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EX-31.1 - MultiCell Technologies, Inc. | v180964_ex31-1.htm |
EX-32.1 - MultiCell Technologies, Inc. | v180964_ex32-1.htm |
U.
S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act
of 1934
|
For
the quarterly period ended February 28, 2010.
o
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the transition period from
to
Commission
File Number
001-10221
MultiCell
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
52-1412493
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer
Identification
No.)
|
68
Cumberland Street, Suite 301
Woonsocket,
RI 02895
(Address
of principal executive offices)
401-762-0045
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act 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 o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes o No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of April 9, 2010, the
issuer had 352,839,703 shares of Common Stock, $.01 par value,
outstanding.
TABLE OF
CONTENTS
PART
I FINANCIAL INFORMATION
|
||
Item
1. Financial Statements
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||
Condensed
Consolidated Balance Sheets (unaudited) as of February 28, 2010 and
November 30, 2009
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3
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Condensed
Consolidated Statements of Operations (unaudited) for the Three Months
Ended February 28, 2010 and 2009
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4
|
|
Condensed
Consolidated Statement of Equity (Deficiency) (unaudited) for the Three
Months Ended February 28, 2009 and 2010
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5
|
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Condensed
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended February 28, 2010 and 2009
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6
|
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Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
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|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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16
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||
Item
3. Quantitative And Qualitative Disclosures About Market
Risk
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20
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Item
4T. Controls and Procedures
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20
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PART
II OTHER INFORMATION
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||
Item
1. Legal Proceedings
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22
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|
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||
Item
1A. Risk Factors
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22
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|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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37
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Item
3. Defaults Upon Senior Securities
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37
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Item
4. Removed and Reserved
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37
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Item
5. Other Information
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37
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Item
6. Exhibits
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37
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SIGNATURES
|
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38
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PART
I FINANCIAL INFORMATION
Item
1: Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
February 28,
|
November 30,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 601,798 | $ | 396,554 | ||||
Other
current assets
|
7,406 | 6,442 | ||||||
Total
current assets
|
609,204 | 402,996 | ||||||
Property
and equipment, net of accumulated depreciation of $62,636
and
|
||||||||
$60,753
at February 28, 2010 and November 30, 2009, respectively
|
3,831 | 5,714 | ||||||
Other
assets
|
1,685 | 1,685 | ||||||
Total
assets
|
$ | 614,720 | $ | 410,395 | ||||
LIABILITIES
AND EQUITY (DEFICIENCY)
|
||||||||
Current
liabilities
|
||||||||
Notes
payable - related parties
|
$ | - | $ | 30,000 | ||||
Accounts
payable and accrued expenses
|
1,350,085 | 1,297,486 | ||||||
Advance
from debenture holder
|
151,200 | - | ||||||
Current
portion of deferred revenue
|
67,012 | 98,862 | ||||||
Total
current liabilities
|
1,568,297 | 1,426,348 | ||||||
Non-current
liabilities
|
||||||||
Convertible
debentures, net of discount
|
42,120 | 40,320 | ||||||
Deferred
income, net of current portion
|
634,365 | 646,694 | ||||||
Derivative
liability related to Series B convertible preferred stock
|
277,644 | - | ||||||
Total
non-current liabilities
|
954,129 | 687,014 | ||||||
Total
liabilities
|
2,522,426 | 2,113,362 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Equity
(Deficiency)
|
||||||||
MultiCell
Technologies, Inc. equity (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;
|
||||||||
335,614,703
and 299,892,504 shares issued and outstanding at
|
||||||||
February
28, 2010 and November 30, 2009, respectively
|
3,356,147 | 2,998,925 | ||||||
Additional
paid-in capital
|
31,279,990 | 32,514,975 | ||||||
Accumulated
deficit
|
(38,221,469 | ) | (38,917,068 | ) | ||||
Total
MultiCell Technologies, Inc. stockholders' equity
(deficiency)
|
(1,181,897 | ) | (999,733 | ) | ||||
Noncontrolling
interests
|
(725,809 | ) | (703,234 | ) | ||||
Total
equity (deficiency)
|
(1,907,706 | ) | (1,702,967 | ) | ||||
Total
Liabilities and Equity (Deficiency)
|
$ | 614,720 | $ | 410,395 |
See
accompanying notes to condensed consolidated financial
statements.
