Form 10-Q for MULTICELL TECHNOLOGIES, INC.
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15-Jul-2009
Quarterly Report
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. It is our intent that such statements be protected by the safe harbor created thereby. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.
Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relating to: our plans to pursue research and development of therapeutics in addition to continuing to advance our cellular systems business, our plans to become an integrated biopharmaceutical company, our use of proprietary cell-based systems and immune system modulation technologies to discover, develop and commercialize new therapeutics, our plans to continue to operate our business and minimize expenses, our expectations regarding future cash expenditures increasing significantly, our intent to gradually add scientific and support personnel, the expansion of our product offerings, additional revenues and profits, our ability to complete strategic mergers and acquisitions of product candidates, plans to increase further our operating expenses and administrative resources, future potential direct product sales, the sale of additional equity securities, debt financing and/or the sale or licensing of our technologies.
Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to difficulties or delays in development, testing, obtaining regulatory approval, and undertaking production and marketing of our drug candidates; difficulties or delays in patient enrollment for our clinical trials; unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials); activities and decisions of, and market conditions affecting current and future strategic partners; pricing pressures; accurately forecasting operating and clinical trial costs; uncertainties of litigation and other business conditions; our ability to obtain additional financing if necessary; changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target; the uncertainty of protection for our intellectual property or trade secrets, through patents or otherwise; and potential infringement of the intellectual property rights or trade secrets of third parties. In addition such statements are subject to the risks and uncertainties discussed under "Factors That May Affect Future Performance" in Item 1, Description of Business, of our Annual Report filed on Form 10-KSB for the year ended November 30, 2008.
Overview
Following the formation of MultiCell Immunotherapeutics, Inc. during September 2005 and the recent in-licensing of drug candidates, we are pursuing research and development of therapeutics. Historically, we have specialized in developing primary liver cell immortalization technologies to produce cell-based assay systems for use in drug discovery. We seek to become an integrated biopharmaceutical company that will use its proprietary immune system modulation technologies to discover, develop and commercialize new therapeutics itself and with strategic partners.
Regardless of the outcome of our negotiations with potential partners or acquirers of our cell line business, we have operated and will continue to operate our business and seek to minimize expenses. Our largest expenses relate to personnel and meeting the legal and reporting requirements of being a public company. By utilizing consultants whenever possible, and asking employees to manage multiple responsibilities, operating costs are minimized. Additionally, several 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. 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.
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As funding permits, we intend to gradually add scientific and support personnel. We want to add specialists for our key research areas. These strategic additions will help us expand our product offerings leading us to additional revenues and profits. As revenues increase, additional administrative personnel will be necessary to meet the added workload. Other expenses, such as sales and customer service, will be added commensurate with increased revenues. Our current research and development efforts focus on development of future cell lines and therapeutic products and improvement of existing products. Due to the ongoing nature of this research, we are unable to ascertain with certainty the estimated completion dates and total costs associated with this research. As with any research efforts, there is uncertainty and risk associated with whether these efforts will produce results in a timely manner so as to enhance our market position. Company sponsored research and development costs related to future products and redesign of present products are expensed as incurred. For the six months ended May 31, 2009 and 2008, research and development costs were $95,347 and $201,877, respectively. Research and development costs include such costs as allocations of salaries, employee benefits, certain legal costs, and supplies.
Results of Operations
The following discussion is included to describe our consolidated financial position and results of operations. The consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Quarter Ended May 31, 2009 Compared to the Quarter Ended May 31, 2008
Revenue. Total revenue for the three months ended May 31, 2009 was $43,295, as compared to revenue of $44,482 for the same quarter in the prior fiscal year, a decrease of $1,187. All of the revenue for the quarter ended May 31, 2009 is from license revenue under agreements with Corning, Pfizer, and Eisai. For the quarter ended May 31, 2008, revenue consisted of license revenue totaling $43,632 under agreements with Corning, Pfizer and Eisai plus revenue of $850 from sales of cells and related media.
Operating Expenses. Total operating expenses for the three months ended May 31, 2009 were $261,094, compared to operating expenses for the three months ended May 31, 2008 of $344,992, representing a decrease of $83,898. This decrease was principally due to 1) a reduction of $74,000 in director fees resulting from the change in the compensation arrangement with directors, including the reversal of $18,250 of director fees accrued in the quarter ended February 28, 2009 that were eliminated as a result of the change; 2) a reduction in amortization of intangibles of $17,258 due to the write off of intangible assets at November 30, 2008; and 3) offset by an increase in legal fees of $13,618.
