Attached files
U.S. Securities and Exchange
Commission
Washington,
D.C. 20549
Form 10-K
(Mark
One)
☑ ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended May 31,
2016
☐ TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from __________ to __________
Commission
file number 0-10035
LESCARDEN INC.
(Exact name of registrant as specified in its charter)
New York
|
|
13-2538207
|
(State or other jurisdiction of incorporation or
organization)
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|
(I.R.S. Employer Identification No.)
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420 Lexington Avenue, New York, NY 10170
(Address of principle executive offices) (Zip
Code)
Issuer's telephone number (212)
687-1050
Securities registered under Section 12(b) of
the Act: None
Securities
registered under Section 12(g) of the Act:
Common
Stock $.001 par value
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes ☐ No ☐
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☐ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405 of
this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form
10-K. ☑
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 ☐ Accelerated
filer ☐ Non-accelerated
filer ☐ Smaller reporting
company ☑
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No ☑
Issuer’s
revenues for its most recent fiscal year were
$119,681.
The
aggregate market value of the registrant’s Common Stock held
by non-affiliates of the registrant on November 30, 2015 was
approximately $239,399.
The
number of shares of registrant’s Common Stock outstanding as
of September 21, 2016 was 63,622,316
Forward Looking Statements
This
annual report on Form 10-K contains predictions projections
and other statements about the future that are intended to be
forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (collectively
“forward-looking statements”). Forward-looking
statements involve risks and uncertainties. A number of important
factors could cause actual results to differ materially from those
in the forward-looking statements. In assessing forward-looking
statements, readers are urged to read carefully all cautionary
statements including those contained in other sections of this
annual report on Form 10-K.
2
PART I
ITEM 1.
BUSINESS
Since
its inception in 1960, Lescarden has devoted its resources to fund
research and development of proprietary biologic materials with a
focus on wound healing, clinical skin care, osteoarthritis and
cancer applications. In the ensuing years, significant
studies substantiated the ability cartilage powder to function as a
biological response modifier by stimulating the body's immune
system. This response has significant, demonstrated benefits for
chronic wound management, and has been investigated as a potential
treatment for certain types of cancer. Further studies indicated
that Catrix has potent anti-inflammatory properties that could also
be effective against diseases such as arthritis, scleroderma and
psoriasis.
With
a solid clinical platform, the Company in recent years has focused
its strategy toward pursuing marketing and licensing opportunities
for fully developed products that have received patents and are
ready for commercialization.
The
Company's product line is led by Catrix Wound Dressing, a powder
derived from bovine cartilage that has been shown to be effective
in the management of chronic lesions and burns, and especially
helpful when applied to non-healing wounds such as decubitus
ulcers, venous stasis ulcers, and diabetic ulcers. The product has
been approved for sale by the FDA and the Spanish Health Ministry
for distribution throughout the European Union with additional
registration activities proceeding in Asia.
Lescarden
also derives revenue from a line of Catrix-based skin care products
targeting the Plastic Surgery, Dermatology and Medical Spa markets.
Sales of two nutritional supplements, Bio-Cartilage and Poly-NAG, a
patented glucosamine polymer, also contribute to the Company's
overall sales.
Catrix Wound Care
Background
In
the early 1950's, the Company's founders discovered that cartilage
powder significantly hastened the healing of surgical wounds in
animals. Early clinical studies by the Company, supported by
extensive product testing and refinement, led to the creation of a
proprietary process for purifying bovine cartilage to produce a
sterile white powder that could be used to optimize healing. The
resulting product was given the brand name Catrix.
The
Company believes there is persuasive evidence that Catrix functions
in the body as a biological response modifier, regulating the
components of the immune system. Some observed effects of Catrix on
the body include:
● Acceleration of wound healing;
● Inhibition of excessive vascularization of certain
tissues;
● Inhibition of proliferation of malignant
cells;
● Moderation of excessive collagen synthesis by
fibroblast cells
Chronic Wound Market
It
is estimated that the global market for wound care products is
approximately $10 billion. This is likely to increase due to
several factors:
● Demographic trends confirm that the world’s
population is living longer, a significant plus factor for the
Company’s Wound Dressing since it is the elderly who are
especially at risk for the various ulcers and non-healing lesions
for which the product provides therapy.
● There is also a steady worldwide increase in the
incidences of diabetes which affects a wide range of age groups who
are at increase risk of developing non-healing
wounds.
● There is at present no effective treatment for
non-healing wounds. This represents a growing problem for
hospitals, out- patient centers and long-term care facilities. The
best treatment protocols generally focus on proper wound cleaning
and preparation (removal of dead tissue around the wound) and
maintaining an environment that is conducive to proper
healing.
3
Human Clinical Trial Conducted With Catrix
Decubitus Ulcers
In 2004 a clinical study was performed in Spain by
the senior nursing professionals associated with the Spanish Ulcer
and Chronic Wound Advisory Panel. The purpose of the study was to demonstrate that
Catrix® Wound Dressing could achieve a significant healing
effect on pressure ulcers (bed sores) and other chronic wounds that
had failed to respond after months of standard wound healing
treatment. The 101 lesions included in the study had resisted
healing for an average treatment time of 155 days. 51 of the
lesions were Stage III, or serious, while 32 lesions were deemed to
be Stage IV, very serious (total loss of the skin thickness with
extensive destructions, necrosis of tissue in muscle, bone or
support structure.)
The
conclusions of the study were emphatically positive for
Catrix® Wound Dressing: after 49 days of treatment with the
Dressing, 38.4% of all lesions had healed completely. Another 34.7%
showed significant improvement. Of the 32 most serious Stage IV
lesions, 7 had healed completely, while another 11 had improved to
Stage II condition (partial loss of the skin thickness in the
epidermis, dermis, or both.)
In
their Summary, the administrators of the Study stated:
“…treatment with Catrix is effective in the treatment
of pressure ulcers that did not heal after the application of one
of several standard treatments…”
“…these results prove that the treatment with Catrix
significantly reduces the treatment length, and therefore leads to
a reduction in the sanitary cost in this kind of
patient.”
