ITEM 1. BUSINESS
About MultiCell Technologies, Inc.
MultiCell Technologies, Inc. was incorporated in Delaware on April 28, 1970 as Exten Ventures, Inc., and subsequently changed its name to Exten Industries, Inc. (“Exten”). An agreement of merger between Exten and an entity then called MultiCell Associates, Inc. (“MTI”), was entered into on March 20, 2004, whereby MTI ceased to exist and all of its assets, property, rights and powers, as well as all debts due it, were transferred to and vested in Exten as the surviving corporation. Effective April 1, 2004, Exten changed its name to MultiCell Technologies, Inc. (“MultiCell”). MultiCell currently operates two subsidiaries, Xenogenics Corporation (“Xenogenics”) of which MultiCell holds 95.3% of the outstanding shares (on an as-if-converted to common stock basis), and MultiCell Immunotherapeutics, Inc. (“MCTI”), of which MultiCell holds 85.1% of the outstanding shares (on an as-if-converted to common stock basis). As used herein, the “Company”, “we”, “our”, and “us” refers to MultiCell, together with Xenogenics and MCTI. Our principal offices are located at 68 Cumberland Street, Suite 301, Woonsocket, RI 02895. Our telephone number is (401) 762-0045.
We are a biopharmaceutical company which owns a majority interest in its two subsidiary companies MCTI and Xenogenics. We and our subsidiaries are developing novel therapeutics and discovery tools to address unmet medical needs for the treatment of neurological disorders, hepatic disease, cancer and interventional cardiology and peripheral vessel applications.
Our Therapeutic Platform
Our therapeutic development platform includes several patented techniques used to: (i) control the immune response at transcriptional and translational levels through double-stranded RNA (“dsRNA”)-sensing molecules such as the Toll-like Receptors (“TLRs”), RIG-I-like receptor (“RLR”), and Melanoma Differentiation-Associated protein 5 (“MDA-5”) signaling; (ii) generate specific and potent immunity against key tumor targets through a novel immunoglobulin platform technology; (iii) modulate the noradrenaline-adrenaline neurotransmitter pathway; and (iv) develop mext-generation antibody drug conjugates (“ADCs”) which provide for the simultaneous targeted delivery of multiple drugs from a single antibody. Our medical device development platform is based on the design of a next-generation bioabsorbable stent, the Ideal BioStent™, for interventional cardiology and peripheral vessel applications.
Our therapeutic new drug candidate, MCT-125, offers several key advantages, including selective modulation of noradrenergic neurons without influencing seratoninergic neurons to inhibit the reuptake of noradrenaline (norepinephrine) while promoting increased tyrosine hydroxylase activity for the treatment of primary multiple sclerosis-related fatigue (PMSF) affecting over 70% of all persons with multiple sclerosis (“MS”).
Unlike other immune modulating compounds, our use of novel synthetic dsRNAs (MCT-485 and MCT-465) is not species or sequence-specific yet enables selective control of critical immune signaling pathways, and therefore has the potential in a broader spectrum of therapeutic applications as a monotherapy or in combination with other therapies.
Coupling our synthetic dsRNA platform technology with our therapeutic antibody-drug conjugate (“ADC”) technology maximizes the potential to create a novel class of potentially more effective anticancer therapeutics.
Our portfolio of lead drug candidates is in various stages of discovery optimization, and preclinical and clinical development, and includes the following:
·MCT-125, a Phase 2 therapeutic candidate for the treatment of PMSF which has demonstrated efficacy in a 138-patient Phase IIa clinical trial;
·MCT-465, a preclinical synthetic dsRNA therapeutic candidate and potent immune enhancer for the treatment of solid tumor cancers such as those expressing TLR-3; and
·MCT-485, a discovery stage dsRNA therapeutic candidate with tumor cytolytic properties for the treatment of certain cancers.
Our Medical Device Platform
Our medical device development platform is based on the design of a next-generation bioabsorbable stent, the Ideal BioStent™, for interventional cardiology and peripheral vessel applications. Xenogenics’ bioabsorbable stent technology allows for the ability to layer different combinations of polymers and drugs, enabling the optimization of the delivery of combination drug therapies to provide superior clinical results. The Ideal BioStent™ represents a significant advance over currently available stents, including:
·The ability to promote positive vessel remodeling;
·A significant reduction in late-stent thrombosis risk;
·No metal artifact remaining in the patient’s body after vessel healing; and
·The reduced need for long-term and costly anti-platelet therapy.
In extensive animal testing and initial human use, the Ideal BioStent™ demonstrated equivalence in safety, short-term efficacy and structural integrity when compared with today’s leading bare metal stent and drug-eluting metal stent. Unlike other bioabsorbable stent technologies, the Ideal BioStent™ showed no stent recoil, either acute or at six month follow up, remaining well apposed to the vessel wall. Furthermore, the Ideal BioStent™ is designed to be fully absorbed at 12 months, leaving no artifact behind and allowing the vessel to heal and return to its natural state.
Our Therapeutic Programs
We are pursuing research and development targeting multiple sclerosis-related fatigue, degenerative diseases, and cancer.
Our therapeutics candidates addresse significant unmet medical needs and is designed to augment current therapeutic strategies via:
·Modulation of the noradrenaline-adrenaline neurotransmitter pathway (MCT-125) for the treatment of primary multiple sclerosis fatigue (“PMSF”) affecting over 70% of all persons with MS;
·Triggering the adaptive immune response thru Toll-like Receptor 3 (TLR3) signaling of the innate immune system using dsRNA (MCT-465) to treat cancer;
·Triggering cytolysis using dsRNA (MCT-485) via activation of stromal macrophages and release of tumor necrosis factor alpha (“TNF-alpha”), interleukin 6 (“IL-6”) and other pro-inflammatory cytokines; and
·Development of next-generation antibody drug conjugates (ADCs) which provide for the simultaneous targeted delivery of multiple drugs from a single antibody.
Our therapeutic development platform has several advantages over those of our competitors:
·Modulation of noradrenergic neurons without effecting seratoninergic neurons to inhibit the reuptake of noradrenaline (norepinephrine);
·Unlike DNA-based immunostimulatory CpG motifs or antisense and small interfering RNA (siRNA) technologies, our use of dsRNA signaling thru TLR3 is not species or sequence-specific, and therefore has the potential to have application in a broader spectrum of therapeutic applications. SiRNA, sometimes known as short interfering RNA or silencing RNA, is a class of dsRNA molecures 20-25 base pairs in length;
·Using very small dsRNA to trigger direct cytotoxic activity (cytolysis) via activation of stromal macrophages and release of TNF-alpha, IL-6 and other pro-inflammatory cytokines; and
·Able to deliver two different drugs simultaneously using a single target antibody drug conjugate.
Our portfolio of lead drug candidates is in various stages of preclinical and clinical development and includes:
·MCT-125, a Phase IIb therapeutic candidate for the treatment of PMSF with demonstrated efficacy in 138 patients;
·MCT-465, a preclinical adjuvant therapeutic candidate for the treatment of TLR3+ cancers; and
·MCT-485, a preclinical therapeutic candidate that appears to have direct cytotoxic activity (cytolysis) via activation of stromal macrophages and release of TNF-alpha, IL-6 and other pro-inflammatory cytokines.
Multiple Sclerosis Therapeutic Program
Multiple Sclerosis, or MS, is an autoimmune disease in which immune cells attack and destroy the myelin sheath, which insulates neurons in the brain and spinal cord. When the myelin is destroyed, nerve messages are sent more slowly and less efficiently. Scar tissue then forms over the affected areas, disrupting nerve communication. MS symptoms occur when the brain and spinal cord nerves cease to communicate properly with other parts of the body.
Approximately 350,000 individuals have been diagnosed with MS in the United States and more than one million persons worldwide are afflicted with MS. Initial symptoms typically manifest themselves between the ages of 20 and 40; symptoms rarely begin before 15 or after 60 years of age. Women are almost twice as likely to get MS as men, especially in their early years. People of northern European heritage are more likely to be affected than people of other racial backgrounds, and MS rates are higher in the United States, Canada, and Northern Europe than in other parts of the world. MS is very rare among Asians, North and South American Indians, and Eskimos.
MCT-125 for the treatment of fatigue in patients with multiple sclerosis
Fatigue is the most common symptom in MS. Overall, greater than 75% of persons with MS report having fatigue, and 50% to 60% report it as the worst symptom of their disease. Fatigue can severely affect an individual’s quality of life and functioning, even if the level of disability appears to be insignificant to the outside observer. Many MS care providers are unaware that fatigue is also a major reason for unemployment, especially for those individuals with otherwise minor disability. Moreover, fatigue in MS has a severe effect on patients’ ability to feel as if they have control over their illness. Perhaps the most dramatic evidence that fatigue is a distinct symptom of MS comes from the clinical characteristics that have been recognized by clinicians for years. These characteristics include the sensitivity of MS fatigue patients to heat as well as the fact that in about 30% of MS patients, fatigue predates other symptoms of MS. In addition, clinical observation has shown that MS fatigue exhibits relapsing-remitting characteristics. Many individuals appear to have “fatigue relapses”.
Individuals can suffer from weeks of extraordinary fatigue for no apparent reason, then report feeling not fatigued for a period of time followed by a relapse of feeling fatigued; these episodes may or may not be associated with the typical symptoms of an MS relapse. All of these characteristics suggest that fatigue is not a secondary effect of MS, but is a primary part of the disease itself.
In December 2005, MultiCell exclusively licensed the drug candidate LAX-202 from Amarin Neuroscience Limited (“Amarin”) for the treatment of fatigue in patients suffering from MS. MultiCell renamed LAX-202 to MCT-125, and intends to further evaluate MCT-125 in a Phase IIb/III clinical trial. In a 138-patient, multi-center, double-blind placebo controlled Phase II clinical trial conducted in the United Kingdom by Amarin, LAX-202 demonstrated efficacy in significantly reducing the levels of fatigue in MS patients enrolled in the study. LAX-202 proved to be effective within four weeks of the first daily oral dosing, and showed efficacy in MS patients who were moderately as well as severely affected. LAX-202 demonstrated efficacy in all MS patient sub-populations including relapsing-remitting, secondary progressive and primary progressive. Patients enrolled in the Phase II trial conducted by Amarin also reported few if any side effects following daily oral dosing of LAX-202. MultiCell intends to proceed with the anticipated Phase IIb/III trial of MCT-125 using the data generated by Amarin for LAX-202 following discussions with regulatory authorities.
The license agreement with Amarin provides that MultiCell will pay future royalty milestone payments to Amarin in accordance with the following:
·$500,000 upon the first filing of a new drug application with the U.S. Food and Drug Administration (“FDA”) or a reasonably similar filing with any regulatory authority for an Active Agent Product (as further defined below);
·$1,000,000 upon the first FDA approval for sale in the U.S. for an Active Agent Product;
·$1,500,000 within 12 calendar months after the first sale in the U.S. for an Active Agent Product; and
·$1,000,000 within 12 calendar months after the first sale in the European Economic Area for an Active Agent Product.
As defined in the license agreement with Amarin, an “Active Agent Product” means any preventative or therapeutic product which is composed of, or incorporates an Active Agent or an intermediate thereof or is developed utilizing the licensed technology. An “Active Agent” means: (a) a pharmaceutical composition comprising a tricyclic antidepressant and at least one noradrenaline precursor selected from tyrosine or phenylalanine, with or without the addition of vitamin B12, covered, either ultimately or presently, by (i) an enforceable claim of any patent within the licensed patent rights, or (ii) by licensed technical information; or (b) any chemical compound other than a chemical compound described in (a) above comprising a pharmaceutical composition comprising tricyclic antidepressants or monoamine oxidase inhibitors or selective serotonin uptake inhibitors in combination with one or more amino acids, with or without the addition of vitamin B12, covered, either ultimately or presently, by (i) an enforceable claim of any patent within licensed patent rights or (ii) by licensed technical information.
None of these milestones were achieved as of November 30, 2014.
MCT-465 and MCT-485 for the treatment of cancer
Worldwide, breast cancer is the second most common type of cancer. It is estimated that 585,720 deaths will occur from cancer in 2014. Breast cancer accounts for 29% of all new cancers among women and the number of cases worldwide has significantly increased, partly due to modern lifestyles in the Western world. Approximately 40,000 women died from breast cancer in the United States during 2013.
MCT-465 and MCT 485 are in preclinical development, and are being investigated as prospective treatments for primary liver cancer and triple negative breast cancer.
The immune system is composed of two synergistic elements: the innate immune system and the adaptive immune system. Stimulation of the innate immune system through key receptors plays a critical role in triggering the adaptive immune response stimulating T and B cells to produce antibodies. In cancer, this integrated defense system does not work well, resulting in suboptimal activation of innate immunity and thus, late or inefficient adaptive immunity. The innate immune system is composed of a family of ten receptor molecules, the Toll-like Receptors (TLR1-TLR10), which act as sentries to identify invaders and signal the alarm to mobilize the body’s array of immune defenses.
Within the tumor lesion, there may be infiltrating monocytes, dendritic cells and leukocytes in general, that have the capability to mobilize an adaptive or innate immune response but they are either silent or immune suppressive in the absence of select immune interventions. Such infiltrating non-cancerous immune cells may express TLR3, other TLRs, RIG-I and/or MDA-5. In addition, within tumor lesions, there may be cancerous cells or stromal cells or cancer stem cells which express TLR3, other TLRs, RIG-I and MDA-5 (representing RNA-sensing molecules).
Cancer stem cells are thought to play a role in a tumor’s resistance to therapy. While significant progress has been made in developing cancer therapies that result in cytoreduction and thus tumor regression, the control of cancer over a longer interval and especially of metastatic disease, remains a key goal. Cancer stem cells are believed to be responsible for cancer relapse by being less sensitive to conventional therapies.
MultiCell owns exclusive rights to two issued U.S. patents (6,872,389 and 6,129,911), one U.S. patent application (U.S. 2006/0019387A1), and several corresponding issued and pending foreign patents and patent applications related to the isolation and differentiation of liver stem cells. The role of liver stem cells in the carcinogenic process has recently led to a new hypothesis that hepatocellular carcinoma arises by maturation arrest of liver stem cells.
dsRNA provides a therapeutic avenue for cancer treatment through (a) activating intra-tumoral leukocytes, abrogating their immune suppressive activity and/or (b) interacting with cancerous cells and directly inducing apoptosis, or indirectly through mobilization of immune effector mechanisms.
MCT-465 is a high molecular weight synthetic dsRNA with immune-enhancing properties. The mechanism of action of MCT-465 is pleiotropic and mediated by RNA sensors - such as TLR3, TLR 7/8, MDA-5 and RIG-I - expressed by antigen presenting cells and select cases, by tumor cells:
·Induction of pro-inflammatory, immune enhancing cytokines locally and systemically;
·Anti-angiogenic effects through a local exposure to interleukin 12 (IL-12) / Interferor gamma (IFNg); and
·In select cases, direct pro-apoptotic anti-tumoral effect.
Prior studies with similar compounds support a strong immune enhancing effect of MCT-465, consisting in generation of Tc immunity against tumors, when administered as a companion to a vaccine. This raises the possibility that MCT-465 is an effective adjunctive therapy to any small molecule targeted therapy (such as tyrosine kinase inhibitors (TKIs)) that results in release of endogenous tumor antigen while interfering minimally with the immune competence.
MCT-485 is a low molecular weight synthetic dsRNA with direct tumor cytolytic properties. The mechanism of action of MCT-485 is distinct from that of MCT-465:
·Induction of tumor cell death upon direct exposure, while normal cells are minimally affected; and
·Production of TNF-alpha by cancer cells resulting in amplified tumor cell death and a localized immune reaction that has the potential to generalize and curb progression of metastatic cancer.
Ideal BioStent™
Purchase of Ideal BioStent™ - Foreclosure Sale Agreement
On September 30, 2010, Xenogenics entered into a Foreclosure Sale Agreement (“Foreclosure Sale Agreement”) with Venture Lending & Leasing IV, Inc., Venture Lending & Leasing V, Inc. and Silicon Valley Bank (collectively, the “Sellers”). Pursuant to the Foreclosure Sale Agreement, Xenogenics acquired all of the Sellers’ interests in certain bioabsorbable stent assets (known as “Ideal BioStent™”) and related technologies. In consideration for the purchase of the assets, Xenogenics made cash payments to the Sellers in the aggregate amount of $400,000.
Xenogenics is also required to make cash payments to the Sellers as follows based on the achievement of certain milestones:
·$300,000 is payable upon the earlier to occur of (i) initiation of pivotal Generation 2 stent human clinical trials, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $3,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments), and (iii) a “change of control” of Xenogenics;
·$1,000,000 is payable upon the earlier to occur of (i) regulatory approval by any regulatory authority in a European Union member country, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $5,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments); and (iii) a “change of control” of Xenogenics; and
·$3,000,000 is payable upon the earlier to occur of (i) regulatory approval by the FDA;, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $5,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments); and (iii) a “change of control” of Xenogenics.
None of these milestones were achieved as of November 30, 2014, and, accordingly, none of these obligations have accrued. Xenogenics’ obligations under the Foreclosure Sale Agreement had been previously extended pursuant to Amendments No. 1, No. 2, and No. 3 dated September 30, 2011, October 23, 2012, and October 11, 2013, respectively. On December 1, 2014, Xenogenics entered into Amendment No. 4 to the Foreclosure Sale Agreement which further extended the deadlines for the achievement of these milestones under the Foreclosure Sale Agreement by an additional 12 months. As a result of these various amendments to extend the dates for achievement of the milestones, we are in compliance with the requirements of the Foreclosure Sale Agreement, as amended. Xenogenics is required to use Good Faith Reasonable Efforts (as defined in the Foreclosure Sale Agreement) to achieve these milestones. Failure to achieve any of these milestones shall result in all milestone payments, totaling $4.3 million, becoming immediately due and payable, unless Xenogenics’ failure to use Good Faith Reasonable Efforts is due to Technical Difficulties (as defined in the Foreclosure Sale Agreement) or to Financial Hardship (as defined in the Foreclosure Sale Agreement), in which case Xenogenics can elect to (i) pay all remaining milestone payments and continue commercialization efforts, or (ii) assign all intellectual property acquired by Xenogenics under the agreement to the counterparties to the agreement and cease all development and commercialization efforts.
