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EX-31.1 - MultiCell Technologies, Inc.v198730_ex31-1.htm
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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
 
For the quarterly period ended August 31, 2010.
 
¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
Commission File Number
001-10221
 

 
MultiCell Technologies, Inc.
(Exact name of registrant as specified in its charter)



DELAWARE
52-1412493
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
68 Cumberland Street, Suite 301
Woonsocket, RI 02895
(Address of principal executive offices)

401-762-0045
(Registrant’s telephone number, including area code)


 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x     No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer    ¨ Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)     Yes  ¨     No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  As of October 8, 2010, the issuer had 434,728,911 shares of Common Stock, $.01 par value, outstanding.
   
 
 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
   
Condensed Consolidated Balance Sheets (unaudited) as of August 31, 2010 and November 30, 2009
3
   
Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended August 31, 2010 and 2009
4
   
Condensed Consolidated Statements of Equity (Deficiency) (unaudited) for the Nine Months Ended August 31, 2009 and 2010
5
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended August 31, 2010 and 2009
6
   
Notes to Condensed Consolidated Financial Statements (unaudited)
7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
   
Item 3. Quantitative And Qualitative Disclosures About Market Risk
21
   
Item 4. Controls and Procedures
22
   
PART II OTHER INFORMATION
 
   
Item 1. Legal Proceedings
23
   
Item 1A. Risk Factors
23
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
38
   
Item 3. Defaults Upon Senior Securities
38
   
Item 4. Removed and Reserved
38
   
Item 5. Other Information
38
   
Item 6. Exhibits
38
   
SIGNATURES
39
 
 

 

PART I FINANCIAL INFORMATION
Item 1: Financial Statements

MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
August 31,
   
November 30,
 
    
2010
   
2009
 
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 405,452     $ 396,554  
Other current assets
    8,451       6,442  
Total current assets
    413,903       402,996  
                 
Property and equipment, net of accumulated depreciation of $64,905 and $60,753 at August 31, 2010 and November 30, 2009, respectively
    1,562       5,714  
                 
Other assets
    1,685       1,685  
                 
Total assets
  $ 417,150     $ 410,395  
                 
LIABILITIES AND EQUITY (DEFICIENCY)
               
                 
Current liabilities
               
Notes payable - related parties
  $ -     $ 30,000  
Accounts payable and accrued expenses
    1,359,304       1,297,486  
Current portion of deferred revenue
    49,318       98,862  
Total current liabilities
    1,408,622       1,426,348  
                 
Non-current liabilities
               
Convertible debentures, net of discount
    47,306       40,320  
Deferred income, net of current portion
    609,706       646,694  
Derivative liability related to Series B convertible preferred stock
    86,169       -  
Total non-current liabilities
    743,181       687,014  
                 
Total liabilities
    2,151,803       2,113,362  
                 
Commitments and contingencies
    -       -  
                 
Equity (Deficiency)
               
MultiCell Technologies, Inc. equity (deficiency)
               
Undesignated preferred stock, $0.01 par value; 963,000 shares authorized
    -       -  
Series B convertible preferred stock, 17,000 shares designated; 11,339 and 16,262 shares issued and outstanding at August 31, 2010 and November 30, 2009, respectively; liquidation value of $1,377,735 and $1,870,035 at August 31, 2010 and November 30, 2009, respectively
    1,349,844       1,830,035  
Series I convertible preferred stock, 20,000 shares designated; 5,734 shares issued and outstanding; liquidation value of $573,400
    573,400       573,400  
Common stock, $0.01 par value; 775,000,000 shares authorized; 427,296,479 and 299,892,504 shares issued and outstanding at August 31, 2010 and November 30, 2009, respectively
    4,272,965       2,998,925  
Additional paid-in capital
    31,450,700       32,514,975  
Accumulated deficit
    (38,610,937 )     (38,917,068 )
Total MultiCell Technologies, Inc. stockholders' equity (deficiency)
    (964,028 )     (999,733 )
Noncontrolling interests
    (770,625 )     (703,234 )
Total equity (deficiency)
    (1,734,653 )     (1,702,967 )
                 
Total liabilities and equity (deficiency)
  $ 417,150     $ 410,395  

See accompanying notes to condensed consolidated financial statements.

 
3

 

MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
    
August 31,
   
August 31,
 
    
2010
   
2009
   
2010
   
2009
 
                         
Revenue
  $ 12,330     $ 44,179     $ 86,533     $ 130,061  
                                 
Operating expenses
                               
Selling, general and administrative
    207,116       198,382       613,201       584,145  
Research and development
    81,962       56,544       215,392       151,891  
Depreciation and amortization
    474       2,312       4,152       7,190  
                                 
Total operating expenses
    289,552       257,238       832,745       743,226  
                                 
Loss from operations
    (277,222 )     (213,059 )     (746,212 )     (613,165 )
                                 
Other income (expense)
                               
Interest expense
    (6,296 )     (7,329 )     (18,472 )     (22,471 )
Change in fair value of derivative liability
    95,204       -       91,298       -  
Interest income
    -       -       -       639  
                                 
Total other income (expense)
    88,908       (7,329 )     72,826       (21,832 )
                                 
Net loss
    (188,314 )     (220,388 )     (673,386 )     (634,997 )
                                 
Less net loss attributable to the noncontrolling interests
    (27,639 )     (20,800 )     (67,391 )     (66,961 )
                                 
Net loss attributable to MultiCell Technologies, Inc.
    (160,675 )     (199,588 )     (605,995 )     (568,036 )
                                 
Preferred stock dividends
    (31,741 )     (37,403 )     (105,733 )     (111,395 )
                                 
Net loss attributable to common stockholders
  $ (192,416 )   $ (236,991 )   $ (711,728 )   $ (679,431 )
                                 
Basic and Diluted Loss Per Common Share Attributable to Common Stockholders
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                 
Basic and Diluted Weighted-Average Common Shares Outstanding
    399,253,590       201,604,921       357,304,464       154,623,450  

See accompanying notes to condensed consolidated financial statements.

 
4

 

MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
For the Nine Months Ended August 31, 2009 and 2010
(Unaudited)

                                        
Additional
               
Total
 
    
Preferred Stock - Series B
   
Preferred Stock - Series I
   
Common stock
   
Paid in
   
Accumulated
   
Noncontrolling
   
Equity
 
    
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Par Value
   
Capital
   
Deficit
   
Interests
   
(Deficiency)
 
                                                              
Balance at November 30, 2008
    16,262     $ 1,830,035       5,734     $ 573,400       83,146,214     $ 831,462     $ 32,894,705     $ (38,012,502 )   $ (615,537 )   $ (2,498,437 )
                                                                                 
Issuance of common stock for conversion of 4.75% debentures
    -       -       -       -       176,407,747       1,764,078       (1,754,068 )     -       -       10,010  
                                                                                 
Issuance of common stock for exercise of warrants
    -       -       -       -       1,001,000       10,010       1,081,080       -       -       1,091,090  
                                                                                 
Stock-based compensation
    -       -       -       -       -       -       10,040       -       -       10,040  
                                                                                 
Dividends on Series B preferred stock
    -       -       -       -       -       -       -       (111,395 )     -       (111,395 )
                                                                                 
Net loss
    -       -       -       -       -       -       -       (568,036 )     (66,961 )     (634,997 )
                                                                                 
Balance at August 31, 2009
    16,262     $ 1,830,035       5,734     $ 573,400       260,554,961     $ 2,605,550     $ 32,231,757     $ (38,691,933 )   $ (682,498 )   $ (2,133,689 )
                                                                                 
Balance at November 30, 2009, prior to change in accounting principle
    16,262     $ 1,830,035       5,734     $ 573,400       299,892,504     $ 2,998,925     $ 32,514,975     $ (38,917,068 )   $ (703,234 )   $ (1,702,967 )
                                                                                 
Cumulative effect of a change in accounting principle for beneficial conversion feature of Series B preferred stock
    -       -       -       -       -       -       (1,244,076 )     1,017,859       -       (226,217 )
                                                                                 
Balance at November 30, 2009, as restated
    16,262       1,830,035       5,734       573,400       299,892,504       2,998,925       31,270,899       (37,899,209 )     (703,234 )     (1,929,184 )
                                                                                 
Issuance of common stock for conversion of 4.75% debentures
    -       -       -       -       118,260,762       1,182,608       (1,174,595 )     -       -       8,013  
                                                                                 
Issuance of common stock for exercise of warrants
    -       -       -       -       801,330       8,013       865,437       -       -       873,450  
                                                                                 
Conversion of Series B preferred stock into common stock
    (4,923 )     (480,191 )     -       -       7,991,883       79,919       449,022       -       -       48,750  
                                                                                 
Issuance of common stock for compensation to employees
    -       -       -       -       350,000       3,500       490       -       -       3,990  
                                                                                 
Stock-based compensation
    -       -       -       -       -       -       39,447       -       -       39,447  
                                                                                 
Dividends on Series B preferred stock
    -       -       -       -       -       -       -       (105,733 )     -       (105,733 )
                                                                                 
Net loss
    -       -       -       -       -       -       -       (605,995 )     (67,391 )     (673,386 )
                                                                                 
Balance at August 31, 2010
    11,339     $ 1,349,844       5,734     $ 573,400       427,296,479     $ 4,272,965     $ 31,450,700     $ (38,610,937 )   $ (770,625 )   $ (1,734,653 )

See accompanying notes to condensed consolidated financial statements.