“…it is difficult to state the reasons why Catrix was
so effective in this study. Although this study does not compare
Catrix with other scarring products, we must take into account that
all the included pressure ulcers were previously treated with other
products, vastly used and considered necessary for the treatment of
pressure ulcers at the centres where the patients came from. The
cures with these other products were proven to be inefficient, and
sometimes to even cause wound deterioration. In all the cases, the
only change from the previous treatment was the application of
Catrix. We can therefore conclude that the obtained results were
due to Catrix.”
In
comparing the estimated cost of treating the wounds that healed,
including the nursing time and materials, the investigators
determined that Catrix® reduced the average cost by
40%.
Nine
additional studies have been undertaken in Italy, Germany, Spain,
Hungary and Poland to further establish the credibility of Catrix
to heal chronic ulcerations.
Radiation Dermatitis
In
May 2004 a study was undertaken to compare the efficacy of
Catrix with that of hydrocolloid dressings, the standard therapy
used on cancer patients treated with radiation therapy. Skin
injuries caused by repeated exposure to radiation are a frequent
side effect in oncology treatments. If wounds persist they not only
bring discomfort and risk of infection to the patient, but can even
force suspension of the radiation treatments.
Results
of the study demonstrated that Catrix is more effective than
hydrocolloid dressings in the treatment of wounds caused by
radiodermatitis (average healing time with Catrix: 4.9 days, vs. an
average of 9.0 days with hydrocolloid dressings). Both the nursing
staff and patient groups gave Catrix a higher evaluation in the
study.
Diabetic and Venous Ulcers
This
observational study, was published in November 2004, examined
the effectiveness and safety of Catrix in the treatment of diabetic
and venous ulcers compared to standard treatments. 54.8% of the
wounds healed in the 20 week timeframe with the average healing
time being 9.3 weeks. The conclusion was that Catrix was well
tolerated and effective in treating these types of lower extremity
wounds.
4
Burns
In February 2007 a pilot study was presented
in Korea demonstrating the benefits of utilizing Catrix Wound
Dressing with pediatric patients suffering from
2nd
and 3rd
degree burns. The purpose was to
evaluate whether Catrix could provide caregivers with a viable
alternative to skin grafting, the standard treatment for these
severe burns.
The
results will be published soon. They indicate that Catrix Wound
Dressing can indeed provide a healing option comparable to graft
surgery without the complications and expense associated with
grafting. This approach will receive further study, but it appears
to offer a new, non-invasive method for treating severe burns that
is safer and more cost-effective.
Many
plastic surgeons that provide primary care for burn patients are
already familiar with the Catrix skin care line, which they utilize
to aid in healing cosmetic surgical procedures. Since these
surgeons are already part of Lescarden’s customer base, they
would appear to be excellent prospects to purchase the Catrix Wound
Dressing to treat burn patients. Lescarden intends to capitalize on
this opportunity.
Catrix Skin Care
Catrix
powder is formulated into a line of skin care products designed to
meet the needs of plastic surgeons, cosmetic dermatologists and
their patients. The demonstrated ability of Catrix to expedite
healing, reduce inflammation and enhance patient comfort following
aesthetic procedures fills a unique niche in the rapidly growing
market for cosmetic and anti-aging procedures.
These
Catrix-based products are especially valued for their ability to
provide anti-inflammatory benefits without the use of steroids
which can adversely affect the skin when used for extended periods
of time. According to The American Society of Aesthetic Plastic
Surgery the market for cosmetic procedures in the US totaled
$12.4 billion in 2005.
In
April 2002, Lescarden announced that another study, published
in The Journal of The American Academy of Dermatologic Surgery, had
concluded that Lescarden’s Catrix 10 Ointment facilitates
faster healing than conventional treatments following cosmetic
surgery procedures. The study was conducted by a team headed by
Maritza Perez, M.D., director of cosmetic dermatology as St.
Lukes-Roosevelt Hospital Center in New York.
The
Perez study focused on patients who, after completing laser
resurfacing treatments on their faces, were randomly assigned to
receive Catrix 10 Ointment on one side of their faces and a widely
utilized over-the-counter ointment on the other side for eight
consecutive days. At the completion of the test period researchers
evaluated their data and were able to confirm that facial areas
treated with Catrix 10 Ointment healed much faster.
“Since
the Catrix 10 Ointment facilitates quicker healing, in theory
patients treated with it were at less risk for the complications
that open wounds imply,” said Dr. Perez. “Although the
mechanism by which bovine cartilage accelerates wound healing is
not completely understood, we think it may enhance and accelerate
the skin’s own healing process.”
The
Company has also developed a 5% Catrix Rejuvenation Cream and a 5%
Catrix Lip Balm. The Cream is intended for daily use as a
rejuvenating moisturizer while it is also effective in relieving
symptoms associated with psoriasis, dermatitis and other skin
anomalies. Domestically, sales of these products have occurred
principally through dispensing physicians, skin care professionals,
independent representatives, specialty retailers and via the
internet.
Poly-NAG
Derived
from specially processed crustacean shells, Poly-NAG is a polymeric
form of glucosamine (Poly-N-Acetyl-D-Glucosamine) that is marketed
by Lescarden in the anti-arthritic market as a treatment for
osteoarthritis. The product has demonstrable advantages over the
numerous products that compete in the glucosamine marketplace
because it remains active in the body longer than competitive
products.
5
In
clinical trials at the University of North Texas Health Science
Center, orally administered Poly-NAG was shown to be absorbed by
the body and metabolized into glucosamine, which was measurably
present in subjects’ blood serum. In addition, the tests
confirmed that serum levels of glucosamine remained higher for a
longer time in subjects receiving Poly-NAG, compared to subjects
receiving plain NAG. Based on these results, the Company was
awarded a US Patent for Poly-NAG in September, 2000. A European
patent was awarded in April, 2005.
Lescarden
recently engaged in two clinical studies of Poly-NAG’s effect
in animals. The purpose was to better define the marketability of
Poly-NAG for veterinary applications, a market where North American
sales of anti-arthritic remedies are over $400 million
annually. The results of these laboratory animal studies were
similar to those of the human tests, confirming that Poly
NAG’s activity in the organism lasts longer than the effects
with standard glucosamine. This important point of differentiation
should provide a meaningful market advantage when Poly-NAG is
introduced into the veterinary marketplace.
