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VITRO DIAGNOSTICS INC - 10-K -

Edgar Online, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



Introduction


The following discussion and analysis summarizes the financial condition of the Company at fiscal year- end October 31, 2012, and compares that to its financial condition at October 31, 2011. It also analyzes our results of operation for the year ended October 31, 2012 and compares those results to the year ended October 31, 2011. This discussion and analysis should be read in conjunction with our financial statements and notes appearing elsewhere in this report. The discussion should also be read with the cautionary statements and risk factors appearing at the end of this section.

Overview

During 2012, the Company built on progress made during 2011 by gaining increased revenue from our stem cell-based products while also achieving advances in product development and expansion viewed by management as necessary for the Company to further expand revenue growth to attain profitable operations and to sustain earnings growth in the future. There were also additional advances in the commercialization of FSH for use in the treatment of infertility facilitated through interactions between the Company and it patent licensee who licensed two patents related to FSH production for use in the treatment of infertility during 2011. Since the Company has royalty income provisions within this patent license agreement, such developments also enhance potential revenue generation opportunities especially since royalty income translates primarily to the bottom line with minimal associated expenses.

Our 2012 operations were highlighted by increased revenue generation from our stem cell products through increased distribution achieved by both direct sales and establishment of strategic distribution agreements. Our lead MSC-Gro™ cell culture media product showed increases in sales revenue during 2012. In addition, we added several new cell lines and media products during 2012, especially focused on differentiated cells derived from adult stem cells known as mesenchymal stem cells (MSCs). These include, for example, human MSC-derived chondrocytes that synthesize collagen and are important to function of joints and connective tissues. These products allow the Company to approach additional markets in drug discovery and development and in therapeutic applications as well. In addition, several different cell types may be differentiated from MSCs and each of these cell types represents a different potential product line for the Company.

The Company also advanced its technology related to labeling of stem cells including new and expanded methods for fluorescent labeling and for the introduction of fluorescent & magnetic nanoparticles into stem cells.

Management believes that the combination of nanotechnology and stem cells represents an important new avenue for the enhancement of regenerative capacity of stem cells through in-vivo imaging and monitoring. We now offer both our MSC products and terminally differentiated cells in native and multiple labeled formats including four different fluorescent labels and supra-paramagnetic iron oxide as well, the latter label is detectable by magnetic resonance imaging (MRI) a common clinical imaging method. The Company anticipates additional sales of its cell lines based on these advances in labeling technology.

For Clients with Prostate Cancer



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We also filed a new patent application with the United States Patent Office in 2012 for our novel technology for mesenchymal stem cell generation from the umbilical cord. We plan to launch additional new products during 2013 based on these technologies targeting therapeutic applications, also expanding opportunities for revenue generation by the Company. Additional details regarding our 2012 business development achievements are presented elsewhere in this report (See: Part I: Item 1: Business)

Liquidity and Capital Resources

At fiscal year-end October 31, 2012, the Company had a working capital deficit of $ 1,803,262, consisting of current assets of $36,652 and current liabilities of $1,839,914. The working capital deficit increased by $174,417 from fiscal year end October 31, 2011. Current assets increased by $12,862, from year-end 2011 to 2012 while total assets decreased $1,193 during that time, the former from inventory increase while this increase was offset by equipment depreciation in our total assets. Increase inventory reflects increased demand for our products. Current liabilities increased $187,279 at October 31, 2012 compared to October 31, 2011due to operating expenses in excess of revenues. The majority of the working capital deficit and the shareholder deficit of $1,754,733 is due to accrued salaries and notes/advances due to the president and CEO, which totaled $1,734,266 at October 31, 2012.

The Company remains dependent on receipt of additional cash to continue its business plan and achieve profitability in the future. The report of the independent accountant that audited the Company's financial statements for the year ended October 31, 2012 includes a qualification that the Company may not continue as a going concern. In that event, the Company might be liquidated and its assets sold to satisfy any claims of creditors. See Note A to the financial statements attached to this report for a more complete description of this contingency.