 
5

 

MULTICELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Nine Months Ended
 
    
August 31,
 
    
2010
   
2009
 
Cash flows from operating activities
           
Net loss
  $ (673,386 )   $ (634,997 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation and amortization
    4,152       7,190  
Stock-based compensation for services
    43,437       10,040  
Interest expense from amortization of discount on convertible debentures
    15,000       15,000  
Change in fair value of derivative liability
    (91,298 )     -  
Changes in assets and liabilities
               
Other current assets
    (2,009 )     10,720  
Accounts payable and accrued liabilities
    (43,916 )     (192,591 )
Deferred income
    (86,532 )     (2,661 )
Net cash used in operating activities
    (834,552 )     (787,299 )
                 
Cash flows from investing activities
               
Collection of principal on note receivable
    -       17,356  
Net cash provided by investing activities
    -       17,356  
                 
Cash flows from financing activities
               
Proceeds from the exercise of stock warrants
    873,450       1,091,090  
Advance from debenture holder
    -       79,350  
Payment of principal on notes payable - related parties
    (30,000 )     (15,000 )
Net cash provided by financing activities
    843,450       1,155,440  
Net increase in cash and cash equivalents
    8,898       385,497  
Cash and cash equivalents at beginning of period
    396,554       6,022  
Cash and cash equivalents at end of period
  $ 405,452     $ 391,519  
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest
  $ 8,709     $ 3,921  
Noncash Investing and Financing Activities:
               
Issuance of common stock for conversion of 4.75% debentures
    8,013       10,010  
Conversion of Series B preferred stock into common stock and elimination of related derivative liability
    480,191       -  
Accrual of dividends on Series B preferred stock
    105,733       111,395  

See accompanying notes to condensed consolidated financial statements.

 
6

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS, BASIS OF PRESENTATION, AND RECENT ACCOUNTING PRONOUNCEMENTS

ORGANIZATION AND NATURE OF OPERATIONS

MultiCell Technologies, Inc. (“MultiCell”), operates three subsidiaries, MCT Rhode Island Corp. (“MCT”), Xenogenics Corporation (“Xenogenics”), and MultiCell Immunotherapeutics, Inc. (“MCTI”).  MCT is a 100%-owned subsidiary that has been inactive since its formation in 2004. Xenogenics is a 56.4%-owned subsidiary with a focus on the research and development of Sybiol technology. Xenogenics has not generated any revenues as of August 31, 2010. MultiCell holds approximately 67% of the outstanding shares (on an as if converted basis) of MCTI. As used herein, the “Company” refers to MultiCell, together with MCT, Xenogenics, and MCTI.

Historically, the Company has specialized in developing primary liver cell immortalization technologies to produce cell-based assay systems for use in drug discovery. The Company seeks to become an integrated biopharmaceutical company that will use its proprietary cell-based systems and immune system modulation technologies to discover, develop and commercialize new therapeutics itself and with strategic partners. Following the formation of MCTI during September 2005, the Company is pursuing research and development of therapeutics in addition to continuing to advance its cellular systems business.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements and related notes of MultiCell Technologies, Inc. and its subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements.  Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation have been included.  It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended November 30, 2009 previously filed with the SEC. The results of operations for the three-month and nine-month periods ended August 31, 2010 are not necessarily indicative of the operating results for the fiscal year ending November 30, 2010.  The condensed consolidated balance sheet as of November 30, 2009 has been derived from the Company’s audited financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (FASB) issued new accounting guidance on noncontrolling interests in consolidated financial statements.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. This guidance requires the recognition of a noncontrolling interest (minority interest) as equity or deficit in the consolidated financial statements and separate from the parent’s equity or deficit. The amount of net income or loss attributable to the noncontrolling interest is included in consolidated net income or loss on the face of the statement of operations. It also amends certain consolidation procedures for consistency with the requirements of the new accounting guidance on business combinations. This guidance also includes expanded disclosure requirements regarding the interests of the parent and of its noncontrolling interest.  The Company adopted the new accounting guidance on noncontrolling interests effective December 1, 2009, at which date the Company’s consolidated financial statements were retroactively restated to reflect the new presentation for noncontrolling interests in the Company’s consolidated financial statements.

 
7

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In June 2008, the FASB ratified accounting guidance for determining whether an instrument, or an embedded feature, is indexed to an entity's own stock.  The guidance provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. It also clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation.  The guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted this new accounting guidance effective December 1, 2009.  As more fully discussed in Note 5 to these condensed consolidated financial statements, the Company determined that the fair value of the beneficial conversion feature related to the Series B convertible preferred stock is required to be accounted for as an embedded derivative as of December 1, 2009 under this new accounting guidance.  The accounting implications of this determination is that the fair value of the derivative, calculated to be $226,217 as of December 1, 2009, was recorded as a noncurrent liability with a corresponding adjustment to equity on that date.  The Company is also required to record the change in the fair value of the derivative liability at each subsequent balance sheet date, with a corresponding adjustment to other income or expense.  The change in the fair value of the derivative was a decrease of $95,204 and a decrease of $91,298 for the three months and nine months ended August 31, 2010, respectively.

In January 2010, the FASB issued new accounting guidance related to improving disclosures about fair value measurements, to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, and the activity in fair value measurements using significant unobservable inputs (Level 3 inputs).  The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements related to activity of Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the initial disclosures requirements in the second quarter of fiscal 2010.  Other than requiring additional disclosures, adoption of this guidance did not have and is not expected to have a material impact on the Company’s condensed consolidated financial statements.

NOTE 2. GOING CONCERN

These condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As of August 31, 2010, the Company has operating and liquidity concerns and, as a result of recurring losses, has incurred an accumulated deficit of $38,610,937.  The Company will have to raise additional capital in order to initiate Phase IIb/III clinical trials for MCT-125, the Company’s therapeutic for the treatment of fatigue in multiple sclerosis patients. Management is evaluating several sources of financing for its clinical trial program.  Additionally, with its strategic shift in focus to therapeutic programs and technologies, management expects the Company’s future cash requirements to increase significantly as it advances the Company’s therapeutic programs into clinical trials.  Until the Company is successful in raising additional funds, it may have to prioritize its therapeutic programs and delays may be necessary in some of the Company’s development programs.

Since March of 2008, the Company has operated on working capital principally provided by La Jolla Cove Investors, Inc. (LJCI). As further described in Note 3 to these condensed consolidated financial statements, under terms of the agreement, LJCI can convert a portion of the convertible debenture by simultaneously exercising a warrant at $1.09 per share. As of August 31, 2010, there are 7,730,629 shares remaining on the stock purchase warrant and a balance of $77,306 remaining on the convertible debenture. Should LJCI continue to exercise all of its remaining warrants, approximately $8.4 million of cash would be provided to the Company. The agreement limits LJCI’s investment to an aggregate ownership that does not exceed 9.9% of the outstanding shares of the Company. The Company expects that LJCI will continue to exercise the warrants and convert the debenture over the next year.

 
8

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

These factors, among others, create an uncertainty about the Company’s ability to continue as a going concern.  There can be no assurance that LJCI will continue to exercise its warrant to purchase the Company’s common stock, or that the Company will be able to successfully acquire the necessary capital to continue its on-going research efforts and bring its products to the commercial market.  Management’s plans to acquire future funding include the potential sale of common and/or preferred stock, the sale of warrants, and continued sales of our proprietary media, immortalized cells and primary cells to the pharmaceutical industry.  Additionally, the Company continues to pursue research projects, government grants and capital investment.  The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 3. CONVERTIBLE DEBENTURES

The Company entered into a Securities Purchase Agreement with LJCI on February 28, 2007 pursuant to which the Company agreed to sell a convertible debenture in the principal amount of $100,000 and maturing on February 28, 2012 (the “Debenture”).  The Debenture accrues interest at 4.75% per year, payable at each conversion date, in cash or common stock at the option of LJCI.  In connection with the Debenture, the Company issued LJCI a warrant to purchase up to 10 million shares of our common stock (the “LJCI Warrant”) at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007.  Pursuant to the terms of the LJCI Warrant, upon the conversion of any portion of the principal amount of the Debenture, LJCI is required to simultaneously exercise and purchase that same percentage of the warrant shares equal to the percentage of the dollar amount of the Debenture being converted.  Therefore, for each $1,000 of the principal converted, LJCI would be required to simultaneously purchase 100,000 shares under the LJCI Warrant at $1.09 per share.

The Debenture is convertible at the option of LJCI at any time up to maturity into the number of shares determined by the dollar amount of the Debenture being converted multiplied by 110, minus the product of the Conversion Price multiplied by 100 times the dollar amount of the Debenture being converted, with the entire result divided by the Conversion Price.  The Conversion Price is equal to the lesser of $1.00 or 80% of the average of the three lowest volume-weighted average prices during the twenty trading days prior to the election to convert.  During the three months ended August 31, 2010, LJCI converted $2,050 of the Debenture into 43,056,460 shares of common stock.  During the nine months ended August 31, 2010, LJCI converted $8,013 of the Debenture into 118,260,762 shares of common stock.  Simultaneously with these conversions, LJCI exercised warrants to purchase 205,000 and 801,330 shares of the Company’s common stock during the three months and the nine months ended August 31, 2010, respectively.  Proceeds from the exercise of the warrants were $223,450 and $873,450 for the three months and the nine months ended August 31, 2010, respectively.  As of August 31, 2010, the remainder of the Debenture in the amount of $77,306 could have been converted by LJCI into approximately 1.9 billion shares of common stock, which would require LJCI to simultaneously exercise and purchase all of the remaining 7,730,629 shares of common stock under the LJCI Warrant at $1.09 per share.  For the Debenture, upon receipt of a conversion notice from the holder, the Company may elect to immediately redeem that portion of the debenture that the holder elected to convert in such conversion notice, plus accrued and unpaid interest. After February 28, 2008, the Company, at its sole discretion, has the right, without limitation or penalty, to redeem the outstanding principal amount of this debenture not yet converted by the holder into common stock, plus accrued and unpaid interest thereon.

A discount representing the value of 10 million warrants issued in the amount of $73,727 was recorded as a reduction to the note. The discount was calculated based on the relative fair values of the convertible debenture and the warrants. The fair market value of the warrants used in the above calculation was determined under the Black-Scholes option-pricing model.  Additionally, based on the excess of the aggregate fair value of the common shares that would have been issued if the Debenture had been converted immediately over the proceeds allocated to the convertible debenture, the investors received a beneficial conversion feature for which the Company recorded an increase in additional paid-in-capital of $26,273 and a corresponding discount to the debenture.  These discounts, in the aggregate amount of $100,000, are being amortized over the 60-month term of the debenture as a charge to interest expense. The balance of the unamortized discount is $30,000 at August 31, 2010.