3
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For
the Three Months Ended
|
||||||||
February
28,
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
$ | 44,179 | $ | 42,587 | ||||
Operating
expenses
|
||||||||
Selling,
general and administrative
|
193,547 | 183,998 | ||||||
Research
and development
|
99,368 | 38,405 | ||||||
Depreciation
and amortization
|
1,883 | 2,491 | ||||||
Total
operating expenses
|
294,798 | 224,894 | ||||||
Loss
from operations
|
(250,619 | ) | (182,307 | ) | ||||
Other
income (expense)
|
||||||||
Interest
expense
|
(6,199 | ) | (7,761 | ) | ||||
Change
in fair value of derivative liability
|
(51,427 | ) | - | |||||
Interest
income
|
- | 354 | ||||||
Total
other income (expense)
|
(57,626 | ) | (7,407 | ) | ||||
Net
loss
|
(308,245 | ) | (189,714 | ) | ||||
Less
net loss attributable to the noncontrolling interests
|
(22,575 | ) | (16,552 | ) | ||||
Net
Loss attributable to MultiCell Technologies, Inc.
|
(285,670 | ) | (173,162 | ) | ||||
Preferred
stock dividends
|
(36,590 | ) | (36,589 | ) | ||||
Net
loss attributable to common stockholders
|
$ | (322,260 | ) | $ | (209,751 | ) | ||
Basic
and Diluted Loss Per Common Share
|
||||||||
Attributable
to Common Stockholders
|
$ | (0.00 | ) | $ | (0.00 | ) | ||
Basic
and Diluted Weighted-Average
|
||||||||
Common
Shares Outstanding
|
316,062,575 | 102,420,579 |
See
accompanying notes to condensed consolidated financial
statements.
4
MULTICELL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
For
the Three Months Ended February 28, 2009 and 2010
(Unaudited)
Additional
|
Total
|
|||||||||||||||||||||||||||||||||||||
Preferred
Stock - Series B
|
Preferred
Stock - Series I
|
Common
stock
|
Paid
in
|
Accumulated
|
Noncontrolling
|
Equity
|
||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Par
Value
|
Capital
|
Deficit
|
Interests
|
(Deficiency)
|
|||||||||||||||||||||||||||||
Balance
at November 30, 2008
|
16,262 | $ | 1,830,035 | 5,734 | $ | 573,400 | 83,146,214 | $ | 831,462 | $ | 32,894,705 | $ | (38,012,502 | ) | $ | (615,537 | ) | $ | (2,498,437 | ) | ||||||||||||||||||
Issuance
of common stock for
|
||||||||||||||||||||||||||||||||||||||
conversion
of 4.75% debentures
|
- | - | - | - | 50,886,292 | 508,863 | (506,973 | ) | - | - | 1,890 | |||||||||||||||||||||||||||
Issuance
of common stock for
|
||||||||||||||||||||||||||||||||||||||
exercise
of warrants
|
- | - | - | - | 189,000 | 1,890 | 204,120 | - | - | 206,010 | ||||||||||||||||||||||||||||
Dividends
on Series B preferred
|
||||||||||||||||||||||||||||||||||||||
stock
|
- | - | - | - | - | - | - | (36,589 | ) | - | (36,589 | ) | ||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (173,162 | ) | (16,552 | ) | (189,714 | ) | |||||||||||||||||||||||||
Balance
at February 28, 2009
|
16,262 | $ | 1,830,035 | 5,734 | $ | 573,400 | 134,221,506 | $ | 1,342,215 | $ | 32,591,852 | $ | (38,222,253 | ) | $ | (632,089 | ) | $ | (2,516,840 | ) | ||||||||||||||||||
Balance
at November 30, 2009,
|
||||||||||||||||||||||||||||||||||||||
prior
to change in accounting principle
|
16,262 | $ | 1,830,035 | 5,734 | $ | 573,400 | 299,892,504 | $ | 2,998,925 | $ | 32,514,975 | $ | (38,917,068 | ) | $ | (703,234 | ) | $ | (1,702,967 | ) | ||||||||||||||||||
Cumulative
effect of a change in
|
||||||||||||||||||||||||||||||||||||||
accounting
principle for
|
||||||||||||||||||||||||||||||||||||||
beneficial
conversion feature
|
||||||||||||||||||||||||||||||||||||||
of
Series B preferred stock
|
- | - | - | - | - | - | (1,244,076 | ) | 1,017,859 | - | (226,217 | ) | ||||||||||||||||||||||||||
Balance
at November 30, 2009,
|
||||||||||||||||||||||||||||||||||||||
as
restated
|
16,262 | 1,830,035 | 5,734 | 573,400 | 299,892,504 | 2,998,925 | 31,270,899 | (37,899,209 | ) | (703,234 | ) | (1,929,184 | ) | |||||||||||||||||||||||||
Issuance
of common stock for
|
||||||||||||||||||||||||||||||||||||||
conversion
of 4.75% debentures
|
- | - | - | - | 35,402,199 | 354,022 | (350,822 | ) | - | - | 3,200 | |||||||||||||||||||||||||||
Issuance
of common stock for
|
||||||||||||||||||||||||||||||||||||||
exercise
of warrants
|
- | - | - | - | 320,000 | 3,200 | 345,600 | - | - | 348,800 | ||||||||||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | - | - | 14,313 | - | - | 14,313 | ||||||||||||||||||||||||||||
Dividends
on Series B preferred
|
||||||||||||||||||||||||||||||||||||||
stock
|
- | - | - | - | - | - | - | (36,590 | ) | - | (36,590 | ) | ||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | (285,670 | ) | (22,575 | ) | (308,245 | ) | |||||||||||||||||||||||||
Balance
at February 28, 2010
|
16,262 | $ | 1,830,035 | 5,734 | $ | 573,400 | 335,614,703 | $ | 3,356,147 | $ | 31,279,990 | $ | (38,221,469 | ) | $ | (725,809 | ) | $ | (1,907,706 | ) |
See
accompanying notes to condensed consolidated financial
statements.