During the fiscal year ended October 31, 2012, the Company's financing activities provided $138,923 to support operations. During that time, the Company's operations used $130,629 of cash compared to $115,850 of cash used during the twelve months ended October 31, 2011. The use of cash during 2012 reflects an operating cash requirement of about $10,886 per month for operations while the cash raised was primarily from product revenues, and cash advances provided by its president. While most R&D necessary for manufacture of the current line of products has been performed previously, the Company focused its efforts on marketing and expansion of its product lines resulting in increased cash expenditures of $14,779 for fiscal year 2012. Operating expenses are anticipated to be similar in 2013 from the operating plans described elsewhere in this report.

The Company had lines of credit totaling $37,091 with $2,109 in available credit at October 31, 2012. The Company must continue to service debt and the Chairman personally guarantees most of the Company debt.

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Sales of products increased from $6,103 in 2009 to $15,651 in 2010, to $22,999 in 2011, and were $28,079 in 2012 that was a 22% increase over 2011. Management anticipates increases in product revenue during fiscal year 2013 due to product line expansion and marketing efforts as described in greater detail elsewhere in this report (See Part I, Item 1, Marketing and Distribution). We now have distribution agreements with other companies who provide considerable assistance in sales of



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our products; during 2012 11% of our total sales were through distributors and 89% were direct. We anticipate expanded business relations with our distributors in 2013 and an increased proportion of our total sales through our distributors. We may also engage in additional alliances with other third parties who provide expanded distribution of the Company's products. The Company focuses its limited resources on product development, manufacture and expansion of its product lines and has only limited available resources for direct sales efforts. Thus the distributors of the Company's products are an important component of our current sales program. In addition, we continuously work closely with the licensee of our FSH patents to develop business opportunities. We anticipate commercialization of these products during 2013 and additional revenues to the Company from royalty income. Management has also conserved working capital by reducing administrative expenses and expenditures related to its operational activities as described above. The Company remains committed to a growth strategy based on suitable business combinations with private entities and is engaged in discussions with potential merger/acquisition candidates. The present capital structure of the Company is conducive to acquisition of synergistic private entities operating in comparable business sector to the Company. Management believes that because of the focus of the Company on adult stem cell products and technology together with the strong growth of this industry due numerous demonstrations of clinical efficacy for a variety of indications, both in animals and humans, that there are significant business combination opportunities available to the Company. A goal of our business development program is to identify and pursue suitable business partners as exemplified by our strategic alliance partnerships including HemoGenix®, Inc., Neuromics, Inc, Stemgenesis, Inc and our patent license with Dr. James Posillico. The Company is also pursuing other approaches to increase its capital resources such as investment, further out-licensing of its intellectual property, sale of assets or other transactions that may be appropriate.



Results of Operations


During the year ended October 31, 2012, the Company realized a net loss of $227,657, or ($.01) per share, with $28,0879 in revenue from products. The operating loss in 2012 was $213,635 more than the operating loss of $14,022 in 2011. The increase in the net loss during 2012 as compared to 2011 was primarily due to the lack of other income items during the year ended October 31, 2011 including income from a patent license, the forgiveness of certain debt associated with the patent licensing, and the expiration of certain stock purchase warrants. Research and development expenses decreased by $11,858 and selling, general and administrative expenses decreased by $10,073 in 2012. Product revenue increased 22% during 2012 as the Company continued commercialization of its new stem cell-based products. The Company has initiated a multi-faceted product marketing plan including internet marketing, use of social media, direct sales, use of distributors and attendance at trade shows.

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The Company believes it has significant prospective sales opportunities that management is pursuing to the full extent possible. These efforts have been supported by addition of new products to expand the Company's offerings to the research community. Additional detail regarding specific operational achievements during 2012 is presented elsewhere in this report (Part I. Item 1: Business).

Total operating expenses were $21,931 less in 2012 than in 2011, as the expense reduction activities enacted in 2011 became effective. Also, management has increased certain expenses, e.g., by addition of necessary employees and increased marketing expenses, that partly offset some of the expense reductions previously described. Additional operational goals of 2013 may entail



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necessary expense increases. However, management intends to tightly control expenses while at the same time ensuring achievement of profitability through revenue growth.

Research and development expenses (R&D) decreased by $11,858 during fiscal year 2012 compared to fiscal year 2011. While the R& D necessary for launch of its initial products was completed in 2009, the Company continued development of several new products during 2012 including cell culture media formulations and cell lines including both MSC lines and differentiated cells derived from MSCs.