 
9

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. NOTES PAYABLE – RELATED PARTIES

The Company issued notes payable totaling $50,000 to two related parties during August 2008 and an additional $5,000 in November 2008.  The notes accrued interest at 8.5% per year and were secured by all of the Company’s assets, including its intellectual property.  Prior to November 30, 2009, the Company had repaid all except for $30,000 of the outstanding principal on the original notes.  The remaining balance, plus related accrued interest, was repaid in full in December 2009.

NOTE 5. SERIES B CONVERTIBLE PREFERRED STOCK

The Company’s Board of Directors has the authority, without further action by the stockholders, to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of these shares of preferred stock.  The Board of Directors has designated 17,000 shares as Series B convertible preferred stock.  The Series B preferred stock does not have voting rights.

Commencing on the date of issuance of the Series B preferred stock until the date a registration statement registering the common shares underlying the preferred stock and warrants issued is declared effective by the SEC, the Company will pay on each outstanding share of Series B preferred stock a preferential cumulative dividend at an annual rate equal to the product of multiplying $100 per share by the higher of the Wall Street Journal Prime Rate plus 1%, or 9%.  In no event will the dividend rate be greater than 12% per annum.  The dividend will be payable monthly in arrears in cash on the last day of each month based on the number of shares of Series B preferred stock outstanding as of the first day of that month.  In the event the Company does not pay the Series B preferred dividends when due, the conversion price of the Series B preferred shares is reduced to 85% of the otherwise applicable conversion price.  The Company has not paid the required monthly Series B preferred dividends since November 30, 2006, which, in part, has caused the conversion price to be reduced. During the three months ended August 31, 2009 and 2010, the Company accrued preferred dividends in the amounts of $37,403 and $31,741, respectively, on the Series B preferred stock.  During the nine months ended August 31, 2009 and 2010, the Company accrued preferred dividends in the amounts of $111,395 and $105,733, respectively, on the Series B preferred stock.  Total accrued but unpaid preferred dividends recorded in the accompanying condensed consolidated balance sheet as of August 31, 2010 are $554,876, of which $243,835 are recorded in permanent equity with the Series B preferred stock and $311,041 are recorded as a current liability with accounts payable and accrued expenses.

The Series B shares are convertible at any time into common stock at a conversion price determined by dividing the purchase price per share of $100 by the conversion price.  The conversion price was originally $0.32 per share.  Upon the occurrence of an event of default (as defined in the agreement), the conversion price of the Series B shares shall be reduced to 85% of the then applicable conversion price of such shares. The conversion price is subject to equitable adjustment in the event of any stock splits, stock dividends, recapitalizations and the like.  In addition, the conversion price is subject to weighted average anti-dilution adjustments in the event the Company sells common stock or other securities convertible into or exercisable for common stock at a per share price, exercise price or conversion price lower than the conversion price then in effect in any transaction (other than in connection with an acquisition of the securities, assets or business of another company, joint venture and employee stock options).  As a result of the Company issuing common stock upon conversion of convertible debentures and upon the exercise of warrants both at prices lower than the conversion price, and due to the Company not paying Series B dividends on a monthly basis, the conversion price of the Series B preferred stock has been reduced to $0.0579 per share as of August 31, 2010.  The conversion of the Series B preferred stock is limited for each investor to 9.99% of the Company’s common stock outstanding on the date of conversion.

 
10

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In July 2010, the Company received notice from one of the preferred shareholders that it was converting 4,923 shares of Series B preferred stock.  The carrying value of the converted Series B preferred stock was $480,191, consisting of the original proceeds from the issuance of the preferred stock of $492,300 ($100 per share) less allocated issuance costs of $12,109.  On the date that the notice was received, the conversion price of the Series B preferred stock was $0.0616.  Accordingly, the conversion resulted in the issuance of 7,991,883 shares of common stock.  On the date that the notice was received, the fair value of the derivative liability (as discussed in the following paragraph) associated with the conversion feature of the converted Series B preferred stock was $48,750.  On the date of conversion, the fair value of the derivative liability related to the converted Series B preferred stock has been reclassified from non-current liabilities and included in the additional paid in capital for the newly-issued common stock.

Effective December 1, 2009, the Company adopted new accounting provisions for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.  These provisions apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by standards for accounting for derivative instruments and hedging activities, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.  As of December 1, 2009 and August 31, 2010, there are 16,262 and 11,339 shares of Series B preferred stock that were convertible into 21,341,207 and 19,583,765 shares of common stock, respectively.  The Company determined that the conversion feature to allow the holders of the Series B convertible preferred stock to acquire common shares is an embedded derivative that no longer qualifies as equity under the new accounting guidance.  As a result of adopting these standards, the Company has evaluated the conversion feature as though it was accounted for as a derivative liability since the issuance of the Series B convertible preferred stock in July 2006 and has recorded, as a cumulative effect adjustment on December 1, 2009, a noncurrent derivative liability of $226,217 with a corresponding reduction in other components of equity on that date.  The fair value of the conversion feature decreased by $95,204 and $91,298 during the three months and nine months ended August 31, 2010, respectively, which has been recorded as a gain from the change in the fair value of the derivative liability.

The fair value of the embedded conversion feature was estimated to be $0.0044, $0.0090, and $0.0106 per share of common stock as of August 31, 2010, May 31, 2010, and December 1, 2009, respectively, and has been estimated using the Black-Scholes pricing model using the following assumptions:

   
August 31, 2010
   
May 31, 2010
   
December 1, 2009
 
                    
Risk free interest rate
  2.47 %   3.31 %   3.28 %
Expected life
 
10 Years
   
10 Years
   
10 Years
 
Dividend yield
  -     -     -  
Volatility
  140 %   140 %   150 %

In the event of any dissolution or winding up of the Company, whether voluntary or involuntary, holders of each outstanding share of Series B preferred stock shall be entitled to be paid second in priority to the Series I preferred stock holders out of the assets of the Company available for distribution to stockholders, an amount equal to $100 per share of Series B convertible preferred stock held plus any declared but unpaid dividends.  After such payment has been made in full, such holders of Series B convertible preferred stock shall be entitled to no further participation in the distribution of the assets of the Company.

 
11

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. SERIES I CONVERTIBLE PREFERRED STOCK

The Company’s Board of Directors has the authority, without further action by the stockholders, to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of these shares of preferred stock.  The Board of Directors originally designated 20,000 shares as Series I convertible preferred stock.

The Series I shares are convertible at any time into common stock at 80% of the average trading price of the lowest three inter-day trading prices of the common stock for the ten days preceding the conversion date, but at an exercise price of no more than $1.00 per share and no less than $.25 per share.  The conversion of the Series I preferred stock is limited to 9.99% of the Company’s common stock outstanding on the date of conversion.

The Series I preferred stock does not have voting rights.  In the event of any dissolution or winding up of the Company, whether voluntary or involuntary, holders of each outstanding share of Series I convertible preferred stock shall be entitled to be paid first out of the assets of the Company available for distribution to stockholders, an amount equal to $100 per share of Series I preferred stock held.  After such payment has been made in full, such holders of Series I convertible preferred stock shall be entitled to no further participation in the distribution of the assets of the Company.

NOTE 7. COMMON STOCK

On August 26, 2010, the shareholders of the Company approved the amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the Company’s authorized common stock from 475 million to 775 million shares of common stock.  The amendment of the certificate of incorporation was filed with the Delaware Secretary of State on September 1, 2010.

In March 2010, the Company issued a total of 350,000 shares of common stock to its two employees.  On the date that issuance was authorized, the closing price of the common stock was $0.0115, representing compensation of $3,990.

NOTE 8. LICENSE AGREEMENTS AND DEFERRED REVENUE

On October 9, 2007, MultiCell Technologies, Inc. (“MultiCell”) executed an exclusive license and purchase agreement (the “Agreement”) with Corning Incorporated (“Corning”) of Corning, New York.  Under the terms of the Agreement, Corning has the right to develop, use, manufacture, and sell MultiCell’s Fa2N-4 cell lines and related cell culture media for use as a drug discovery assay tool, including biomarker identification for the development of drug development assay tools, and for the performance of absorption, distribution, metabolism, elimination and toxicity assays (ADME/Tox assays).  MultiCell retained and will continue to support all of its existing licensees, including Pfizer, Bristol-Myers Squibb, and Eisai.  MultiCell retains the right to use the Fa2N-4 cells for use in applications not related to drug discovery or ADME/Tox assays.   MultiCell also retains rights to use the Fa2N-4 cell lines and other cell lines to further develop its Sybiol® liver assist device, to produce therapeutic proteins using the Company’s BioFactories™ technology, to identify drug targets and for other applications related to the Company’s internal drug development programs.  Corning paid MultiCell $750,000 in consideration for the license granted.  The Company is recognizing the income ratably over a 17 year period.  The Company recognized $11,029 and $33,088, respectively, in income for the three months and nine months ended August 31, 2010 and 2009.  The balance of deferred revenue from this license is $621,324 at August 31, 2010 and will be amortized into revenue through October 2024.

 
12

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company had a license agreement with Eisai, for which revenue was being deferred.  During May 2008 and April 2009, the Company received $121,030 and $127,400, respectively, from Eisai representing the second and third annual installments under their five-year agreement.  On May 1, 2009, Eisai notified the Company of its plan to terminate the license agreement effective March 31, 2010.  The Company recognized revenue from the agreement with Eisai in the amounts of zero and $49,544, respectively, for the three months and nine months ended August 31, 2010.  The Company recognized revenue from the agreement with Eisai in the amounts of $31,850 and $93,073, respectively, for the three months and nine months ended August 31, 2009.  The balance of deferred revenue from the agreement with Eisai is zero at August 31, 2010, and no further revenue will be recognized from this agreement.

The Company has another license agreement with Pfizer, for which revenue is being deferred.  The Company recognized revenue from the agreement with Pfizer in the amount of $1,300 and $3,900 for the three months and nine months ended August 31, 2010 and 2009, respectively.  The balance of deferred revenue from the agreement with Pfizer is $37,700 at August 31, 2010, which will be amortized into revenue through January 2018.

