 shares of the Company’s common stock, resulting
in proceeds to the Company of $1,510,240.
A summary
of the status of warrants at November 30, 2009 and 2008, and changes during the
years then ended is presented in the following table:
Shares
|
||||
Under
|
||||
Warrants
|
||||
Outstanding
at November 30, 2007
|
35,440,946 | |||
Granted
|
- | |||
Exercised
|
(82,500 | ) | ||
Expired
|
(8,305,584 | ) | ||
Outstanding
at November 30, 2008
|
27,052,862 | |||
Granted
|
- | |||
Exercised
|
(1,385,541 | ) | ||
Expired
|
(1,568,000 | ) | ||
Outstanding
at November 30, 2009
|
24,099,321 |
Note
13 – Leasing Arrangements
During
the years ended November 30, 2009 and 2008, the Company has leased facilities in
Rhode Island that have housed activities related to administration, research and
development. The Company currently leases space in Rhode Island under
a one-year lease that expires in April 2010. Current rent is $900 per
month. Rent expense under the Company’s operating leases was $10,800
and $12,671 for the years ended November 30, 2009 and 2008,
respectively.
F-20
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Note
14 – Income Taxes
The
Company provides for income taxes using an asset and liability based
approach. Deferred income tax assets and liabilities are recorded to
reflect the tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
As of
November 30, 2009, the Company has U.S. Federal operating loss carryforwards of
approximately $24 million. The operating losses expire, if not used,
from 2010 through 2030. The Company had net deferred tax assets of
approximately $10.4 million and $10.1 million at November 30, 2009 and 2008
relating primarily to the net operating loss carryforwards generated by its
operations. For financial statement purposes, the deferred tax assets
have been fully offset by valuation allowances due to the uncertainties related
to the extent and timing of the Company’s future taxable income.
The
Company and its subsidiaries file tax returns in the U.S. Federal jurisdiction
and, in the states of California and Rhode Island. The Company is no
longer subject to U.S. federal tax examinations for tax years before and
including November 30, 2006. The Company’s subsidiaries are no longer
subject to examination by State tax authorities for tax years before and
including November 30, 2004. During the years ended November 30, 2009
and 2008, the Company did not recognize interest and penalties.
A
reconciliation of the expected income tax benefit at the U.S. Federal income tax
rate to the income tax benefit actually recognized for the years ended November
30, 2009 and 2008 is set forth below:
2009
|
2008
|
|||||||
Benefit
at federal statutory rate (34%)
|
$ | (286,916 | ) | $ | (712,278 | ) | ||
State
income tax benefit, net of federal tax
|
(48,680 | ) | (122,814 | ) | ||||
Other
differences
|
7,784 | 9,301 | ||||||
Change
in valuation allowance
|
327,812 | 825,791 | ||||||
Benefit
from Income Taxes
|
$ | - | $ | - |
Note
15– Contingent Liability
On May
14, 2008, one of our stockholders, George Colin, filed a lawsuit against the
Company and W. Gerald Newmin in the Superior Court of California – County of
Orange, alleging causes of action for breach of written contract and intentional
misrepresentation. Mr. Colin claimed reimbursement for lost capital
gains in the amount of $550,000 due to a decline in the market value of the
Company’s common stock. Mr. Colin claimed that the Company refused to remove the
restrictive legend on stock certificates following the exercise of certain stock
purchase warrants which prevented the sale of the underlying shares. On March
27, 2009 the Company received a letter from its Directors and Officers insurance
carrier notifying the Company that it was declining coverage on behalf of the
Company but was accepting coverage on behalf of Mr. Newmin. The Company
disagreed with the carrier’s denial of coverage. The Company and Mr. Newmin
believed this claim was without merit and both parties have vigorously defended
the action. However, in September 2009, the case was dismissed in its
entirety with prejudice pursuant to a settlement agreement providing for a total
payment of $105,000 to Mr. Colin, of which $100,000 was covered by insurance.
F-21
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
For
the Years Ended November 30, 2009 and 2008
Note
16– Subsequent Events
Conversion of Debentures and
Exercise of Stock Warrants
As
further described in Note 7 to these consolidated financial statements, the
Company is subject to a Securities Purchase Agreement with La Jolla Cove
Investors (LJCI) dated February 28, 2007 pursuant to which the Company agreed to
sell a convertible debenture in the original principal amount of
$100,000. The debenture is convertible at the option of LJCI into the
number of shares determined by the dollar amount of the debenture being
converted multiplied by 110, minus the product of the conversion price
multiplied by 100 times the dollar amount of the debenture being converted, with
the entire result divided by the conversion price. The conversion
price is equal to the lesser of $1.00 or 80% of the average of the three lowest
volume-weighted average prices during the twenty trading days prior to the
election to convert. In connection with the debenture, the Company
issued LJCI a warrant to purchase up to 10 million shares of our common stock at
an exercise price of $1.09 per share. Pursuant to the terms of the
warrant, upon the conversion of any portion of the principal amount of the
debenture, LJCI is required to simultaneously exercise and purchase that same
percentage of the warrant shares equal to the percentage of the dollar amount of
the debenture being converted. Therefore, for each $1,000 of the
principal converted, LJCI would be required to simultaneously purchase 100,000
shares under the warrant at $1.09 per share. The agreement limits LJCI’s
investment to an aggregate common stock ownership that does not exceed 9.99% of
the outstanding common shares of the Company.
During
the period subsequent to November 30, 2009 through February 26, 2010, LJCI
converted $2,500 of the debenture into 27,280,710 shares of common
stock. Simultaneously with these conversions, LJCI exercised warrants
to purchase 250,000 shares of the Company’s common stock. Proceeds
from the exercise of the warrants were $272,500.
F-22