During 2012 our product development activities were focused on the development of novel and effective MSC differentiation methods that yielded our initial MSC-derived human chondrocytes that are terminally differentiated cells producing collagen. Terminally differentiated cells have application to new drug development discovery and toxicology studies. Thus, these new products open additional markets to the Company and include numerous other cell types.

We are currently developing MSC-derived endothelial cells and plan launch of these products in our first quarter of 2013. The addition of differentiated cells to our product offerings is complemented by our enhanced cell labeling technology including use of nanotechnology to label MSCs with both fluorescent and magnetic nanoparticles. We are thus able to offer stem cells and differentiated cells derived from stem cells as native unlabeled cells together with 4 different types of fluorescent label and magnetic labeling as well.

These different cell lines offer our customers numerous options to support various research applications. Also, such cells have diagnostic applications including in-vivo imaging by MRI.

In addition to our products intended for research and clinical development, the Company is also developing products with therapeutic applications including both cell culture media and stem cell lines. We have media formulations for use in the expansion of MSCs for clinical applications and we also developed novel technology for the generation of MSCs from umbilical cord during 2012. This intellectual property is the subject of a new USPTO patent application.

During the year ended October 31, 2011, the Company realized a net loss of $14,022, or ($.00) per share, on $22,999 of revenue.

Operating expenses decreased $53,659 from fiscal 2010 to fiscal 2011, due to decreased S, G & A and R&D expenses. Selling, general and administrative expenses decreased by $14,189 in 2011, while research and development expenses decreased by $39,470 in 2011.






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RISK FACTORS

This 10-K report, including Management's Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors including those discussed below.

The Company is wholly dependent on the efforts and expertise of its sole employee to further its business plan, and the loss of his service for any reason would have a material adverse effect on the Company and its business and may require a suspension of operations.

Achievement of the objectives described in this report depends critically upon Dr. James Musick, who has contributed substantially to the development of the products and technology presently owned by the Company. At present, the Company has an employment contract with Dr. Musick. However, the Company does not maintain "key man" life insurance on his life. Loss of his services would adversely impact the efforts to commercialize of the Company's products.

We are required to formally assess our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such assessment could result in a loss of investor confidence in our financial reports and have a material adverse effect on the price of our common stock.?

The Sarbanes-Oxley Act of 2002 (SOX), which became law in July 2002, has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of SOX, the SEC and major stock exchanges have promulgated new rules and listing standards covering a variety of subjects. Compliance with these new rules and listing standards that are likely to increase our general and administrative costs, and we expect these to continue to increase in the future. In particular, we are required to include the management report on internal control as part of this and future annual reports pursuant to Section 404 of SOX. We have evaluated our internal control systems in order (i) to allow management to report on those controls, as required by these laws, rules and regulations, (ii) to provide reasonable assurance that our public disclosure will be accurate, complete, and timely, and (iii) to comply with the other provisions of Section 404 of SOX. Future compliance with SOX 404 may require additional expenditures of human resources and capital, and could adversely impact our operations. Furthermore, there is no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements relating to internal controls and all other provisions of Section 404 in a timely fashion or achieve adequate compliance with these requirements or other requirements of SOX, we might become subject to sanctions or investigation by regulatory authorities such as the SEC or FINRA. Any such action may materially adversely affect our reputation, financial condition and the value of our securities, including our common stock. We expect that SOX and these other laws, rules and regulations will increase legal and financial compliance costs and will make our corporate governance activities more difficult, time-consuming and costly. We also expect that these requirements will make it more difficult and expensive for us to obtain director and officer liability insurance.




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Current economic conditions in the global economy generally, including ongoing disruptions in the debt and equity capital markets, may adversely affect our business and results of operations, and our ability to obtain financing.

The global economy is currently undergoing numerous challenges, and the future economic environment may continue to be less favorable than that of past years. We are unable to predict the likely duration and severity of the current disruptions in debt and equity capital markets and adverse economic conditions in the United States and other countries, which may continue to have an adverse effect on our business and results of operations, in part because we are dependent upon customer behavior and the impact on consumer spending that the continued market disruption may have.

The global stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings materially less attractive, and in certain cases have resulted in the unavailability of certain types of financing. This volatility and illiquidity has negatively affected a broad range of mortgage and asset-backed and other fixed income securities. As a result, the market for fixed income securities has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased defaults. Global equity markets have also been experiencing heightened volatility and turmoil, with issuers exposed to the credit markets particularly affected. These factors and the continuing market disruption have an adverse effect on us, in part because we, like many companies, from time to time may need to raise capital in debt and equity capital markets including in the asset-backed securities markets.