Other income (expense). Other income (expense) amounted to a net expense of $7,096 for the three months ended May 31, 2009 as compared to net expense of $2,874 for the corresponding quarter of the prior year. In 2009, other income (expense) was principally composed of interest expense on the 4.75% debentures, including amortization of discount. In 2008, the other income (expense) was the result of a gain on the disposition of equipment, less interest expense from the 4.75% and 7.75% debentures, including interest expense from the amortization of discounts related to the beneficial conversion feature and associated warrants.
Net Loss. Net loss for the three months ended May 31, 2009 was $224,895, as compared to a net loss of $303,384 for the same period in the prior fiscal year, representing a decrease in the net loss of $74,489. The primary reason for this decreased loss in the current year is due to the decrease in operating expenses as explained above.
Six Months Ended May 31, 2009 Compared to the Six Months Ended May 31, 2008
Revenue. Total revenue for the six months ended May 31, 2009 was $85,882, as compared to revenue of $101,528 for the same period in the prior fiscal year, a decrease of $15,646. All of the revenue for the six months ended May 31, 2009 is from license revenue under agreements with Corning, Pfizer, and Eisai. For the six months ended May 31, 2008, revenue consisted of license revenue totaling $83,229 under agreements with Corning, Pfizer and Eisai plus revenue of $18,299 from sales of cells and related media.
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Operating Expenses. Total operating expenses for the six months ended May 31, 2009 were $485,988, compared to operating expenses for the six months ended May 31, 2008 of $690,107, representing a decrease of $204,119. This decrease was principally due to 1) a reduction of $80,000 in director fees resulting from the change in the compensation arrangement with directors; 2) a reduction in amortization of intangibles of $34,516 due to the write off of intangible assets at November 30, 2008; 3) a reduction of $35,497 in the cost of outside services from accountants and consultants; 4) a reduction in share-based compensation of $23,180; and 5) a reduction in the expense for director and officer insurance of $23,335.
Other income (expense). Other income (expense) amounted to a net expense of $14,503 for the six months ended May 31, 2009 as compared to net income of $9,481 for the corresponding period of the prior year. In 2009, other income (expense) was principally composed of interest expense on the 4.75% debentures, including amortization of discount. In 2008, the other income (expense) was the result of a gain on the disposition of equipment, less interest expense from the 4.75% and 7.75% debentures, including interest expense from the amortization of discounts related to the beneficial conversion feature and associated warrants.
Net Loss. Net loss for the six months ended May 31, 2009 was $414,609, as compared to a net loss of $579,098 for the same period in the prior fiscal year, representing a decrease in the net loss of $164,489. The primary reason for this decreased loss in the current year is due to the decrease in operating expenses as explained above.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
issuance of debt or equity instruments. The following is a summary of our key
liquidity measures at May 31, 2009 and , 2008:
May 31, 2009 May 31, 2008
Cash and cash equivalents $ 103,151 $ 78,779
Current assets $ 108,916 $ 109,632
Current liabilities (1,843,373 ) (1,509,205 )
Working capital deficiency $ (1,734,457 ) $ (1,399,573 )
On February 28, 2007, we entered into a Securities Purchase Agreement with La Jolla Cove Investors, Inc. ("LJCI") on February 28, 2007 pursuant to which we agreed to sell, among other things, a convertible debenture in a principal amount of $100,000 with an annual interest rate of 4.75% and expiring on February 28, 2012 (the "Debenture"). In addition, we issued LJCI a warrant to purchase up to 10 million shares of our common stock (the "LJCI Warrant") at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007. Pursuant to the terms of the LJCI Warrant, upon the conversion of any portion of the principal amount of the Debenture, LJCI is required to simultaneously exercise and purchase that same percentage of the warrant shares equal to the percentage of the dollar amount of the Debenture being converted.
The Debenture is convertible at the option of LJCI at any time up to maturity at a conversion price equal to the lesser of the fixed conversion price of $1.00, or 80% of the average of the lowest three daily volume weighted average trading prices per share of our common stock during the twenty trading days immediately preceding the conversion date. The Debenture accrues interest at 4.75% per year payable in cash or our common stock. Through May 31, 2009, interest is being paid in cash on a monthly basis. If paid in stock, the stock will be valued at the rate equal to the conversion price of the Debentures in effect at the time of payment. Upon receipt of a conversion notice from the holder for the Debenture, the Company may elect to immediately redeem that portion of the Debenture that the holder elected to convert in such conversion notice, plus accrued and unpaid interest. After February 28, 2008, the Company, at its sole discretion, shall have the right, without limitation or penalty, to redeem the outstanding principal amount of the Debenture not yet converted by holder into common stock, plus accrued and unpaid interest thereon.