5
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For
the Three Months Ended
|
||||||||
February
28,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (308,245 | ) | $ | (189,714 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
and amortization
|
1,883 | 2,491 | ||||||
Stock-based
compensation for services
|
14,313 | - | ||||||
Interest
expense from amortization of discount
|
||||||||
on
convertible debentures
|
5,000 | 5,000 | ||||||
Change
in fair value of derivative liability
|
51,427 | - | ||||||
Changes
in assets and liabilities
|
||||||||
Other
current assets
|
(964 | ) | 8,109 | |||||
Accounts
payable and accrued liabilities
|
16,009 | 46,173 | ||||||
Deferred
income
|
(44,179 | ) | (42,588 | ) | ||||
Net
cash used in operating activities
|
(264,756 | ) | (170,529 | ) | ||||
Cash
flows from investing activities
|
||||||||
Collection
of principal on note receivable
|
- | 4,345 | ||||||
Net
cash provided by investing activities
|
- | 4,345 | ||||||
Cash
flows from financing activities
|
||||||||
Proceeds
from the exercise of stock warrants
|
348,800 | 206,010 | ||||||
Advance
from debenture holder
|
151,200 | - | ||||||
Payment
of principal on notes payable - related parties
|
(30,000 | ) | - | |||||
Net
cash provided by financing activities
|
470,000 | 206,010 | ||||||
Net
increase in cash and cash equivalents
|
205,244 | 39,826 | ||||||
Cash and
cash equivalents at beginning of period
|
396,554 | 6,022 | ||||||
Cash
and cash equivalents at end of period
|
$ | 601,798 | $ | 45,848 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
paid for interest
|
$ | 7,231 | $ | 1,202 | ||||
Noncash
Investing and Financing Activities:
|
||||||||
Issuance
of common stock for conversion of 4.75% debentures
|
3,200 | 1,890 | ||||||
Accrual
of dividends on Series B preferred stock
|
36,590 | 36,589 |
See
accompanying notes to condensed consolidated financial
statements.
6
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS, BASIS OF PRESENTATION, AND RECENT
ACCOUNTING PRONOUNCEMENTS
ORGANIZATION
AND NATURE OF OPERATIONS
MultiCell
Technologies, Inc. (“MultiCell”), operates three subsidiaries, MCT Rhode Island
Corp. (“MCT”), Xenogenics Corporation (“Xenogenics”), and MultiCell
Immunotherapeutics, Inc. (“MCTI”). 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 February 28, 2010. 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.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements and related
notes of MultiCell Technologies, Inc. and its subsidiaries have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”) for interim financial statements. Accordingly, they do
not include all of the information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments
consisting of normal recurring adjustments considered necessary for a fair
presentation have been included. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s annual report
on Form 10-K for the year ended November 30, 2009 previously filed with the SEC.
The results of operations for the three-month period ended February 28, 2010 are
not necessarily indicative of the operating results for the fiscal year ending
November 30, 2010. The condensed consolidated balance sheet as of
November 30, 2009 has been derived from the Company’s audited financial
statements.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through April 14, 2010, the date these
consolidated financial statements were issued. See Note 11 to these
condensed consolidated financial statements for a description of events
occurring subsequent to February 28, 2010.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (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 adopted
the new accounting guidance on noncontrolling interests effective December 1,
2009, at which date the Company’s consolidated financial statements were
retroactively restated to reflect the new presentation for noncontrolling
interests in the Company’s consolidated financial statements.
7
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 adopted this new
accounting guidance effective December 1, 2009 and the new standard did not 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
adopted this new accounting guidance effective December 1, 2009. As
more fully discussed in Note 5 to these condensed consolidated financial
statements, the Company determined that the fair value of the beneficial
conversion feature related to the Series B convertible preferred stock is
required to be accounted for as an embedded derivative as of December 1, 2009
under this new accounting guidance. The accounting implications of
this determination is that the fair value of the derivative, calculated to be
$226,217 as of December 1, 2009, was recorded as a noncurrent liability with a
corresponding adjustment to equity on that date. The Company is also
required to record the change in the fair value of the derivative liability at
each subsequent balance sheet date, with a corresponding adjustment to other
income or expense. The change in the fair value of the derivative for
the three months ended February 28, 2010 was $51,427.