NOTE 9. STOCK OPTIONS AND WARRANTS

On August 26, 2010, the stockholders of the Company approved the amendment of the 2004 Equity Incentive Plan.  The purpose of the 2004 Plan is to provide a means by which eligible recipients of stock awards may be given the opportunity to benefit from increases in the value of the common stock through granting of incentive stock options (ISO), non-statutory stock options, stock purchase awards, stock bonus awards, stock appreciation rights, stock unit awards and other stock awards.  The amendment of the 2004 Plan increases the shares reserved thereunder by 25 million shares.  There are 31,595,266 shares of common stock available for future awards under the 2004 Plan at August 31, 2010.

Stock Options

Generally accepted accounting principles for stock options requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements, is measured based on the grant date fair value of the award, and requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period), net of estimated forfeitures.  The estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates differ from the current estimates, such resulting adjustment will be recorded in the period estimates are revised.  No income tax benefit has been recognized for stock-based compensation arrangements and no compensation cost has been capitalized in the accompanying condensed consolidated balance sheet.

A summary of stock option activity for the nine-month period ended August 31, 2010 is presented below:

             
Weighted
     
          
Weighted
 
Average
     
    
Shares
   
Average
 
Remaining
 
Aggregate
 
    
Under
   
Exercise
 
Contractual
 
Intrinsic
 
    
Option
   
Price
 
Life
 
Value
 
                      
Outstanding at November 30, 2009
    9,338,947     $ 0.19  
4.0 years
  $ 10,060  
Granted
    5,000,000       0.01            
Exercised
    -       -            
Expired
    (1,110,000 )     1.40            
                           
Outstanding at August 31, 2010
    13,228,947     $ 0.02  
4.2 years
  $ -  
                           
Exercisable at August 31, 2010
    7,953,114     $ 0.03  
3.8 years
  $ -  
 
 
13

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On June 28, 2010, the Board of Directors granted an option to each of the five directors to purchase one million shares of the Company’s common stock at $.008 per share.  The options vest quarterly over one year and expire five years after grant.  On June 25, 2009, the Board of Directors granted an option to each of the five directors to purchase one million shares of the Company’s common stock at $.011 per share.  The options vest quarterly over one year and expire five years after grant.  In May 2009, the Company also granted an option to a scientific advisor to purchase 30,000 shares of common stock at $0.011 per share.  The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model.  The weighted-average fair value of stock options granted during the nine months ended August 31, 2010 was $0.0075.  The weighted-average assumptions used for options granted during the nine months ended August 31, 2010 were risk-free interest rate of 1.8%, volatility of 165%, expected life of 5.0 years, and dividend yield of zero.  The weighted-average fair value of stock options granted during the nine months ended August 31, 2009 was $0.011.  The weighted-average assumptions used for options granted during the nine months ended August 31, 2009 were risk-free interest rate of 2.6%, volatility of 157%, expected life of 5.0 years, and dividend yield of zero.  The assumptions employed in the Black-Scholes option pricing model include the following.  The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding prior to exercise. The expected volatility is based on the historical price volatility of the Company’s common stock. The risk-free interest rate represents the U.S. Treasury constant maturities rate for the expected life of the related stock options. The dividend yield represents anticipated cash dividends to be paid over the expected life of the stock options.

For the three-month periods ended August 31, 2010 and 2009, the Company reported compensation expense related to stock options of $10,821 and $10,040, respectively.  For the nine-month periods ended August 31, 2010 and 2009, the Company reported compensation expense related to stock options of $39,447 and $10,040, respectively.  As of August 31, 2010, there was $35,588 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 1.0 years.  The intrinsic values at August 31, 2010 are based on a closing price of $0.0048.

Stock Warrants

In connection with the issuance of common stock, preferred stock, notes payable, and debentures, and as compensation for services provided, the Company has issued warrants to purchase shares of the Company’s common stock.  The Company did not issue warrants during the nine months ended August 31, 2010 or 2009.

A summary of stock warrant activity for the nine-month period ended August 31, 2010 is presented below:

             
Weighted
     
          
Weighted
 
Average
     
    
Shares
   
Average
 
Remaining
 
Aggregate
 
    
Under
   
Exercise
 
Contractual
 
Intrinsic
 
    
Option
   
Price
 
Life
 
Value
 
                     
Outstanding at November 30, 2009
    24,099,321     $ 0.61  
2.6 years
  $ -  
Issued
    -       -            
Exercised
    (801,330 )     1.09            
Expired
    (300,000 )     0.82            
                           
Outstanding at August 31, 2010
    22,997,991     $ 0.59  
1.9 years
  $ -  

NOTE 10. LOSS PER SHARE

Basic loss per share is computed on the basis of the weighted-average number of common shares outstanding during the period.  Diluted loss per share is computed on the basis of the weighted-average number of common shares and all dilutive potentially issuable common shares outstanding during the year. Common stock issuable upon conversion of debt and preferred stock, or exercise of stock options and stock warrants have not been included in the loss per share for the three month or nine month periods ended August 31, 2010 and 2009 as they are anti-dilutive.

 
14

 

MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The potential common shares as of August 31, 2010 are as follows:

Warrants
    22,997,991  
Stock options
    13,228,947  
Series B Convertible Preferred Stock
    19,583,765  
Series I Convertible Preferred Stock
    2,293,600  
LJCI Second Debenture
    1,913,284,107  
         
      1,971,388,410  

The Company does not currently have sufficient authorized shares of common stock to meet the commitments entered into under the Debenture and the related LJCI Warrants.  As further discussed in Note 3, upon the conversion of any portion of the remaining $77,306 principal amount of the Debenture, LJCI is required to simultaneously exercise and purchase that same percentage of the remaining 7,730,629 warrant shares equal to the percentage of the dollar amount of the Debenture being converted.  The agreement limits LJCI’s investment to an aggregate common stock ownership that does not exceed 9.99% of the outstanding common shares of the Company. Furthermore, the Company has the right to redeem that portion of the Debenture that the holder may elect to convert and also has the right to redeem the outstanding principal amount of the Debenture not yet converted by the holder into common stock, plus accrued and unpaid interest thereon.

NOTE 11. FAIR VALUE MEASUREMENTS

For assets and liabilities measured at fair value, the Company uses the following hierarchy of inputs:

 
Level one — Quoted market prices in active markets for identical assets or liabilities;

 
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

 
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the Company and reflect those assumptions that a market participant would use.

Liabilities measured at fair value on a recurring basis at August 31, 2010 are summarized as follows:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
                          
Derivative liability
  $ -     $ 86,169     $ -     $ 86,169  

There were no liabilities measured at fair value at November 30, 2009.  As further described in Note 5, the fair value of the derivative liability is determined using the Black-Scholes pricing model.

 
15

 
 
MULTICELL TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12. SUBSEQUENT EVENTS

Stock Issued for Conversion of Debenture and Exercise of Warrants

As more fully discussed in Note 3 to these consolidated financial statements, the Company sold a convertible debenture to La Jolla Cove Investors, Inc. (LJCI) and issued LJCI a stock warrant in connection with the convertible debenture.  Between September 1, 2010 and October 12, 2010, LJCI converted $250 of the 4.75% debenture into 7,407,432 shares of common stock.  Simultaneously with the conversions of the debenture, LJCI was required to exercise warrants to purchase 25,000 shares of common stock at $1.09 per share.  The total proceeds from the exercise of the warrants were $27,250.

 
16

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This document contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995.  It is our intent that such statements be protected by the safe harbor created thereby.  This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report.  Operating results are not necessarily indicative of results that may occur in future periods.

Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements.  Examples of such forward-looking statements include, but are not limited to, statements about or relating to: our plans to pursue research and development of therapeutics in addition to continuing to advance our cellular systems business, our plans to become an integrated biopharmaceutical company, our use of proprietary cell-based systems and immune system modulation technologies to discover, develop and commercialize new therapeutics, our plans to continue to operate our business and minimize expenses, our expectations regarding future cash expenditures increasing significantly, our intent to gradually add scientific and support personnel, the expansion of our product offerings, additional revenues and profits, our ability to complete strategic mergers and acquisitions of product candidates, plans to increase further our operating expenses and administrative resources, future potential direct product sales, the sale of additional equity securities, debt financing and/or the sale or licensing of our technologies.

Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to difficulties or delays in development, testing, obtaining regulatory approval, and undertaking production and marketing of our drug candidates; difficulties or delays in patient enrollment for our clinical trials; unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials); activities and decisions of, and market conditions affecting current and future strategic partners; pricing pressures; accurately forecasting operating and clinical trial costs; uncertainties of litigation and other business conditions; our ability to obtain additional financing if necessary; changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target; the uncertainty of protection for our intellectual property or trade secrets, through patents or otherwise; and potential infringement of the intellectual property rights or trade secrets of third parties.  In addition such statements are subject to the risks and uncertainties discussed under Item 1A, Risk Factors, of our Annual Report filed on Form 10-K for the year ended November 30, 2009.

Overview

Following the formation of MultiCell Immunotherapeutics, Inc. during September 2005 and the recent in-licensing of drug candidates, we are pursuing research and development of therapeutics.  Historically, we have specialized in developing primary liver cell immortalization technologies to produce cell-based assay systems for use in drug discovery.  We seek to become an integrated biopharmaceutical company that will use its proprietary immune system modulation technologies to discover, develop and commercialize new therapeutics itself and with strategic partners.

Regardless of the outcome of our negotiations with potential partners or acquirers of our cell line business, we have operated and will continue to operate our business and seek to minimize expenses.  Our largest expenses relate to personnel and meeting the legal and reporting requirements of being a public company.  By utilizing consultants whenever possible, and asking employees to manage multiple responsibilities, operating costs are minimized.  With our strategic shift in focus on therapeutic programs and technologies, however, we expect our future cash expenditures to increase significantly as we advance our therapeutic programs into clinical trials.