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During the past fiscal year (and into the current fiscal year), the Company has operated on working capital provided by LJCI in connection with its exercise of warrants issued to it by the Company. As of July 10, 2009 there are 9,323,500 shares remaining on the stock purchase warrant. Should LJCI continue to exercise all of its remaining warrants approximately $10.2 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 the outstanding shares of the Company at any given time. The Company expects that LJCI will continue to exercise the warrants and convert the debenture over the next year, but cannot assure that LJCI will do so. We are investigating the possible sale or license of certain assets that we did not already license to Corning in October 2007. We are presently pursuing discussions with companies operating in the stem cell research market and the general life science research market.
On July 14, 2006, the Company completed a private placement of Series B convertible preferred stock. A total of 17,000 Series B shares were sold to accredited investors at a price of $100 per share. The Series B shares are convertible at any time into common stock at a conversion price determined by dividing the purchase price per share of $100 by $0.32 per share (the "Conversion Price"). The Conversion Price is subject to equitable adjustment in the event of any stock splits, stock dividends, recapitalizations and the like. In addition, the Conversion Price is subject to weighted average anti-dilution adjustments in the event the Company sells common stock or other securities convertible into or exercisable for common stock at a per share price, exercise price or conversion price lower than the Conversion Price then in effect in any transaction (other than in connection with an acquisition of the securities, assets or business of another company, joint venture and employee stock options). The conversion of the Series B preferred stock is limited for each investor to 9.99% of the Company's common stock outstanding on the date of conversion. The Series B preferred stock does not have voting rights. Commencing on the date of issuance of the Series B preferred stock until the date a registration statement registering the common shares underlying the preferred stock and warrants issued was declared effective by the SEC, the Company paid on each outstanding share of Series B preferred stock a preferential cumulative dividend at an annual rate equal to the product of multiplying $100 per share by the higher of (a) the Wall Street Journal Prime Rate plus 1%, or (b) 9%. In no event will the dividend rate be greater than 12% per annum. In the event the Company does not pay the Series B preferred dividends when due, the conversion price of the Series B preferred shares will be reduced to 85% of the otherwise applicable conversion price.
The Series B preferred stock was formerly redeemable under certain circumstances, but those redemption provisions expired on July 14, 2008, two years after the closing date of the placement of the Series B Shares.
In the event of any dissolution or winding up of the Company, whether voluntary or involuntary, holders of each outstanding share of Series B preferred stock shall be entitled to be paid second in priority to the Series I preferred stockholders out of the assets of the Company available for distribution to stockholders, an amount equal to $100 per share of Series B preferred stock held plus any declared but unpaid dividends. After such payment has been made in full, such holders of Series B preferred stock shall be entitled to no further participation in the distribution of the assets of the Company.
The Company will have to raise additional capital in order to initiate Phase IIb clinical trials for MCT-125, the Company's therapeutic product for the treatment of fatigue in multiple sclerosis patients. Management is evaluating several sources of financing for its clinical trial program. Additionally, with our strategic shift in focus to therapeutic programs and technologies, we expect our future cash requirements to increase significantly as we advance our therapeutic programs into clinical trials. Until we are successful in raising additional funds, we may have to prioritize our therapeutic programs and delays may be necessary in some of our development programs.
Cash provided by (used in) operating, investing and financing activities for the six month periods ended May 31, 2009 and 2008 is as follows:
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May 31, 2009 May 31, 2008
Operating activities $ (464,587 ) $ (381,859 )
Investing activities 17,356 12,977
Financing activities 544,360 35,970
Net increase (decrease) in cash and cash equivalents $ 97,129 $ (332,912 )
Operating Activities
For the six months ended May 31, 2009, net cash used in operating activities approximated our net loss for the period. For the six months ended May 31, 2008, the most significant differences between our net loss and our net cash used in operating activities are due to non-cash charges totaling $107,533 included in our net loss for compensation, interest, depreciation, and amortization, plus decreases in working capital totaling $89,706.
Investing Activities
Net cash provided by investing activities in the six months ended May 31, 2009 and 2008 principally related to the collections of principal on a note receivable.
Financing Activities
During the six months ended May 31, 2009, LJCI converted $5,040 of the 4.75% Debenture into common stock and exercised warrants to purchase 504,000 shares of common stock at a price of $1.09 per share, resulting in total proceeds of $549,360. During the six months ended May 31, 2008, LJCI converted $330 of the 4.75% Debenture into common stock and exercised warrants to purchase 33,000 shares of common stock at a price of $1.09 per share, resulting in total proceeds of $35,970.
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