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 were effective for annual reporting periods beginning after
November 15, 2009. These changes did not have an immediate impact on the
Company’s financial statements. However, these changes would impact
the accounting for controlling financial interests in any VIE that the Company
may acquire in the future.
In
October 2009, the FASB issued a new accounting standard which amends guidance on
accounting for revenue arrangements involving the delivery of more than one
element of goods and/or services. This standard addresses the unit of accounting
for arrangements involving multiple deliverables and removes the previous
separation criteria that objective and reliable evidence of fair value of any
undelivered item must exist for the delivered item to be considered a separate
unit of accounting. This standard also addresses how the arrangement
consideration should be allocated to each deliverable. Finally, this standard
expands disclosures related to multiple element revenue arrangements. This
standard was effective for the Company December 1, 2009. The adoption of this
standard did not have a material impact on the Company’s financial
statements.
8
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
2. GOING CONCERN
These
condensed consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As of February 28, 2010,
the Company has operating and liquidity concerns and, as a result of recurring
losses, has incurred an accumulated deficit of $38,221,469. 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.
Since
March of 2008, the Company has operated on working capital principally provided
by La Jolla Cove Investors, Inc. (LJCI). As further described in Note 3 to these
condensed 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 February 28, 2010, there are 8,211,959
shares remaining on the stock purchase warrant and a balance of $82,120
remaining on the convertible debenture. Should LJCI continue to exercise all of
its remaining warrants, approximately $8.95 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. CONVERTIBLE DEBENTURES
The
Company 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
“Debenture”). The Debenture accrues interest at 4.75% per year,
payable at each conversion date, in cash or common stock at the option of
LJCI. In connection with the 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 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 LJCI Warrant at $1.09 per share.
9
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
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 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. During the three months ended February 28, 2010,
LJCI converted $3,200 of the Debenture into 35,402,199 shares of common
stock. Simultaneously with these conversions, LJCI exercised warrants
to purchase 320,000 shares of the Company’s common stock during the three months
ended February 28, 2010. Proceeds from the exercise of the warrants
were $348,800 for the three months ended February 28, 2010. In
addition, as of February 28, 2010, LJCI had advanced $151,200 to the Company
towards the future exercise of warrants, which occurred in March
2010. The advance from LJCI is reflected as a current liability in
the accompanying condensed consolidated balance sheet. As of February
28, 2010, the remainder of the Debenture in the amount of $82,120 could have been converted
by LJCI into approximately 957 million shares of common stock, which would
require LJCI to simultaneously exercise and purchase all of the remaining 8,211,959 shares of common stock
under the LJCI Warrant at $1.09 per share. For the Debenture, upon
receipt of a conversion notice from the holder, the Company may elect to
immediately redeem that portion of the debenture that the 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 market 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 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 is $40,000 at February 28, 2010.
NOTE
4. 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
accrued interest at 8.5% per year and were secured by all of the Company’s
assets, including its intellectual property. Prior to November 30,
2009, the Company had repaid all except for $30,000 of the outstanding principal
on the original notes. The remaining balance, plus related accrued
interest, was repaid in full in December 2009.
NOTE
5. SERIES B 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 has designated
17,000 shares as Series B convertible preferred stock. The Series B
preferred stock does not have voting rights.
10
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 three months ended February 28, 2009
and 2010, the Company accrued preferred dividends in the amounts of $36,589 and
$36,590, respectively, on the Series B preferred stock. Total accrued
but unpaid preferred dividends recorded in the accompanying condensed
consolidated balance sheet as of February 28, 2010 are $485,732, of which
$243,835 are recorded in permanent equity with the Series B preferred stock and
$241,897 are recorded as a current liability with accounts payable and accrued
expenses.
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 $0.0697 per share as of February 28, 2010. 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.