Rutgers License Agreement
Effective September 30, 2010, Xenogenics entered into a license agreement (the “Rutgers License Agreement”) with Rutgers, The State University of New Jersey (“Rutgers”).
Pursuant to the Rutgers License Agreement, Rutgers granted Xenogenics a worldwide exclusive license to exploit and commercialize certain patents and other intellectual property rights, as further described in the Rutgers License Agreement, relating to bioabsorbable stents for interventional cardiology and peripheral vascular applications, which incorporate salicylic acid as part of the polymer chain. In consideration for the license and other rights granted under the Rutgers License Agreement, Xenogenics paid Rutgers a license fee of $50,000. In addition, under the Rutgers License Agreement, Xenogenics was obligated to pay Rutgers a license maintenance fee of $25,000 on the third anniversary of the Rutgers License Agreement, and $50,000 on the fourth anniversary. Additionally, Xenogenics agreed to pay Rutgers for unpaid costs of $136,000 incurred by Rutgers prior to the effective date of the Rutgers License Agreement for preparing, filing, prosecuting, defending, and maintaining all United States patent applications and patents covered under the Rutgers License Agreement.
Xenogenics was also required to make cash payments to Rutgers as follows based on the achievement of certain milestones with respect to products to be commercialized using the intellectual property licensed pursuant to the Rutgers License Agreement:
·$50,000 is payable upon initiation of first in-human clinical trials anywhere in the world;
·$200,000 is payable upon initiation of pivotal human clinical trials anywhere in the world in connection with submitting an application for market approval to a regulatory authority; and
·$300,000 is payable upon submission of an application for market approval to a regulatory authority anywhere in the world.
None of these milestones were achieved, and accordingly, none of these obligations were ever accrued.
Upon the sale of products commercialized using the technology licensed pursuant to the Rutgers License Agreement, Xenogenics was required to make royalty payments to Rutgers in an amount equal to three percent of the annual aggregate gross amounts charged for such products less deductions for expenses such as sales/use taxes, transportation charges and trade discounts. No sales were ever made that required the payment of any royalty.
It became apparent during the evaluation and development of the Ideal BioStent™ that the use of intellectual property licensed from Rutgers would have introduced complications in the design of the Ideal BioStent. As a result, Xenogenics abandoned the use of the Rutgers technology effective January 2014. On January 31, 2014, Rutgers notified Xenogenics of its alleged default of the provisions in the Rutgers License Agreement. On May 9, 2014, Rutgers issued a notice of termination of the Rutgers License Agreement, and demanded payment of unpaid license fees of $25,000, unpaid patent costs of $75,665, and accrued interest of $8,375. All of these claimed fees, costs, and interest have been accrued in the accompanying consolidated financial statements. Management is currently evaluating the merits of these claims.
Patents and Proprietary Technology
Our success depends in part on intellectual property protection and the ability of our licensees to preserve those rights.
We use certain licenses granted to us under various licensing agreements. We also use trade secrets and proprietary knowledge unprotected by patents that we protect, in part, by confidentiality agreements. It is our policy to require our employees, directors, consultants, licensees, outside contractors and collaborators, scientific advisory board members and other advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements provide that all confidential information made known to the individual in the course of the individual’s relationship with us be kept as confidential and not be disclosed to third parties except in specific limited and agreed upon circumstances. We also require signed confidentiality or material transfer agreements from any company that is to receive our confidential information. In the case of employees, consultants and contractors, the agreements generally provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as our exclusive property. There can be no guarantee that these agreements will not be violated or that we would have adequate remedies for any such violation or that our trade secrets or proprietary knowledge will not become known by or independently developed by competitors.
Any proprietary protection that we can obtain and maintain will be important to our business.
On September 7, 2005, MCTI, entered into an Asset Contribution Agreement (the “Asset Contribution Agreement”) with MultiCell, Alliance Pharmaceutical Corp. (“Alliance”), and Astral, Inc. (“Astral,” and together with Alliance, (“Transferors”). Pursuant to the Asset Contribution Agreement, MCTI issued 490,000 shares of common stock to Alliance in consideration for the acquisition of certain assets and the assumption of certain liabilities relating to Transferors’ business. The intellectual property acquired by MCTI includes ten United States and 20 foreign issued and pending patents and patent applications related to chimeric antibody technology, treatment of Type 1 diabetes, T-cell tolerance, TLR technology, dendritic cells, dsRNA technology and immunosuppression.
In December 2003, we acquired the exclusive worldwide rights to US Patent # 6,129,911, for Liver Stem Cells from Rhode Island Hospital. We agreed to pay an annual license fee of $20,000 for the first three years of the applicable license agreement and $10,000 per annum thereafter until a product is developed. Once a product is developed, if ever, the annual license fee will end and we will pay Rhode Island Hospital a five percent royalty on net sales of any product we sell covered by the patent until we pay an aggregate of $550,000 in royalties and a two percent royalty thereafter until the expiration of the patent. The expiration date of this patent is October 10, 2017.
In April 2005, we were granted US Patent # 6,872,389 for the liver stem cell invention of Dr. Ron Faris, MultiCell’s former Senior Vice President and Chief Scientific Officer. This patent contains 24 claims to a method of obtaining a population of liver cell clusters from adult stem cells and is an important enhancement to our adult stem cell portfolio. The expiration date of this patent is July 8, 2019.
We have an exclusive, long-term license agreement with Rhode Island Hospital for use of the following patents owned by the hospital related to liver cell lines and Liver Assist Devices (LADs):
US Patent #6,017,760, Isolation and Culture of Porcine Hepatocytes, expires October 9, 2015;
US Patent #6,107,043, Immortalized Hepatocytes, expires February 8, 2019;
US Patent #6,129,911, Liver Stem Cell, expires October 10, 2017; and
US Patent # 6,872,389 Liver Stem Cell expires on July 8, 2019.
If we generate revenues and pay royalties, the annual license fee structure does not apply. Our agreement with Rhode Island Hospital provides that we would pay a five percent royalty until we pay Rhode Island Hospital an aggregate of $550,000. After that, the royalty percentage decreases to two percent for the life of the patents.
Xenogenics’ patent for an “Artificial Liver Apparatus And Method”, the Sybiol® Synthetic Bio-Liver Device (United States patent 6,858,146) was issued in 2005. The expiration date of this patent is February 22, 2026. The Sybiol® trademark is registered in the United States Patent and Trademark Office, number 2,048,080.
The patent estate acquired by Xenogenics as part of its acquisition of the Ideal BioStent™ includes one issued U.S. patent and four patent applications. This patent estate covers the composition and synthesis of the Ideal BioStent™ proprietary bioabsorbable polymers, admixing of drugs and bioabsorbable polymers for therapeutic applications, and the use of these bioabsorbable polymers in stents and other medical devices.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture, marketing and distribution of drugs. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our drug candidates and drugs.
In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act and implementing regulations. The process required by the FDA before our drug candidates may be marketed in the United States generally involves the following:
•completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies, all performed in accordance with the FDA’s good laboratory practice, or GLP, regulations;
•submission to the FDA of an investigational new drug (“IND”) application which must become effective before clinical trials may begin;
•performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the drug candidate for each proposed indication;
•submission of a new drug application (“NDA”) to the FDA;
•satisfactory completion of an FDA preapproval inspection of the manufacturing facilities at which the product is produced to assess compliance with current Good Manufacturing Practice (“cGMP”), regulations; and
•FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.
This testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our drug candidates will be granted on a timely basis, if at all.
Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of preclinical tests, together with manufacturing information and analytical data, are submitted as part of an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND, or those of our collaborators, may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the clinical trial until completed. The FDA, the IRB or the clinical trial sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice, or GCP, regulations and regulations for informed consent.
Clinical Trials: For purposes of an NDA submission and approval, clinical trials are typically conducted in the following three sequential phases, which may overlap:
•Phase I: The clinical trials are initially conducted in a limited population to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients. In some cases, particularly in cancer trials, a sponsor may decide to run what is referred to as a “Phase Ib” evaluation, which is a second, safety-focused Phase I clinical trial typically designed to evaluate the impact of the drug candidate in combination with currently approved drugs.
•Phase II: These clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the drug candidate for specific targeted indications and to determine dose tolerance and 	optimal dosage. Multiple Phase II clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase III clinical trials. In some cases, a sponsor may decide to run what is referred to as a “Phase 	IIb” evaluation, which is a second, confirmatory Phase II clinical trial that could, if positive and accepted by the FDA, serve as a pivotal clinical trial in the approval of a drug candidate.
•Phase III: These clinical trials are commonly referred to as pivotal clinical trials. If the Phase II clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety profile, Phase III clinical trials are then undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites.
In some cases, the FDA may condition approval of an NDA for a drug candidate on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval trials are typically referred to as Phase IV clinical trials.
New Drug Application. The results of drug candidate development, preclinical testing and clinical trials are submitted to the FDA as part of an NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, by law the FDA has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it may require additional clinical data or an additional pivotal Phase III clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaborators do. Once issued, the FDA may withdraw a drug approval if ongoing regulatory requirements are not met or if safety problems occur after the drug reaches the market. In addition, the FDA may require further testing, including Phase IV clinical trials, and surveillance programs to monitor the effect of approved drugs which have been commercialized. The FDA has the power to prevent or limit further marketing of a drug based on the results of these post-marketing programs. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved label. Further, if there are any modifications to a drug, including changes in indications, labeling or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.
Fast Track Designation. The FDA’s fast track program is intended to facilitate the development and to expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug candidate may request the FDA to designate the drug candidate for a specific indication as a fast track drug concurrent with or after the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.
If fast track designation is obtained, the FDA may initiate review of sections of an NDA before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the time period specified in the Prescription Drug User Fees Act, which governs the time period goals the FDA has committed to reviewing an application, does not begin until the complete application is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
In some cases, a fast track designated drug candidate may also qualify for one or more of the following programs:
•Priority Review. Under FDA policies, a drug candidate is eligible for priority review, or review within a six-month time frame from the time a complete NDA is accepted for filing, if the drug candidate provides a significant improvement compared to marketed drugs in the treatment, diagnosis or prevention of a disease. A fast track designated drug candidate would ordinarily meet the FDA’s criteria for priority review. We cannot guarantee any of our drug candidates will receive a priority review designation, or if a priority designation is received, that review or approval will be faster than conventional FDA procedures, or that FDA will ultimately grant drug approval.
•Accelerated Approval. Under the FDA’s accelerated approval regulations, the FDA is authorized to approve drug candidates that have been studied for their safety and effectiveness in treating serious or life-threatening illnesses, and that provide meaningful therapeutic benefit to patients over existing treatments based upon either a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than patient survival. In clinical trials, surrogate endpoints are alternative measurements of the symptoms of a disease or condition that are substituted for measurements of observable clinical symptoms. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase IV or post-approval clinical trials to validate the surrogate endpoint or confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or to validate a surrogate endpoint or confirm a clinical benefit during post-marketing studies, will allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
When appropriate, we and our collaborators intend to seek fast track designation or accelerated approval for our drug candidates. We cannot predict whether any of our drug candidates will obtain a fast track or accelerated approval designation, or the ultimate impact, if any, of the fast track or the accelerated approval process on the timing or likelihood of FDA approval of any of our drug candidates.
Satisfaction of FDA regulations and requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Typically, if a drug candidate is intended to treat a chronic disease, as is the case with some of our drug candidates, safety and efficacy data must be gathered over an extended period of time. Government regulation may delay or prevent marketing of drug candidates for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for new indications for our drug candidates on a timely basis, if at all. Even if a drug candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a drug may result in restrictions on the drug or even complete withdrawal of the drug from the market. Delays in obtaining, or failures to obtain, regulatory approvals for any of our drug candidates would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.
Other regulatory requirements. Any drugs manufactured or distributed by us or our collaborators pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution, or withdraw approval of the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the drug’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.
Need for Government Approval
The use of immortalized hepatocytes for drug discovery purposes does not require FDA approval. However, some of our products will be subject to regulation in the United States by the FDA and by comparable regulatory authorities in foreign jurisdictions. The Sybiol® Synthetic Bio-Liver Device will be classified as a “biologic” regulated under the Public Health Service Act and the Food, Drug and Cosmetic Act. The use of human immortalized liver cells for this application will also be regulated by the FDA. Development of therapeutic products of human use is a multi-step process. The process required by the FDA before our drug candidates may be marketed in the United States generally involves the following:
• completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies all performed in accordance with the FDA’s good laboratory practice, or GLP, regulations;
• submission to the FDA of an IND application which must become effective before clinical trials may begin;
• performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;
• submission of an NDA, to the FDA;
• satisfactory completion of an FDA preapproval inspection of the manufacturing facilities at which the product is produced to assess compliance with cGMP regulations; and
• FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.
The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our drug candidates will be granted on a timely basis, if at all.
Research and Development
In fiscal years 2014 and 2013, we spent $323,517 and $314,283, respectively, on research and development. Research and development cost increases principally related to increases in costs of research under a sponsored research agreement.
Historically, our research and development has also been funded to some extent by the National Institute of Health (“NIH”) grants, Small Business Innovative Research (“SBIR”) grants, and other similar grants.
We received grant awards in 2010 under the U.S. government’s Qualifying Therapeutic Discovery Project (“QTDP”) program for three of its drug development programs: MCT-125, MCT-465, and MCT-475. The QTDP program was created by Congress as part of the Patient Protection and Affordable Care Act, and provides a tax credit or grant equal to 50% of qualified investment for fiscal years ending November 30, 2010 and 2011. To be eligible, a therapeutic development project must: (i) have the potential to develop new treatments that address unmet medical needs or chronic and acute diseases; (ii) reduce long-term health care costs; (iii) represent a significant advance in finding a cure for cancer; (iv) advance U.S. competitiveness in the fields of life, biological, and medical sciences; or (v) create or sustain well-paying jobs, either directly or indirectly. On October 29, 2010, we received notification from the Department of Treasury that we had been awarded a total cash grant of $733,437. Of the total grant, $430,335 relates to qualifying expenses incurred during the fiscal year ended November 30, 2010 and the remainder of $303,102 was received and recognized during the fiscal year ended November 30, 2011. We did not receive any grant revenue for the fiscal years ended November 30, 2014 or 2013 from any source.
Competition
We compete in segments of the pharmaceutical and biotechnology markets that are highly competitive. We face significant competition from most pharmaceutical companies as well as biotechnology companies that are researching and selling products similar to ours. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies in particular have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research capabilities than we do. In addition, many universities and private and public research institutes are active in research, some in direct competition with us. We believe that our ability to successfully compete will depend on, among other things:
·our drug candidates’ efficacy, safety and reliability;
·the speed at which we develop our drug candidates;
·the completion of clinical development and laboratory testing and obtaining regulatory approvals for drug candidates;
·the timing and scope of regulatory approvals for our drug candidates;
·our ability to manufacture and sell commercial quantities of a drug to the market;
·acceptance of our drugs by physicians and other health care providers;
·the willingness of third party payors to provide reimbursement for the use of our drugs;
·our ability to protect our intellectual property and avoid infringing the intellectual property of others;
·the quality and breadth of our technology;
·the skills of our employees’ and our ability to recruit and retain skilled employees;
·our cash flows under existing and potential future arrangements with licensees, partners and other parties; and
·the availability of substantial capital resources to fund development and commercialization activities.
Our competitors may develop drug candidates and market drugs that are less expensive and more effective than our future drugs, or that may render our drugs obsolete. Our competitors may also commercialize competing drugs before we or our partners can launch any drugs developed from our drug candidates.
Other companies that are early-stage are currently developing alternative treatments and products that could compete with our drugs. These organizations also compete with us to attract qualified personnel and potential parties for acquisitions, joint ventures or other strategic alliances.
Employees
As of November 30, 2014, we had two employees, both of whom were employed full-time.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related To Our Business
Our drug candidates, bioabsorbable stent assets 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 MultiCell’s cellular systems technologies and Xenogenics’ bioabsorbable stent assets are in early stages of development and require further development before they may be commercially viable. We have incurred a substantial accumulated deficit since our inception in 1970. As of November 30, 2014, our accumulated deficit was $46,134,117. 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, conduct development of, and seek regulatory approvals for, our drug candidates, 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, bioabsorbable stent assets 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.
We will need substantial additional capital to fund continued business operations and we cannot be sure that additional financing will be available.
Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the fiscal year ended November 30, 2014, 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, we have operated on working capital provided by La Jolla Cove Investors, Inc. (“LJCI”). Under terms of the Securities Purchase Agreement entered into with LJCI, LJCI can convert a portion of the convertible debenture by simultaneously exercising a warrant at $1.09 per share. As of November 30, 2014, there were 3,642,629 shares remaining on the stock purchase warrant and a balance of $36,426 remaining on the convertible debenture. If LJCI were to exercise all of its remaining warrants, we would receive approximately $3.97 million. The agreement limits LJCI’s investment to an aggregate ownership that does not exceed 9.99% of our outstanding shares. We expect that LJCI will continue to exercise the warrants and convert the debenture through February 28, 2016, the amended date that the debenture is due and the warrants expire, subject to the limitations of the agreement and availability of our authorized common stock.