In addition, continued uncertainty in the stock and credit markets may negatively affect our ability to access additional short-term and long-term financing, including future securitization transactions, on reasonable terms or at all, which would negatively impact our liquidity and financial condition. In addition, if one or more of the financial institutions that support our future credit facilities fails, we may not be able to find a replacement, which would negatively impact our ability to borrow under the credit facilities. These disruptions in the financial markets also may adversely affect our credit rating and the market value of our Common Stock. If the current pressures on credit continue or worsen, we may not be able to refinance, if necessary, our outstanding debt when due, which could have a material adverse effect on our business. While we believe we will have adequate sources of liquidity to meet our anticipated requirements for working capital, contractual commitments and capital expenditures for approximately the following 6 to 12 months based on curtailed operating plans, (of which there can be no assurance), or if our operating results worsen significantly, or our cash flow or capital resources prove inadequate, we could face liquidity problems that could materially and adversely affect our results of operations and financial condition.

We cannot predict our future capital needs and we may not be able to secure additional financing.

Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no



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assurance that we can raise additional financing on a timely basis or on favorable terms. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

Significant increases in interest rates could adversely affect our operations and our ability to raise additional capital.

While we have not depended upon outside financing, we have significantly depended upon advances from our president to fund operations. These advances accrue interest at an annual rate of 10%. Significant increases in interest rates could affect the Company's ability to secure future advances as well as have adverse effects upon interest expenses of possible future advances.

Future financings may result in dilution to our shareholders and restrictions on its business operations.

If we raise additional funds by issuing equity or convertible debt securities, further dilution to our shareholders could occur. Additionally, we may grant registration rights to investors purchasing equity or debt securities. Debt financing, if available, may involve pledging some or all of our assets and may contain restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain necessary additional capital, we may be unable to execute our business strategy, which would have a material adverse effect on our business, financial condition and results of operations.

We have incurred losses since inception and may never achieve profitability.

We are subject to many of the risks common to developing enterprises, including undercapitalization, cash shortages, limitations with respect to financial and other resources, and insufficient revenue to be self-sustaining. There is no assurance that we will ever attain profitability.

We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.

We expect that the expansion of our business will place a significant strain on our limited managerial, operational, and financial resources. We will be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in the pharmaceutical industry. Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We will need substantial additional capital in order to attract and retain critical management. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all. We currently are required to limit the engagement of critical management to part-time due to limited resources and there is no



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assurance that we will be successful in raising the necessary additional financial resources to employ them, and other key employees, on a full time basis. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees. If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results could be materially adversely affected.

If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval in the United States or elsewhere, we will be unable to commercialize these products.

To receive regulatory approval for the commercial sale of our product candidates that we may develop or out-license, we must conduct, at our own expense, adequate and well controlled clinical trials to demonstrate efficacy and safety in humans. Clinical testing is expensive, takes many years and has an uncertain outcome. Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing. Our failure to adequately demonstrate the efficacy and safety of any product candidate that we may develop or out-license would prevent receipt of regulatory approval of that product candidate.

Our assumptions concerning the regulatory approval pathway for our diagnostic products may prove to be incorrect.

Our business plan makes certain assumptions concerning the regulatory approval pathway for our planned diagnostic and therapeutic products. While such assumptions are based on the guidance of regulatory consultants, there is no assurance the FDA will agree with our conclusions, which could result in a longer, more costly process than we are currently anticipating.

Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates or may not be eligible to participate in or may be required to withdraw from a clinical trial as a result of changing standards of care. The commencement and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:



·

reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·

obtaining regulatory approval to commence a clinical trial;



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·

obtaining institutional review board approval to conduct a clinical trial at a prospective site;

·

recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and

·

retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.

In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities, due to a number of factors, including:

·

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

·

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

·

unforeseen safety issues or any determination that a trial presents unacceptable health risks; or

·

lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if U.S. regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product's indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of these restrictions or requirements could adversely affect our potential product revenues. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers' facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring



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withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as current Good Manufacturing Practices, or "CGMPs", a regulatory agency may:

·

issue warning letters or untitled letters;

·

require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

·

impose other civil or criminal penalties;

·

suspend regulatory approval;

·

suspend any ongoing clinical trials;

·

refuse to approve pending applications or supplements to approved applications filed by us;

·

impose restrictions on operations, including costly new manufacturing requirements; or

·

seize or detain products or require a product recall.