Effective
December 1, 2009, the Company adopted new accounting provisions for
determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock. These provisions apply to any freestanding
financial instruments or embedded features that have the characteristics of a
derivative, as defined by standards for accounting for derivative instruments
and hedging activities, and to any freestanding financial instruments that are
potentially settled in an entity’s own common stock. As of December
1, 2009 and February 28, 2010, the Series B preferred stock was convertible into
21,341,207 and 23,331,420 shares of common stock, respectively. The
Company determined that the conversion feature to allow the holders of the
Series B convertible preferred stock to acquire common shares is an embedded
derivative that no longer qualifies as equity under the new accounting
guidance. As a result of adopting these standards, the Company has
evaluated the conversion feature as though it was accounted for as a derivative
liability since the issuance of the Series B convertible preferred stock in July
2006 and has recorded, as a cumulative effect adjustment on December 1, 2009, a
noncurrent derivative liability of $226,217 with a corresponding reduction in
other components of equity on that date. The fair value of the
conversion feature increased by $51,427 as of February 28, 2010, which was
recorded as a loss from the change in the fair value of the derivative liability
during the three months ended February 28, 2010. The fair value of
the embedded conversion feature was estimated to be $0.0119 and $0.0106 per
share of common stock as of February 28, 2010 and December 1, 2009,
respectively, and has been estimated using the Black-Scholes pricing model using
the following assumptions:
February
28, 2010
|
December
1, 2009
|
|||||||
Risk
free interest rate
|
3.61 | % | 3.28 | % | ||||
Expected
life
|
10
Years
|
10
Years
|
||||||
Dividend
yield
|
- | - | ||||||
Volatility
|
140 | % | 150 | % |
11
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
6. 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.
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.
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
7. LICENSE AGREEMENTS AND DEFERRED REVENUE
On
October 9, 2007, MultiCell Technologies, Inc. (“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). MultiCell retained and will continue to support all of its
existing licensees, including Pfizer, Bristol-Myers Squibb, and
Eisai. MultiCell retains the right to use the Fa2N-4
cells for use in applications not related to drug discovery or ADME/Tox
assays. MultiCell 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. Corning paid MultiCell $750,000
in consideration for the license granted. The Company is recognizing
the income ratably over a 17 year period. The Company recognized
$11,029 in income for the three months ended February 28, 2010 and
2009. The balance of deferred revenue from this license is $643,382
at February 28, 2010 and will be amortized into revenue through October
2024.
The
Company has a license agreement with Eisai, for which revenue is being
deferred. During May 2008 and April 2009, the Company received
$121,030 and $127,400, respectively, from Eisai representing the second and
third annual installments under their five-year agreement. On May 1,
2009, Eisai notified the Company of its plan to terminate the license agreement
effective March 31, 2010. The Company recognized revenue from the
agreement with Eisai in the amounts of $31,850 and 30,258, respectively, for the
three months ended February 28, 2010 and 2009. The balance of
deferred revenue from the agreement with Eisai is $17,695 at February 28, 2010,
which will be amortized into revenue through March 31, 2010.
12
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company has another license agreement with Pfizer, for which revenue is being
deferred. The Company recognized revenue from the agreement with
Pfizer in the amount of $1,300 for the three months ended February 28, 2010 and
2009. The balance of deferred revenue from the agreement with Pfizer
is $40,300 at February 28, 2010, which will be amortized into revenue through
January 2018.
NOTE
8. STOCK OPTIONS AND WARRANTS
Stock
Options
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 accompanying condensed consolidated balance
sheet.
A summary
of stock option activity for the three-month period ended February 28, 2010 is
presented below:
Weighted
|
|||||||||||||
Weighted
|
Average
|
||||||||||||
Shares
|
Average
|
Remaining
|
Aggregate
|
||||||||||
Under
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||
Option
|
Price
|
Life
|
Value
|
||||||||||
Outstanding
at November 30, 2009
|
9,338,947 | $ | 0.19 |
4.0
years
|
$ | 10,060 | |||||||
Granted
|
- | - | |||||||||||
Exercised
|
- | - | |||||||||||
Expired
|
(1,000,000 | ) | 1.40 | ||||||||||
Outstanding
at February 28, 2010
|
8,338,947 | $ | 0.05 |
4.2
years
|
$ | 7,545 | |||||||
Exercisable
at February 28, 2010
|
5,481,447 | $ | 0.07 |
4.2
years
|
$ | 3,761 |
There
were no options granted during the three months ended February 28, 2010 or
2009.
For the
three-month periods ended February 28, 2010 and 2009, the Company reported
compensation expense related to stock options of $14,313 and $0,
respectively. As of February 28, 2010, there was $23,222 of
unrecognized compensation cost related to stock options that will be recognized
over a weighted average period of approximately 0.9 years. The
intrinsic values at February 28, 2010 are based on a closing price of
$0.0125.
Stock
Warrants
In
connection with the issuance of common stock, preferred stock, notes payable,
and debentures, and as compensation for services provided, the Company has
issued warrants to purchase shares of the Company’s common stock. The
Company did not issue warrants during the three months ended February 28, 2010
or 2009.