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.
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. Our 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 will not generally decrease with decreases in financing capital or revenues, our operating costs may exceed the income therefrom. No representation or warranty can be made that we 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 in a variety of ways, including a scarcity of financing needed to fund our current and planned operations, and the reluctance or inability of potential 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 subject to available financing, 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 and through strategic alliances.
We will need 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 have raised gross proceeds of $950,480 and $1,185,920 during the fiscal years ended November 30, 2014 and 2013, respectively, 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.
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 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 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.
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;
· inadequate 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.
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.
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 proprietary 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:
· 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;
· 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;
· 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
· 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.
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.
The Foreclosure Sale Agreement requires us to use good faith reasonable efforts to achieve certain development milestones. To the extent we fail to do so, milestone payments of up to $4.3 million could become immediately due.
The Foreclosure Sale Agreement requires that we achieve the following development milestones for the second generation of the Ideal BioStent assets:
· restart manufacturing and produce a device by September 30, 2015;
· initiate an animal study by March 31, 2016;
· make a regulatory submission to support a human use clinical trial by September 30, 2016; and
· initiate a human use clinical trial by September 30, 2017.
We are required to use good faith reasonable efforts to achieve these milestones. Failure to achieve any of these milestones could result in all milestone payments, totaling $4.3 million, becoming immediately due and payable. If Xenogenics meets the financial hardship exception provided for in the Foreclosure Sale Agreement, it could elect to pay all remaining milestone payments and continue commercialization efforts, or assign all intellectual property under the agreement to the counterparties to the agreement and cease all development and commercialization efforts. The failure to achieve any of the milestones could have a material negative impact on our results of operations, financial condition and cash flows.
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:
· expand our research and development and technologies;
· fund clinical trials and seek regulatory approvals;
· build or access manufacturing and commercialization capabilities;
· implement additional internal systems and infrastructure;
· maintain, defend and expand the scope of our intellectual property; and
· hire and support additional management and scientific personnel.
Our future funding requirements will depend on many factors, including, but not limited to:
· the rate of progress and cost of our clinical trials and other research and development activities;
· the costs and timing of seeking and obtaining regulatory approvals;
· the costs associated with establishing manufacturing and commercialization capabilities;
· the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
· the costs of acquiring or investing in businesses, products and technologies;
· the effect of competing technological and market developments; and
· the payment and other terms and timing of any strategic alliance, licensing or other arrangements that we may establish.
Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings and strategic alliances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs or future commercialization initiatives.
We have limited capacity to carry out our own clinical trials in connection with the development of our drug candidates and potential drug candidates, and to the extent we elect to develop a drug candidate without a strategic partner we will need to expand our development capacity, and we will require additional funding.
The development of drug candidates is complicated, and requires resources and experience for which we currently have limited resources. To the extent we conduct clinical trials for a drug candidate without support from a strategic partner we will need to develop additional skills, technical expertise and resources necessary to carry out such development efforts on our own or through the use of other third parties, such as contract research organizations (“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 will be forced to depend on our partners or contract manufacturers to produce our products and clinical trial drug supplies for each of our drug candidates and potential drug candidates, and anticipate continued reliance on contract manufacturers for the development and commercialization of our potential products and drugs.
We do not currently operate manufacturing facilities for clinical or commercial production of our drug candidates or potential drug candidates that are under development. We have no experience in drug formulation or manufacturing, and we lack the resources and the capabilities to manufacture any of our drug candidates on a clinical or commercial scale. We anticipate reliance on a limited number of contract manufacturers. Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval of our drug candidates or commercialization of our drugs, producing additional losses and depriving us of potential product revenues.
Our products and drug candidates require precise, high quality manufacturing. Our failure or our contract manufacturer’s failure to achieve and maintain high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. These manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S. Drug Enforcement Agency and other regulatory agencies to ensure strict compliance with current good manufacturing practices and other applicable government regulations and corresponding foreign standards; however, we do not have control over contract manufacturers’ compliance with these regulations and standards. If one of our contract manufacturers fails to maintain compliance, the production of our drug candidates could be interrupted, resulting in delays, additional costs and potentially lost revenues. Additionally, our contract manufacturer must pass a preapproval inspection before we can obtain marketing approval for any of our drug candidates in development.
If the FDA or other regulatory agencies approve any of our products or our drug candidates for commercial sale, we will need to manufacture them in larger quantities. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we are unable to successfully increase the manufacturing capacity for a product or drug candidate, the regulatory approval or commercial launch of any related products or drugs may be delayed or there may be a shortage in supply. Even if any contract manufacturer makes improvements in the manufacturing process for our products and drug candidates, we may not own, or may have to share, the intellectual property rights to such improvements.
In addition, our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our products and drug candidates. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace such contract manufacturer in a timely manner and the production of our products or drug candidates would be interrupted, resulting in delays and additional costs.
Switching manufacturers may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer prior to manufacturing our products or drug candidates. Such approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our drug candidates after receipt of FDA approval. It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all.
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.
Subject to available financing, we expect to have significant growth in expenditures, the number of our employees and the scope of our operations, in particular with respect to those drug candidates that we elect to develop or commercialize independently or together with a partner. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
The failure to attract and retain skilled personnel could impair our drug development and commercialization efforts.
Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel. The employment of these individuals and our other personnel is terminable at will with short or no notice. The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of drug development and other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, and could have a material adverse effect on our business, operating results and financial condition. We also rely on consultants and advisors to assist us in formulating our research and development strategy. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us. In addition, we believe that we will need to recruit additional executive management and scientific and technical personnel. There is currently intense competition for skilled executives and employees with relevant scientific and technical expertise, and this competition is likely to continue. Our inability to attract and retain sufficient scientific, technical and managerial personnel could limit or delay our product development efforts, which would adversely affect the development of our products and drug candidates and commercialization of our products and potential drugs and growth of our business.
Risks Related to Our Industry
Our competitors may develop products and drugs that are less expensive, safer, or more effective than ours, 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:
· develop products and drug candidates and market products and drugs that are less expensive or more effective than our future drugs;
· commercialize competing products and drugs before we or our partners can launch any products and drugs developed from our drug candidates;
· obtain proprietary rights that could prevent us from commercializing our products;
· initiate or withstand substantial price competition more successfully than we can;
· have greater success in recruiting skilled scientific workers from the limited pool of available talent;
· more effectively negotiate third-party licenses and strategic alliances;
· take advantage of acquisition or other opportunities more readily than we can;
· 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
· introduce technologies or market products and drugs that render the market opportunity for our potential products and drugs obsolete.
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:
· developing products and drug candidates;
· undertaking preclinical testing and clinical trials;
· building relationships with key customers and opinion-leading physicians;
· obtaining and maintaining FDA and other regulatory approvals;
· formulating and manufacturing; and
· launching, marketing and selling products and drugs.
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:
· a drug candidate may not be safe or effective;
· FDA officials may not find the data from preclinical testing and clinical trials sufficient;
· the FDA might not approve our or our contract manufacturer’s processes or facilities; or
· the FDA may change its approval policies or adopt new regulations.
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® Synthetic Bio-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, or 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:
· timing of market introduction of competitive drugs;
· clinical safety and efficacy of alternative drugs or treatments;
· cost-effectiveness;
· availability of reimbursement from health maintenance organizations and other third-party payors;
· convenience and ease of administration;
· prevalence and severity of adverse side effects;
· other potential disadvantages relative to alternative treatment methods; and
· insufficient marketing and distribution support.
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 and consultants 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 consultants 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.
Our partners may use hazardous chemicals and radioactive and biological materials in connection with our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.
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:
· results from, and any delays in, the clinical trials programs for our products and drug candidates;
· delays in or discontinuation of the development of any of our products and drug candidates;
· failure or delays in entering additional drug candidates into clinical trials;
· failure or discontinuation of any of our research programs;
· failure to achieve milestones required by our current licensing or other agreements;
· delays or other developments in establishing new strategic alliances;
· announcements concerning our existing or future strategic alliances;
· issuance of new or changed securities analysts’ reports or recommendations;
· market conditions in the pharmaceutical and biotechnology sectors;
· actual or anticipated fluctuations in our quarterly financial and operating results;
· the exercise of outstanding options and warrants, the conversion of outstanding convertible preferred stock and debt and the issuance of additional options, warrants, preferred stock and convertible debt;
· developments or disputes concerning our intellectual property or other proprietary rights;
· introduction of technological innovations or new commercial products by us or our competitors;
· issues in manufacturing our drug candidates or drugs;
· market acceptance of our products and drugs;
· third-party healthcare reimbursement policies;
· FDA or other United States or foreign regulatory actions affecting us or our industry;
· litigation or public concern about the safety of our products, drug candidates or drugs;
· additions or departures of key personnel; and
· volatility in the stock prices of other companies in our industry.
These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
Our common stock is subject to penny stock regulation, which may affect its liquidity.
Our common stock is subject to regulations of the Securities and Exchange Commission (the “Commission”) relating to the market for penny stocks. Penny stock, as defined by the Penny Stock Reform Act, is any equity security not traded on a national securities exchange or quoted on the NASDAQ National Market or SmallCap Market that has a market price of less than $5.00 per share. The penny stock regulations generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. The broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale. In addition, the broker-dealer must make certain mandated disclosures, including the actual sale or purchase price and actual bid offer quotations, as well as the compensation to be received by the broker-dealer and certain associated persons. The regulations applicable to penny stocks may severely affect the market liquidity for our common stock and could limit your ability to sell your securities in the secondary market.
It is anticipated that dividends will not be paid in the foreseeable future.
We do not intend to pay dividends on our common stock in the foreseeable future. There can be no assurance that our operations will result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flows. Further, dividend policy is subject to the discretion of our Board of Directors (the “Board”) and will depend on, among other things, our earnings, financial condition, capital requirements and other factors.
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 OTC Bulletin Board 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 than 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.
We have been unsuccessful in authorizing additional shares of our capital stock.
We may become required, upon exercise of certain warrants or conversion of certain debentures, to issue more shares of our capital stock than are currently authorized for issuance under our certificate of incorporation. While we have attempted to obtain the required consent of our stockholders to amend our certificate of incorporation accordingly, we have been forced to adjourn the related stockholder meeting twice for lack of a quorum. Our inability to authorize more shares may lead to claims against us for breach of the terms of such warrants and debentures, and may also limit our ability to raise additional financing.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 2.
ITEM 2. PROPERTIES
During the years ended November 30, 2014 and 2013, we leased facilities at 68 Cumberland Street, Suite 301, Woonsocket RI 02895. The leased property includes office and storage space totaling 1,075 square feet. The lease was initially for a one-year period, but now is on a month-to-month basis. The leased facilities are fully utilized and adequate for our current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Bulletin Board under the symbol MCET. Our stock is considered a penny stock and is, therefore, subject to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Penny stock is defined as any equity security not traded on a national stock exchange or quoted on the NASDAQ National Market or SmallCap Market and that has a market price of less than $5.00 per share. Additional disclosure is required in connection with any trades involving a stock defined as a penny stock (subject to certain exceptions); including the delivery, prior to any such transaction, of a disclosure schedule explaining the penny stock market and the associated risks. Broker-dealers who recommend such low-priced securities to persons other than established customers and accredited investors are required to satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchase and receive the purchaser's written consent prior to the transaction.
The table below gives the range of high and low closing prices of our common stock for the fiscal years ended November 30, 2014 and November 30, 2013 based on high and low closing prices per share of common stock for the quarters indicated.
No cash dividends have been paid on our common stock for the 2014 and 2013 fiscal years and no change of this policy is under consideration by the Board. The payment of cash dividends in the future will be determined by the Board in light of conditions then existing, including our earnings, financial requirements, and opportunities for reinvesting earnings, business conditions, and other factors. There are otherwise no restrictions on the payment of dividends.
The number of shareholders of record of our common stock on February 20, 2015 was approximately 356, not including any persons who hold their stock in “street name”.
We did not repurchase any of our shares of common stock during the fourth quarter of the fiscal year covered by this report.
See the “Equity Compensation Plan Information” table in Item 12 of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
Stock Issuances
On September 26, 2014, we issued 122,172,222 shares of our common stock to LJCI pursuant to its conversion of $500 of convertible debentures. We also issued 50,000 shares of our common stock to LJCI pursuant to its exercise of warrants. Proceeds from the exercise were $54,500, or $1.09 per share. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.
On October 29, 2014, we issued 137,450,000 shares of our common stock to LJCI pursuant to its conversion of $500 of convertible debentures. We also issued 50,000 shares of our common stock to LJCI pursuant to its exercise of warrants. Proceeds from the exercise were $54,500, or $1.09 per share. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.
On November 24, 2014, we issued 85,912,500 shares of our common stock to LJCI pursuant to its conversion of $250 of convertible debentures. We also issued 25,000 shares of our common stock to LJCI pursuant to its exercise of warrants. Proceeds from the exercise were $27,250, or $1.09 per share. The securities were issued in a transaction pursuant to Regulation D under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management’s Discussion and Analysis for the fiscal years ended November 30, 2014 and 2013 is presented below.
Overview
We are a biopharmaceutical company developing novel therapeutics and discovery tools to address unmet medical needs for the treatment of neurological disorders, hepatic disease, cancer and interventional cardiology and peripheral vessel applications. 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 our immune system modulation technologies to discover, develop and commercialize new therapeutics ourself and with strategic partners.
MultiCell has an exclusive license and purchase agreement with Corning Incorporated (“Corning”) of Corning, New York. Under the terms of such agreement, Corning has the right to develop, use, manufacture and sell MultiCell’s Fa2N-4 cell lines and related cell culture media for use as a drug discovery assay tool, including biomarker identification for the development of drug development assay tools, and for the performance of absorption, distribution, metabolism, elimination and toxicity assays (ADME/Tox assays). Corning paid MultiCell a non-refundable license fee, purchased certain inventory and equipment related to MultiCell’s Fa2N-4 cell line business, hired certain MultiCell scientific personnel, and paid for access to MultiCell’s laboratories during the transfer of the Fa2N-4 cell lines to Corning. MultiCell retained and continues to support all of its existing licensees. MultiCell retained the right to use the Fa2N-4 cells for use in applications not related to drug discovery or ADME/Tox assays. MultiCell also retained rights to use the Fa2N-4 cell lines and other cell lines to further develop its Sybiol® liver assist device, to identify drug targets and for other applications related to the Company’s internal drug development programs.
Our therapeutic development platform includes several patented techniques used to: (i) control the immune response at transcriptional and translational levels through dsRNA-sensing molecules such as TLRs, RLRs, and MDA-5 signaling; (ii) generate specific and potent immunity against key tumor targets through a novel immunoglobulin platform technology; and (iii) modulate the noradrenaline-adrenaline neurotransmitter pathway; and (iv) develop next-generation antibody drug conjugates (ADCs) which provide for the simultaneous targeted delivery of multiple drugs from a single antibody. Our medical device development platform is based on the design of next-generation bioabsorbable stents, the Ideal BioStent™, for interventional cardiology and peripheral vessel applications.
On July 5, 2011, MultiCell entered into a sponsored research agreement with the University Health Network, or UHN, a not-for-profit corporation incorporated under the laws of Canada. Under this agreement UHN evaluated our product candidates, MCT-465 and MCT-485, in its in vitro models for the treatment of primary liver cancer. The mechanism of action of MCT-465 and MCT-485 and their potential selective effect on liver cancer stem cells was also be evaluated. Under the terms of this agreement, we retained exclusive access to the research findings and intellectual property resulting from the research activities preformed by UHN. On September 27, 2013, MultiCell entered into a new sponsored research agreement with Anand Ghanekar, M.D., Ph.D, of UHN’s Toronto General Hospital expanding the scope of the current research project with UHN to evaluate MCT-485 in animal models for the treatment of primary liver cancer (the “Ghanekar Agreement”). Under the terms of the Ghanekar Agreement, the Company retained exclusive access to the research findings and intellectual property resulting from the research activities preformed by of Dr. Ghanekar. As of November 30, 2014, this sponsored research arrangement had concluded, but this research is continuing in a non-academic setting.
As described above, in December 2005, MultiCell exclusively licensed LAX-202 from Amarin for the treatment of fatigue in patients suffering from MS. MultiCell renamed LAX-202 to MCT-125, and intends to further evaluate MCT-125 in a pivotal Phase IIb/III clinical trial. In a 138- patient, multi-center, double-blind placebo controlled Phase II clinical trial conducted in the United Kingdom by Amarin, LAX-202 demonstrated efficacy in significantly reducing the levels of fatigue in MS patients enrolled in the study. LAX-202 proved to be effective within four weeks of the first daily oral dosing, and showed efficacy in MS patients who were moderately as well as severely affected. LAX-202 demonstrated efficacy in all MS patient sub-populations including relapsing-remitting, secondary progressive and primary progressive. Patients enrolled in the Phase II trial conducted by Amarin also reported few if any side effects following daily oral dosing of LAX-202. MultiCell intends to proceed with the anticipated Phase IIb/III trial of MCT-125 using the data generated by Amarin for LAX-202 following discussions with the regulatory authorities.