Distribution
Europe
The
Company is continuing its presence in the European market and
promoting the value of the Wound Dressing as a valuable healing
asset in the treatment of burns and chronic wounds through a
licensing agreement with Smith & Nephew signed in June 2009.
The arrangement with Smith & Nephew has increased sales of
Catrix wound dressing in Spain.
Korea
In
December 2004, Lescarden entered into a 10 year exclusive license
agreement with Daewoong Pharmaceuticals, headquartered in Seoul,
South Korea. Daewoong is the largest producer and marketer of
over-the counter and ethical pharmaceutical products in Korea, with
annual sales over $400 million. Already established in the diabetic
foot ulcer segment of the market, Daewoong is expanding its product
line to cover all aspects of wound treatment. The Company is
working with Daewoong to secure approval from the Korean FDA to
distribute Catrix pursuant to the terms of the agreement. Subject
to such approval, designation of Catrix as a class IV medical
device from the KFDA would yield higher levels of reimbursement but
it is unclear if and when such designation will be
achieved.
6
Government Regulation
Since
the 1996 FDA approval of the Company's 510(k) application for the
use of Catrix in the management of a variety of skin ulcerations,
wounds and burns, the Company has focused on the development of a
distribution network for its family of proprietary, market-ready
products. This strategy envisions a network of licensing and
distribution agreements in addition to Lescarden's own direct
marketing efforts. The plan includes a complete marketing program
for Catrix powder, as well as for Catrix Skin Care Products, which
are being offered to cosmetic dermatologists, plastic surgeons and
skin care specialists. Looking to the future, the Company believes
that the observed effects of Catrix (including acceleration of
wound healing, tumor inhibition and reduction, inhibition of
excessive vascularization and modulation of immune system
functions) coupled with an absence of toxicity, present additional
promising avenues of investigation.
The
production and marketing of the Company's products and its research
and development activities are subject to comprehensive regulation
by various federal, state and local authorities in the United
States and governmental authorities of other countries in which we
conduct business. Among others, the FDA, HPB (Health Canada) and
the SHM (Spanish Ministry of Health) exercise regulatory authority
over the development, testing, formulation, manufacture, labeling,
storage, record keeping, quality control, advertising and promotion
of the Company's products.
A
new drug or device may not be marketed in the United States until
it has satisfied rigorous testing procedures established and
approved by the FDA. The drug may then be marketed only for the
specific indications, uses, formulation, dosage, forms, and
strengths approved by the FDA. Similar requirements are imposed by
foreign regulators upon the marketing of a new drug in their
respective countries.
All
of the Company's contract manufacturing facilities are subject to
periodic inspections by the FDA and comparable agencies from other
countries. If violations of applicable regulations are discovered
during these inspections, the Company may be restrained from
continued marketing of the manufactured products. Such facilities
are also subject to regulation regarding, among other things,
occupational safety, laboratory practices, the use and handling of
radio-isotopes and hazardous chemicals, prevention of illness and
injury, environmental protection and hazardous substance
control.
The
Company also is subject to foreign regulatory authorities with
respect to clinical trials and pharmaceutical sales. Whether or not
FDA approval has been obtained, approval of a product by the
comparable regulatory authorities of foreign countries must be
obtained prior to commencement of marketing of the product in those
countries. The approval process varies from country to country and
the time required may be longer or shorter than that required for
FDA approval.
7
Raw Materials and Manufacturing
Catrix
is manufactured for the Company by contract manufacturers. These
manufacturers must be FDA-approved pharmaceutical manufacturing
facilities. Likewise, foreign government agencies, in countries
where marketing approval is sought, must also approve all such
manufacturers. The Company's food supplement cartilage material,
BIO-CARTILAGE, and its Poly-NAG are manufactured in the United
States and Iceland. An additional manufacturer is being developed
in the Western Pacific Area.
Catrix is
prepared from animal cartilage tissue. The most accessible and
easily processed source is bovine tracheas collected from normal
healthy beef cattle subsequent to slaughter. Tracheas are cleaned,
flash frozen and delivered to qualified pharmaceutical
manufacturing facilities. The cattle from which the tracheas are
harvested are certified free of BSE (Bovine Spongiform
Encephalitis) and the only cattle herds used as source material are
located in New Zealand. All Catrix and production procedures have been
submitted in extensive detail to the FDA, the HPB in Canada, and
the Spanish Health Ministry in Spain, and accepted as part of the
review of the Company's official submissions with respect to
studying Catrix in patients.
Intellectual Property
The
Company was granted and owns, by assignment, several United States
patents. There are similar patents or pending patents in various
foreign countries. We also rely on trade secrets, know-how and
continuing technological innovation to maintain our competitive
position. We use other methods to protect our proprietary rights,
including confidentiality agreements and proprietary information
agreements with vendors, employees, consultants and others that may
have access to proprietary information.
Competition
Competition
in the wound healing and clinical skin care markets is based
primarily on: product performance, including efficacy, safety, ease
of use and adaptability to various modes of administration; patient
compliance; price; acceptance by physicians; marketing; and
distribution. The availability of patent protection and the ability
to obtain government approval for testing, manufacturing and
marketing are also critical factors. See "Business-Government
Regulation."
A
key factor to our success will be our ability to expand our
distribution network and production capabilities while we continue
to enhance our existing products and technologies. Where possible,
we intend to pursue patent and trademark protection for our
products and processes we design and develop.
Human Resources
At
August 29, 2016, the Company had one full time employee. Outside
consultants are hired to coordinate the financial reporting,
regulatory, production operations, quality control and customer
service functions.
8
ITEM 1A. RISK
FACTORS
A
description of the risks and uncertainties associated with our
business is set forth below. You should carefully consider such
risks and uncertainties, together with the other information
contained in this report and in our other public filings. If any of
such risks and uncertainties actually occurs, our business,
financial condition or operating results could differ materially
from the plans, projections and other forward-looking statements
included in the section titled “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and elsewhere in this report and in our other
public filings. In addition, if any of the following risks and
uncertainties, or if any other risks and uncertainties, actually
occurs, our business, financial condition or operating results
could be harmed substantially, which could cause the market price
of our stock to decline, perhaps significantly.