 
17

 

As funding permits, we intend to gradually add scientific and support personnel.  We want to add specialists for our key research areas.  These strategic additions will help us expand our product offerings leading us to additional revenues and profits.  As revenues increase, additional administrative personnel will be necessary to meet the added workload.  Other expenses, such as sales and customer service, will be added commensurate with increased revenues.  Our current research and development efforts focus on development of future cell lines and therapeutic products and improvement of existing products.  Due to the ongoing nature of this research, we are unable to ascertain with certainty the estimated completion dates and total costs associated with this research.  As with any research efforts, there is uncertainty and risk associated with whether these efforts will produce results in a timely manner so as to enhance our market position.  Company sponsored research and development costs related to future products and redesign of present products are expensed as incurred.  For the nine months ended August 31, 2010 and 2009, research and development costs were $215,392 and $151,891, respectively.  Research and development costs include such costs as certain legal costs, contract services, consulting fees, and supplies.

Results of Operations

The following discussion is included to describe our consolidated financial position and results of operations.  The condensed consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.

Three Months Ended August 31, 2010 Compared to the Three Months Ended August 31, 2009

Revenue. Total revenue for the three months ended August 31, 2010 was $12,330, as compared to revenue of $44,179 for the same quarter in the prior fiscal year, a decrease of $31,849.  All of the revenue for the quarters ended August 31, 2010 and 2009 is from license revenue under agreements with Corning, Pfizer, and Eisai.  The decrease in revenue for the three months ended August 31, 2010 compared to the corresponding quarter of the prior year is due to the cancelation of the license agreement with Eisai as of March 31, 2010.

Operating Expenses. Total operating expenses for the three months ended August 31, 2010 were $289,552, compared to operating expenses for the three months ended August 31, 2009 of $257,238, representing an increase of $32,314.  This increase was principally due to an increase in consulting and other outside service provider fees of $21,318.

Other income (expense). Other income (expense) amounted to net income of $88,908 for the three months ended August 31, 2010 as compared to net expense of $7,329 for the corresponding quarter of the prior year.  Other income (expense) for the three months ended August 31, 2010 consists of interest expense of $6,296 and a gain from the change in fair value of derivative liability of $95,204.  Other income (expense) for the three months ended August 31, 2009 was composed of interest expense of $7,329.  Interest expense includes interest on the 4.75% debentures, including amortization of discount, plus interest on notes payable to related parties.  The change in fair value of derivative liability is the result of our adoption on December 1, 2009 of new accounting guidance related to the embedded conversion feature in the Series B convertible preferred stock.  The valuation of the derivative liability is dependent upon a number of factors beyond our control.  As such, the amount of other income or expense that we report related to the change in the fair value of the derivative liability is somewhat unpredictable, but may be significant, and will continue to be reported until the holders of the Series B convertible preferred stock have converted their shares into shares of our common stock.

Net Loss. Net loss for the three months ended August 31, 2010 was $188,314, as compared to a net loss of $220,388 for the same period in the prior fiscal year, representing a decrease in the net loss of $32,074.  The primary reason for this decrease in net loss in the current year is due to the gain from the change in fair value of derivative liability, offset by the decrease in revenue and the increase in operating expenses, as explained above.

 
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Nine Months Ended August 31, 2010 Compared to the Nine Months Ended August 31, 2009

 Revenue. Total revenue for the nine months ended August 31, 2010 was $86,533, as compared to revenue of $130,061 for the nine months ended August 31, 2009, a decrease of $43,528.  All of the revenue for the nine months ended August 31, 2010 and 2009 is from license revenue under agreements with Corning, Pfizer, and Eisai.  The decrease in revenue for the nine months ended August 31, 2010 compared to the corresponding period of the prior year is due to the cancelation of the license agreement with Eisai as of March 31, 2010.

Operating Expenses. Total operating expenses for the nine months ended August 31, 2010 were $832,745, compared to operating expenses for the nine months ended August 31, 2009 of $743,226, representing an increase of $89,519.  This increase was principally due to 1) an increase in consulting, accounting, and other fees of $53,101 and 2) an increase in stock-based compensation of $33,398.

Other income (expense). Other income (expense) amounted to net income of $72,826 for the nine months ended August 31, 2010 as compared to net expense of $21,832 for the corresponding period of the prior year.  Other income (expense) for the nine months ended August 31, 2010 consists of interest expense of $18,472 and a gain from the change in fair value of derivative liability of $91,298.  Other income (expense) for the nine months ended August 31, 2009 was composed of interest expense of $22,471 and interest income of $639.  Interest expense includes interest on the 4.75% debentures, including amortization of discount, plus interest on notes payable to related parties.  The change in fair value of derivative liability is the result of our adoption on December 1, 2009 of new accounting guidance related to the embedded conversion feature in the Series B convertible preferred stock.  The valuation of the derivative liability is dependent upon a number of factors beyond our control.  As such, the amount of other income or expense that we report related to the change in the fair value of the derivative liability is somewhat unpredictable, but may be significant, and will continue to be reported until the holders of the Series B convertible preferred stock have converted their shares into shares of our common stock.

Net Loss. Net loss for the nine months ended August 31, 2010 was $673,386, as compared to a net loss of $634,997 for the same period in the prior fiscal year, representing an increase in the net loss of $38,389.  The primary reason for this increase in net loss in the current year is due to the decrease in revenue and the increase in operating expenses, offset by the gain from the change in fair value of derivative liability, as explained above.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through the issuance of debt or equity instruments.  The following is a summary of our key liquidity measures at August 31, 2010 and 2009:

   
August 31, 2010
   
August 31, 2009
 
Cash and cash equivalents
  $ 405,452     $ 391,519  
                 
Current assets
  $ 413,903     $ 397,591  
Current liabilities
    (1,408,622 )     (1,843,085 )
Working capital deficiency
  $ (994,719 )   $ (1,445,494 )

The Company will have to raise additional capital in order to initiate Phase IIb clinical trials for MCT-125, the Company’s therapeutic product for the treatment of fatigue in multiple sclerosis patients.  Management is evaluating several sources of financing for its clinical trial program.  Additionally, with our strategic shift in focus to therapeutic programs and technologies, we expect our future cash requirements to increase significantly as we advance our therapeutic programs into clinical trials. Until we are successful in raising additional funds, we may have to prioritize our therapeutic programs and delays may be necessary in some of our development programs.

 
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Commencing in about March 2008, the Company has operated on working capital provided by La Jolla Cove Investors (“LJCI”) in connection with its exercise of warrants issued to it by the Company (which LJCI must exercise whenever it wants to convert amounts owning under the convertible debenture it holds), all as discussed in more detail below.  The warrants are exercisable at $1.09 per share.  As of August 31, 2010 there were 7,730,629 shares remaining on the stock purchase warrant.  Should LJCI continue to exercise all of its remaining warrants approximately $8.4 million of cash would be provided to the Company.  However, the Debenture Purchase Agreement (discussed below) limits LJCI’s stock ownership in the Company to 9.99% of the outstanding shares of the Company.  The Company expects that LJCI will continue to exercise the warrants and continue to convert the debenture over the next year, but cannot assure that LJCI will do so. We are investigating the possible sale or license of certain assets that we did not already license to Corning in October 2007.  We are presently pursuing discussions with companies operating in the stem cell research market and the general life science research market.

On July 14, 2006, the Company completed a private placement of Series B convertible preferred stock.  A total of 17,000 Series B shares were sold to accredited investors at a price of $100 per share.  The Series B shares are convertible at any time into common stock at a conversion price determined by dividing the purchase price per share of $100 by $0.32 per share (the “Conversion Price”).  The Conversion Price is subject to equitable adjustment in the event of any stock splits, stock dividends, recapitalizations and the like.  In addition, the Conversion Price is subject to weighted average anti-dilution adjustments in the event the Company sells common stock or other securities convertible into or exercisable for common stock at a per share price, exercise price or conversion price lower than the Conversion Price then in effect in any transaction (other than in connection with an acquisition of the securities, assets or business of another company, joint venture and employee stock options).  The conversion of the Series B preferred stock is limited for each investor to 9.99% of the Company’s common stock outstanding on the date of conversion.  In July 2010, one of our preferred shareholders converted 4,923 shares of Series B preferred stock into 7,991,883 shares of common stock.  As of August 31, 2010, there are 11,339 shares of Series B preferred outstanding.  The Series B preferred stock does not have voting rights.  Commencing on the date of issuance of the Series B preferred stock until the date a registration statement registering the common shares underlying the preferred stock and warrants issued was declared effective by the SEC, the Company paid on each outstanding share of Series B preferred stock a preferential cumulative dividend at an annual rate equal to the product of multiplying $100 per share by the higher of (a) the Wall Street Journal Prime Rate plus 1%, or (b) 9%.  In no event will the dividend rate be greater than 12% per annum.  In the event the Company does not pay the Series B preferred dividends when due, the conversion price of the Series B preferred shares will be reduced to 85% of the otherwise applicable conversion price.

In the event of any dissolution or winding up of the Company, whether voluntary or involuntary, holders of each outstanding share of Series B preferred stock shall be entitled to be paid second in priority to the Series I preferred stockholders out of the assets of the Company available for distribution to stockholders, an amount equal to $100 per share of Series B preferred stock held plus any declared but unpaid dividends.  After such payment has been made in full, such holders of Series B preferred stock shall be entitled to no further participation in the distribution of the assets of the Company.

On February 28, 2007, we entered into a Securities Purchase Agreement with LJCI on February 28, 2007 (the “Securities Purchase Agreement”) pursuant to which we agreed to sell a convertible debenture in a principal amount of $100,000 with an annual interest rate of 4.75% and expiring on February 28, 2012 (the “Debenture”).  In addition, we issued to LJCI a warrant to purchase up to 10 million shares of our common stock (the “LJCI Warrant”) at an exercise price of $1.09 per share, exercisable over the next five years according to a schedule described in a letter agreement dated February 28, 2007.

The Debenture is convertible at the option of LJCI at any time up to maturity at a conversion price equal to the lesser of the fixed conversion price of $1.00, or 80% of the average of the lowest three daily volume weighted average trading prices per share of our common stock during the twenty trading days immediately preceding the conversion date.  The Debenture accrues interest at 4.75% per year payable in cash or our common stock.  Through August 31, 2010, interest is being paid in cash.  If paid in stock, the stock will be valued at the rate equal to the conversion price of the Debenture in effect at the time of payment.