As described above, on September 30, 2010, Xenogenics entered into the Foreclosure Sale Agreement with the Sellers. Pursuant to the Foreclosure Sale Agreement, Xenogenics acquired all of the Sellers’ interests in certain bioabsorbable stent assets, known as the Ideal BioStent™, and related technologies. Under the Foreclosure Sale Agreement, Xenogenics is also required to make cash payments totaling $4.3 million to the Sellers based on the achievement of certain milestones at certain dates. None of these milestones were achieved as of November 30, 2014. Xenogenics’ obligations under the Foreclosure Sale Agreement had been previously extended pursuant to Amendments No. 1, No. 2, and No. 3, dated September 30, 2011, October 23, 2012, and October 11, 2013, respectively. On December 1, 2014, Xenogenics entered into Amendment No. 4 to the Foreclosure Sale Agreement which further extended the deadlines for the achievement of the milestones under the Foreclosure Sale Agreement by an additional 12 months. Xenogenics is required to use good faith reasonable efforts to achieve these milestones. Failure to achieve any of these milestones could result in all milestone payments, totaling $4.3 million, becoming immediately due and payable.
As described above, effective September 30, 2010, Xenogenics entered into the Rutgers License Agreement with Rutgers. Pursuant to the Rutgers License Agreement, Rutgers granted Xenogenics a worldwide exclusive license to exploit and commercialize certain patents and other intellectual property rights, as further described in the Rutgers License Agreement, relating to bioabsorbable stents for interventional cardiology and peripheral vascular applications. This agreement was terminated on May 9, 2014.
Plan of Operation
We have operated and will continue to operate by minimizing expenses. Our largest cash expenses relate to personnel, professional and consulting fees, and meeting the legal and reporting requirements of being a public company. By utilizing consultants whenever possible, and asking employees to manage multiple responsibilities, operating costs are kept low. With our strategic shift in focus on therapeutic programs and technologies, however, we expect our future cash expenditures to increase significantly as we advance our therapeutic programs into clinical trials.
We intend to add scientific and support personnel gradually. We want to add specialists for our key research areas. These strategic additions will help us expand our product offerings leading us to additional revenues and profits. Of course as revenues increase, administrative personnel will be necessary to meet the added workload. Other expenses, such as sales and customer service, will increase commensurate with increased revenues. Our current research and development efforts focus on development of future products and redesign of existing products. Due to the ongoing nature of this research, we are unable to ascertain with certainty the total estimated completion dates and costs associated with this research. As with any research efforts, there is uncertainty and risk associated with whether these efforts will produce results in a timely manner so as to enhance our market position. Company sponsored research and development costs related to future products and redesign of present products are expensed as incurred. For the fiscal years ended November 30, 2014 and 2013, research and development costs were $323,517 and $314,283, respectively. Research and development costs primarily consist of external clinical and preclinical study costs, consulting fees, legal fees associated with our intellectual property, and materials and supplies.
The Application of Critical Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Research and Development - Company-sponsored research and development costs related to future products and redesign of present products are expensed as incurred.
Revenue Recognition - In the fiscal years covered by this Annual Report on Form 10-K, our revenues have been generated from license revenue under agreements with Corning and Pfizer Inc. Management believes such sources of revenue will be part of our ongoing operations. We recognize revenue from licensing and research agreements as services are performed, provided a contractual arrangement exists, the contract price is fixed or determinable and the collection of the contractual amounts is reasonably assured. In situations where we receive payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. Deferred revenues associated with services expected to be performed within the 12-month period subsequent to the balance sheet date are classified as a current liability. Deferred revenues associated with services expected to be performed at a later date are classified as non-current liabilities.
Stock-Based Compensation - We account for stock based compensation in accordance with GAAP, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values over the period during which an employee is required to provide service in exchange for the award (the vesting period), net of estimated forfeitures. The estimation of fair value of stock options requires management to make estimates for certain assumptions regarding risk-free interest rates, expected life of the options, expected volatility of the price of our common stock, and the expected dividend yield of our common stock.
Long-Lived Assets - Long-lived assets that do not have indefinite lives, such as property and equipment, license agreements, and patents are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses for assets to be held and used are then measured based on the excess, if any, of the carrying amounts of the assets over their fair values. Long-lived assets to be disposed of in a manner that meets certain criteria are stated at the lower of their carrying amounts or fair values less costs to sell and are no longer depreciated.
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.
Fiscal Year Ended November 30, 2014 compared to Fiscal Year Ended November 30, 2013
Revenue. Total revenue for the fiscal years ended November 30, 2014 and November 30, 2013 was $49,318. All of the revenue for the fiscal years ended November 30, 2014 and 2013 is from the amortization of deferred license revenue under agreements with Corning and Pfizer Inc.
Operating Expenses. Total operating expenses for the year ended November 30, 2014 were $772,125, compared to operating expenses for the year ended November 30, 2013 of $1,417,344, representing a decrease of $645,219. This decrease was due to the reversal of $461,000 of stock-based compensation and a decrease of $142,799 in the recognition of other stock-based compensation, a decrease of $28,930 in shareholder meeting expenses, a decrease of $14,177 in materials costs associated with sponsored research, and a net decrease in other operating expenses of $14,979, offset by an increase of $16,666 in license fees under the Rutgers license agreement.
The reversal of $461,000 of stock-based compensation and the amounts of stock-based compensation is more fully described in Note 11 to the accompanying consolidated financial statements. In November 2010, Xenogenics granted an option to a prospective executive officer to purchase an aggregate of 2,500,000 shares of its common stock, exercisable at $0.246 per share of common stock and having an expiration date in November 2015. The option to acquire 500,000 of the shares vested on the grant date and the remaining 2,000,000 option shares were to vest in the future upon the achievement of specified milestones. The fair value of these options was estimated to be $576,250, or $0.2305 per share. This prospective executive officer resigned in May 2014 and the rights under this option were forfeited in August 2014. At the date of the forfeiture, only the initial option to acquire 500,000 shares had vested, and the remaining 2,000,000 option shares remained unvested because the specified milestones had not been achieved. The share-based compensation related to these 2,000,000 option shares ($461,000) had been recognized over the periods of time, originally estimated on the date of grant, that management expected each of the specified milestones was likely to be achieved. As of the date of forfeiture, all of the share-based compensation related to these performance-based options had been recognized in the consolidated financial statements. Under GAAP, if vesting is based solely on one or more performance or service conditions, any previously recognized compensation cost is reversed if the award does not vest (that is, the requisite service is not rendered). Accordingly, Xenogenics reversed the compensation cost for these options in the amount of $461,000 during the year ended November 30, 2014 when the options were forfeited. The other decrease in stock-based compensation of $142,799 relates to the vesting patterns of other non-performance based options, principally in Xenogenics.
The decrease in shareholder meeting expenses of $28,930 relates to the timing of when shareholder meetings were held. A meeting was held on November 15, 2013. The next shareholder meeting was scheduled for January 2015, accordingly no significant expenses were incurred during the year ended November 30, 2014. The decrease in materials costs of $14,177 associated with sponsored research related to the timing of when materials were needed in connection with the research. The increase in license fee expense under the Rutgers license agreement related to the amortization period of the license fee of $25,000 for the third year of the agreement, $4,167 was amortized in the year ended November 30, 2013 compared to $20,833 being amortized in the year ended November 30, 2014, a difference of $16,666.
Other income/(expense). Other income (expense) amounted to net income of $193,980 for the year ended November 30, 2014 as compared to net expense of $1,406 for the year ended November 30, 2013. Other income (expense) for the year ended November 30, 2014 was composed of (i) interest expense of $10,781, (ii) a loss from the change in fair value of derivative liability of $7,584, (iii) a gain on extinguishment of liabilities of $212,294, and (iv) interest income of $51. Other income (expense) for the year ended November 30, 2013 consisted of (i) interest expense of $2,691, (ii) a gain from the change in fair value of derivative liability of $1,098, and (iii) interest income of $187.
For the year ended November 30, 2014, interest expense includes $8,375 for interest claimed by Rutgers in its notice of termination of its license agreement with Xenogenics. Otherwise, interest expense for the year ended November 30, 2014 and 2013 principally is composed of interest on the 4.75% debenture.
The change in fair value of derivative liability is 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.	
During the fiscal year ended November 30, 2014, our management determined that certain recorded accounts payable totaling $212,294 had been extinguished with the passage of time for collection under the laws related to the statute of limitations. Accordingly, we removed these accounts from our records and recorded a corresponding gain on the extinguishment of the liabilities.
Net Loss. Net loss for the fiscal year ended November 30, 2014 was $528,527, as compared to a net loss of $1,369,432 for the fiscal year ended November 30, 2013, representing a decrease in net loss of $840,605. The primary reasons for the decrease in net loss are the (i) the decrease in operating expenses principally as a result of the reversal of $461,000 of stock-based compensation and by (ii) the amount of net other income, principally resulting from the extinguishment of $212,294 of liabilities, all as further described above.
Liquidity and Capital Resources
The following is a summary of our key liquidity measures at November 30, 2014 and November 30, 2013:
Since our inception, a significant portion of our financing has been provided through private placements of preferred and common stock, the exercise of stock options and warrants and issuance of convertible debentures and other debt. We have in the past increased, and if funding permits plan to further increase, our operating expenses in order to fund higher levels of product development, undertake and complete the regulatory approval process, and increase our administrative resources in anticipation of future growth. In addition, acquisitions such as MCTI increase operating expenses and therefore negatively impact, in the short term, our liquidity position. We will have to raise additional capital in order to initiate Phase IIb clinical trials for MCT-125, our therapeutic product for the treatment of fatigue in MS patients, conduct further research on MCT-465 and MCT-485 for the treatment of primary liver cancer, and initiate clinical trials for Xenogenic’s bioabsorbable, drug eluting stent, the Ideal BioStent™. 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.
La Jolla Cove Investors, Inc.
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 the principal amount of $100,000 and originally scheduled to mature 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. In August 2011, we and LJCI amended the debenture and the warrant agreements to extend the maturity date of the Debenture and the expiration date of the LJCI Warrant to February 28, 2014. On February 20, 2014, we and LJCI amended the debenture and the warrant agreements to further extend the maturity date of the Debenture and the expiration date of the LJCI Warrant to February 28, 2016.
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 (defined below) 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 20 trading days prior to the election to convert. The Debenture accrues interest at 4.75% per year payable in cash or our common stock. Through November 30, 2014, interest is being paid in cash. 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. Upon receipt of a conversion notice from the holder, we 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. Since February 28, 2008, we, in our sole discretion, have had the right, without limitation or penalty, to redeem the outstanding principal amount of the Debenture not yet converted by the holder into shares of our common stock, plus accrued and unpaid interest thereon.
Commencing in March 2008, we have operated on working capital provided by LJCI in connection with its exercise of LJCI Warrant issued to it by the Company (which LJCI must exercise whenever it converts amounts owing under the convertible debenture it holds). As of February 20, 2015 there were 3,572,629 shares remaining under the LJCI Warrant and a balance of $35,726 remaining on the Debenture. Should LJCI continue to exercise all of its remaining warrants, approximately $3.9 million of cash would be provided to the Company. However, the Securities Purchase Agreement limits LJCI’s stock ownership in the Company to 9.99% of our outstanding shares.
We expect that LJCI will continue to exercise the LJCI Warrant and convert the Debenture over the next year, subject to the limitations of the Securities Purchase Agreement and availability of our authorized common stock, but cannot assure that LJCI will do so. We anticipate that our future cash requirements may be fulfilled by potential direct product sales, the sale of additional equity securities, debt financing and/or the sale or licensing of our technologies. We also anticipate the need for additional financing in the future in order to fund continued research and development and to respond to competitive pressures. We cannot guarantee, however, that enough future funds will be generated from operations or from the aforementioned or other potential sources. If adequate funds are not available or are not available on acceptable terms, we may be unable to fund expansion, develop new or enhance existing products and services or respond to competitive pressures, any of which could have a material adverse effect on our business, results of operations and financial condition.
Series B Convertible Preferred Stock
On July 14, 2006, we completed a private placement of Series B convertible preferred stock. A total of 17,000 shares of Series B convertible preferred stock were sold to accredited investors at a price of $100 per share. Originally, the Series B shares were convertible at any time into shares of our common stock at a conversion price determined by dividing the purchase price per share of $100 by $0.32 per share (the “Series B Conversion Price”). The Series B Conversion Price was reduced to 85% of the then applicable Series B Conversion Price as a result of an event of default in the payment of preferred dividends. The Series B Conversion Price is also subject to equitable adjustment in the event of any stock splits, stock dividends, recapitalizations and the like. In addition, the Series B Conversion Price is subject to weighted average anti-dilution adjustments in the event that we sell shares of our common stock or other securities convertible into or exercisable for shares of our common stock at a per share price, exercise price or conversion price lower than the Series B Conversion Price then in effect in any transaction (other than in connection with an acquisition of the securities, assets or business of another company, a joint venture and/or the issuance of employee stock options). As a result of these adjustments, the Series B Conversion Price has been reduced to $0.0067 per share as of November 30, 2014. Pursuant to the applicable Series B convertible preferred stock purchase agreement, each investor may only convert that number of shares of Series B convertible preferred stock into that number of shares of our common stock that does not exceed 9.99% of the outstanding shares of our common stock on the date of conversion. The Series B convertible preferred stock does not have voting rights.
Commencing on the date of issuance of the Series B convertible preferred stock until the date a registration statement registering the common shares underlying the preferred stock and warrants issued was declared effective by the Commission, we were required to pay on each outstanding share of Series B convertible 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 was the dividend rate greater than 12% per annum. The dividend was 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 we did not pay the Series B preferred dividends when due, the conversion price of the Series B preferred shares was reduced to 85% of the otherwise applicable conversion price. We have not paid the required monthly Series B preferred dividends since November 30, 2006, which, in part, has caused the conversion price to be reduced. Subsequent to November 30, 2010, we received an opinion of outside counsel providing for the removal of the restrictive legend on the Series B convertible preferred stock, which in turn terminated the requirement to accrue the related dividends. Accordingly, no dividends have been accrued since November 30, 2010. Total accrued but unpaid preferred dividends recorded in the accompanying consolidated balance sheet as of November 30, 2014 and November 30, 2013 are $290,724, of which $125,516 are recorded in permanent equity with the Series B preferred stock and $165,208 are recorded as a current liability in accounts payable and accrued expenses. As of November 30, 2014, there are 3,448 shares of Series B convertible preferred stock outstanding.
In the event of any dissolution or winding up of our company, whether voluntary or involuntary, holders of each outstanding share of Series B convertible preferred stock shall be entitled to be paid first in priority out of our assets 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 our assets.
Cash provided by (used in) operating, investing and financing activities for the fiscal years ended November 30, 2014 and November 30, 2013 is as follows:
Operating Activities
For the fiscal year ended November 30, 2014, the differences between our net loss and net cash used in operating activities were due to net non-cash credits totaling $584,836 included in our net loss for stock-based compensation, change in fair value of derivative liability, and gain on extinguishment of liabilities, plus changes in non-cash working capital totaling $25,311. For the fiscal year ended November 30, 2013, the differences between our net loss and net cash used in operating activities are due to net non-cash charges totaling $222,575 included in our net loss for stock-based compensation and change in fair value of derivative liability, less changes in non-cash working capital totaling $104,280.
Investing Activities
We had no cash flows from investing activities during the years ended November 30, 2014 or 2013.
Financing Activities
During the fiscal year ended November 30, 2014, principal cash flows from financing activities related to LJCI converting $8,720 of the Debenture into shares of MultiCell’s common stock and exercising warrants to purchase 872,000 shares of MultiCell’s common stock at a price of $1.09 per share, resulting in total proceeds of $950,480. Additionally, LJCI increased its advances by $104,200 towards the future exercise of warrants. During the year ended November 30, 2013, cash flows from financing activities related to LJCI converting $10,880 of the Debenture into shares of MultiCell’s common stock and exercising warrants to purchase 1,088,000 shares of MultiCell’s common stock at a price of $1.09 per share, resulting in total proceeds of $1,185,920. Additionally, LJCI increased its advances by $11,950 towards the future exercise of warrants.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full text of our audited consolidated financial statements for the fiscal years ended November 30, 2014 and 2013 begins on page of this Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2014 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 our financial statements for the current reporting period.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with GAAP. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our principal executive officer and principal accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (1992). Based on its evaluation, our management concluded that there are material weaknesses 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 our annual or interim financial statements will not be prevented or detected on a timely basis. As of November 30, 2014 and 2013, the following material weaknesses existed:
1. Entity-Level Controls: We did not maintain effective entity-level controls as defined by the framework issued by COSO. Specifically, we did not effectively segregate certain accounting duties due to the small size of our accounting staff, and did not 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.
Due to these material weaknesses, management has concluded that our internal control over financial reporting was not effective as of November 30, 2014 and 2013.
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 and the Audit Committee of the Board. If at any time we determine a new control can be implemented to mitigate these risks at a reasonable cost, it is implemented as soon as possible.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Commission rules that permit us to provide only management’s report in this annual report.
This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that occurred during the quarter ended November 30, 2014 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The Directors and Executive Officers of the Company
Our executive officers, key employees and directors are listed in the below table. There are no family relationships among any of our executive officers, key employees and directors. There currently are no legal proceedings, and during the past ten years there have been no legal proceedings, that are material to the evaluation of the ability or integrity of any of our directors or director nominees.
(1) Each director serves until the next annual meeting of stockholders.
(2) Elected as President, Chief Executive Officer, Chief Financial Officer, and Secretary on December 21, 2007.