The Company’s dependence on independent contractors for
production, regulatory, and selling processes increases the
likelihood of unforeseen production and marketing
disruptions.
The
regulatory environment associated with the manufacture and sale of
a medical device requires extensive scientific, quality control,
and production operations expertise in order to achieve regulatory
compliance and remain certified to do business in the markets
served. The Company relies on exclusive customer service
representatives in Asia and Europe and outsources its regulatory
compliance and quality control functions. We plan to add human
resources and decrease reliance on outside sources of expertise as
the Company returns to profitability.
If we fail to maintain proper and effective internal controls, our
ability to produce accurate and timely financial statements could
be impaired and investors’ views of us could be
harmed.
We
have evaluated and tested our internal controls in order to allow
management to report on our internal controls, as required by
Section 404 of the Sarbanes-Oxley Act of 2002. If we are not able
to meet the requirements of Section 404 in a timely manner or with
adequate compliance, we would be required to disclose material
weaknesses if they develop or are uncovered and we may be subject
to sanctions or investigation by regulatory authorities, such as
the Securities and Exchange Commission. Any such action could
negatively impact the perception of us in the financial market and
our business. In addition, our internal controls may not prevent or
detect all errors and fraud. A control system, no matter how well
designed and operated, is based upon certain assumptions and can
provide only reasonable assurance that the objectives of the
control system will be met.
ITEM 2.
PROPERTIES
The
Company owns no real property.
ITEM 3. LEGAL
PROCEEDINGS
NONE
ITEM 4. MINE SAFETY
DISCLOSURES
9
PART II
ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The
Common Stock of the Company is traded in the over-the counter
market under the symbol "LCAR". The following table sets forth, for
the periods indicated, the high and low bid quotations for the
Common Stock as reported by the National Quotation
Bureau.
Fiscal Year Ending May 31, 2016
|
High
|
Low
|
Fourth
Quarter
|
0.02
|
0.01
|
Third
Quarter
|
0.02
|
0.01
|
Second
Quarter
|
0.02
|
0.02
|
First
Quarter
|
0.03
|
0.02
|
Fiscal Year Ending May 31, 2015
|
High
|
Low
|
Fourth
Quarter
|
0.03
|
0.01
|
Third
Quarter
|
0.02
|
0.01
|
Second
Quarter
|
0.02
|
0.02
|
First
Quarter
|
0.03
|
0.02
|
On
August 22, 2016 the closing bid price per share of Common Stock, as
reported by the National Quotation Bureau, was $0.018. As of May
31, 2016 there were 332 holders of record of the Company's Common
stock.
ITEM 6. SELECTED
FINANCIAL DATA
Not
applicable to smaller reporting Companies.
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF OPERATIONS
Lescarden
derives revenue primarily from Catrix-based wound and skin care
products that are useful for a variety of plastic surgery,
dermatology and medical applications. Sales of two nutritional
supplements, BIO-CARTILAGE and a patented glucosamine polymer,
Poly-Nag, also contribute to the Company's overall
sales.
Review
The
results of operations for fiscal year ending May 31, 2016 were
negatively impacted the ongoing inability to reestablish production
operations. The Company continues to explore alternative packaging
and raw material processing alternatives. Sales of the
Company’s skin care products to Asian markets increased from
the previous fiscal year as a result of the implementation of
alternative marketing strategies in that region.
Significant accounting policies
Our
discussion and analysis of our financial condition are based upon
our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses and related
disclosure of contingent liabilities. On an on going basis, we
evaluate our estimates, including those related to accounts
receivable, inventories and deferred income taxes. We based our
estimates on our historical experience, knowledge of current
conditions and our beliefs of what could occur in the future
considering available information. Actual results may differ from
these estimates under different assumptions or conditions. The
Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the
preparation of its financial statements.
10
Revenue recognition
Revenue from product sales is recognized upon
shipment of the product when title to the property transfers to the
buyer as does the risk of loss and collectability of the sales
price is reasonably assured. Deferred license fees relate to
license fees received from the company’s licenses, which are
normally amortized over the term of active license
agreements. The Company
evaluates the status of its licensing agreements to assess the need
for changes in accounting estimates and amortization
assumptions.
Inventory valuation
Inventories
are valued at lower of cost, using first in first out method, or
market. We routinely evaluate the composition of our inventory and
identify slow-moving, excess, obsolete or otherwise impaired
inventories. Inventories identified as impaired are evaluated to
determine if reserves are required. Our evaluation is primarily
based upon forecasted short-term demand for the
product.
Deferred taxes
The
Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.
While we consider historical levels of income, expectations and
risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing
the need for the valuation allowance, in the event that we
determine that we would be able to realize deferred tax assets in
the future, an adjustment to the deferred tax asset would increase
income in the period such determination was made.
Results of Operations
Fiscal year ended May 31, 2016 compared to May 31,
2015
The decrease of $133,364 or 53% in product sales
during the year ended May 31, 2016 was attributable to an 81%
decrease in the sales of Catrix resulting from ongoing raw material
production delays which was offset by a 104% increase in sales of
skin care products. The cost of
sales as a percent of sales decreased from the previous year due to
the shipment of repurposed product that was previously packaged
that had a zero value during the year ended May 31,
2016.
Total expenses
excluding cost of sales decreased 43% or $165,751. The net decrease
was principally due to decreases in rent, salaries and professional
fees.
Liquidity and Capital Resources
Cash
flow from financing operations aggregated $278,765 for the two-year
period ended May 31, 2016. Net cash decreased by $32,955 for the
fiscal year ended May 31, 2016 due to a use of cash of $42,955 for
operations offset by an increase in loan from shareholder of
$10,000 during the year ended May 31, 2016. The Company’s
liabilities exceeded its assets by $384,659.
The
Company has no material commitments for capital expenditures at May
31, 2016.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See
page F-1 for Lescarden Inc. Index to Financial
Statements.
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company’s filings under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the Securities and Exchange
Commission. Such information is accumulated and communicated to the
Company’s management, including its Chief Executive and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. The Company’s management,
including the Chief Executive and Chief Financial Officer,
recognizes that any set of controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.
