Form 10QSB for MULTICELL TECHNOLOGIES, INC.
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17-Oct-2005
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.
This document contains forward-looking statements that are based upon current expectations that are within the meaning of the Private Securities Reform Act of 1995. It is our intent that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements regarding:
† applications for future cell lines and our technologies;
† our intellectual property strategies;
† development of products by our subsidiaries;
† applications for our liver stem cells;
† the utility and benefits of our technology and cell lines;
† expansion of our scientific and support personnel;
† increasing or improved revenues;
† increasing expenses; and
† liquidity and financing.
Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:
† difficulties or delays in development, testing, regulatory approval, production and commercialization of our and our subsidiaries' current and future cell lines and technologies;
† effective integration of the business of our subsidiaries;
† the uncertainty of patent protection for our intellectual property or trade secrets;
† potential infringement of the intellectual property rights or trade secrets of third parties;
† hiring and retaining personnel; and
† our financial position and our ability to obtain additional financing if necessary.
Overview
MultiCell Technologies, Inc., (or MultiCell) was incorporated in Delaware on April 28, 1970 as "Exten Ventures, Inc". As of August 31, 2005, it operated two subsidiaries, MCT Rhode Island Corp. (or MCT) and Xenogenics Corporation (or Xenogenics). As used herein, the "Company" refers to MultiCell, together with MCT and Xenogenics. Effective April 1, 2004, we changed our name from Exten Industries, Inc. to MultiCell Technologies, Inc. Subsequent to the acquisition and Series A Financing described in Note 12 and as of September 7, 2005 MultiCell holds approximately 67% of the outstanding shares (on an as-converted basis) of a newly formed subsidiary, MultiCell Immunotherapeutics, Inc. (or MCTI).
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We are a global leader in producing immortalized human liver cells (hepatocytes). Our intellectual property portfolio positions us as a leader in the creation of highly functional, immortalized, non-tumorigenic human hepatocyte cell lines. Our proprietary human cell lines are ideal for developing highly predictive, high throughput drug discovery assays and enable innovative clinical approaches for treating a variety of liver-related diseases.
We believe we are differentiated by: 1) our understanding of the function and manipulation of the liver cell and 2) our understanding of stem cells, cell therapy and cell transplantation. Our intellectual property portfolio positions us for use of immortalized mammalian hepatocytes for treating liver disease. We have established a worldwide reputation as a source of licensed immortalized liver cell lines. The Company is developing cell-related technologies and products to treat a variety of liver diseases and has identified four clinically relevant applications for its cell-based products:
† Drug Discovery - High throughput screening assays for drug discovery, lead optimization, and pharmacogenomic studies;
† Stem cells and cell transplantation to treat metabolic liver deficiencies;
† Cellular component of liver assist devices used to treat patients suffering from acute and chronic liver failure; and
† Production of natural therapeutic plasma proteins.
MultiCell's immortalized human hepatocyte cell lines have demonstrated the ability to replace the continuous need for primary cells for many absorption, distribution, metabolism, excretion and toxicity, also referred to as ADME/tox applications. Expanded from our cell banks, our cell lines have significant cost and quality control advantages over primary cell sources. Our proprietary hepatic cell lines radically differ from other liver cell lines in that they are non-tumorigenic yet regenerate while maintaining liver function. A prolific cell without liver function is of little value. Our cell lines provide a consistent and functional resource for drug discovery and toxicology research, and can also be clinically utilized for cell-based therapies to supplement liver function and regeneration.
The Company is developing new cell lines to better model the impact of genetic differences on drug disposition. We envision that validated cell lines will be incorporated into medium-to-high throughput assays to economically and rapidly identify potential adverse drug reactions prior to expensive clinical studies.
In December 2003, we acquired the exclusive worldwide rights to US Patent # 6129911, for Liver Stem Cells. In April, 2005, the Company was granted US Patent # 6872389 for the liver stem cell invention of Dr. Ron Faris, MultiCell's Chief Scientific Officer. This patent contains twenty-four claims to a method of obtaining a population of liver cell clusters from adult stem cells and is an important enhancement to the Company's adult stem cell portfolio.