W. Gerald “Jerry” Newmin joined MultiCell as a director in June 1995. He currently serves as the Chairman, Chief Executive Officer, President, Chief Financial Officer and Secretary of MultiCell. Mr. Newmin served as Chief Executive Officer of MultiCell from June 1995 to May 2006, and was appointed to serve again as Chief Executive Officer on December 21, 2007. Mr. Newmin is Chairman, Chief Executive Officer, Secretary and a director of Xenogenics, a partially-owned subsidiary of MultiCell and Chief Executive Officer, Secretary and a director of MCTI, a partially-owned subsidiary of MultiCell. He has managed New York Stock Exchange and American Stock Exchange Fortune 500 companies. He was President of HealthAmerica Corporation, then the nation’s largest publicly-held HMO management company. He was Chief Executive Officer and President of The International Silver Company, a diversified multi-national manufacturing company that he restructured. He was Chief Operating Officer of numerous Whittaker Corporation operating units, including Production Steel Company, Whittaker Textiles, Bertram Yacht, Trojan Yacht, Columbia Yacht, Narmco Materials and Anson Automotive. He was instrumental in Whittaker’s entry into the U.S. and international health care markets. He was Western Regional Vice President of American Medicorp, Inc, where he managed 23 acute care hospitals in the Western United States. He retired as Chairman and Chief Executive Officer of SYS Technologies, Inc., a high-growth defense technology company in 2003. Mr. Newmin has a Bachelor’s degree in Accounting from Michigan State University. As our Chief Executive Officer, Mr. Newmin is specially qualified to serve on the Board because of his detailed knowledge of our operations and market.
Stephen Chang, Ph.D. has served as a director of MultiCell since June 2004, became President of MultiCell in February 2005, and became Chief Executive Officer in May 2006. Dr. Chang resigned as Chief Executive Officer and President on December 21, 2007. On December 21, 2007, Dr. Chang also resigned as President and Chief Executive Officer of MCTI, a subsidiary of MultiCell. In 2008, Dr. Chang became Chief Scientific Officer and Founder of Stemgent, Inc. In 2010, Dr. Chang joined the New York Stem Cell Foundation as its Vice-President of Research and Development. Dr. Chang is also President of CURES, a coalition of patient advocates, biotechnology companies, pharmaceutical companies and venture capitalists dedicated to ensuring the safety, research and development of innovative life saving medications. Dr. Chang was Chief Science Officer and Vice President of Canji Inc./Schering Plough Research Institute in San Diego, California from 1998 to 2004. Dr. Chang earned his doctoral degree in Biological Chemistry, Molecular Biology and Biochemistry from the University of California, Irvine. Prior to that he received a bachelor of science in Zoology, Microbiology, and Cell and Molecular Biology from the University of Michigan and a USPHS Postdoctoral Fellowship at the Baylor College of Medicine. Dr. Chang’s scientific background gives him a perspective that is helpful to the Board for understanding our market potential.
Edward Sigmond has served as a director of MultiCell since May 2000. In 2003, he founded The Great American Food Chain, a public restaurant holding company with the mission to incubate and develop successful restaurant concepts, where he currently serves as Chief Executive Officer and Chairman of the Board. Mr. Sigmond is a partner in Sigmond and Johnson, Inc., a Dallas-based investment banking firm specializing in working with public micro cap companies through the early stages of development. Mr. Sigmond owns Kestrel Holdings, Inc., a real estate and equity investment company focusing on the restaurant and bar market in the Dallas area. He is a member of the board of directors of Na Zdravi Ventures, a.s., a Hooters of America franchisee for the Czech Republic and Slovak Republic. Mr. Sigmond has held other executive sales, marketing and operations management positions over his 25 years of working experience. These include founder and president of American Machine and Bearing and Specialty Food Products. He was Assistant to the President of Alpha Aviation and Vice President/Regional Manager of Geodata Corporation. Mr. Sigmond’s extensive business background makes him a valuable addition to the Board.
Thomas A. Page has served as a director of MultiCell since September 2003. Mr. Page is Director Emeritus and former Chairman of the board of directors and Chief Executive Officer of Enova Corporation and San Diego Gas and Electric Company (now part of Sempra Energy). Prior to the formation of Sempra Energy Corporation as a holding company in 1998, at various times Mr. Page was San Diego Gas and Electric Company’s Chairman, President and Chief Executive Officer and held one or more of these positions until his retirement in 1998. Mr. Page joined San Diego Gas and Electric Company in 1978 as Executive Vice President and Chief Operating Officer. In 1981, he was elected President and Chief Executive Officer and added the chairmanship in 1983. Mr. Page has been active in numerous industrial, community and governmental associations and has funded medical research. Mr. Page earned a Bachelor of Science degree in civil engineering, a masters degree in industrial administration and was awarded an honorary doctorate in management, all from Purdue University. He has been licensed as an engineer and as a certified public accountant. Mr. Page’s extensive business background makes him a valuable addition to the Board.
Grant Miller has served as a director of MultiCell since October 2012. Mr. Miller received his B.A. from Loma Linda University in Riverside, California and an MBA; Finance from the University of San Diego, in San Diego, California. Mr. Miller has served as Chief Financial & Operating Officer of Encore Semi, Inc. since 2012, and has previously served as Chief Financial & Operating Officer of Sandel Avionics, Inc., Chief Financial Officer of Rapid Bridge, LLC, General Manager & Division Controller of Scubapro, Chief Financial Officer of USA Broadband, Inc., Chief Financial Officer & Senior Vice President Operations of Alitum, and held several positions with WorldXchange and Time Warner Cable, including International Director of Development in Spain and Portugal, Regional Vice President Finance, Corporate Mergers & Acquisitions Analyst, Manager, Finance and Information Systems and Financial Analysis. Mr. Miller’s extensive business background makes him a valuable addition to the Board.
CORPORATE GOVERNANCE
General
We believe that good corporate governance is important to ensure that we are managed for the long-term benefit of our stockholders. This section describes key corporate governance practices that we have adopted.
Board of Directors Meetings and Attendance
The Board has responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The primary responsibility of the Board is to oversee the management of the Company and, in doing so, serve the best interests of the Company and its stockholders. The Board selects, evaluates and provides for the succession of executive officers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources. The Board also participates in decisions that have a potential major economic impact on the Company. Management keeps the directors informed of Company activity through regular communication, including written reports and presentations at Board and committee meetings.
We have no formal policy regarding director attendance at the annual meeting of stockholders. The Board held seven meetings in 2014, six of which were telephonic. All board members were present, either in person or on the telephone in the case of the telephonic meetings, at all meetings except for Ed Sigmond and Steve Chang who each missed one meeting.
Board Committees
Our Board has established an Audit Committee and a Nominating, Corporate Governance and Compensation Committee (the “Nominating Committee”). The members of each committee are appointed by the Board, upon recommendation of the Nominating Committee, and serve one-year terms. Each of these committees operates under a charter that has been approved by the Board. The charter for each committee is available on our website. The Audit Committee met four times during 2014. The Nominating Committee did not hold a meeting during 2014.
Audit Committee
The Audit Committee of the Board oversees our corporate accounting and financial reporting process. For this purpose, the Audit Committee performs several functions. The Audit Committee evaluates the performance of and assesses the qualifications of the independent registered public accounting firm; determines and approves the engagement of the independent registered public accounting firm; determines whether to retain or terminate the existing independent registered public accounting firm or to appoint and engage a new independent registered public accounting firm; reviews and approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting firm on our audit engagement team as required by law; confers with management and the independent registered public accounting firm regarding the effectiveness of internal controls over financial reporting; establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; reviews the financial statements to be included in our Annual Report on Form 10-K; and discusses with management and the independent registered public accounting firm the results of the annual audit and the results of our quarterly financial statements. Three directors comprise the Audit Committee: Grant Miller (Chairman), Edward Sigmond and Thomas Page. Mr. Miller was appointed as the chairman of the Audit Committee on October 19, 2012.
The Board annually reviews the NASDAQ listing standards definition of independence for Audit Committee members and has determined that all members of our Audit Committee are independent (as independence is currently defined in Rule 10A-3 of the Exchange Act). The Board has determined that Grant Miller, Thomas Page and Edward Sigmond each qualify as “audit committee financial experts”, as defined in applicable Commission rules. The Board made a qualitative assessment of Grant Miller’s, Thomas Page’s and Edward Sigmond’s level of knowledge and experience based on a number of factors, including their formal education and experience as financial experts and their prior experience as certified public accountants, as further set forth in the subsection above entitled “The Directors and Executive Officers of the Company”. The Audit Committee met four times during the fiscal year ended November 30, 2014.
Nominating, Corporate Governance and Compensation Committee
The Nominating Committee provides assistance to the corporate directors in fulfilling their responsibility to the stockholders, potential stockholders, and investment community to ensure that our officers, key executives, and Board members are compensated in accordance with our total compensation objectives and executive compensation policy. The Nominating Committee advises, recommends, and approves compensation policies, strategies, and pay levels necessary to support organizational objectives. The Nominating Committee maintains free and open means of communication between the Board and the Chief Executive Officer of the Company.
The Nominating Committee responsibilities include:
·Assisting us in defining an executive total compensation policy that (i) supports our overall business strategy and objectives, (ii) attracts and retains key executives, (iii) links total compensation with business objectives and organizational performance in good and bad times, and (iv) provides competitive total compensation opportunities at a reasonable cost while enhancing stockholder value creation.
·Acting on behalf of the Board in setting executive compensation policy, administering compensation plans approved by the Board and stockholders, and making decisions or developing recommendations for the Board with respect to the compensation of key Company executives.
·Reviewing and recommending to the full Board for approval the annual base salary levels, annual incentive opportunity levels, long-term incentive opportunity levels, executive prerequisites, employment agreements (if and when appropriate), change in control provisions/agreements (if and when appropriate), benefits, and supplemental benefits of the Chief Executive Officer.
·Evaluating annually the Chief Executive Officer’s compensation levels and payouts against (i) pre-established performance goals and objectives, and (ii) an appropriate peer group.
·Keeping abreast of current developments in executive compensation outside the Company.
·Meeting regularly and/or as needed to consider the nomination and screening of Board member candidates, evaluate the performance of the Board and its members, as well as termination of membership of Board members in accordance with corporate policy, conflicts of interest, for cause or other appropriate reasons.
·Submiting the minutes of all meetings of the Nominating Committee to, or discussing the matters discussed at each committee meeting with, the Board.
·Administering the stock incentive plans.
The members of the Nominating Committee are Edward Sigmond, Chairman and Thomas Page. The Nominating Committee did not meet during the fiscal year ended November 30, 2014.
Director Candidates
The process followed by the Nominating Committee to identify and evaluate director candidates includes requests to Board members and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the Nominating Committee and the Board.
In considering whether to recommend any particular candidate for inclusion in the Board’s slate of recommended director nominees, the Nominating Committee applies certain criteria, including:
·The candidate’s honesty, integrity and commitment to high ethical standards;
·Demonstrated financial and business expertise and experience;
·Understanding of the Company, its business and its industry;
·Actual or potential conflicts of interest; and
·The ability to act in the interests of all stockholders.
The Nominating Committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a significant breadth of experience, knowledge and abilities that will allow our Board to fulfill its responsibilities.
The Nominating Committee will consider director candidates recommended by stockholders or groups of stockholders who have owned more than five percent of our common stock for at least a year as of the date the recommendation is made. Stockholders may recommend individuals to the Nominating Committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and a statement as to whether the stockholder or group of stockholders making the recommendation has beneficially owned more than five percent of our common stock for at least a year as of the date such recommendation is made, to the Nominating Committee, c/o Corporate Secretary, MultiCell Technology, Inc., 86 Cumberland Street, Suite 301, Woonsocket, Rhode Island 02895. Assuming that appropriate biographical and background material have been provided on a timely basis, the Committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others. There have been no material changes to the procedures by which the stockholders may recommend nominees to the Board since the filing of our Annual Report on Form 10-K for the fiscal year ended November 30, 2013.
Communicating with the Directors
The Board will give appropriate attention to written communications that are submitted by stockholders, and will respond if and as appropriate. The chair of the Audit Committee is primarily responsible for monitoring communications from stockholders and for providing copies or summaries to the other directors as he considers appropriate.
Communications are forwarded to all directors if they relate to important substantive matters and include suggestions or comments that the chair of the Audit Committee considers to be important for the directors to know. In general, communications relating to corporate governance and corporate strategy are more likely to be forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we tend to receive repetitive or duplicative communications.
Stockholders who wish to send communications on any topic to the Board should address such communications to the Board of Directors, c/o Corporate Secretary, MultiCell Technologies, Inc., 68 Cumberland Street, Suite 301, Woonsocket, RI 02895. You should indicate on your correspondence that you are a MultiCell Technologies, Inc. stockholder.
Anyone may express concerns regarding questionable accounting or auditing matters or complaints regarding accounting, internal accounting controls or auditing matters to the Audit Committee by calling (401) 762-0045. Messages to the Audit Committee will be received by the chairman of the Audit Committee and our Corporate Secretary. You may report your concern anonymously or confidentially.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, directors, officers and beneficial owners of ten percent or more of our common stock (the “Reporting Persons”) are required to report to the Commission on a timely basis the initiation of their status as a Reporting Person and any changes regarding their beneficial ownership of our common stock. We believe that, during 2014, the Reporting Persons complied with all Section 16(a) filing requirements and we do not know of any failure of any Reporting Person to file on a timely basis reports required by Section 16(a) of the Exchange Act with the exception of the Form 4 being filed late by each of our directors with respect to such director’s option grant disclosed in Item 11
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Executive Compensation Objectives and Philosophy
Our executive compensation plan’s objectives are to attract and retain highly competent executives and to compensate them based upon a pay-for-performance philosophy. With the intent to increase short-term and long-term stockholder value, we have designed our executive compensation plan to reward:
·Individual performance as measured against personal goals and objectives that contain quantitative components wherever possible; such personal goals depend on the position occupied by our executive officers and can include achieving technological advances, broadening of our products and services offerings, or building a strong team; and
·Demonstration of leadership, team building skills and high ethical standards. We design our overall compensation to align the long-term interests of our executives with those of our stockholders. Our compensation plan is designed to encourage success of our executives as a team, rather than only as individual contributors, by attaining overall corporate success.
Elements of Executive Compensation
Executive compensation consists of the following elements:
·Base salary; and
·Long-Term Incentives.
Base Salary. The base salary for each executive is initially established through negotiation at the time the executive is hired, taking into account his or her scope of responsibilities, qualifications, experience, prior salary and competitive salary information within our industry. Year-to-year adjustments to each executive officer’s base salary are determined by an assessment of her or his sustained performance against individual goals, including leadership skills and the achievement of high ethical standards, the individual’s impact on our business and financial results, current salary in relation to the salary range designated for the job, experience, demonstrated potential for advancement, and an assessment against base salaries paid to executives for comparable jobs in the marketplace. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies.
Long-Term Incentive Program. Our long-term incentives consist of stock option awards. The objective of these awards is to align the longer-term interests of our stockholders and our executive officers and to complement incentives tied to annual performance. We have historically elected to use stock options as our primary long-term equity incentive vehicle. We have not adopted stock ownership guidelines.
Why We Chose to Pay Each of the Executive Compensation Elements and How We Determine the Amount of Each Element
Base Salary. Base salary is paid to attract and retain our executives and to provide them with a level of predictable base compensation. Because base salary, in the first instance, is set at the time the executive is hired, it is largely market-driven and influenced by the type of position occupied, the level of responsibility, experience and training of each executive, and the base salary at his or her prior employment. Annual adjustments to base salary, if any, are influenced by the individual’s achievement of individual goals and our achievement of our financial goals.
The base salary we paid to our executive in 2014 and 2013 is reflected in the summary compensation table below.
Long-Term Incentives. We grant stock options to our executives and directors as part of our executive compensation package program to directly link their interests to those of our stockholders, since stock options will only produce value to executives if the price of our stock appreciates. We believe that our compensation program must include long-term incentives such as stock options if we wish to hire and retain high-level executive talent. We also believe that stock options help to provide a balance to the overall executive compensation program as base salary and bonus awards focus only on short-term compensation. In addition, the vesting period of stock options encourages executive retention and the preservation of stockholder value. We base the number of stock options granted on the type and responsibility level of the executive’s position, the executive’s performance in the prior year and the executive’s potential for continued sustained contributions to our long-term success and the long-term interests of our stockholders. The number of stock options is also dependent on the number of options available in the option pool and the number of options already granted and vested to each individual executive.
The Level of Salary and Bonus in Proportion to Total Compensation
Because of the congruence of interests by our executives and our stockholders in sustained, long-term growth of the value of our stock, we seek to keep cash compensation in line with market conditions and, if justified by our financial performance, place emphasis on the use of options as a means of obtaining significantly better than average compensation.
Summary Compensation Table
(1) During fiscal years ended November 30 2014 and 2013, the listed person was the only principal executive officer of the Company and the only person that earned more than $100,000 during either of such fiscal years.
(2) Appointed as President, Chief Executive Officer, Chief Financial Officer, and Secretary on December 21, 2007.
(3) In January 2014, Mr. Newmin was granted an option to acquire 4,600,000 shares of our common stock at an exercise price of $0.0008 per share. The option vests quarterly over one year and expires five years after the grant date. The weighted average assumptions used in determining the fair value of the option under the Black-Scholes model for expected volatility, dividends, expected term, and risk-free interest rate were 140%; 0%; 5 years; and 1.68%; respectively.
(4) This amount represents fees earned in consideration for attending meetings of the Board during the fiscal year ended November 30, 2014. Mr. Newmin earned $1,000 for each meeting of the Board attended in person and $250 for each meeting attended by teleconference during the fiscal year ended November 30, 2014. Our policy for director fees earned in the fiscal year ended November 30, 2014 is to pay such fees in cash.
(5) In August 2013, Mr. Newmin was granted an option to acquire 5,000,000 shares of our common stock at an exercise price of $0.0011 per share. The option vests quarterly over one year and expires five years after the grant date. The weighted average assumptions used in determining the fair value of the option under the Black-Scholes model for expected volatility, dividends, expected term, and risk-free interest rate were 175%; 0%; 5 years; and 1.60%; respectively.