11
The
Company has carried out an evaluation, under the supervision and
with the participation of the Company’s management, including
the Company’s Chief Executive and Chief Financial Officer, of
the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. Based on such
evaluation, the Company’s Chief Executive and Chief Financial
Officer concluded that the Company’s disclosure controls and
procedures are not effective as of the end of the period covered by
this annual report on Form 10K.
There
have been no significant changes in the Company’s internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date of their evaluation in
connection with the preparation of this annual report on
Form 10-K.
Management’s report on internal control over financial
reporting.
Management of the
Company is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s
internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
reporting purposes in accordance with U.S. generally accepted
accounting principles.
Our
internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; (ii) provide reasonable assurances
that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and the
directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that
could have a material effect on our financial statements. Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting as of May 31, 2016 based on the framework
established in Internal
Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that assessment, management concluded that, as of May 31,
2016, the Company’s internal control over financial reporting
was not effective based on the criteria established in Internal Control—Integrated
Framework due to the existence of the following material
weaknesses:
● Lack
of appropriate segregation of duties and multiple levels of
supervisions and review
● Lack
of documented control procedures surrounding inventory cost
allocations
This
Annual Report on Form 10-K does not include an attestation
report of the Company’s registered public accounting firm
regarding internal control over financial reporting since the rules
of the SEC permit the Company to provide only management’s
report on this Annual Report on Form 10-K.
Changes in internal control over financial reporting.
As of
the end of the period covered by this report, there have been no
changes in our internal controls over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during the
year ended May 31, 2016 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
12
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The
executive officers and directors of the Company are as
follows:
Name
|
|
Position
|
William E. Luther
|
|
President, Chief Executive and Chief Financial Officer,
Director.
|
Charles T. Maxwell
|
|
Director.
|
Russell O. Wiese
|
|
Director.
|
Xavier Gras Balaguer
|
|
Director.
|
Mr. Luther (age 56) came to Lescarden in
1997, serving as Marketing Director for the
CATRIX Wound
Care and Skin Care lines. He was promoted to Vice President of
Marketing in 1998 and then promoted to President and Chief
Executive in October 2002. Mr. Luther was elected to the
Board in April 2003. Mr. Luther is a graduate of the
Boston University School of Management.
Mr. Maxwell
(age 84) was the Vice Chairman and Senior Energy Strategist of C.J.
Lawrence Inc., a member firm of the New York Stock Exchange, for
more than twenty-five years, until his retirement in 1997.
Mr. Maxwell has acted as a consultant to various oil companies
and the United States Government on oil policy matters. He became a
Director and Executive Vice President of the Company in
July 1997. Mr. Maxwell is a graduate of Princeton
University and Oxford University.
Mr. Wiese
(age 50) is the Chief Marketing Officer of Davis Advisors, L.P., an
Investment Advisor that manages over $65 billion. He has held
this position since 1994. Prior to joining Davis Advisors, L.P.,
Mr. Wiese worked for Merck & Co., Inc. where he held
positions in sales, sales management, and product management.
Mr. Wiese is a graduate of the University of California,
Berkley and the Stern School of Business, New York
University.
Mr. Balaguer
(age 63) has for more than the past five years owned a company
devoted to giving advice on strategy and project development to
pharmaceutical companies. Since 1998 he has been a representative
of the Company in Europe. Mr. Balaguer received his license in
Medicine from the Autonomous University of Barcelona, Spain and his
MD at the School of Medicine from the University of
Barcelona.
ITEM 11. EXECUTIVE
COMPENSATION
|
|
|
|
Annual Compensation
|
|
Long-Term Compensation Awards
|
Name
|
|
Fiscal Year Ended May 31,
|
|
Salary $
|
|
Warrants(#)
|
William E. Luther
|
|
2016
|
|
$ 50,000
|
|
––
|
|
|
2015
|
|
$ 75,000
|
|
––
|
|
|
2014
|
|
$ 68,750
|
|
––
|
Aggregated Option and Warrant Exercises in Last Fiscal Year and FY
End Option and Warrant Values
|
|
Shares Acquiredon Exercise
|
|
Value Realized
|
|
Number of Unexercised Options/ Warrants at FY End
(#)
|
|
Value of Unexercised In-the-money Options Warrants at FY End
($)
|
|
|
|
|
|
|
|
|
|
Name
|
|
(#)
|
|
($)
|
|
Exercisable
|
|
Exercisable
|
13
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth, as of May 31, 2016 the ownership of the
Company’s Common Stock by each person who is known by the
Company to own Shares of record or beneficially, more that (5%) of
the Company’s Common Stock, as well as each of the
Company’s directors and executive officers and all directors
and executive officers as a group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and
investment powers with respect to the shares
indicated.
Title of Class (1)
|
|
Name and Address of Beneficial Owner
|
|
Number of Shares beneficially Owned
|
|
Percent of Class
|
|
|
|
|
|
|
|
Common Stock
|
|
Charles T. Maxwell
420 Lexington Ave.
Suite 212
New York, NY 10170
|
|
45,412,378
|
|
71.38%
|
|
|
|
|
|
|
|
|
William Luther
420 Lexington Ave.
Suite 212
New York, NY 10170
|
|
100,000
|
|
0.16%
|
|
|
|
|
|
|
|
|
|
Russell O. Wiese
420 Lexington Ave.
Suite 212
New York, NY 10170
|
|
2,000,000
|
|
3.14%
|
|
|
|
|
|
|
|
|
|
Xavier Gras Balaguer
420 Lexington Ave.
Suite 212
New York, NY 10170
|
|
150,000
|
|
0.24%
|
|
|
|
|
|
|
|
|
|
Directors and Officers as a Group
5 persons
|
|
47,662,378
|
|
74.91%
|
———————
(1) The percentages are calculated on the basis
of 63,622,316 shares of Common Stock outstanding. For the purpose
of calculating the percentage of shares of the Company’s
Common Stock owned by any person, the shares issuable upon the
exercise of rights to acquire owned by such a person if exercisable
within 60 days of May 31, 2016 are included in the number of shares
beneficially owned, but such shares are not included in the
calculation of the percent of class. All share ownership is
direct unless otherwise indicated.