It is our goal to obtain broad patent protection on liver stem cell technology followed by diversification into other stem cell fields such as cardiovascular and pancreatic stem cell technologies. We continue to advance our internal research programs to characterize the liver stem and/or progenitor cells. Liver stem cells may be useful in the treatment of diseases such as hepatitis, liver failure, blood-clotting disorder, cirrhosis of the liver and liver cancer. Our adult stem cell technology has two distinct advantages over embryonic stem cells its non-controversial, non-fetal origin and lack of animal protein contamination. Xenogenics, our majority-owned subsidiary, owns all of the rights to the Sybiol synthetic bio-liver device, for which notice of allotment for a U.S. patent has been issued. The Sybiol "artificial liver" is intended to act as a substitute liver for a patient whose own liver is healing from injury or disease or for use as an artificial liver "bridge" for transplant patients awaiting a donor organ. The device may also be used to assist and improve the quality of life for patients with chronic liver disease or episodic liver trauma. The key to our artificial liver device, or other devices attempting to gain approval, is the functionality of the cells it utilizes. The Company plans to use its proprietary immortalized human hepatocytes to catalyze the Sybiol. The Company 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 standards as those pertaining to a pharmaceutical company. The cells may be produced in our own facility, or by a manufacturing partner with the requisite skills and equipment that meets the requirements of the U. S. Food and Drug Administration, or FDA. Both the device and the cells will require FDA approval. The Company has not yet filed with the FDA a plan to initiate clinical trials for the Sybiol device.
Our technology offers potentially significant competitive advantages in the development and commercialization of products. We believe that MultiCell's liver cell technology can be used to produce biopharmaceutical products that may demonstrate enhanced biological properties and prove to be potentially more efficacious and less toxic than products derived from other cell production systems. The technology may be well suited for the production of certain human viruses that cannot be produced efficiently at present using alternative technologies. From a production perspective, our technology may offer the ability to manufacture biopharmaceutical products in large volumes, which may speed the production process and reduce manufacturing costs.
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We believe that our technology provides a unique manufacturing system that consists of a human cell line that can be used to produce a variety of biopharmaceutical products. We developed the MultiCell liver cell technology from a single source of healthy, human liver cells in a documented manner. The cell line has been successfully adapted to grow without the need for serum supplementation.
MultiCell's technology may also be used as a production system for developing and manufacturing antibodies or proteins by inserting DNA encoding for a particular protein into liver cells. We expect these modified liver cells to grow further and secrete the desired antibody or protein, which can then potentially be used for pre-clinical research or developed for therapeutic proteins.
In August 2003, we signed an exclusive manufacturing and distribution license agreement for two of our cell lines with XenoTech, LLC. The agreement was for a seven year term, of which as of August 31, 2005, four years and eleven months remain, with minimum remaining royalties of $17.2 million due the Company in order for XenoTech to maintain exclusivity. Prior to December 1, 2004, the Company had recognized revenues under the XenoTech agreement based on the minimum royalty amount for each period because it had received a prepayment of a substantial portion of the amount due. XenoTech is required to pay the Company a $2.1 million minimum royalty amount for the current fiscal year as a condition of its exclusivity. Since XenoTech could elect to give up its exclusive rights, the collection of the contractual amount is no longer reasonably assured and, in accordance with SEC Staff Accounting Bulletin Topic 13, commencing December 1, 2004, the Company began recognizing revenues under the XenoTech agreement based on the agreement's royalty percentage applied to XenoTech's actual sales for the period instead of the minimum royalty amount. The Company is currently in discussions with XenoTech relative to the status of the minimum royalties for the remaining contract period.
XenoTech has distribution agreements with numerous companies for a variety of pharmaceutical and laboratory products and also performs contract research for pharmaceutical companies. These services position XenoTech to promote market and distribute our cell lines. XenoTech utilizes direct and group sales presentations, telemarketing, and direct mail to promote and sell our cells. Additionally, since XenoTech has a number of respected scientists and have developed compelling efficacy data for our cells, its representatives frequently give presentations regarding our cell lines at conferences, which we believe helps develop sales leads. On June 15, 2005, the Company announced that XenoTech would begin distributing the Company's product in a shrink-wrap vial, in an effort to speed acceptance of the Company's product through a reduction in the length of the sales cycle. Previously, the Company's product was distributed exclusively through a license agreement.