(6) This amount represents fees earned in consideration for attending meetings of the Board during the fiscal year ended November 30, 2013. Mr. Newmin earned $1,000 for each meeting of the Board attended in person and $250 for each meeting attended by teleconference during the fiscal year ended November 30, 2013. Our policy for director fees earned in the fiscal year ended November 30, 2013 is to pay such fees in cash.
Contracts, Termination of Employment and Change-in-Control Arrangements
Employment Agreement with W. Gerald Newmin. Mr. Newmin does not have a written employment agreement with the Company. Mr. Newmin’s base salary is $15,000 per month.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table shows for the fiscal year ended November 30, 2014, certain information regarding options granted to, exercised by, and held at year-end by, the Named Executive Officers:
(1) Mr. Newmin was granted an option on January 15, 2014 to purchase 4,600,000 shares of our common stock. The option has an exercise price of $0.0008, vests quarterly over one year from the grant date, and expires five years after the grant date.
NON-EMPLOYEE DIRECTOR COMPENSATION
The following table details the total compensation of our non-employee directors for the fiscal year ended November 30, 2014.
(1) On January 15, 2014, each director was granted an option to acquire 4,600,000 shares of our common stock at an exercise price of $0.0008 per share. Each option vests quarterly over one year and expires five years after the grant date. The weighted average assumptions used in determining the fair value of the option under the Black-Scholes model for expected volatility, dividends, expected term, and risk-free interest rate were 140%; 0%; 5 years; and 1.68%; respectively.
(2) As of November 30, 2014, the following non-employee directors held options to purchase the following numbers of shares of our common stock: Mr. Chang, 12,600,000; Mr. Page, 12,600,000; Mr. Sigmond, 12,600,000; and Mr. Miller, 10,600,000. Options exercisable within 60 days of February 20, 2015, are included in the table below in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, under the subtitle of “Beneficial Ownership of Directors, Officer and 5% Shareholders”.
Director Compensation Arrangements
Each director earns fees of $1,000 for each board meeting attended and $250 for each teleconference of the board. The Chairman of the Audit Committee and the Chairman of the Nominating, Corporate Governance and Compensation Committee earn $500 for each Committee meeting, whether attended in person or by teleconference. Each member of the Nominating, Corporate Governance and Compensation Committee and each member of the Audit Committee earns $250 per Committee meeting, whether attended in person or by teleconference. The members of the Board of Directors are also eligible for reimbursement for their expenses incurred in attending Board meetings in accordance with Company policy.
The options granted are pursuant to our 2004 Equity Incentive Plan. None of the options granted are incentive stock options, as defined in the Internal Revenue Code.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership of Directors, Officers and 5% Stockholders
The following table sets forth, as of February 20, 2015, certain information as to shares of our common stock owned by (i) each person known to beneficially own more than five percent of our outstanding common stock or preferred stock, (ii) each of our directors, and executive officers named in our summary compensation table, and (iii) all of our executive officers and directors as a group. Unless otherwise indicated, the address of each named beneficial owner is the same as that of our principal executive offices located at 86 Cumberland Street, Suite 301, Woonsocket, Rhode Island, 02895.
* Represents less than 1% of the issued and outstanding shares of the applicable class of equity securities of the Company as of February 20, 2015.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the Commission, shares of our common stock that each named person and group has the right to acquire within 60 days pursuant to options, warrants, or other rights, are deemed outstanding for purposes of computing shares beneficially owned by the percentage ownership of each such person and group. Applicable percentages are based on 4,863,448,700 shares of our common stock and 3,448 shares of our Series B preferred stock outstanding on February 20, 2015, and are calculated as required by rules promulgated by the Commission.
(2) Unless otherwise noted, all shares listed are owned of record and the record owner has sole voting and investment power, subject to community property laws where applicable.
(3) Includes 54,730,159 shares of our common stock issuable to Mercator Momentum Fund III upon conversion of 3,448 shares of Series B Preferred Stock. The last known address of Mercator Momentum Fund III is P.O. Box 4571, 2nd Floor, Palm Grove House, Wickhams Cay, Road Town, Tortola, British Virgin Islands.
(4) Represents the maximum possible amount of shares of our common stock (i) held by LJCI, (ii) issuable to LJCI upon the exercise of a common stock warrant it holds, and (iii) issuable to LJCI upon the conversion of the Debenture, all as of February 20, 2015. Pursuant to the terms of the warrant and Debenture, LJCI may not acquire shares of our common stock to the extent such acquisition would cause LJCI to own more than 9.99% of our outstanding common stock immediately after such acquisition. Provided the aforementioned 9.99% cap is complied with, LJCI may in the future exercise or convert into, as applicable, a significant amount of additional shares of our common stock (e.g. as of February 20, 2015, there are a total of 3,572,629 shares remaining under the stock purchase warrant and a balance of $35,726 remaining on the Debenture, which is convertible pursuant to the formula set forth in the Debenture listed in the Exhibits section of this Annual Report on Form 10-K). LJCI’s address is 1793 Union Street, San Francisco, CA 94123.
(5) Includes (i) 7,520,689 shares of our common stock of which 5,587,914 shares are held by Newmin Corbett Trust U/A 5/10/02, W. G. Newmin and Barbara L. Corbett TTEES, for which Mr. Newmin and his spouse serve as trustees; 1,399,210 shares of our common stock are held by Cay J Associates, Ltd., a Partnership, for which Mr. Newmin and his spouse serve as partners; 502,011 shares of our common stock are held by FMTC Custodian W. G. Newmin IRA, for which Mr. Newmin is the beneficiary; and 31,554 shares of our common stock are held by W. Gerald Newmin IRA, for which Mr. Newmin is the beneficiary, (ii) 1,029,065 shares of our common stock issuable to Mr. Newmin upon the exercise of warrants within 60 days of February 20, 2015, (iii) 12,600,000 shares of our common stock issuable to Mr. Newmin under options exercisable within 60 days of February 20, 2015, and (iv) warrants to purchase 220,000 shares of our common stock issuable upon exercise of warrants owned by Mr. Newmin’s spouse. Mr. Newmin disclaims beneficial ownership of the aforementioned stock warrants beneficially owned by Mr. Newmin’s spouse, except to the extent of his pecuniary interest therein.
(6) Includes (i) 1,635,658 shares of our common stock, (ii) 475,903 shares of our common stock issuable upon the exercise of common stock warrants within 60 days of February 20, 2015, and (iii) 11,450,000 shares of our common stock issuable under options exercisable within 60 days of February 20, 2015.
(7) Includes (i) 988,163 shares of our common stock, (ii) 364,071 shares of our common stock issuable upon the exercise of common stock warrants within 60 days of February 20, 2015 and (iii) 7,450,000 shares of our common stock issuable under options exercisable within 60 days of February 20, 2015.
(8) Includes (i) 1,031,906 shares of our common stock, (ii) 161,577 shares of our common stock issuable upon the exercise of common stock warrants within 60 days of February 20, 2015 and (iii) 11,450,000 shares of our common stock issuable under options exercisable within 60 days of February 20, 2015.
(9) Includes 10,433,333 shares of our common stock issuable upon the exercise of common stock warrants within 60 days of February 20, 2015.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under equity compensation plans as of November 30, 2014.
(1) Pursuant to our Amended and Restated 2004 Equity Incentive Plan (the “2004 Plan”), from 2005 through our fiscal year end 2014, the number of shares of our common stock authorized for issuance under the 2004 Plan was increased from time to time to a total of 70,974,213 shares. The number of shares set forth in this row include all of such previous increases. Under the provisions of the 2004 Plan, the 2004 Plan terminated on March 2, 2014, and as such, there are no additional shares of common stock available for future awards under the 2004 Plan.
(2) Represents warrants issued to service providers as compensation for services provided. These warrants were issued on February 28, 2007 to eight individuals and expire on February 28, 2017.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as described below, none of the following parties has, in the fiscal year ending November 30, 2014, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us, other than as noted in this section:
·Any of our directors or officers,
·Any person proposed as a nominee for election as a director,
·Any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock,
·Any of our promoters, and
·Any relative or spouse of any of the foregoing persons who has the same house as such person.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since December 1, 2013, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds the lesser of (1) $120,000 and (2) one percent of the average of our total assets at year end for the last three completed fiscal years, in which any director, executive officer or beneficial holder of more than 5% of any class of our voting securities or members of such person’s immediate family had or will have a direct or indirect material interest, other than the transactions described below. All future transactions between us and any of our directors, executive officers or related parties will be subject to the review and approval of our Audit Committee.
La Jolla Cove Investors, Inc.
We entered into a Securities Purchase Agreement with LJCI on February 28, 2007, pursuant to which we agreed to sell a convertible debenture in the principal amount of $100,000 and maturing on February 28, 2012 (the “Debentures”). The Debentures accrue interest at 4.75% per year, payable at each conversion date, in cash or shares of our common stock at the option of LJCI. The proceeds from the Debentures were deposited on March 5, 2007. In connection with the Debentures, we 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. On August 16, 2011, we and LJCI amended the Debentures to extend the maturity date to February 28, 2014, and amended the LJCI Warrant to extend its expiration date to February 28, 2014. On February 20, 2014, we and LJCI amended the Debentures to further extend the maturity date to February 28, 2016, and amended the LJCI Warrant to further extend its expiration date to February 28, 2016. 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.
The Debentures are convertible at the option of LJCI at any time up to maturity into the number of shares determined by the dollar amount of the Debentures being converted multiplied by 110, minus the product of the Conversion Price multiplied by 100 times the dollar amount of the Debentures 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 20 trading days prior to the election to convert. During the year ended November 30, 2014, LJCI converted $8,720 of the Debenture into 1,941,135,049 shares of our common stock. Simultaneously with these conversions, LJCI exercised warrants to purchase 872,000 shares of our common stock. Proceeds from the exercise of the warrants were $950,480. As of November 30, 2014, the balance of the Debentures was $36,426 and there were remaining warrants to purchase 3,642,629 shares of our common stock at $1.09 per share. During the period from December 1, 2014 through February 20, 2015, LJCI has converted an additional $700 of the Debentures into 310,578,148 shares of our common stock. Simultaneously with these additional conversions, LJCI exercised additional warrants to purchase 70,000 shares of our common stock. Proceeds from the additional exercise of warrants were $76,300. As of February 20, 2015, the balance of the Debentures is $35,726 and there are remaining warrants to purchase 3,572,629 shares of our common stock at $1.09 per share.
Board Determination of Independence
We comply with the standards of “independence” prescribed by rules set forth by the National Association of Securities Dealers (“NASD”). Accordingly, a director will only qualify as an “independent director” if, in the opinion of our Board, that person does not have a material relationship with us which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. A director who is or, at any time during the past three years, was employed by us or by any parent or subsidiary, shall not be considered independent. Accordingly, Thomas Page, Edward Sigmond, Dr. Chang and Grant Miller meet the definition of “independent director” under Rule 5605(a)(2) of the NASD Listing Manual; Mr. Newmin does not.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table summarizes the fees of Hansen, Barnett & Maxwell, P.C. (“HBM”) and of Eide Bailly, LLP (“Eide Bailly”), our independent auditors, billed to us for each of the last two fiscal years for audit services and billed to us in each of the last two years for other services.
(1) 	Audit fees consist of aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for the fiscal years ended November 30, 2014 and 2013.
(2) 		Audit-related fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These fees include review of registration statements and participation at meetings of the audit committee.
(3) 	Tax fees consist of aggregate fees billed for professional services for tax compliance, tax advice and tax planning. For the fiscal years ended November 30, 2014 and 2013, “Tax Fees” consist of compliance services for the preparation of state and federal income tax returns for MultiCell, MCTI, and Xenogenics.
(4) 	All other fees consist of aggregate fees billed for products and services provided by the independent auditor, other than those disclosed above. These fees include services related to certain accounting research and assistance with a regulatory matter.
Our policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the audit committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. To the extent that additional services are necessary beyond those specifically budgeted for, the audit committee and management pre-approve such services on a case-by-case basis. All services provided by the independent auditors were approved by the Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)Index to Financial Statements
The following Consolidated Financial Statements are included herein:
(b)Please see the Exhibit Index which follows the signature page to this annual report on Form 10-K and which is incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 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,
MULTICELL TECHNOLOGIES, INC.
(Registrant)
By /s W. Gerald Newmin
W. Gerald Newmin
Chairman, CEO, CFO, President, Treasurer and Secretary
Dated February 27, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ W. Gerald Newmin
Chairman, CEO, CFO, President,
February 27, 2015
W. Gerald Newmin
Treasurer and Secretary
/s/ Stephen Chang
Director
February 27, 2015
Stephen Chang
/s/ Edward Sigmond
Director
February 27, 2015
Edward Sigmond
/s/ Thomas A. Page
Director
February 27, 2015
Thomas A. Page
/s/ Grant Miller
Director
February 27, 2015
Grant Miller
EXHIBIT INDEX
+ Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the Commission.
(1) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on September 8, 2005.
(2) Incorporated by reference from an exhibit to our Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed on May 6, 2005.
(3) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on May 18, 2005.
(4) Incorporated by reference from an exhibit to our Form SB-2 Registration Statement filed on August 12, 2004.
(5) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 19, 2006.
(6) Incorporated by reference from an exhibit to our Current Report on Form 8-K/A filed on March 7, 2007.
(7) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 20, 2006.
(8) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on November 1, 2006.
(9) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 5, 2006.
(10) Incorporated by reference from an exhibit to our Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed on January 12, 2006.
(11) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on October 10, 2007.
(12) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on September 1, 2010.
(13) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on September 30, 2010.
(14) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 13, 2011.
(15) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on August 19, 2011.
(16) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 11, 2011.
(17) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on October 6, 2011.
(18) Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on October 15, 2012.
(19) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on October 25, 2012.
(20) Incorporated by reference from an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form SB-2 filed on September 27, 2005.
(21) Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on February 28, 2013.
(22) Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on October 15, 2013.
(23) Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on February 28, 2014.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
MultiCell Technologies, Inc.
Woonsocket, Rhode Island
We have audited the accompanying consolidated balance sheets of MultiCell Technologies, Inc. and Subsidiaries (collectively the Company) as of November 30, 2014 and 2013, and the related consolidated statements of operations, equity (deficiency), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated 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 also includes examining, on a test basis, evidences supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MultiCell Technologies, Inc. as of November 30, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered losses from operations and had negative cash flows from operating activities during the years ended November 30, 2014 and 2013 and as of November 30, 2014, the Company had a working capital deficit and a stockholders’ deficiency. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Eide Bailly LLP
Salt Lake City, Utah
February 27, 2015
www.eidebailly.com
5 Triad Center, Ste. 600 | Salt Lake City, UT 84180-1128 | T 801.532.2200 | F 801.532.7944 | EOE
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
For the Years Ended November 30, 2013 and 2014
See accompanying notes to consolidated financial statements.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 1 - Organization and Summary of Significant Accounting Policies
Organization - MultiCell Technologies, Inc. (“MultiCell”), has two subsidiaries, Xenogenics Corporation (“Xenogenics”) and MultiCell Immunotherapeutics, Inc. (“MCTI”). MultiCell holds 95.3% of the outstanding shares (on an as-if-converted to common stock basis) of Xenogenics. Prior to August 15, 2014, MultiCell held approximately 67% of the outstanding shares (on an as-if-converted to common stock basis) of MCTI. Commencing on August 15, 2014, MultiCell’s ownership of MCTI was increased to 85.1% of the outstanding shares (on an as-if-converted to common stock basis) as a result of the conversion of $1,165,867 of inter-company liabilities into shares of common stock of MCTI. As used herein, the “Company” refers to MultiCell, together with Xenogenics and MCTI.
The Company’s therapeutic development platform includes several patented techniques used to: (i) isolate, characterize and differentiate stem cells from human liver; (ii) control the immune response at transcriptional and translational levels through double-stranded RNA (dsRNA)-sensing molecules such as the Toll-like Receptors (TLRs), RIG-I-like receptor (RLR), and Melanoma Differentiation-Associated protein 5 (MDA-5) signaling; (iii) generate specific and potent immunity against key tumor targets through a novel immunoglobulin platform technology; and (iv) modulate the noradrenaline-adrenaline neurotransmitter pathway. The Company’s medical device development platform is based on the design of a next-generation bioabsorbable stent, the Ideal BioStent™, for interventional cardiology and peripheral vessel applications.
Principles of Consolidation and Basis of Presentation - The accompanying consolidated financial statements of MultiCell Technologies Inc. and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which MultiCell exercises control. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - The Company considers all unrestricted highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments - The carrying amounts of cash and cash equivalents, accounts payable, accrued expenses, payable to related party, and advance from debenture holder approximate fair value because of the short-term maturity or demand features of those instruments. The fair value of convertible debentures was approximately $36,426 and $45,146 at November 30, 2014 and 2013, respectively.
Credit Risk - It is the Company’s practice to place its cash equivalents in high quality money market securities with major banking institutions. Periodically, the Company maintains cash balances at this institution that exceeds the Federal Deposit Insurance Corporation insurance limit of $250,000 per bank. The Company considers its credit risk associated with cash and cash equivalents to be minimal. The Company does not require collateral from its customers.
Revenue Recognition - In the years covered by these consolidated financial statements, the Company's operating revenues have been generated primarily from license revenue under agreements with Corning Incorporated (“Corning”) and Pfizer Inc. Management believes such sources of revenue will be part of the Company's ongoing operations. When applicable, the Company recognizes revenue from licensing and research agreements as services are performed, provided a contractual arrangement exists, the contract price is fixed or determinable and the collection of the contractual amounts is reasonably assured. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. Deferred revenues associated with services expected to be performed within the 12 - month period subsequent to the balance sheet date are classified as a current liability. Deferred revenues associated with services expected to be performed at a later date are classified as non-current liabilities.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Property and Equipment - Property and equipment are recorded at cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the assets, generally three to ten years. As of November 30, 2014 and 2013, all property and equipment is fully depreciated.
