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MCET > SEC Filings for MCET > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for MULTICELL TECHNOLOGIES, INC.

Form 10-K for MULTICELL TECHNOLOGIES, INC.


28-Feb-2014

Annual Report


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, 2013 and 2012 is presented below.

Overview

MultiCell is 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) isolate, characterize and differentiate stem cells from human liver;
(ii) control the immune response at transcriptional and translational levels through dsRNA-sensing molecules such as TLRs, RLRs, and 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. 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 will evaluate the Company's 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 will also be evaluated. Under the terms of this agreement, we will retain 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 retains exclusive access to the research findings and intellectual property resulting from the research activities preformed by of Dr. Ghanekar. The Ghanekar Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.13 and incorporated herein by this reference.

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 September 30, 2013. Xenogenics' obligations under the Foreclosure Sale Agreement had been previously extended pursuant to Amendments No. 1 and No. 2, dated September 30, 2011 and October 23, 2012, respectively. On October 11, 2013, Xenogenics entered into Amendment No. 3 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.

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, 2013 and 2012, research and development costs were $314,283 and $427,994, 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, 2013 compared to Fiscal Year Ended November 30, 2012

Revenue. Total revenue for the fiscal years ended November 30, 2013 and November 30, 2012 was $49,318. All of the revenue for the fiscal years ended November 30, 2013 and 2012 is from the amortization of deferred license revenue under agreements with Corning and Pfizer Inc.

Operating Expenses. Total operating expenses for selling, general and administrative expenses, research and development expenses, and stock-based compensation for the fiscal year ended November 30, 2013, were $1,417,344, compared to the total corresponding operating expenses for the fiscal year ended November 30, 2012, of $1,624,181, representing a decrease of $206,837. This decrease was principally due to a decrease in stock-based compensation of $102,656 primarily related to the options issued by Xenogenics as further discussed in the Notes to our Consolidated Financial Statements filed herewith; a decrease in legal, consulting, and other professional fees of $95,511; and a decrease in state franchise taxes and other filing fees of $20,674. These decreases were offset by increases in various other expenses of $12,004.

Other income/(expense). Other income (expense) amounted to net expense of $1,406 for the fiscal year ended November 30, 2013, as compared to net income of $216,263 for the fiscal year ended November 30, 2012. Other income (expense) for the fiscal year ended November 30, 2013, primarily consists of (i) interest expense of $2,691 and (ii) a gain from the change in fair value of derivative liability of $1,098. Other income (expense) for the fiscal year ended November 30, 2012, primarily consists of (i) interest expense of $8,137, (ii) a gain from the change in fair value of derivative liability of $88,663, and (iii) a gain on the extinguishment of certain liabilities in the amount of $133,540.

Interest expense principally consists of interest on the Debentures as discussed below in the subsection entitled "Liquidity and Capital Resources"), including amortization of discount through February 28, 2012, the original due date of the Debentures.

The change in fair value of derivative liability is the result of the embedded conversion feature in our 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 all of their shares into shares of our common stock.

During the fiscal year ended November 30, 2012, our management determined that certain recorded accounts payable totaling $133,540 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, 2013 was $1,369,432, as compared to a net loss of $1,358,600 for the fiscal year ended November 30, 2012, representing an increase in net loss of $10,832. The primary reasons for the increase in net loss are the (i) the decrease in operating expenses offset by (ii) the decrease in other income (expense), primarily related to decreases in gains from the change in fair value of derivative liability and from the extinguishment of liabilities, all as described above.

Liquidity and Capital Resources

The following is a summary of our key liquidity measures at November 30, 2013 and November 30, 2012:

                              November 30, 2013     November 30, 2012

Cash and cash equivalents    $           146,205   $           199,472

Current assets               $           178,805   $           210,765
Current liabilities                  (1,278,935)           (1,255,495)

Working capital deficiency   $       (1,100,130)   $       (1,044,730)

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, the liquidity position of the Company. 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 convertible debentures in the principal amount of $100,000 and maturing on February 28, 2012 (the "Debentures"). In addition, we issued to LJCI a warrant to purchase up to 10 million shares of our common stock at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007. In August 2011, the Company and LJCI amended the debenture and the warrant agreements to extend the maturity date of the Debentures and the expiration date of the warrants to February 28, 2014. On February 20, 2014, the Company and LJCI amended the debenture and the warrant agreements to further extend the maturity date of the Debentures and the expiration date of the warrants to February 28, 2016.

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 (defined below) 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. The Debentures accrue interest at 4.75% per year payable in cash or our common stock. Through November 30, 2013, 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 Debentures in effect at the time of payment. Upon receipt of a conversion notice from the holder, the Company may elect to immediately redeem that portion of the Debentures that the holder elected to convert in such conversion notice, plus accrued and unpaid interest. Since February 28, 2008, the Company, at its sole discretion, has had the right, without limitation or penalty, to redeem the outstanding principal amount of the Debentures not yet converted by the holder into shares of its 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 warrants issued to it by the Company (which LJCI must exercise whenever it converts amounts owing under the convertible debenture it holds). As of February 21, 2014 there were 4,307,629 shares remaining under the stock purchase warrant and a balance of $43,076 remaining on the convertible debenture. Should LJCI continue to exercise all of its remaining warrants approximately $4.7 million of cash would be provided to the Company. However, the Debenture 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 warrants and convert the Debentures 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 $0.0114 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 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 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 did not pay 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, 2013 and November 30, 2012 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, 2013, 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, 2013 and November 30, 2012 is as follows:

                                             November 30, 2013     November 30, 2012

Operating activities                        $       (1,251,137)   $         (889,555)
Investing activities                                          -                 1,500
Financing activities                                  1,197,870               682,200

Net decrease in cash and cash equivalents   $          (53,267)   $         (205,855)

Operating Activities

For the fiscal year ended November 30, 2013, the differences between our net loss and net cash used in operating activities were 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. For the fiscal year ended November 30, 2012, the differences between our net loss and net cash used in operating activities are due to net non-cash charges and credits totaling $107,626 included in our net loss for stock-based compensation, interest, gain on disposition of equipment, gain from extinguishment of liabilities, and change in fair value of derivative liability, plus changes in non-cash working capital totaling $361,419 (principally the collection of the grant receivable of $303,102).

Investing Activities

We had no cash flows from investing activities during the year ended November 30, 2013. During the year ended November 30, 2012, we sold surplus equipment for $1,500.

Financing Activities

During the year ended November 30, 2013, cash flows from financing activities related to LJCI converting $10,880 of the Debentures into shares of our common stock and exercising warrants to purchase 1,088,000 shares of our 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. During the fiscal year ended November 30, 2012, principal cash flows from financing activities related to LJCI converting $8,570 of the . . .

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