 
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For the Debenture, upon receipt of a conversion notice from the holder, the Company may elect to immediately redeem that portion of the Debenture that holder elected to convert in such conversion notice, plus accrued and unpaid interest.  After February 28, 2008, the Company, at its sole discretion, shall have the right, without limitation or penalty, to redeem the outstanding principal amount of this debenture not yet converted by holder into Common Stock, plus accrued and unpaid interest thereon.

Cash provided by (used in) operating, investing and financing activities for the nine month periods ended August 31, 2010 and 2009 is as follows:

   
August 31, 2010
   
August 31, 2009
 
Operating activities
  $ (834,552 )   $ (787,299 )
Investing activities
    -       17,356  
Financing activities
    843,450       1,155,440  
Net increase in cash and cash equivalents
  $ 8,898     $ 385,497  

Operating Activities

For the nine months ended August 31, 2010, the most significant differences between our net loss and net cash used in operating activities are due to net non-cash credits totaling $28,709 included in our net loss for compensation, interest, depreciation, and change in fair value of derivative liability, less changes in non-cash working capital totaling $132,457.  For the nine months ended August 31, 2009, the most significant differences between our net loss and net cash used in operating activities are due to net non-cash charges totaling $32,230 included in our net loss for interest, depreciation, and stock-based compensation, less changes in non-cash working capital totaling $184,532.

Investing Activities

We had no cash flows from investing activities during the nine months ended August 31, 2010.  Net cash provided by investing activities during the nine months ended August 31, 2009 related to the collections of principal on a note receivable.

Financing Activities

During the nine months ended August 31, 2010, principal cash flows from financing activities related to LJCI converting $8,013 of the 4.75% Debenture into common stock and exercising warrants to purchase 801,330 shares of common stock at a price of $1.09 per share, resulting in total proceeds of $873,450.  During the nine months ended August 31, 2010, we also used $30,000 to repay the remaining amounts owed on notes payable to related parties.  During the nine months ended August 31, 2009, principal cash flows from financing activities related to LJCI converting $10,010 of the 4.75% Debenture into common stock and exercising warrants to purchase 1,001,000 shares of common stock at a price of $1.09 per share, resulting in total proceeds of $1,091,090.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
 
 
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Item 4. CONTROLS AND PROCEDURES

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2010 and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted material weaknesses as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.

Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of August 31, 2010, the following material weaknesses existed:

1. 
Entity-Level Controls: We did not maintain effective entity-level controls as defined by the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control –Integrated Framework. Specifically, we did not effectively segregate certain accounting duties due to the small size of our accounting staff, and maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks critical to financial reporting.
2. 
Information Technology: We did not maintain effective controls over the segregation of duties and access to financial reporting systems. Specifically, key financial reporting systems were not appropriately configured to ensure that certain transactions were properly processed with segregated duties among personnel and to ensure that unauthorized individuals did not have access to add or change key financial data.
 
Due to this material weakness, management has concluded that our internal control over financial reporting was not effective as of August 31, 2010.

In order to mitigate these material weaknesses to the fullest extent possible, all financial reports are reviewed by the Chief Financial Officer, who has limited system access.  In addition, regular meetings are held with the Board of Directors and the Audit Committee.  If at any time we determine a new control can be implemented to mitigate these risks at a reasonable cost, it is implemented as soon as possible.

There were no changes in our internal control over financial reporting that occurred during the quarter ended August 31, 2010 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION

Item 1: LEGAL PROCEEDINGS

None.

Item 1A: RISK FACTORS
 
Risks Related To Our Business
 
Our drug candidates and cellular systems technologies are in the early stages of clinical testing and we have a history of significant losses and may not achieve or sustain profitability.

Our drug candidates are in the early stages of clinical testing and we must conduct significant additional clinical trials before we can seek the regulatory approvals necessary to begin commercial sales of our drugs.  Similarly, some of our cellular systems technologies are in early stages of development and require further development before they may be commercially viable.  We have incurred a substantial accumulated deficit since our inception in 1970.  As of August 31, 2010, our accumulated deficit was $38,610,937.  Our losses have primarily resulted from significant costs associated with the research and development relating to our cellular systems technologies and other operating costs.  We expect to incur increasing losses for at least several years, as we continue our research activities and conduct development of, and seek regulatory approvals for, our drug candidates, and commercialize any approved drugs and as we continue to advance our cellular systems technologies business.  If our drug candidates fail in clinical trials or do not gain regulatory approval, or if our drugs and cellular systems technologies do not achieve market acceptance, we will not achieve or maintain profitability.  If we fail to become and remain profitable, or if we are unable to fund our continuing losses, you could lose all or part of your investment.

 If La Jolla Cove Investors does not continue to provide us with working capital, it would have a material adverse effect on our financial condition and we may be unable to continue as a going concern.

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the financial statements for the year ended November 30, 2009, relative to our ability to continue as a going concern.  Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.  Our ability to obtain additional funding will determine our ability to continue as a going concern.  Since March 2008, the Company has operated on working capital provided by La Jolla Cove Investors, or LJCI. Under terms of the agreement, LJCI can convert a portion of the convertible debenture by simultaneously exercising a warrant at $1.09 per share. As of August 31, 2010 there are 7,730,629 shares remaining on the stock purchase warrant and a balance of $77,306 remaining on the convertible debenture. Should LJCI continue to exercise all of its remaining warrants, approximately $8.4 million of cash would be provided to the Company. The agreement limits LJCI’s investment to an aggregate ownership that does not exceed 9.9% of the outstanding shares of the Company. The Company expects that LJCI will continue to exercise the warrants and continue to convert the debenture over the next year.

Our business strategy of focusing on our therapeutic programs and technologies makes evaluation of our business prospects difficult.

Our business strategy of focusing on therapeutic programs and technologies is unproven, and we cannot accurately predict our product development success.  Moreover, we have limited experience developing therapeutics, and we cannot be sure that any product that we develop will be commercially successful.  As a result of these factors, it is difficult to predict and evaluate our future business prospects.
 
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We are subject to a variety of general business risks.

We will be subject to the risks inherent in the ownership and operation of a research and development biotechnology venture such as regulatory setbacks and delays, fluctuations in expenses, competition from other biotechnology ventures and pharmaceutical companies, the general strength of regional and national economies, and governmental regulation.  The Company’s products may fail to advance due to inadequate therapeutic efficacy, adverse effects, inability to finance clinical trials or other regulatory or commercial setbacks.  Because certain costs of the Company will not generally decrease with decreases in financing capital or revenues, the cost of operating the Company may exceed the income there from.  No representation or warranty can be made that the Company will be profitable or will be able to generate sufficient working capital.

Difficulties encountered during challenging and changing economic conditions could adversely affect our results of operations.

Our future business and operating results will depend to a significant extent on economic conditions in general.  World-wide efforts to cut capital spending, general economic uncertainty and a weakening global economy could have a material adverse effect on us a variety of ways, including a scarcity of financing needed to fund our current and planned operations, and the reluctance or inability of potential strategic partners to consummate strategic partnerships due to their own financial hardships.  If we are unable to effectively manage during the current challenging and changing economic conditions, our business, financial condition, and results of operations could be materially adversely affected.

If we do not obtain adequate financing to fund our future research and development and operations, we may not be able to successfully implement our business plan.

We have in the past increased, and plan to increase further, our operating expenses in order to fund higher levels of research and development, undertake and complete the regulatory approval process, and increase our administrative resources in anticipation of future growth.  We plan to increase our administrative resources to support the hiring of additional employees that will enable us to expand our research and product development capacity.  We intend to finance our operations with revenues from royalties generated from the licensing of our technology, by selling securities to investors, through the issuance of debt instruments, through strategic alliances, and by continuing to use our common stock to pay for consulting and professional services.

We also anticipate the need for additional financing in the future in order to fund continued research and development and to respond to competitive pressures.  We anticipate that our future cash requirements may be fulfilled by potential direct product sales, the sale of additional securities, debt financing and/or the sale or licensing of our technologies.  We cannot guarantee, however, that enough future funds will be generated from operations or from the aforementioned or other potential sources.  Although we raised gross proceeds of $873,450 and $1,510,240 during the nine months ended August 31, 2010 and the year ended November 30, 2009, respectively, from the exercise of stock warrants, we do not have any binding commitment with regard to future financing.  If adequate funds are not available or are not available on acceptable terms, we may be unable to pursue our therapeutic programs, fund expansion of our cellular technologies business, develop new or enhance existing products and services or respond to competitive pressures, any of which could have a material adverse effect on our business, results of operations and financial condition.

 
24

 
 
We have never generated, and may never generate, revenues from commercial sales of our drug or therapeutic candidates and we may not have drugs or therapeutic products to market for at least several years, if ever.

We currently have no drugs or therapeutic products approved by the Food and Drug Administration, or FDA, or similar regulatory authorities that are available for commercial sale anywhere in the world, and we cannot guarantee that we will ever have marketable drugs or therapeutic products available for sale anywhere in the world.  We must demonstrate that our drug or therapeutic product candidates satisfy rigorous standards of safety and efficacy to the FDA and other regulatory authorities in the United States and abroad.  We and our partners will need to conduct significant additional research and preclinical and clinical testing before we or our partners can file applications with the FDA or other regulatory authorities for approval of our drug candidates and therapeutic products.  In addition, to compete effectively, our drugs and therapeutic products must be easy to use, cost-effective and economical to manufacture on a commercial scale, compared to other therapies available for the treatment of the same conditions.  We may not achieve any of these objectives.  We cannot be certain that the clinical development of our drug candidates in preclinical testing or clinical development will be successful, that they will receive the regulatory approvals required to commercialize them, or that any of our other research programs will yield a drug candidate suitable for entry into clinical trials.  We do not expect any of our drug and therapeutic products candidates to be commercially available for several years, if at all.  The development of one or more of these drug candidates may be discontinued at any stage of our clinical trials programs and we may not generate revenue from any of drug candidates.
 
Clinical trials may fail to demonstrate the desired safety and efficacy of our drug or therapeutic candidates, which could prevent or significantly delay completion of clinical development and regulatory approval.