14
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
During
the year ended May 31, 2016 an officer and director of the Company
provided a loan to the Company totaling $10,000 to fund working
capital requirements. A company director is paid a sales commission
on European sales of Catrix wound dressing.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
following table sets forth the fees billed by our independent
accountants for each of our last two fiscal years for the
categories of services indicated.
|
2016
|
2015
|
Audit
fees(1)
|
$20,500
|
$24,000
|
Audit-related
fees(2)
|
—
|
—
|
Tax
fees(3)
|
$—
|
$—
|
———————
(1) Consists of fees billed for the audit of our
annual financial statements, review of financial statements
included in our Quarterly Reports on Form 10-Q and services
that are normally provided by the accountant in connection with
statutory and regulatory filings or
engagements.
(2) Consists of assurance and related services that
are reasonably related to the performance of the audit and reviews
of our financial statements and are not included in “audit
fees” in this table. The services provided by our accountants
within this category consisted of advice relating to SEC matters
and employee benefit matters.
(3) Consists of professional services rendered by a
company aligned with our principal accountant for tax compliance,
tax advice and tax planning.
ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
ExhibitNumber
|
|
Description of Exhibit
|
2.1
|
|
Plan
of Reorganization dated. January 15, 1997 (and Amended
Disclosure Statement dated. March 12, 1997).**
|
3.1
|
|
Certificate of Incorporation of Registrant, as
amended.*
|
3.2
|
|
By-Laws of Registrant, as amended.*
|
22.1
|
|
Subsidiaries of the Registrant.*
|
|
Certification pursuant to Exchange Act
Rule 13a-14(a)/15d-14(a)
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
|
———————
* Incorporated by reference to Registrant’s
Form S-1 (Registration no. 33-50743) filed August 12,
1992.
** Incorporated by reference to Registrant’s
Form 10-KSB for the fiscal year ended May 31,
1998.
15
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
LESCARDEN INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ William E.
Luther
|
Date: August 29, 2016
|
|
William E. Luther
Chief Executive and Chief Financial Officer
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
By:
|
/s/ William E. Luther
|
|
President, Principal Executive Officer,
|
|
William E. Luther
|
|
Principal Financial Officer,
|
|
August 29, 2016
|
|
Principal Accounting Officer and Director
|
|
|
|
|
By:
|
/s/ Charles T. Maxwell
|
|
Director
|
|
Charles T. Maxwell
|
|
|
|
August 29, 2016
|
|
|
|
|
|
|
By:
|
/s/ Russell O. Wiese
|
|
Director
|
|
Russell O. Wiese
|
|
|
|
August 29, 2016
|
|
|
|
|
|
|
By:
|
/s/ Xavier Gras Balaguer
|
|
Director
|
|
Xavier Gras Balaguer
|
|
|
|
August 29, 2016
|
|
|
16
LESCARDEN INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting
Firm
|
F-2
|
Balance Sheets as of May 31, 2016 and 2015
|
F-4
|
Statements of Operations for the Years Ended May 31, 2016 and
2015
|
F-5
|
Statements of Stockholders’ Deficit for the Years Ended May
31, 2016 and 2015
|
F-6
|
Statements of Cash Flow for the Years Ended May 31, 2016 and
2015
|
F-7
|
Notes to Financial Statements
|
F-8 – F-10
|
F-1
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Stockholders of Lescarden Inc.
We have audited the accompanying balance sheet of Lescarden Inc. as
of May 31, 2015, and the related statements of operations,
stockholders’ deficit, and cash flows for the year ended May
31, 2015. Lescarden Inc.’s management is responsible for
these financial statements. Our responsibility is to express an
opinion on these financial statements based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Lescarden Inc. as of May 31, 2015, and the results of its
operations and its cash flows for the year ended May 31, 2015, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered
recurring losses from operations and has a stockholders’ and
working capital deficiency. These conditions raise substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are
also described in Note 1. The accompanying financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Cowan, Gunteski & Co., P.A.
August 28, 2015
Tinton Falls, NJ
F-2
To the Board of Directors and
Stockholders of
Lescarden,
Inc.
New York, New
York
We have audited the accompanying
balance sheet of Lescarden, Inc. (the “Company”) as of
May 31, 2016 and the related statements of operations,
stockholders’ deficit, and cash flows for the year ended May
31, 2016. These financial statements are the responsibility of the
Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material
misstatements. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial
reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our
audit provides a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material
respects, the financial position of Lescarden, Inc. as of May 31,
2016, and the results of its operations and its cash flows for
the year ended May 31, 2016, in conformity with accounting
principles generally accepted in the United States of
America.
The accompanying financial statements
have been prepared assuming that Lescarden, Inc. will continue as a
going concern. As discussed in Note 1 to the financial statements,
Lescarden, Inc. suffered losses from operations and has negative
operating cash flows and a working capital deficit, which raises
substantial doubt about its ability to continue as a going concern.
Management’s plans regarding those matters are also described
in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
September 27,
2016
F-3
LESCARDEN INC.
BALANCE SHEETS
As of May 31,
|
2016
|
2015
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$4,252
|
$37,207
|
Accounts
receivable, net of allowance for doubtful accounts of $19,396at May
31, 2016 and 2015
|
1,279
|
48,902
|
Inventory
|
197,978
|
83,586
|
Total current assets
|
203,509
|
169,695
|
|
|
|
Deferred
income tax asset, net of valuation allowance of $1,668,000and
$1,630,000 at May 31, 2016 and 2015
|
––
|
––
|
Total assets
|
$203,509
|
$169,695
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
Liabilities:
|
|
|
Accounts
payable and accrued expenses
|
$309,403
|
$172,846
|
Shareholder
loan
|
278,765
|
268,765
|
Total current liabilities
|
588,168
|
441,611
|
|
|
|
Stockholders'
deficit:
|
|
|
Convertible
preferred stock - $.02 par value; $1.50 liquidation value;
authorized 2,000,000 shares, issued and outstanding 92,000
shares
|
1,840
|
1,840
|
Common
stock - $.001 par value; authorized 200,000,000 issued and
outstanding 63,622,316 shares at May 31, 2016 and 2015
|
63,622
|
63,622
|
Additional
paid-in capital
|
17,505,936
|
17,505,936
|
Accumulated
deficit
|
(17,956,057)
|
(17,843,314)
|
Total Stockholders' deficit
|
(384,659)
|
(271,916)
|
Total liabilities and stockholders' deficit
|
$203,509
|
$169,695
|
See Notes to Financial Statements
F-4
LESCARDEN INC.