13
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary
of stock warrant activity for the three-month period ended February 28, 2010 is
presented below:
Shares
|
||||
Under
|
||||
Warrants
|
||||
Outstanding
at November 30, 2009
|
24,099,321 | |||
Issued
|
- | |||
Exercised
|
(320,000 | ) | ||
Expired
|
- | |||
Outstanding
at February 28, 2010
|
23,779,321 |
NOTE
9. LOSS PER SHARE
Basic
loss per share is computed on the basis of the weighted-average number of common
shares outstanding during the period. Diluted loss per share is
computed on the basis of the weighted-average number of common shares and all
dilutive potentially issuable common shares outstanding during the year. Common
stock issuable upon conversion of debt and preferred stock, or exercise of stock
options and stock warrants have not been included in the loss per share for the
three month periods ended February 28, 2010 and 2009 as they are
anti-dilutive.
The
potential common shares as of February 28, 2010 are as follows:
Warrants
|
23,779,321 | |||
Stock
options
|
8,338,947 | |||
Series
B Convertible Preferred Stock
|
23,331,420 | |||
Series
I Convertible Preferred Stock
|
2,293,600 | |||
LJCI
Second Debenture
|
956,868,693 | |||
1,014,611,981 |
The
Company does not currently have sufficient authorized shares of common stock to
meet the commitments entered into under the Debenture and the related LJCI
Warrants. As further discussed in Note 3, upon the conversion of any
portion of the remaining $82,120 principal amount of the Debenture, LJCI is
required to simultaneously exercise and purchase that same percentage of the
remaining 8,211,959 warrant shares equal to the percentage of the dollar amount
of the 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 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
10. FAIR VALUE MEASUREMENTS
For
assets and liabilities measure at fair value, the Company uses the following
hierarchy of inputs:
|
•
|
Level
one — Quoted market prices in active markets for identical assets or
liabilities;
|
|
•
|
Level
two — Inputs other than level one inputs that are either directly or
indirectly observable; and
|
|
•
|
Level
three — Unobservable inputs developed using estimates and assumptions,
which are developed by the Company and reflect those assumptions that a
market participant would use.
|
14
MULTICELL
TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Liabilities
measured at fair value on a recurring basis at February 28, 2010 are summarized
as follows:
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Derivative
liability
|
$ | - | $ | 277,644 | $ | - | $ | 277,644 |
There
were no liabilities measured at fair value at November 30, 2009. As
further described in Note 5, the fair value of the derivative liability is
determined using the Black-Scholes pricing model.
NOTE
11. SUBSEQUENT EVENTS
Stock Issued for Conversion
of Debenture and Exercise of Warrants
As more
fully discussed in Note 3 to these consolidated financial statements, the
Company sold a convertible debenture to La Jolla Cove Investors, Inc. (LJCI) and
issued LJCI a stock warrant in connection with the convertible
debenture. Between March 1, 2010 and April 14, 2010, LJCI converted
$1,350 of the 4.75% debenture into 16,740,000 shares of common
stock. Simultaneously with the conversions of the debenture, LJCI was
required to exercise warrants to purchase 135,000 shares of common stock at
$1.09 per share. The total proceeds from the exercise of the warrants
was $147,150, which was deducted from the advance previously received from
LJCI.
Stock Issued to Current
Employees for Compensation
In March
2010, the Company issued a total of 350,000 shares of common stock to its two
employees. On the date of issuance, the closing price of the common
stock was $0.0124, representing compensation of $4,340.
15
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. This discussion and analysis should be read
in conjunction with our financial statements and accompanying notes included
elsewhere in this report. Operating results are not necessarily
indicative of results that may occur in future periods.
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: our
plans to pursue research and development of therapeutics in addition to
continuing to advance our cellular systems business, our plans to become an
integrated biopharmaceutical company, our use of proprietary cell-based systems
and immune system modulation technologies to discover, develop and commercialize
new therapeutics, our plans to continue to operate our business and minimize
expenses, our expectations regarding future cash expenditures increasing
significantly, our intent to gradually add scientific and support personnel, the
expansion of our product offerings, additional revenues and profits, our ability
to complete strategic mergers and acquisitions of product candidates, plans to
increase further our operating expenses and administrative resources, future
potential direct product sales, the sale of additional equity securities, debt
financing and/or the sale or licensing of our technologies.
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 under Item 1A,
Risk Factors, of our Annual Report filed on Form 10-K for the year ended
November 30, 2009.
Overview
Following
the formation of MultiCell Immunotherapeutics, Inc. during September 2005 and
the recent in-licensing of drug candidates, we are pursuing research and
development of therapeutics. Historically, we have specialized in
developing primary liver cell immortalization technologies to produce cell-based
assay systems for use in drug discovery. We seek to become an
integrated biopharmaceutical company that will use its proprietary immune system
modulation technologies to discover, develop and commercialize new therapeutics
itself and with strategic partners.
Regardless
of the outcome of our negotiations with potential partners or acquirers of our
cell line business, we have operated and will continue to operate our business
and seek to minimize 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
minimized. 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.