Prior to receiving approval to commercialize any of our drug and therapeutic candidates, we must demonstrate with substantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA and other regulatory authorities in the United States and abroad, that such drug candidate is both sufficiently safe and effective.  Before we can commence clinical trials, we must demonstrate through preclinical studies satisfactory product chemistry, formulation, stability and toxicity levels in order to file an investigational new drug application, or IND, (or the foreign equivalent of an IND) to commence clinical trials.  In clinical trials we will need to demonstrate efficacy for the treatment of specific indications and monitor safety throughout the clinical development process.  Long-term safety and efficacy have not yet been demonstrated in clinical trials for any of our drug and therapeutic candidates, and satisfactory chemistry, formulation, stability and toxicity levels have not yet been demonstrated for our drug candidates or compounds that are currently the subject of preclinical studies.  If our preclinical studies, clinical trials or future clinical trials are unsuccessful, our business and reputation will be harmed.

All of our drug and therapeutic candidates are prone to the risks of failure inherent in drug development.  Preclinical studies may not yield results that would satisfactorily support the filing of an IND or comparable regulatory filing abroad with respect to our drug candidates, and, even if these applications would be or have been filed with respect to our drug and therapeutic candidates, the results of preclinical studies do not necessarily predict the results of clinical trials.  Similarly, early-stage clinical trials do not predict the results of later-stage clinical trials, including the safety and efficacy profiles of any particular drug and therapeutic candidate.  In addition, there can be no assurance that the design of our clinical trials is focused on appropriate disease types, patient populations, dosing regimens or other variables which will result in obtaining the desired efficacy data to support regulatory approval to commercialize the drug or therapeutic.  Even if we believe the data collected from clinical trials of our drug and therapeutic candidates are promising, such data may not be sufficient to support approval by the FDA or any other United States or foreign regulatory authority.  Preclinical and clinical data can be interpreted in different ways.  Accordingly, FDA officials or officials from foreign regulatory authorities could interpret the data in different ways than we or our partners do, which could delay, limit or prevent regulatory approval.

Administering any of our drug candidates and therapeutic products, or potential drug candidates that are the subject of preclinical studies to animals, may produce undesirable side effects, also known as adverse effects.  Toxicities and adverse effects that we have observed in preclinical studies for some compounds in a particular research and development program may occur in preclinical studies or clinical trials of other compounds from the same program.  Such toxicities or adverse effects could delay or prevent the filing of an IND or comparable regulatory filing abroad with respect to such drug candidates or potential drug candidates or cause us to cease clinical trials with respect to any drug candidate.  In clinical trials, administering any of our drug candidates to humans may produce adverse effects.  These adverse effects could interrupt, delay or halt clinical trials of our drug candidates and could result in the FDA or other regulatory authorities denying approval of our drug candidates for any or all targeted indications.  The FDA, other regulatory authorities, our partners or we may suspend or terminate clinical trials at any time.  Even if one or more of our drug candidates were approved for sale, the occurrence of even a limited number of toxicities or adverse effects when used in large populations may cause the FDA to impose restrictions on, or prevent, the further marketing of such drugs.  Indications of potential adverse effects or toxicities which may occur in clinical trials and which we believe are not significant during the course of such trials may later turn out to actually constitute serious adverse effects or toxicities when a drug has been used in large populations or for extended periods of time.  Any failure or significant delay in completing preclinical studies or clinical trials for our drug candidates, or in receiving and maintaining regulatory approval for the sale of any drugs resulting from our drug candidates, may severely harm our reputation and business.

 
25

 
 
Clinical trials are expensive, time consuming and subject to delay.

Clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous requirements.  The clinical trial process is also time consuming.  According to industry sources, the entire drug development and testing process takes on average 12 to 15 years.  According to industry studies, the fully capitalized resource cost of new drug development averages approximately $800 million; however, individual trials and individual drug candidates may incur a range of costs above or below this average.  We estimate that clinical trials of our most advanced drug candidates will continue for several years, but may take significantly longer to complete.  The commencement and completion of our clinical trials could be delayed or prevented by several factors, including, but not limited to:
 
·
delays in obtaining regulatory approvals to commence a clinical trial;
 
·
delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites;
 
·
slower than expected rates of patient recruitment and enrollment, including as a result of the introduction of alternative therapies or drugs by others;
 
·
lack of effectiveness during clinical trials;
 
·
unforeseen safety issues;
 
·
adequate supply of clinical trial material;
 
·
uncertain dosing issues;
 
·
introduction of new therapies or changes in standards of practice or regulatory guidance that render our clinical trial endpoints or the targeting of our proposed indications obsolete;
 
·
inability to monitor patients adequately during or after treatment; and
 
·
inability or unwillingness of medical investigators to follow our clinical protocols.
 
We do not know whether planned clinical trials will begin on time, will need to be restructured or will be completed on schedule, if at all.  Significant delays in clinical trials will impede our ability to commercialize our drug candidates and generate revenue and could significantly increase our development costs, any of which could significantly and negatively impact our results of operations and harm our business.

 
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If we fail to enter into and maintain successful strategic alliances for certain of our therapeutic products or drug candidates, we may have to reduce or delay our drug candidate development or increase our expenditures.

Our strategy for developing, manufacturing and commercializing certain of our therapeutic products or drug candidates involves entering into and successfully maintaining strategic alliances with pharmaceutical companies or other industry participants to advance our programs and reduce our expenditures on each program.  However, we may not be able to maintain our current strategic alliances or negotiate additional strategic alliances on acceptable terms, if at all.  If we are not able to maintain our existing strategic alliances or establish and maintain additional strategic alliances, we may have to limit the size or scope of, or delay, one or more of our drug development programs or research programs or undertake and fund these programs ourselves or otherwise reevaluate or exit a particular business.  To the extent that we are required to increase our expenditures to fund research and development programs or our therapeutic programs or cellular systems technologies on our own, we will need to obtain additional capital, which may not be available on acceptable terms, or at all.
 
Our proprietary rights may not adequately protect our technologies and drug candidates.

Our commercial success will depend in part on our obtaining and maintaining patent protection and trade secret protection of our technologies and drug candidates as well as successfully defending these patents against third-party challenges.  We will only be able to protect our technologies and drug candidates from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.  Furthermore, the degree of future protection of 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.

The patent positions of life sciences 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 such companies’ 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 or 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.  For example:
 
·
we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
 
·
we or 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 technologies;
 
·
it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
 
·
our issued patents and issued patents of our licensors may not provide a basis for commercially viable drugs, or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; and
 
·
we may not develop additional proprietary technologies or drug candidates that are patentable.
 
 
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We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable.  However, trade secrets are difficult to protect.  While we use reasonable efforts to protect our trade secrets, our or our strategic partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our information to competitors.  If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable.  In addition, courts outside the United States are sometimes less willing to protect trade secrets.  Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed.

If we are not able to defend the patent or trade secret protection position of our technologies and drug candidates, then we will not be able to exclude competitors from developing or marketing competing drugs, and we may not generate enough revenue from product sales to justify the cost of development of our drugs and to achieve or maintain profitability.
 
If we are sued for infringing intellectual property rights of third parties, such litigation will be costly and time consuming, and an unfavorable outcome would have a significant adverse effect on our business.

Our ability to commercialize drugs depends on our ability to sell such drugs without infringing the patents or other proprietary rights of third parties.  Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the areas that we are exploring.  In addition, because patent applications can take several years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our drug candidates may infringe.  There could also be existing patents of which we are not aware that our drug candidates may inadvertently infringe.

Future products of ours may be impacted by patents of companies engaged in competitive programs with significantly greater resources.  Further development of these products could be impacted by these patents and result in the expenditure of significant legal fees.

If a third party claims that our actions infringe on their patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including, but not limited to:
 
·
infringement and other intellectual property claims that, with or without merit, can be costly and time consuming to litigate and can delay the regulatory approval process and divert management’s attention from our core business strategy;
 
·
substantial damages for past infringement which we may have to pay if a court determines that our drugs or technologies infringe upon a competitor’s patent or other proprietary rights;
 
·
a court prohibiting us from selling or licensing our drugs or technologies unless the holder licenses the patent or other proprietary rights to us, which it is not required to do; and
 
·
if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights.

 
28

 
 
We may become involved in disputes with our strategic partners over intellectual property ownership, and publications by our research collaborators and scientific advisors could impair our ability to obtain patent protection or protect our proprietary information, which, in either case, would have a significant impact on our business.

Inventions discovered under our strategic alliance agreements become jointly owned by our strategic partners and us in some cases, and the exclusive property of one of us in other cases.  Under some circumstances, it may be difficult to determine who owns a particular invention, or whether it is jointly owned, and disputes could arise regarding ownership of those inventions.  These disputes could be costly and time consuming, and an unfavorable outcome would have a significant adverse effect on our business if we were not able to protect or license rights to these inventions.  In addition, our research collaborators and scientific advisors have contractual rights to publish our data and other proprietary information, subject to our prior review.  Publications by our research collaborators and scientific advisors containing such information, either with our permission or in contravention of the terms of their agreements with us, may impair our ability to obtain patent protection or protect our proprietary information, which could significantly harm our business.
 
To the extent we elect to fund the development of a drug candidate or the commercialization of a drug at our expense, we will need substantial additional funding.

The discovery, development and commercialization of drugs is costly.  As a result, to the extent we elect to fund the development of a drug candidate or the commercialization of a drug at our expense, we will need to raise additional capital to:

·
expand our research and development and technologies;

·
fund clinical trials and seek regulatory approvals;

·
build or access manufacturing and commercialization capabilities;

·
implement additional internal systems and infrastructure;

·
maintain, defend and expand the scope of our intellectual property; and

·
hire and support additional management and scientific personnel.

Our future funding requirements will depend on many factors, including, but not limited to:

·
the rate of progress and cost of our clinical trials and other research and development activities;

·
the costs and timing of seeking and obtaining regulatory approvals;

·
the costs associated with establishing manufacturing and commercialization capabilities;

·
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

·
the costs of acquiring or investing in businesses, products and technologies;

·
the effect of competing technological and market developments; and

·
the payment and other terms and timing of any strategic alliance, licensing or other arrangements that we may establish.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings and strategic alliances.  We cannot be certain that additional funding will be available on acceptable terms, or at all.  If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs or future commercialization initiatives.