With the addition as of September 7, 2005 of MCTI, as a majority-owned subsidiary of MultiCell, the Company will begin to develop new therapeutic products utilizing stem cells and other related technologies. MCTI's promising therapeutic platform complements the Company's existing intellectual property portfolio including promising stem cell technologies. We expect the combination of the Company's existing adult stem cell technology and the new therapeutic technologies obtained through MCTI to significantly expand the potential to further monetize the Company's intellectual property.
We have operated and will continue to operate by minimizing expenses. The largest expenses relate to personnel and to meeting the legal and reporting requirements of being a public company. By utilizing consultants whenever possible, and asking employees to manage multiple responsibilities, we reduce our operating cost. Additionally, a number of employees and our Board of Directors receive Company stock in lieu of cash as all or part of their compensation to help in the effort to minimize monthly cash flow.
We intend to gradually add scientific and support personnel. We want to add specialists for our key research areas. We believe these strategic additions will help us expand our product offerings and lead 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.
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Results of Operations
The following discussion is included to describe our consolidated financial position and results of operations. The condensed consolidated financial statements and notes thereto herein and the consolidated financial statements and notes thereto in our annual report on Form 10-KSB for the year ended November 30, 2004, contain detailed information that should be referred to in conjunction with this discussion.
Quarter ended August 31, 2005 Compared to the Quarter Ended August 31, 2004
Revenue. Total revenue for the three months ended August 31, 2005 was $69,056, as compared to revenue of $176,299 for the same quarter in the prior fiscal year, a decrease of $107,243. In the comparable quarter of the prior year $150,000 was recognized as amortization of the $700,000 royalty prepayment made by XenoTech for the first 16 month royalty period. This prepayment period ended November 30, 2004. Revenues under the XenoTech agreement commencing December 1, 2004 are being recognized based on the agreement's royalty percentage applied to XenoTech's actual sales for the period. On June 15, 2005, the Company announced the launch of a shrink-wrap version of its product. We believe that this action, along with further product enhancements and the launch of new products currently under development, will lead to an improvement in revenue levels in the future.
Operating Expenses. Total operating expenses for the three months ended August 31, 2005 were $1,173,036, representing an increase of $547,066, as compared to the same period in the prior fiscal year. This increase results from the Company increasing selling, general and administrative expenses by $581,144 due to the hiring of additional management personnel, increasing marketing and investor relations costs, as well as increasing costs associated with meeting the requirements of being a public company. Research and development expenditures decreased by $29,872. This decrease is primarily due to the granting of options to the Scientific Advisory Board during the quarter ended August 31, 2004 valued at $235,980, in comparison to direct research and development expenditures of $206,108 incurred during the quarter ended August 31, 2005.
Other income/expense. Interest expense for the three months ended August 31, 2005 was $4,933, which represents a decrease of $17,821 compared to the same quarter in the prior fiscal year. This decrease was attributable to a reduction in the outstanding debt through payments and conversions of convertible notes and accrued interest into the Company's common stock. Interest and dividend income for the quarter ended August 31, 2005 was $37,928, as compared to $17,645 in the previous year. This increase is attributable to the Company having available funds to invest in marketable securities. During the current quarter, the Company also recognized a gain on the sale of property in the amount of $3,847.
Net Loss. Net loss for the three months ended August 31, 2005 was $1,059,363, as compared to a net loss of $2,180,774 for the same period in the prior fiscal year, representing a decrease in the net loss of $1,121,411. The net loss applicable to common stockholders for the three months ended August 31, 2004 included a one-time non-cash charge of $1,721,144 due to the beneficial conversion feature attributable to the difference between the purchase price and the fair market value of the common stock to which the Series I preferred stock issued in July 2004 is convertible, and an increase in operating expenses of $547,066 due to the Company incurring additional operating expenses relating to the management and marketing of the Company as described above.
