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.
14
--------------------------------------------------------------------------------
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.
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
15
--------------------------------------------------------------------------------
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.
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
16
--------------------------------------------------------------------------------
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.
17
--------------------------------------------------------------------------------
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.
18
--------------------------------------------------------------------------------
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
19
--------------------------------------------------------------------------------
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
20
--------------------------------------------------------------------------------
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;
21
--------------------------------------------------------------------------------
·
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
22
--------------------------------------------------------------------------------
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.
23
--------------------------------------------------------------------------------
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.
24
--------------------------------------------------------------------------------
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
25
--------------------------------------------------------------------------------
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
26
--------------------------------------------------------------------------------
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.
27
--------------------------------------------------------------------------------
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.
28
--------------------------------------------------------------------------------
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
29
--------------------------------------------------------------------------------
·
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.
30
--------------------------------------------------------------------------------
ITEM 7A.