STATEMENTS OF OPERATIONS
Year ended May 31,
|
2016
|
2015
|
Revenues:
|
|
|
Product
sales
|
$119,681
|
$248,545
|
License
fees
|
––
|
4,500
|
Total
revenues
|
119,681
|
253,045
|
|
|
|
Costs
and expenses:
|
|
|
Cost
of product sales
|
13,062
|
63,441
|
Salaries
and wages
|
55,683
|
92,649
|
Professional
fees and consulting
|
88,633
|
98,707
|
Rent
and office expenses
|
17,508
|
123,265
|
Insurance
|
33,044
|
34,702
|
Other
administrative expenses
|
21,575
|
20,779
|
Interest
expense
|
250
|
1,133
|
Commission
|
2,675
|
13,884
|
Total
costs and expenses
|
232,430
|
448,560
|
|
|
|
Operating
loss
|
(112,749)
|
(195,515)
|
|
|
|
Other
income
|
6
|
2,364
|
|
|
|
Net
loss
|
$(112,743)
|
$(193,151)
|
Net
loss per common share - basic and diluted
|
$(0.00)
|
$(0.00)
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
Basic
|
63,622,316
|
63,622,316
|
Diluted
|
63,622,316
|
63,622,316
|
See Notes to Financial Statements
F-5
LESCARDEN INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS ENDED MAY 31, 2016 AND
2015
|
Convertible
|
|
|
|
|
||
|
Preferred Stock
|
Common Stock
|
|
|
|
||
|
Number of Shares
|
Par Value Amount
|
Number of Shares
|
Par Value Amount
|
Additional Paid-in Capital
|
Accumulated Deficit
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Balance
at May 31, 2014
|
92,000
|
$1,840
|
63,622,316
|
$63,622
|
$17,505,936
|
$(17,650,163)
|
$(78,765)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
(193,151)
|
$(193,151)
|
Balance
at May 31, 2015
|
92,000
|
$1,840
|
63,622,316
|
$63,622
|
$17,505,936
|
$(17,843,314)
|
$(271,916)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
(112,743)
|
$(112,743)
|
Balance
at May 31,
2016
|
92,000
|
$1,840
|
63,622,316
|
$63,622
|
$17,505,936
|
$(17,956,057)
|
$(384,659)
|
See Notes to Financial Statements
F-6
LESCARDEN INC.
STATEMENTS OF CASH FLOWS
Year ended May 31,
|
2016
|
2015
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(112,743)
|
$(193,151)
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
Changes
in operating assets and liabilities:
|
|
|
Decrease
(increase) in accounts receivable
|
47,623
|
(46,814)
|
(Increase)
Decrease in inventory
|
(114,392)
|
29,986
|
Decrease
in security deposit
|
––
|
20,235
|
Increase
(decrease) in accounts payable and accrued expenses
|
136,557
|
(47,746)
|
Decrease
in deferred license fees
|
––
|
(4,500)
|
Net cash used in operating activities
|
(42,955)
|
(241,990)
|
|
|
|
Cash
flow from investing activities:
|
––
|
––
|
|
|
|
Cash
flow from financing activities:
|
|
|
Proceeds
from shareholder loan
|
10,000
|
268,765
|
Cash provided by financing activities
|
10,000
|
268,765
|
|
|
|
Net
(decrease) increase
in
cash
|
(32,955)
|
26,775
|
Cash
and cash equivalents at beginning of year
|
37,207
|
10,432
|
Cash
and cash equivalents at end of year
|
$4,252
|
$37,207
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash
paid for interest
|
$-
|
$-
|
Cash
paid for taxes
|
$500
|
$500
|
|
|
|
See Notes to Financial Statements
F-7
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
1. NATURE OF BUSINESS AND
GOING CONCERN:
Nature of Business:
Lescarden
Inc. (the "Company") is engaged in the research, testing and
development of medications for the control and cure of various
diseases and the licensing of its technologies for
commercialization by other companies.
Going Concern:
The
accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability of assets and the satisfaction of liabilities that
might be necessary should the Company be unable to continue as a
going concern.
As
shown in the financial statements, the Company had net loss of
$112,743 for the year ended May 31, 2016 and, has a working capital
deficiency. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The
Company’s major stockholder is uncertain about his ability to
continue providing loans to the Company as needed to fund operating
expenses until the Company can restore productive capacity and
return to profitability.
The
Company’s plan and ability to continue as a going concern is
primarily dependent upon the majority shareholder to continue
funding losses until the Company is able to reestablish production
operations. There can be no assurance that the Company will be able
to grow revenues or secure sufficient additional financing to
restore production operations.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Revenue Recognition:
Revenue
from product sales is recognized upon shipment of the product when
title to the property and risk of loss transfers to the buyer, and
collectability is reasonably assured and the sales price is fixed
or determinable.
Segment Reporting:
The
Company believes it has one business segment for financial
reporting purposes since it operates in the medical products
industry.
Fair Value Measurements:
Fair value is defined as the price
that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it
would transact and it considers assumptions that market
participants would use when pricing the asset or liability. The
Company evaluates the fair value of certain assets and liabilities
using the following fair value hierarchy which ranks the quality
and reliability of inputs, or assumptions, used in the
determination of fair value:
Level 1:
Unadjusted
quoted prices in active markets for identical assets or
liabilities
Level 2:
Inputs
other than quoted prices within Level 1 that are
observable
Level 3:
Inputs
that are unobservable for the asset or liability and that include
situations where there is little, if any, market activity for the
asset or liability.