Our commercialization efforts will be greatly dependent upon our ability to demonstrate product efficacy in clinical trials. Pharmacies and other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our products, without compelling supporting data. While we believe that our products will be effective for our planned indications, there is no assurance that this will be proven in clinical trials. The failure to demonstrate efficacy in our clinical trials, or a delay or failure to complete our clinical trials, would have a material adverse effect on our business, prospects, financial condition and operating results.

Our failure to convince medical practitioners to use our technologies will limit our revenue and profitability.

If we, or our commercialization partners, fail to convince medical practitioners to prescribe products using our technologies, we will not be able to sell our products or license our technologies in sufficient volume for our business to become profitable. We will need to make leading physicians aware of the benefits of products using our technologies through published papers, presentations at scientific conferences and favorable results from our clinical studies. Our failure to be successful in these efforts would make it difficult for us to convince medical practitioners to prescribe products using our technologies for their patients. Failure to convince medical practitioners to prescribe our products will damage our commercialization efforts and would have a material adverse effect on our business, prospects, financial condition and operating results.

If we are unsuccessful in establishing strategic licensing arrangement with strategic industry partners, our efforts to develop our products will be more costly and involve significant delays.

Our product development plan relies upon our ability to join with strategic industry partners in licensing arrangements. This approach would allow us to utilize the resources and scientific talent of our strategic licensing partners.

However, if we are not successful in establishing these relationships, we will be required to bear the cost of commercializing our technology, both financial and human resources, alone. As a result, we would expect that our future capital requirements would be significantly increased than presently projected, and the time to market materially delayed.



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We may not be able to market or generate sales of our products to the extent anticipated.

Assuming that we are successful in receiving regulatory clearances to market any of our products, our ability to successfully penetrate the market and generate sales of those products may be limited by a number of factors, including the following:



·

Certain of our competitors in the field have already received regulatory approvals for and have begun marketing similar products, which may result in greater physician awareness of their products as compared to ours.

·

Information from our competitors or the academic community indicating that current products or new products are more effective than our products could, if and when it is generated, impede our market penetration or decrease our existing market share.



·

Physicians may be reluctant to switch from existing treatment methods, including traditional therapy agents, to our products.

·

The price for our products, as well as pricing decisions by our competitors, may have an effect on our revenues.

·

Our revenues may diminish if third-party payors, including private health coverage insurers and health maintenance organizations, do not provide adequate coverage or reimbursement for our products.

If any of our future marketed products were to experience problems related to their efficacy, safety, or otherwise, or if new, more effective treatments were to be introduced, our revenues from such marketed products could decrease.

If any of our current or future marketed products become the subject of problems, including those related to, among others:

·

efficacy or safety concerns with the products, even if not justified;


·

unexpected side-effects;


·

regulatory proceedings subjecting the products to potential recall;

·

publicity affecting doctor prescription or patient use of the product;

·

pressure from competitive products; or

·

introduction of more effective treatments.

Our revenues from such marketed products could decrease. For example, efficacy or safety concerns may arise, whether or not justified, that could lead to the recall or withdrawal of such marketed products. In the event of a recall or withdrawal of a product, our revenues would significantly decline.



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If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our products, then our products and technologies may be rendered less competitive.

We will face significant competition from industry participants that are pursuing similar products and technologies that we are pursuing and are developing pharmaceutical products that are competitive with our planned products and potential products. Nearly all of our industry competitors have greater capital resources, larger overall research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Rapid technological development, as well as new scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy like we are developing may limit the product's market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.

If the manufacturers upon whom we rely fail to produce our product candidates in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.

We do not yet have agreements established regarding commercial supply of any product candidates. There is no assurance that we will be successful in negotiating an agreement on commercially reasonable terms. There is no assurance that our commercialization partner will approve of our manufacturer. Any problems or delays we experience in preparing for commercial-scale manufacturing of any product candidate may impair our ability to manufacture commercial quantities, which would adversely affect our business. For example, our manufacturers will need to produce specific batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed. If our manufacturers were to encounter any of these difficulties, our ability to provide product to commercialization partners or product candidates to patients in our clinical trials would be jeopardized. In addition, all manufacturers of



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our product candidates must comply with CGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these CGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers' compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers' failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.