Impairment of Long-Lived Assets - The impairment of long-lived assets that do not have indefinite lives, such as equipment, patents, and license agreements, is recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts.
Stock Based Compensation - The Company has stockholder-approved stock incentive plans for employees, directors, officers and consultants. The Company recognizes compensation expense for stock-based awards to employees expected to vest on a straight-line basis over the requisite service period of the award, based on their grant-date fair value. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model, which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock, and expected dividend yield of stock.
Research and Development Costs - Research and development costs are expensed as incurred. Research and development costs primarily consist of external clinical and preclinical study costs, consulting fees, legal fees and patent costs associated with the Company’s intellectual property, and materials and supplies. The Company expenses patent application and maintenance costs for drug candidates or medical devices that have not received regulatory approval and do not have an alternative future use.
Income Taxes - Deferred income taxes are provided for the estimated tax effects of temporary differences between income for tax and financial reporting purposes. A valuation allowance is provided against deferred tax assets, where realization is uncertain. Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a component of selling, general and administrative expense.
Loss Per Common Share - Basic loss per common share is computed by dividing the net loss applicable to common stockholders by the weighted average common shares outstanding during each period. Since the Company incurred losses during the years ended November 30, 2014 and 2013, the assumed effects of the exercise of outstanding stock options and warrants, and the conversion of convertible preferred stock and convertible debentures would be anti-dilutive and, accordingly, diluted loss per common share amounts equal basic loss per share amounts and have not been separately presented in the accompanying consolidated statements of operations. The total number of common shares potentially issuable upon exercise or conversion excluded from the calculation of diluted loss per common share for the years ended November 30, 2014 and 2013 was 12,645,810,542 and 10,429,984,310, respectively.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of these financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Risks and Uncertainties - The Company is dependent on continued financing from investors and obtaining new research grants to sustain the development and other activities necessary to commercialize new products. Management is seeking additional financing in order to fund its future activities. There is no assurance, however, that such financing will be available, if and when needed, or if available, that such financing will be completed on commercially favorable terms, or that such development and other activities in connection with its planned products will be successful.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Accounting For Warrants Issued With Convertible Debentures - The Company accounts for the value of warrants and the intrinsic value of beneficial conversion rights arising from the issuance of convertible debentures with non-detachable conversion rights that are in-the-money at the commitment date by allocating an appropriate portion of the proceeds received from the debt instruments to the warrants or any other detachable instruments included in the exchange. The proceeds allocated to the warrants or any other detachable instruments are recorded as a discount to the debt. The intrinsic value of the beneficial conversion rights at the commitment date is recorded as additional paid-in capital and as additional discount to the debt as of that date. The discount has been amortized and charged to interest expense over the original term of the debt instrument.
Derivative Liability - The Company accounts for the conversion feature of its Series B preferred stock as a derivative liability. The fair value of the conversion feature is estimated using the Black-Scholes option-pricing model.
Recently Enacted Accounting Standards - In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern, (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. Management is currently evaluating the impact of the pending adoption of ASU 2014-15 on the Company’s consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for the Company retrospectively beginning December 1, 2017, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”) to provide guidance on the presentation of unrecognized tax benefits. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective January 1, 2015 with earlier adoption permitted. ASU 2013-11 should be applied prospectively with retroactive application permitted. Management is currently evaluating the impact of the pending adoption of ASU 2013-11 on the Company’s consolidated financial statements.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 2 - Going Concern
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of November 30, 2014, the Company has operating and liquidity concerns and, as a result of recurring losses, has incurred an accumulated deficit of $46,134,117. The Company will have to raise additional capital in order to initiate Phase IIb/III clinical trials for MCT-125, the Company’s therapeutic product for the treatment of fatigue in multiple sclerosis patients, conduct further research on MCT-465 and MCT-485, therapeutic products for the treatment of primary liver cancer, and initiate clinical trials for Xenogenic's bioabsorbable, drug eluting stent, the Ideal BioStent™. The Company’s management is evaluating several sources of financing for the Company’s 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 2008, the Company has operated on working capital provided by La Jolla Cove Investors (LJCI). As further described in Note 5 to these consolidated financial statements, under terms of the LJCI Agreement (as defined below), LJCI can convert a portion of the Debenture (as defined below) by simultaneously exercising the LJCI Warrant (as defined below) at $1.09 per share. As of November 30, 2014, there are 3,642,629 shares remaining on the LJCI Warrant and a balance of $36,426 remaining on the Debenture. Should LJCI continue to exercise all of the shares remaining under the LJCI Warrant, approximately $3.97 million of cash would be provided to the Company. The LJCI Agreement limits LJCI’s investment to an aggregate ownership that does not exceed 9.9% of the common stock of MultiCell. The Company expects that LJCI will continue to exercise the LJCI Warrant and convert the Debenture through February 28, 2016, the date that the Debenture is due and the LJCI Warrant expires, subject to the limitations of the LJCI Agreement and the availability of authorized common stock of MultiCell.
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 the LJCI Warrant to purchase MultiCell’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 shares of the Company’s common and/or preferred stock, the sale of warrants, and continued sales of the Company’s proprietary media, immortalized cells and primary cells to the pharmaceutical industry. Additionally, the Company continues to pursue research projects, government grants and capital investment. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 - Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation, and is comprised of the following at November 30, 2014 and 2013:
At November 30, 2014 and 2013, property and equipment are fully depreciated and the Company recorded no depreciation expense for the fiscal years ended November 30, 2014 and 2013.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 4 - Payable to Related Party
In connection with an acquisition in September 2005, the Company assumed certain liabilities in the amount of $200,000, payable to an individual who is a current director of the Company. The liability is to be paid to this individual over time as determined by the remainder of the members of the board of directors. The balance of the liability owed to this director is $50,000 as of November 30, 2014 and 2013.
Note 5 - Convertible Debenture
The Company entered into a Securities Purchase Agreement with LJCI on February 28, 2007 (the “LJCI Agreement”) pursuant to which MultiCell agreed to sell a convertible debenture in the principal amount of $100,000 and originally scheduled to mature on February 28, 2012 (the “Debenture”). On August 16, 2011, MultiCell and LJCI amended the Debenture to extend the maturity date to February 28, 2014. On February 20, 2014, MultiCell and LJCI amended the Debenture to further extend the maturity date to February 28, 2016. The Debenture accrues interest at 4.75% per year, payable in cash or shares of MultiCell’s common stock at the option of LJCI. In connection with the Debenture, MultiCell issued LJCI a warrant to purchase up to 10 million shares of its common stock (the “LJCI Warrant”) at an exercise price of $1.09 per share, exercisable over five years according to a schedule described in a letter agreement dated February 28, 2007. On August 16, 2011, MultiCell and LJCI amended the LJCI Warrant to extend the expiration date to February 28, 2014. On February 20, 2014, MultiCell and LJCI amended the LJCI Warrant to further extend the expiration date to February 28, 2016. 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, as an example, for each $1,000 of the principal converted, LJCI would be required to simultaneously purchase 100,000 shares under the LJCI Warrant at $1.09 per share. The LJCI Agreement limits LJCI’s investment to an aggregate common stock ownership that does not exceed 9.99% of the outstanding common stock of MultiCell.
The Debenture is convertible at the option of LJCI at any time up to maturity into the number of shares of MultiCell’s common stock determined by the dollar amount of the Debenture being converted multiplied by 110, minus the product of the Conversion Price (as defined below) 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 fiscal year ended November 30, 2013, LJCI converted $10,880 of the Debenture into 1,259,902,474 shares of MultiCell’s common stock. Simultaneously with these conversions, LJCI exercised warrants to purchase 1,088,000 shares of MultiCell’s common stock. Proceeds from the exercise of the warrants were $1,185,920. During the fiscal year ended November 30, 2014, LJCI converted $8,720 of the Debenture into 1,941,135,049 shares of MultiCell’s common stock. Simultaneously with these conversions, LJCI exercised warrants to purchase 872,000 shares of MultiCell’s common stock. Proceeds from the exercise of the warrants were $950,480. At times, LJCI makes advances to the Company prior to the exercise of warrants. At November 30, 2014 and 2013, LJCI had advanced $166,150 and $61,950, respectively, to the Company in advance of LJCI’s exercise of warrants.
As of November 30, 2014, the remainder of the Debenture in the amount of $36,426 could have been converted by LJCI into approximately 12.5 billion shares of common stock, which would require LJCI to simultaneously exercise and purchase all of the remaining 3,642,629 shares of MultiCell’s common stock under the LJCI Warrant at $1.09 per share. As of November 30, 2013, the balance of the Debenture was $45,146. For the Debenture, upon receipt of a conversion notice from the holder, MultiCell 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. MultiCell, at its sole discretion, has had the right, without limitation or penalty, to redeem the outstanding principal amount of the Debenture not yet converted by the holder into common stock, plus accrued and unpaid interest thereon.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 6 - Deferred Revenue
Corning Incorporated
The Company has an exclusive license and purchase agreement (the “Agreement”) with Corning Incorporated (“Corning”) of Corning, New York. Under the terms of the Agreement, Corning has the right to develop, use, manufacture, and sell the Company’s Fa2N-4 cell lines and related cell culture media for use as a drug discovery assay tool, including biomarker identification for the development of drug development assay tools, and for the performance of absorption, distribution, metabolism, elimination and toxicity assays (“ADME/Tox assays”). The Company retained and will continue to support all of its existing licensees. The Company retains the right to use the Fa2N-4 cells for use in applications not related to drug discovery or ADME/Tox assays. The Company also retains rights to use the Fa2N-4 cell lines and other cell lines to further develop its Sybiol® liver assist device, to produce therapeutic proteins using the Company’s BioFactories™ technology, to identify drug targets and for other applications related to the Company’s internal drug development programs. In consideration for the license granted, Corning paid the Company $375,000 upon execution of the Agreement, and an additional $375,000 upon the completion of a transition period. In addition, Corning purchased inventory and equipment from the Company and reimbursed the Company for laboratory costs and other expenses during a transition period. The Company is recognizing the income ratably over a 17 year period. The Company recognized $44,118 in income for each of the fiscal years ended November 30, 2014 and 2013. The balance of deferred revenue from this license is $433,824 and $477,942 at November 30, 2014 and 2013, respectively, and will be amortized into revenue through October 2024.
Pfizer Inc.
The Company has another license agreement with Pfizer Inc., for which revenue is being deferred. During the years ended November 30, 2014 and 2013, the Company recognized $5,200 in each year and the balance of the deferred revenue from this license is $15,600 and $20,800 at November 30, 2014 and 2013, respectively, and will be amortized into revenue through January 2018.
Note 7 - 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 originally designated 17,000 shares as Series B convertible preferred stock. The Series B preferred stock does not have voting rights.
The Series B shares are convertible at any time into shares of MultiCell’s 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 applicable Series B convertible preferred stock purchase 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/or the issuance of employee stock options). As a result of the Company issuing common stock upon conversion of convertible debentures and upon the exercise of warrants at prices lower than the conversion price, and due to the Company not paying Series B dividends on a monthly basis (as discussed below), the conversion price of the Series B convertible preferred stock has been reduced to $0.0067 per share as of November 30, 2014 and to $0.0114 per share as of November 30, 2013. Pursuant to the applicable Series B convertible preferred stock purchase agreement, each investor may only convert that number of shares of Series B convertible preferred stock into that number of shares of MultiCell’s common stock that does not exceed 9.99% of the outstanding shares of common stock on the date of conversion.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Commencing on the date of issuance of the Series B convertible 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 was required to pay on each outstanding share of Series B convertible preferred stock a preferential cumulative dividend at an annual rate equal to the product of multiplying $100 per share by the higher of (i) the Wall Street Journal Prime Rate plus 1%, or (ii) 9%. In no event was the dividend rate to be greater than 12% per annum. The dividend was payable monthly in arrears in cash on the last day of each month based on the number of shares of Series B convertible preferred stock outstanding as of the first day of that month. In the event the Company did not pay the Series B preferred dividends when due, the conversion price of the Series B preferred shares was 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, caused the conversion price to be reduced. Subsequent to November 30, 2010, the Company received an opinion of outside counsel providing for the removal of the restrictive legend on the Series B convertible preferred stock, which in turn terminated the requirement to accrue the related dividends. Accordingly, no dividends have been accrued since November 30, 2010. Total accrued but unpaid preferred dividends recorded in the accompanying consolidated balance sheets as of November 30, 2014 and November 30, 2013 are $290,724, of which $125,516 are recorded in permanent equity with the Series B convertible preferred stock and $165,208 are recorded as a current liability in accounts payable and accrued expenses.
The conversion feature which gives the holders of the Series B convertible preferred stock the right to acquire shares of MultiCell’s common stock is an embedded derivative. As of November 30, 2014 and 2013, there were 3,448 shares of Series B convertible preferred stock that were convertible into 51,462,687 and 30,245,614 shares of MultiCell’s common stock, respectively. The fair value of the conversion feature was estimated at $25,731 ($0.0005 per share of common stock) and $18,147 ($0.0006 per share of common stock) at November 30, 2014 and 2013, respectively, and has been estimated using the Black-Scholes option-pricing model using the following assumptions:
The fair value of the conversion feature decreased by $1,098 during the year ended November 30, 2013, which has been recorded as a gain from the change in the fair value of the derivative liability. The fair value of the conversion feature increased by $7,584 during the year ended November 30, 2014, which has been recorded as a loss from the change in the fair value of the derivative liability.
Pursuant to the Certificate of Designation of the Series B convertible preferred stock, in the event of any dissolution or winding up of the Company, whether voluntary or involuntary, holders of each outstanding share of Series B convertible 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 convertible preferred stock held plus any declared but unpaid dividends. However, as described below, no shares of the Company’s Series I convertible preferred stock were outstanding at November 30, 2014. 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.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 8 - 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. In 2004, the Company completed a private placement of Series I convertible preferred stock. A total of 20,000 shares were originally sold to accredited investors. As of November 30, 2014 and 2013, all of the shares of Series I convertible preferred stock had been converted into shares of MultiCell’s common stock and no shares of the Series I convertible preferred stock were outstanding.
Pursuant to the Certificate of Designations of Preferences and Rights of Series I Preferred Stock, the Series I preferred stock does not have voting rights and 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. As described above, there are no shares of Series I preferred stock outstanding at November 30, 2014.
Note 9 - Common Stock
On November 15, 2013, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders approved an amendment to increase the number of shares of common stock authorized under the Company’s Amended and Restated Certificate of Incorporation to five billion shares. The Amended and Restated Certificate of Incorporation was filed with the State of Delaware on November 21, 2013.
The potential issuable common shares as of November 30, 2014 and 2013 are as follows:
MultiCell 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 5, upon the conversion of any portion of the remaining $36,426 principal amount of the Debenture, LJCI is required to simultaneously exercise and purchase that same percentage of the remaining 3,642,629 warrant shares equal to the percentage of the dollar amount of the Debenture being converted. The LJCI Agreement limits LJCI’s investment to an aggregate common stock ownership that does not exceed 9.99% of the outstanding common shares of MultiCell. Furthermore, MultiCell 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.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 10 - Technology Acquisitions and License Agreements
Ideal BioStent™
Purchase of Ideal BioStent™ - Foreclosure Sale Agreement
On September 30, 2010, Xenogenics entered into a Foreclosure Sale Agreement (“Foreclosure Sale Agreement”) with Venture Lending & Leasing IV, Inc., Venture Lending & Leasing V, Inc. and Silicon Valley Bank (collectively, the “Sellers”). Pursuant to the Foreclosure Sale Agreement, Xenogenics acquired all of the Sellers’ interests in certain bioabsorbable stent assets (known as “Ideal BioStent™”) and related technologies. In consideration for the purchase of the assets, Xenogenics made cash payments to the Sellers in the aggregate amount of $400,000.
Xenogenics is also required to make cash payments to the Sellers as follows based on the achievement of certain milestones:
·$300,000 is payable upon the earlier to occur of (i) initiation of pivotal Generation 2 stent human clinical trials, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $3,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments), and (iii) a “change of control” of Xenogenics;
·$1,000,000 is payable upon the earlier to occur of (i) regulatory approval by any regulatory authority in a European Union member country, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $5,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments); and (iii) a “change of control” of Xenogenics; and
·$3,000,000 is payable upon the earlier to occur of (i) regulatory approval by the U.S. Food and Drug Administration, (ii) execution of an agreement in which Xenogenics grants a third party rights to develop or exploit the purchased assets, valued at no less than $5,000,000 (including all up-front payments and the net present value of any future royalty/milestone payments); and (iii) a “change of control” of Xenogenics.
None of these milestones were achieved as of November 30, 2014 and, accordingly, none of these obligations have accrued. Xenogenics’ obligations under the Foreclosure Sale Agreement had been previously extended pursuant to Amendments No. 1, No. 2, and No. 3 dated September 30, 2011, October 23, 2012, and October 11, 2013, respectively. On December 1, 2014, Xenogenics entered into Amendment No. 4 to the Foreclosure Sale Agreement which further extended the deadlines for the achievement of these milestones under the Foreclosure Sale Agreement by an additional 12 months. As a result of these various amendments to extend the dates for achievement of the milestones, the Company is in compliance with the requirements of the Foreclosure Sale Agreement, as amended. Xenogenics is required to use Good Faith Reasonable Efforts (as defined in the Foreclosure Sale Agreement) to achieve these milestones. Failure to achieve any of these milestones shall result in all milestone payments, totaling $4.3 million, becoming immediately due and payable, unless Xenogenics’ failure to use Good Faith Reasonable Efforts is due to Technical Difficulties (as defined in the Foreclosure Sale Agreement) or to Financial Hardship (as defined in the Foreclosure Sale Agreement), in which case Xenogenics can elect to (i) pay all remaining milestone payments and continue commercialization efforts, or (ii) assign all intellectual property acquired by Xenogenics under the agreement to the counterparties to the agreement and cease all development and commercialization efforts. Accordingly, Xenogenics has not accrued the $4.3 million commitment because Amendment No. 4 has been executed and also believes that the Financial Hardship exemption in the Foreclosure Sale Agreement would protect it in the future from any requirement to pay the $4.3 million.