Nine months ended August 31, 2005 Compared to the Nine Months Ended August 31, 2004
Revenue. Total revenue for the nine months ended August 31, 2005 was $150,571, as compared to revenue of $534,472 for the same period in the prior fiscal year, a decrease of $383,901. In the comparable period of the prior year $450,000 was recognized as amortization of the $700,000 royalty prepayment made by XenoTech for the first 16 month royalty period. This prepayment period ended November 30, 2004. Revenues under the XenoTech agreement commencing December 1, 2004 are being recognized based on the agreement's royalty percentage applied to XenoTech's actual sales for the period. On June 15, 2005, the Company announced the launch of a shrink-wrap version of its product. We believe that this action, along with further product enhancements and the launch of new products currently under development, will lead to an improvement in revenue levels in the future.
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Operating Expenses. Total operating expenses for the nine months ended August 31, 2005 were $3,213,360, representing an increase of $1,237,565, as compared to the same period in the prior fiscal year. This increase results from the Company increasing selling, general and administrative expenses by $1,263,464 due to the hiring of additional management personnel, increasing marketing and investor relations costs, as well as increasing costs associated with meeting the requirements of being a public company.
Other income/expense. Interest expense for the nine months ended August 31, 2005 was $25,338, which represents a decrease of $44,489 compared to the same period in the prior fiscal year. This decrease was attributable to a reduction in the outstanding debt through payments and conversions of convertible notes and accrued interest into the Company's common stock. Interest and dividend income for the nine months ended August 31, 2005 was $80,390, compared to $54,728 in the previous year. This increase is attributable to the Company having available funds to invest in marketable securities. The Company also recognized a gain on the sale of property in the amount of $136,016 during the nine months ended August 31, 2005.
Net Loss. Net loss for the nine months ended August 31, 2005 was $2,860,326, as compared to a net loss of $3,193,897 for the same period in the prior fiscal year, representing a decrease in the net loss of $333,571. The net loss applicable to common stockholders for the nine months ended August 31, 2004 included a one-time non-cash charge of $1,721,144 due to the beneficial conversion feature attributable to the difference between the purchase price and the fair market value of the common stock to which the Series I preferred stock issued in July 2004 is convertible, and an increase in operating expenses of $1,237,565 due to the Company incurring additional operating expenses relating to the management and marketing of the Company as described above.
Liquidity and Capital Resources
The Company's cash needs have been managed primarily through the issuance of debt or equity instruments. During the nine months ended August 31, 2005, we had a net loss of $2,860,326. As a result of the inclusion of non-cash charges for services paid through the issuance of common stock, options and warrants with a fair value of $600,893: depreciation and amortization of equipment and improvements and amortization of a license agreement of $121,052, amortization of deferred compensation of $287,070, an increase in accounts payable and accrued expenses of $123,888, net of the effects of deferred income of $89,614 recognized in revenue, and an increase in other current assets of $91,442, our cash used in operating activities totaled $2,098,624. During the period we were able to issue common stock for aggregate proceeds, net of issuance costs of $3,441,721, convert other notes and accrued interest of $519,272 to common stock, receive proceeds of $465,125 from the exercise of options and warrants, and collect on a note receivable and related interest of $605,000.
In February 2005, the Company completed a $4,000,000 private placement resulting in net proceeds of $3,441,721, in exchange for the issuance of 5,333,333 shares of common stock and related warrants as described in Note 6. This cash substantially improved the Company's liquidity position. As of August 31, 2005, the Company had a cash balance of $2,526,786, marketable securities of $1,144,423 and a working capital balance of $3,329,921, of which $119,486 is attributable to deferred income, which is included in current liabilities that arose from a prepayment made by XenoTech under the license agreement that will be recognized in revenue over the term of the agreement. The Company is maintaining a conservative fiscal policy.
Through August 31, 2005, a significant portion of our financing has been provided through private placements of preferred and common stock and the exercise of stock options and warrants. We have in the past increased, and plan to increase further, our operating expenses in order to fund higher levels of product development, undertake and complete the regulatory approval process, and increase our administrative resources in anticipation of future growth. In addition, acquisitions such as MCTI increase operating expenses and therefore negatively impact, in the short term, the liquidity position of the Company. 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. Although we raised gross proceeds of $4 million in a February 2005 private placement, 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 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.
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