The
Company evaluated assets and liabilities subject to fair value
measurements on a recurring and nonrecurring basis to determine the
appropriate level to classify them for each reporting period. The
recorded values of cash and cash equivalents, accounts receivable,
accounts payable and shareholder loan payable approximate their
fair values and are short term in nature.
F-8
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
Accounts Receivable:
Accounts
receivable are reported at their outstanding unpaid principal
balances reduced by an allowance for doubtful accounts. The Company
estimates doubtful accounts based on historical bad debt, factors
related to specific customers' ability to pay and current economic
trends. The Company writes off accounts receivable against the
allowance when a balance is determined to be
uncollectible.
Cash and Cash Equivalents:
For
purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Earnings (Loss) Per Share:
Basic
earnings (loss) per share is computed by dividing net income (loss)
per common share by the weighted-average number of common shares
outstanding during the year. Diluted earnings per share has not
been presented in the accompanying statement of operations since
there were no warrants to purchase shares of the Company’s
common stock for the years ended May 31, 2016 and
2015.
Inventory:
Inventory,
consisting principally of Catrix and BIO-CARTILAGE supplies and
Catrix topical wound treatment creams and solutions, is stated at
the lower of cost, determined by the first-in, first-out method, or
market. The Company also stores product for testing and product
deveolpement purposes that can also be remanufactured for
sale.
Use of Estimates:
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires the use of estimates by management. Actual results could
differ from those estimates
Recent accounting pronouncements:
The
Company does not believe that any recently issued, but not yet
effective accounting standards will have a material effect on the
Company’s financial position, results of operations or cash
flows.
3. INVENTORY:
Inventory
at May 31, consists of the following:
|
2016
|
2015
|
Finished
goods
|
$175,580
|
$36,875
|
Raw
materials
|
22,398
|
46,711
|
|
$197,978
|
$83,586
|
4. MAJOR CUSTOMERS AND
SUPPLIER:
During
the year ended May 31, 2016, sales to two customers accounted for
approximately 33% and 32% of net product sales, respectively.
During the year ended May 31, 2015, sales to two customers
accounted for approximately 81% and 3% of net product sales,
respectively.
Sales were made to customers in the following
locations:
|
May 31,
|
|
|
2016
|
2015
|
United
States
|
$31,287
|
$39,206
|
Europe
|
38,208
|
200,734
|
Asia
Pacific
|
50,186
|
8,605
|
|
$119,681
|
$248,545
|
5. DEFERRED
LICENSE FEES:
The
deferred license fees of $4,500 stated on the statement of cash
flows relate to license fees received from the Company's
licensees in Canada, Europe and Korea, which are being amortized
straight-line over the term of the license
agreements.
6. COMMITMENTS AND
CONTINGENCIES:
The
Company reached an agreement to terminate the non-cancelable lease
with an unrelated third party to rent office space which expired on
January 31, 2016. The lease provided for aggregate minimum
rental payments for the year ended May 31, 2016 of $60,343. In May
2015, the Company agreed to pay a cancellation fee of $9,615 in
excess of the unpaid rent totaling $105,151 to terminate the
lease.
F-9
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
The
Company pays rent to warehouses for storage of its finished goods
and raw materials. Rent expense charged to operations for the years
ended May 31, 2016 and 2015 amounted to approximately $12,000 and
$92,000, respectively.
7. STOCKHOLDERS'
DEFICIT:
The
92,000 shares of convertible preferred stock has a preference upon
liquidation of $1.50 per share is convertible, at the option of the
holder, into one share of the Company's common stock for each share
of preferred stock; and is callable, at the option of the Company
at such time as its net worth exceeds $3,000,000, for $1.50 per
share. Additionally, holders of preferred stock are entitled to
vote for directors of the Company on a one-share/one-vote
basis.
8. INCOME
TAXES:
The
Company has net operating loss carry forwards of approximately
$4,906,000 available to reduce future taxable income, which expire
in various years through 2034. The utilization of net operating
loss carryforwards may be limited as a result of cumulative changes
in the Company's stock ownership.
Deferred
income taxes reflect the impact of net operating loss
carryforwards. In recognition of the uncertainty regarding the
ultimate amount of income tax benefits to be derived from the
Company's net operating loss carryforwards, the Company has
recorded a valuation allowance for the entire deferred tax
asset.
The
deferred income tax asset is comprised of the following at May 31,
2016 and 2015 respectively:
|
2016
|
2015
|
Gross
deferred tax assets
|
$1,668,000
|
$1,630,000
|
Valuation
allowance
|
(1,668,000)
|
(1,630,000)
|
Net deferred income tax asset
|
$-0-
|
$-0-
|
A
reconciliation of the effective income tax rate to the statutory
rate is as follows:
Year ended May 31,
|
2016
|
2015
|
Tax
benefit at federal statutory rate
|
(34)%
|
(34)%
|
Increase
in valuation allowance
|
34
|
34
|
|
-0-%
|
-0-%
|
Income
taxes are computed using the asset and liability method of
accounting. Under the asset and liability method, a deferred tax
asset or liability is recognized for estimated future tax effects
attributable to temporary differences and carryforwards. The
measurement of deferred income tax assets is adjusted by a
valuation allowance, if necessary, to recognize future tax benefits
only to the extent, based on available evidence; it is more likely
than not such benefits will be realized. The Company recognizes
interest and penalties, if any, related to uncertain tax positions
in selling, general and administrative expenses. No interest and
penalties related to uncertain tax positions were accrued at May
31, 2016.
The
tax years 2012 through 2015 remain open to examination by the major
taxing jurisdictions in which the Company operates. The Company
expects no material changes to unrecognized tax positions within
the next twelve months.
9.
RELATED PARTY
TRANSACTIONS:
During
the year ended May 31, 2016, an officer/director of the Company
provided a loan to the Company of $10,000.
During
the year ended May 31, 2016, a sales commission was paid to a
director of the Company for services rendered in connection with
the sale of Catrix in Europe. The Company has an exclusive
agreement with such director that provides for a commission equal
to 7% of gross sales to European customers in exchange for customer
service and sales services rendered on behalf of the Company.
Pursuant to this agreement, the Company incurred sales commission
expense of $2,675 and $13,884 during the year ended May 31, 2016
and 2015, respectively.
F-10