16
As
funding permits, we intend to gradually add scientific and support
personnel. 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. As revenues
increase, additional administrative personnel will be necessary to meet the
added workload. Other expenses, such as sales and customer service,
will be added commensurate with increased revenues. Our current
research and development efforts focus on development of future cell lines and
therapeutic products and improvement of existing products. Due to the
ongoing nature of this research, we are unable to ascertain with certainty the
estimated completion dates and total 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 our market position. Company sponsored research and
development costs related to future products and redesign of present products
are expensed as incurred. For the three months ended February 28,
2010 and 2009, research and development costs were $99,368 and $38,405,
respectively. Research and development costs include such costs as
allocations of salaries, employee benefits, certain legal costs, and
supplies.
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.
Quarter
Ended February 28, 2010 Compared to the Quarter Ended February 28,
2009
Revenue. Total revenue for
the three months ended February 28, 2010 was $44,179, as compared to revenue of
$42,587 for the same quarter in the prior fiscal year, an increase of
$1,592. All of the revenue for the quarters ended February 28, 2010
and 2009 is from license revenue under agreements with Corning, Pfizer, and
Eisai.
Operating Expenses. Total
operating expenses for the three months ended February 28, 2010 were $294,798,
compared to operating expenses for the three months ended February 28, 2009 of
$224,894, representing an increase of $69,904. This increase was
principally due to 1) an increase in legal, consulting, and accounting fees of
$88,767; 2) an increase in stock-based compensation of $14,313; 3) offset by a
reduction of $14,500 in director fees resulting from the change in the
compensation arrangement with directors; and 4) offset by a reduction in
director, officer, and other insurance expense of $7,757.
Other income (expense). Other
income (expense) amounted to a net expense of $57,626 for the three months ended
February 28, 2010 as compared to net expense of $7,407 for the corresponding
quarter of the prior year. Other income (expense) for the three
months ended February 28, 2010 consists of interest expense of $6,199 and change
in fair value of derivative liability of $51,427. Other income
(expense) for the three months ended February 28, 2009 was composed of interest
expense of $7,761 and interest income of $354. Interest expense
includes interest on the 4.75% debentures, including amortization of discount,
plus interest on notes payable to related parties. The change in fair
value of derivative liability is the result of our adoption on December 1, 2009
of new accounting guidance related to the embedded conversion feature in the
Series B convertible preferred stock. The valuation of the derivative
liability is dependent upon a number of factors beyond our
control. As such, the amount of other income or expense that we
report related to the change in the fair value of the derivative liability is
somewhat unpredictable, but may be significant, and will continue to be reported
until the holders of the Series B convertible preferred stock have converted
their shares into shares of our common stock.
Net Loss. Net loss for the
three months ended February 28, 2010 was $308,245, as compared to a net loss of
$189,714 for the same period in the prior fiscal year, representing an increase
in the net loss of $118,831. The primary reason for this decreased
loss in the current year is due to the increase in operating expenses and due to
the change in fair value of derivative liability, as explained
above.
17
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 February 28, 2010 and 2009:
February 28, 2010
|
February 28, 2009
|
|||||||
Cash
and cash equivalents
|
$ | 601,798 | $ | 45,848 | ||||
Current
assets
|
$ | 609,204 | $ | 67,542 | ||||
Current
liabilities
|
(1,568,297 | ) | (1,878,110 | ) | ||||
Working
capital deficiency
|
$ | (959,093 | ) | $ | (1,810,568 | ) |
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
in 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 28, 2010 there were 8,211,959 shares remaining on the stock purchase
warrant. Should LJCI continue to exercise all of its remaining
warrants approximately $8.95 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. 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.
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.
18
On
February 28, 2007, we 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
“Debenture”). 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
Debenture is 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 Debenture accrues
interest at 4.75% per year payable in cash or our common
stock. Through February 28, 2010, 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 Debenture in effect at the time of
payment.
For the
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.
Cash
provided by (used in) operating, investing and financing activities for the
three month periods ended February 28, 2010 and 2009 is as follows:
February
28, 2010
|
February
28, 2009
|
|||||||
Operating
activities
|
$ | (264,756 | ) | $ | (170,529 | ) | ||
Investing
activities
|
- | 4,345 | ||||||
Financing
activities
|
470,000 | 206,010 | ||||||
Net
increase in cash and cash equivalents
|
$ | 205,244 | $ | 39,826 |
Operating
Activities
For the
three months ended February 28, 2010, the most significant differences between
our net loss and our net cash used in operating activities are due to non-cash
charges totaling $72,623 included in our net loss for compensation, interest,
depreciation, and change in fair value of derivative liability, less changes in
working capital totaling $29,134. For the three months ended February
28, 2009, the most significant differences between our net loss and our net cash
used in operating activities are due to net non-cash charges totaling $7,491
included in our net loss for interest and depreciation, plus changes in working
capital totaling $11,694.