Rutgers License Agreement
To supplement the technology acquired under the Foreclosure Sale Agreement, Xenogenics also entered in to a license agreement (the “Rutgers License Agreement”) with Rutgers, The State University of New Jersey (“Rutgers”) effective September 30, 2010. The term of the Rutgers License Agreement commenced on September 30, 2010, and was to terminate on the earlier of (i) the expiration of all valid patents granted with respect to the licensed technology (or products commercialized therefrom) in a country, and (ii) ten years from the date of first commercial sale in a country.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Pursuant to the Rutgers License Agreement, Rutgers granted Xenogenics a worldwide exclusive license to exploit and commercialize certain patents and other intellectual property rights, as further described in the Rutgers License Agreement, relating to bioabsorbable stents for interventional cardiology and peripheral vascular applications. In consideration for the license and other rights granted under the Rutgers License Agreement, Xenogenics paid Rutgers a license fee of $50,000. In addition, under the Rutgers License Agreement, Xenogenics was obligated to pay Rutgers a license maintenance fee of $25,000 on the third anniversary of the Rutgers License Agreement, and $50,000 on the fourth anniversary. Additionally, Xenogenics agreed to pay Rutgers for unpaid costs of $136,000 incurred by Rutgers prior to the effective date of the Rutgers License Agreement for preparing, filing, prosecuting, defending, and maintaining all United States patent applications and patents covered under the Rutgers License Agreement. Additionally, Xenogenics was also required to make additional cash payments to Rutgers upon the achievement of certain milestones. None of these milestones were ever achieved, and accordingly, none of these obligations were ever accrued. Furthermore, upon the sale of products commercialized using the technology licensed pursuant to the Rutgers License Agreement, Xenogenics was required to make royalty payments to Rutgers in an amount equal to three percent of the annual aggregate gross amounts charged for such products less deductions for expenses such as sales/use taxes, transportation charges and trade discounts. No sales were ever made that required the payment of any royalty.
It became apparent during the evaluation and development of the Ideal BioStent™ that the use of intellectual property licensed from Rutgers would have introduced complications in the design of the Ideal BioStent. As a result, Xenogenics abandoned the use of the Rutgers technology effective January 2014. On January 31, 2014, Rutgers notified Xenogenics of its alleged default of the provisions in the Rutgers License Agreement. On May 9, 2014, Rutgers issued a notice of termination of the Rutgers License Agreement, and demanded payment of unpaid license fees of $25,000, unpaid patent costs of $75,665, and accrued interest of $8,375. All of these claimed fees, costs, and interest have been accrued in the accompanying consolidated financial statements. Management is currently evaluating the merits of these claims.
Sponsored Research Agreement
On September 27, 2013, MultiCell entered into a new sponsored research agreement with Anand Ghanekar, M.D., Ph.D, of the University Health Network’s Toronto General Hospital expanding the scope of the current research project with the University Health Network (“UHN”) to evaluate MCT-485 in animal models for the treatment of primary liver cancer (the “Ghanekar Agreement”). On July 5, 2011, the Company had previously entered into a sponsored research agreement with UHN pursuant to which UHN evaluated the Company’s product candidates, MCT-465 and MCT-485, in in vitro models for the treatment of primary liver cancer (the “UHN Agreement”). The mechanism of action of MCT-465 and MCT-485 and their potential selective effect on liver cancer stem cells were also evaluated. Under the terms of each of the Ghanekar Agreement and the UHN Agreement, the Company retains exclusive access to the research findings and intellectual property resulting from the research activities performed by each of Dr. Ghanekar and UHN, respectively. As of November 30, 2014, this sponsored research agreement had concluded, but this research is continuing in a non-academic setting.
Amarin Neuroscience Limited
On December 31, 2005, the Company entered into a worldwide Exclusive License Agreement (the “License Agreement”) with Amarin Neuroscience Limited (“Amarin”). Among other things, the License Agreement provides that Amarin shall grant to the Company and its affiliates an exclusive worldwide license with respect to therapeutic or commercial uses of certain technology of Amarin, including LAX-202 (to be renamed MCT-125), and the Company shall develop and seek to commercialize products based on such technology. The initial technology to be developed is Amarin’s LAX-202, which is a potential treatment for fatigue in patients diagnosed with multiple sclerosis. The agreement has a term equal to the life of the patents licensed. The License Agreement provides that the Company will pay future royalty milestone payments in accordance with the following:
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
(a)$500,000 upon first filing of a new drug application with Food and Drug Administration (FDA) or a reasonably similar filing with any regulatory authority for Active Agent Product,
(b)$1,000,000 upon first FDA approval for sale in the USA for Active Agent Product,
(c)$1,500,000 within twelve calendar months after the first sale in the USA for Active Agent Product, and
(d)$1,000,000 within twelve calendar months after the first sale in the European Economic Area for Active Agent Product.
None of these milestones have been achieved as of November 30, 2014 and, accordingly, none of these obligations have been paid or recorded. If any milestone payment is not paid when due, and if no payment is received from the Company within thirty days after the date of receipt of a written notice of such nonpayment, Amarin shall have the option to either (i) terminate this agreement or (ii) convert the license under this agreement to a worldwide non-exclusive license with the right to sublicense, which non-exclusive license shall be subject to all of the terms and obligations of the agreement. The Company shall also pay Amarin without set-off or counterclaim a royalty of nine percent on net sales of Active Agent Product sold by the Company, its affiliates, or sublicensees and their affiliates. On November 5, 2008 the License Agreement was amended whereby Amarin granted exclusive worldwide rights to the Company related to the treatment of all chronic fatigue and pain in addition to the treatment of fatigue in multiple sclerosis patients.
Rhode Island Hospital
In September 2001, the Company completed the purchase of its cell line business and, as a result, it acquired an exclusive license agreement with Rhode Island Hospital for the use of four patents owned by the hospital related to liver cell lines and liver assist devices. The primary patent acquired and being utilized is for immortalized hepatocytes. As of November 30, 2006, management tested the carrying value of the license agreement for impairment and concluded that it had been impaired and reduced the carrying value to zero. The Company will pay the hospital a 5% royalty on net sales derived from licenses based upon the patented technology, until it has paid a total of $550,000. As of November 30, 2014, no significant payments had been made under this license agreement. After royalties totaling $550,000 have been paid, the Company pays a 2% royalty instead of a 5% royalty for the life of the patent.
Note 11 - Stock Compensation Plans
On July 11, 2011, at the Company’s Annual Meeting of Stockholders, the stockholders approved an amendment to increase the number of shares reserved under the 2004 Equity Incentive Plan (the “2004 Plan”) to a total of 70,974,213 shares. There have been subsequent amendments to increase the number of shares reserved under the 2004 Plan and the number of shares reserved under the 2004 Plan has also increased pursuant to the provisions of the 2004 Plan. The purpose of the 2004 Plan was to provide a means by which eligible recipients of stock awards could be given the opportunity to benefit from increases in the value of the Company’s common stock. Under the provisions of the 2004 Plan, the 2004 Plan terminated on March 2, 2014, and as such, there are no additional shares of common stock available for future awards under the 2004 Plan.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Generally accepted accounting principles for stock options require the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements, which is measured based on the grant date fair value of the award, and require 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 consolidated balance sheets.
A summary of the status of stock options granted by MultiCell at November 30, 2014 and 2013, and changes during the years then ended is presented in the following table:
On January 15, 2014, the MultiCell Board of Directors granted an option to each of the five members of the Board of Directors to purchase 4,600,000 shares of MultiCell’s common stock at $0.0008 per share. The options vest quarterly over one year, subject to continuing service as a director on each such vesting date, and expire five years after grant. Additionally, the Board of Directors granted an option to an employee to purchase 2,074,710 shares of MultiCell’s common stock at $0.0008 per share. This option vests monthly over three years, subject to continuing service as an employee on each such vesting date, and expires five years after grant. On August 16, 2013, the MultiCell Board of Directors granted an option to each of the five members of its Board of Directors to purchase 5,000,000 shares of the Company’s common stock at $0.0011 per share. The options vest quarterly over one year, subject to continuing service as a director on each such vesting date, and expire five years after grant. Additionally, the Board of Directors granted an option to an employee to purchase 5,000,000 shares of common stock at $0.0011 per share. This option vests monthly over three years, subject to continuing service as an employee on each such vesting date, and expires five years after grant.
The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted during the year ended November 30, 2014 was $0.0007 per share. The weighted-average assumptions used for options granted during the year ended November 30, 2014 were risk-free interest rate of 1.68%, volatility of 140%, expected life of 5.0 years, and dividend yield of zero. The weighted-average fair value of stock options granted during the year ended November 30, 2013 was $0.0011. The weighted-average assumptions used for options granted during the year ended November 30, 2013 were risk-free interest rate of 1.6%, volatility of 175%, expected life of 5.0 years, and dividend yield of zero. The assumptions employed in the Black-Scholes option pricing model include the following. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding prior to exercise. The expected volatility is based on the historical price volatility of MultiCell’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related stock options. The dividend yield represents anticipated cash dividends to be paid over the expected life of the stock options.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
For the years ended November 30, 2014 and 2013, MultiCell reported stock-based compensation expense for services related to stock options of $37,712 and $18,586, respectively. As of November 30, 2014, there is approximately $7,000 of unrecognized compensation cost related to stock-based payments that will be recognized over a weighted average period of approximately 1.3 years. The intrinsic values at November 30, 2014 are based on a closing price of $0.0005.
In October 2010, Xenogenics adopted the 2010 Stock Incentive Plan (the “2010 Plan”) which authorized the granting of stock awards to Xenogenics’ employees, directors, and consultants. As originally adopted, the 2010 Plan provided that the number of shares of Xenogenics’ common stock that could be issued pursuant to stock awards could not exceed 5,000,000 shares of common stock. On February 3, 2011, the 2010 Plan was amended such that the number of shares of Xenogenics’ common stock that could be issued pursuant to stock awards could not exceed 8,000,000 shares of common stock. The purpose of the 2010 Plan is to provide a means by which eligible recipients of stock awards may be given the opportunity to benefit from increases in the value of Xenogenics’ common stock through granting of ISOs, non-statutory stock options, stock bonus awards, stock appreciation rights, and rights to acquire restricted stock. ISOs may be granted only to employees. The exercise price of each ISO granted under the 2010 Plan must equal 100% of the market price of Xenogenics’ stock on the date of the grant. A 10% stockholder shall not be granted an ISO unless the exercise price of such option is at least 110% of the fair market value of Xenogenics’ common stock on the date of the grants and the option is not exercisable after the expiration of five years from the date of the grant. The Board of Directors of Xenogenics, in its discretion, shall determine the exercise price of each nonstatutory stock option. An option’s maximum term is 10 years.
A summary of the status of Xenogenics’ stock options at November 30, 2014 and 2013, and changes during the years then ended is presented in the following table:
On July 28, 2013, Xenogenics granted an option to a consultant to purchase 500,000 shares of Xenogenics’ common stock at $0.246 per share. The option vests in equal increments of 125,000 on each of July 28, 2013, October 1, 2013, January 1, 2014, and April 1, 2014, subject to continuing service to Xenogenics on each such vesting date, and expires five years after grant. The fair value of these options was estimated to be $117,000, or $0.234 per share, as estimated using the Black-Scholes option-pricing model, using a risk-free interest rate of 1.37%, volatility of 175%, expected lives of five years, and dividend yield of zero.
In November 2010, Xenogenics granted an option to a prospective executive officer to purchase an aggregate of 2,500,000 shares of its common stock, exercisable at $0.246 per share of common stock and having an expiration date in November 2015. The option to acquire 500,000 of the shares vested on the grant date and the remaining 2,000,000 option shares were to vest in the future upon the achievement of specified milestones. The fair value of these options was estimated to be $576,250, or $0.2305 per share, as estimated using the Black-Scholes option-pricing model, using a risk-free interest rate of 1.23%, volatility of 165%, expected life of five years, and dividend yield of zero. This prospective executive officer resigned in May 2014 and the rights under this option were forfeited in August 2014. At the date of the forfeiture, only the initial option to acquire 500,000 shares had vested, and the remaining 2,000,000 option shares remained unvested because the specified milestones had not been achieved. The share-based compensation related to these 2,000,000 option shares ($461,000) had been recognized over the periods of time, originally estimated on the date of grant, that management expected each of the specified milestones was likely to be achieved. As of the date of forfeiture, all of the share-based compensation related to these performance-based options had been recognized in the consolidated financial statements. Under GAAP, if vesting is based solely on one or more performance or service conditions, any previously recognized compensation cost is reversed if the award does not vest (that is, the requisite service is not rendered). Accordingly, Xenogenics reversed the compensation cost for these options in the amount of $461,000 during the year ended November 30, 2014 when the options were forfeited.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
For the year ended November 30, 2014, Xenogenics reported a net reversal of stock-based compensation in the amount $417,838, representing stock-based compensation of $43,162 less the reversal of $461,000. For the year ended November 30 2013, Xenogenics reported stock-based compensation of $205,087. As of November 30, 2014, there was no unrecognized compensation cost related to stock-based payments to be recognized in the future for option grants through November 30, 2014.
Note 12 - Warrants
Since the Company’s inception, it has financed its operations primarily through the issuance of debt or equity instruments, which have often included the issuance of warrants to purchase the Company’s common stock.
As further described in Note 5 to these consolidated financial statements, MultiCell entered into the LJCI Agreement, pursuant to which MultiCell agreed to sell the Debenture in the principal amount of $100,000. In connection with the Debenture, MultiCell issued LJCI a warrant to purchase up to 10 million shares of MultiCell’s common stock at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007. Pursuant to the terms of 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, as an example, for each $1,000 of the Debenture converted, LJCI would be required to simultaneously purchase 100,000 shares under the LJCI Warrant at $1.09 per share. As further described in Note 5 to these consolidated financial statements, on February 20, 2014, MultiCell and LJCI amended the LJCI Warrant to extend the expiration date of the warrants to February 28, 2016. During the year ended November 30, 2013, LJCI exercised warrants to purchase 1,088,000 shares of MultiCell’s common stock, resulting in proceeds to the Company of $1,185,920. During the year ended November 30, 2014, LJCI exercised warrants to purchase 872,000 shares of MultiCell’s common stock, resulting in proceeds to the Company of $950,480.
A summary of the status of warrants at November 30, 2014 and 2013, and changes during the years then ended is presented in the following table:
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
Note 13 - Leasing Arrangements
During the years ended November 30, 2014 and 2013, the Company has leased facilities in Rhode Island that have housed activities related to administration, research and development. The Company currently leases space in Rhode Island under month-to-month arrangement. Current rent is $900 per month. Rent expense under the Company’s operating leases was $10,800 for each of the years ended November 30, 2014 and 2013, respectively.
Note 14 - Gain on Extinguishment of Liabilities
During the year ended November 30, 2014, the Company determined that recorded accounts payable totaling $212,294 had been extinguished with the passage of time for collection under the laws related to the statute of limitations. Accordingly, the Company removed these accounts from their records and recorded a corresponding gain on the extinguishment of the liabilities. There was no similar extinguishment of liabilities during the year ended November 30, 2013.
Note 15 - Income Taxes
The Company provides for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The significant components of net deferred tax assets and liabilities were as follows at November 30, 2014 and 2013:
The valuation allowance increased by $34,928 for the year ended November 30, 2014 and increased by $181,262 during the year ended November 30, 2013.
As of November 30, 2014, the Company has U.S. Federal operating loss carryforwards of approximately $26.2 million. The operating losses expire, if not used, from 2015 through 2034. The utilization of the net operating losses is dependent upon the tax laws in effect at the time such losses can be utilized. A significant change of ownership control of the Company could cause the utilization of net operating losses to be limited.
MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2014 and 2013
A reconciliation of the expected income tax benefit at the U.S. Federal income tax rate to the income tax benefit actually recognized for the years ended November 30, 2014 and 2013 is set forth below:
MultiCell and its subsidiaries file tax returns in the U.S. Federal jurisdiction, in the state of Rhode Island, and formerly in the state of California. The Company and its subsidiaries are no longer subject to U.S. federal tax examinations for tax years before and including November 30, 2010. The Company and its subsidiaries are no longer subject to examination by State tax authorities for tax years before and including November 30, 2008. During the years ended November 30, 2014 and 2013, the Company did not recognize interest and penalties.
Note 16 - Fair Value Measurements
For assets and liabilities measured 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.
Liabilities measured at fair value on a recurring basis at November 30, 2014 and 2013 are summarized as follows:
As further described in Note 7, the fair value of the derivative liability is determined using the Black-Scholes pricing model.
Note 17 - Subsequent Events
Conversion of Debentures and Exercise of Stock Warrants
During the period subsequent to November 30, 2014 through the date of issuance of the consolidated financial statements, LJCI converted $700 of the Debenture with LJCI (see Note 5) into 310,578,148 shares of common stock. Simultaneously with these conversions, LJCI exercised warrants to purchase 70,000 shares of MultiCell’s common stock. Proceeds from the exercise of the warrants were $76,300.