The use of any of our potential products in clinical trials and the sale of any approved products exposes us to liability claims.

The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Although we intend to obtain product liability insurance that we believe is adequate, we are subject to the risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.

If other companies claim that we infringe on their intellectual property rights, we may be subject to costly and time-consuming litigation and delays in product introduction.

Our processes and potential products may conflict with patents that have been or may be granted to competitors, academic institutions or others. As the biotechnology and pharmaceutical industries expand and more patents are filed and issued, the risk increases that our product candidates may give rise to a declaration of interference by the U.S. Patent and Trademark Office, to administrative proceedings in foreign patent offices or to claims of patent infringement by other companies, institutions or individuals. These entities or persons could bring legal proceedings against us seeking substantial damages or seeking to enjoin us from testing, manufacturing or marketing our products. If any of these actions were successful, we may also be required to cease the infringing activity or obtain the requisite licenses or rights to use the technology that may not be available to us on acceptable terms, if at all. Any litigation, regardless of the outcome, could be extremely costly to us.

Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection.

Our commercial success will depend in part on maintaining patent protection and trade secret protection for our products, as well as successfully defending these patents against third-party



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challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.

The patent positions of pharmaceutical and biotechnology 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 pharmaceutical or biotechnology 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 and 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.

The degree of future protection for 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. For example:

·

our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

·

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 product candidates or technologies;

·

it is possible that none of the pending patent applications licensed to us will result in issued patents;



·

the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties;

·

we may not develop additional proprietary technologies that are patentable; or

·

patents of others may have an adverse effect on our business.

In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible we may not have the financial resources to pursue infringement actions on a timely basis if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.




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In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our drug candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.

We may also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

If our licensors or we fail to obtain or maintain patent protection or trade secret protection for our products, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.

Our ability to develop, manufacture, market and sell our products depends upon our ability to avoid infringing the proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

·

infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management's attention from our core business;

·

substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor's patent;

·

a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do;

·

if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and

re-designing our processes so they do not infringe, which may not be possible or could require substantial funds and time.






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The public trading market for our Common Stock is subject to the "penny stock" rules.

Our Common Stock is currently quoted on the OTC Electronic Bulletin Board, a FINRA sponsored and operated quotation system for equity securities. This is a more limited trading market than the Nasdaq Captial Market, and timely, accurate quotations of the price of our Common Stock may not always be available. You may expect trading volume to be low in such a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.

Our Common Stock is subject to the requirements of Rule 15g.9, promulgated under the Securities Exchange Act as long as the price of our Common Stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on Nasdaq that has a market price of less than $5.00 per share. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the Subscriber and receive the Subscriber's written agreement to the transaction. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.

Over-the-counter stocks are subject to risks of high volatility and price fluctuation.

The OTC market for securities has experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in our Company's industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our Common Stock and make it more difficult for investors in this offering to sell their shares.

Investors may also find it difficult to obtain accurate information and quotations as to the price of our Common Stock.

Our stock price is volatile and as a result, investors could lose all or part of their investment. The value of an investment could decline due to the impact of any of the following factors upon the market price of our Common Stock:

·

failure to meet sales and marketing goals or operating budget

·

failure to achieve development goals

·

failure to obtain regulatory approvals



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·

concerns regarding insufficient financial resources

·

inability to create an active trading market for our Common Stock

·

decline in demand for our Common Stock

·

operating results failing to meet the expectations of securities analysts or investors in any quarter

·

downward revisions in securities analysts' estimates or changes in general market conditions

·

investor perception of our Company's industry or prospects

·

general economic trends

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile.

These fluctuations are often unrelated to operating performance and may adversely affect the market price of our Common Stock. As a result, investors may be unable to resell their shares at or above the Offering price.

We do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our stock.

We have never paid any cash dividends on any shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time. If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.

If the Company were to dissolve or wind-up, holders of our Common Stock may not receive a liquidation distribution.

If we were to wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we would owe to our creditors. If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock, should a public market develop in the future.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide financial reports or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.



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ITEM 7A.

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