Investing
Activities
We had no
cash flows from investing activities during the three months ended February 28,
2010. Net cash provided by investing activities during the three
months ended February 28, 2009 related to the collections of principal on a note
receivable.
19
Financing
Activities
During
the three months ended February 28, 2010, principal cash flows from financing
activities related to LJCI converting $3,200 of the 4.75% Debenture into common
stock and exercising warrants to purchase 320,000 shares of common stock at a
price of $1.09 per share, plus advancing $151,200 towards a future exercise of
warrants, resulting in total proceeds of $500,000. During the three
months ended February 28, 2010, we also used $30,000 to repay the remaining
amounts owed on notes payable to related parties. During the three
months ended February 28, 2009, LJCI converted $1,890 of the 4.75% Debenture
into common stock and exercised warrants to purchase 189,000 shares of common
stock at a price of $1.09 per share, resulting in total proceeds of
$206,010.
Item
3. 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
4T. 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 February 28, 2010 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.
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 February 28, 2010, the following
material weaknesses existed:
1.
|
Entity-Level
Controls: We did not maintain effective entity-level controls as defined
by the framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control –Integrated Framework.
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.
|
20
Due to
this material weakness, management has concluded that our internal control over
financial reporting was not effective as of February 28, 2010.
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.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended February 28, 2010 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
21
PART
II. OTHER INFORMATION
Item
1: LEGAL PROCEEDINGS
None.
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 February 28, 2010, our
accumulated deficit was $39,187,901. 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 28, 2010 there are 8,211,959 shares remaining on
the stock purchase warrant and a balance of $82,120 remaining on the convertible
debenture. Should LJCI continue to exercise all of its remaining warrants
approximately $8.95 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.
22
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.
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 $348,800 and $1,510,240
during the three months ended February 28, 2010 and the year ended November 30,
2009 from the exercise of stock warrants, 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.
23
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.
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.
24
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:
|
·
|
delays
in obtaining regulatory approvals to commence a clinical
trial;
|
|
·
|
delays
in identifying and reaching agreement on acceptable terms with prospective
clinical trial sites;
|
|
·
|
slower
than expected rates of patient recruitment and enrollment, including as a
result of the introduction of alternative therapies or drugs by
others;
|
|
·
|
lack
of effectiveness during clinical
trials;
|
|
·
|
unforeseen
safety issues;
|
|
·
|
adequate
supply of clinical trial material;
|
|
·
|
uncertain
dosing issues;
|
|
·
|
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;
|
|
·
|
inability
to monitor patients adequately during or after treatment;
and
|
|
·
|
inability
or unwillingness of medical investigators to follow our clinical
protocols.
|
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.
25
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:
|
·
|
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;
|
|
·
|
we
or our licensors might not have been the first to file patent applications
for these inventions;
|
|
·
|
others
may independently develop similar or alternative technologies or duplicate
any of our technologies;
|
|
·
|
it
is possible that none of our pending patent applications or the pending
patent applications of our licensors will result in issued
patents;
|
|
·
|
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
|
|
·
|
we
may not develop additional proprietary technologies or drug candidates
that are patentable.
|
26
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.
27
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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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.
28
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.
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.
29
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.
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.
30
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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31
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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32
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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.
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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33
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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.
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.
34
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;
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failure
or discontinuation of any of our research
programs;
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delays
or other developments in establishing new strategic
alliances;
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announcements
concerning our existing or future strategic
alliances;
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issuance
of new or changed securities analysts’ reports or
recommendations;
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market
conditions in the pharmaceutical and biotechnology
sectors;
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actual
or anticipated fluctuations in our quarterly financial and operating
results;
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35
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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;
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developments
or disputes concerning our intellectual property or other proprietary
rights;
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introduction
of technological innovations or new commercial products by us or our
competitors;
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issues
in manufacturing our drug candidates or
drugs;
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market
acceptance of our products and
drugs;
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third-party
healthcare reimbursement policies;
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FDA
or other United States or foreign regulatory actions affecting us or our
industry;
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litigation
or public concern about the safety of our products, drug candidates or
drugs;
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additions
or departures of key personnel; and
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volatility
in the stock prices of other companies in our
industry.
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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.
36
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
2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item
3: DEFAULTS UPON SENIOR SECURITIES
None.
Item
4: REMOVED AND RESERVED
Item
5: OTHER INFORMATION
None.
Item
6: EXHIBITS:
Exhibit
|
||
Number
|
Description
|
|
31.1*
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 302.
|
|
32.1*
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
18 U.S.C. Section
1350.
|
*
|
Filed
herewith.
|
37
SIGNATURES
Pursuant
to the requirements 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.
|
||
April
14, 2010
|
By:
|
/s/
W. Gerald Newmin
|
W.
Gerald Newmin
(Chief
Executive Officer and Chief Financial
Officer)
|
38