 
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We have limited capacity to carry out our own clinical trials in connection with the development of our drug candidates and potential drug candidates, and to the extent we elect to develop a drug candidate without a strategic partner we will need to expand our development capacity, and we will require additional funding.

The development of drug candidates is complicated, and requires resources and experience for which we currently have limited resources.  To the extent we conduct clinical trials for a drug candidate without support from a strategic partner we will need to develop additional skills, technical expertise and resources necessary to carry out such development efforts on our own or through the use of other third parties, such as contract research organizations, or CROs.

If we utilize CROs, we will not have control over many aspects of their activities, and will not be able to fully control the amount or timing of resources that they devote to our programs.  These third parties also may not assign as high a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves, and therefore may not complete their respective activities on schedule.  CROs may also have relationships with our competitors and potential competitors, and may prioritize those relationships ahead of their relationships with us.  Typically we would prefer to qualify more than one vendor for each function performed outside of our control, which could be time consuming and costly.  The failure of CROs to carry out development efforts on our behalf according to our requirements and FDA or other regulatory agencies’ standards, or our failure to properly coordinate and manage such efforts, could increase the cost of our operations and delay or prevent the development, approval and commercialization of our drug candidates.

If we fail to develop additional skills, technical expertise and resources necessary to carry out the development of our drug candidates, or if we fail to effectively manage our CROs carrying out such development, the commercialization of our drug candidates will be delayed or prevented.
 
We currently have no marketing or sales staff, and if we are unable to enter into or maintain strategic alliances with marketing partners or if we are unable to develop our own sales and marketing capabilities, we may not be successful in commercializing our potential drugs or therapeutic products.

We currently have no internal sales, marketing or distribution capabilities.  To commercialize our products or drugs that we determine not to market on our own, we will depend on strategic alliances with third parties, which have established distribution systems and direct sales forces.  If we are unable to enter into such arrangements on acceptable terms, we may not be able to successfully commercialize such products or drugs.  If we decide to commercialize products or drugs on our own, we will need to establish our own specialized sales force and marketing organization with technical expertise and with supporting distribution capabilities.  Developing such an organization is expensive and time consuming and could delay a product launch.  In addition, we may not be able to develop this capacity efficiently, or at all, which could make us unable to commercialize our products and drugs.

To the extent that we are not successful in commercializing any products or drugs ourselves or through a strategic alliance, our product revenues will suffer, we will incur significant additional losses and the price of our common stock will be negatively affected.
 
We rely on third parties to produce our products and clinical trial drug supplies, and anticipate continued reliance on contract manufacturers for the development and commercialization of our potential products and drugs.

We do not currently operate manufacturing facilities for clinical or commercial production of our drug candidates or potential drug candidates that are under development.  We have no experience in drug formulation or manufacturing, and we lack the resources and the capabilities to manufacture any of our drug candidates on a clinical or commercial scale.  We anticipate reliance on a limited number of contract manufacturers.  Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval of our drug candidates or commercialization of our drugs, producing additional losses and depriving us of potential product revenues.

 
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Our products and drug candidates require precise, high quality manufacturing.  Our failure or our contract manufacturer’s failure to achieve and maintain high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.  Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.  These manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S. Drug Enforcement Agency and other regulatory agencies to ensure strict compliance with current good manufacturing practices and other applicable government regulations and corresponding foreign standards; however, we do not have control over contract manufacturers’ compliance with these regulations and standards.  If one of our contract manufacturers fails to maintain compliance, the production of our drug candidates could be interrupted, resulting in delays, additional costs and potentially lost revenues.  Additionally, our contract manufacturer must pass a preapproval inspection before we can obtain marketing approval for any of our drug candidates in development.

If the FDA or other regulatory agencies approve any of our products or our drug candidates for commercial sale, we will need to manufacture them in larger quantities.  Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve.  If we are unable to successfully increase the manufacturing capacity for a product or drug candidate, the regulatory approval or commercial launch of any related products or drugs may be delayed or there may be a shortage in supply.  Even if any contract manufacturer makes improvements in the manufacturing process for our products and drug candidates, we may not own, or may have to share, the intellectual property rights to such improvements.

In addition, our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our products and drug candidates.  In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace such contract manufacturer in a timely manner and the production of our products or drug candidates would be interrupted, resulting in delays and additional costs.

Switching manufacturers may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer prior to manufacturing our products or drug candidates.  Such approval would require new testing and compliance inspections.  In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our drug candidates after receipt of FDA approval.  It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all.
 
We expect to expand our development, clinical research and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to have significant growth in expenditures, the number of our employees and the scope of our operations, in particular with respect to those drug candidates that we elect to develop or commercialize independently or together with a partner.  To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel.  Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel.  The physical expansion of our operations may lead to significant costs and may divert our management and business development resources.  Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

 
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The failure to attract and retain skilled personnel could impair our drug development and commercialization efforts.

Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel.  The employment of these individuals and our other personnel is terminable at will with short or no notice.  The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of drug development and other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, and could have a material adverse effect on our business, operating results and financial condition.  We also rely on consultants and advisors to assist us in formulating our research and development strategy.  All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us.  In addition, we believe that we will need to recruit additional executive management and scientific and technical personnel.  There is currently intense competition for skilled executives and employees with relevant scientific and technical expertise, and this competition is likely to continue.  Our inability to attract and retain sufficient scientific, technical and managerial personnel could limit or delay our product development efforts, which would adversely affect the development of our products and drug candidates and commercialization of our products and potential drugs and growth of our business.
 
Risks Related to Our Industry
 
Our competitors may develop products and drugs that are less expensive, safer, or more effective, which may diminish or eliminate the commercial success of any drugs that we may commercialize.

We compete with companies that are also developing alternative products and drug candidates.  Our competitors may:

·
develop products and drug candidates and market products and drugs that are less expensive or more effective than our future drugs;

·
commercialize competing products and drugs before we or our partners can launch any products and drugs developed from our drug candidates;

·
obtain proprietary rights that could prevent us from commercializing our products;

·
initiate or withstand substantial price competition more successfully than we can;

·
have greater success in recruiting skilled scientific workers from the limited pool of available talent;

·
more effectively negotiate third-party licenses and strategic alliances;

·
take advantage of acquisition or other opportunities more readily than we can;

·
develop products and drug candidates and market products and drugs that increase the levels of safety or efficacy or alter other product and drug candidate profile aspects that our products and drug candidates need to show in order to obtain regulatory approval; and

·
introduce technologies or market products and drugs that render the market opportunity for our potential products and drugs obsolete.

 
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We will compete for market share against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations.  Many of these competitors, either alone or together with their partners, may develop new products and drug candidates that will compete with ours, as these competitors may, and in certain cases do, operate larger research and development programs or have substantially greater financial resources than we do.  Our competitors may also have significantly greater experience in:

·
developing products and drug candidates;

·
undertaking preclinical testing and clinical trials;

·
building relationships with key customers and opinion-leading physicians;

·
obtaining and maintaining FDA and other regulatory approvals;

·
formulating and manufacturing; and

·
launching, marketing and selling products and drugs.

If our competitors market products and drugs that are less expensive, safer or more efficacious than our potential products and drugs, or that reach the market sooner than our potential products and drugs, we may not achieve commercial success.  In addition, the life sciences industry is characterized by rapid technological change.  Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology.  If we fail to stay at the forefront of technological change we may be unable to compete effectively.  Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies.
 
The regulatory approval process is expensive, time consuming and uncertain and may prevent us from obtaining approvals for the commercialization of some or all of our products and drug candidates.

The research, testing, manufacturing, selling and marketing of drug candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country.  We may not market our potential drugs in the United States until we receive approval of an NDA from the FDA.  Obtaining an NDA can be a lengthy, expensive and uncertain process.  In addition, failure to comply with the FDA and other applicable foreign and United States regulatory requirements may subject us to administrative or judicially imposed sanctions.  These include warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NDAs, or supplements to approved NDAs.

Regulatory approval of an NDA or NDA supplement is never guaranteed, and the approval process typically takes several years and is extremely expensive.  The FDA also has substantial discretion in the drug approval process.  Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical testing and clinical trials.  The number and focus of preclinical studies and clinical trials that will be required for FDA approval varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate.  The FDA can delay, limit or deny approval of a drug candidate for many reasons, including:
 
·
a drug candidate may not be safe or effective;

·
FDA officials may not find the data from preclinical testing and clinical trials sufficient;

 
33

 
  
·
the FDA might not approve our or our contract manufacturer’s processes or facilities; or

·
the FDA may change its approval policies or adopt new regulations.
 
The use of immortalized hepatocytes for drug discovery purposes does not require FDA approval.
 
The Sybiol® synthetic bio-liver device will be classified as a "biologic" regulated under the Public Health Service Act and the Food, Drug and Cosmetic Act.  The use of human immortalized liver cells for this application will also be regulated by the FDA.  We have not yet begun the regulatory approval process for our Sybiol® biosynthetic liver device with the FDA.  We may, when adequate funding and resources are available, begin the approval process.  If we are able to validate the device design, then we currently plan to find a partner to take the project forward.  Before human studies may begin, the cells provided for the system will be subjected to the same scrutiny as the Sybiol device.  We will need to demonstrate sufficient process controls to meet strict standards for a complex medical system.  This means the cell production facility will need to meet the same Good Manufacturing Practice standards as those pertaining to a pharmaceutical company.
 
If we receive regulatory approval, we will also be subject to ongoing FDA obligations and continued regulatory review, such as continued safety reporting requirements, and we may also be subject to additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize our potential drugs.

Any regulatory approvals that we or our partners receive for our drug candidates may also be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies.  In addition, if the FDA approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping for the drug will be subject to extensive regulatory requirements.  The discovery of previously unknown problems with the drug, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates.  We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad.  If we are not able to maintain regulatory compliance, we might not be permitted to market our drugs and our business could suffer.
 
If physicians and patients do not accept our drugs, we may be unable to generate significant revenue, if any.

Even if our drug candidates obtain regulatory approval, resulting drugs, if any, may not gain market acceptance among physicians, healthcare payors, patients and the medical community.  Even if the clinical safety and efficacy of drugs developed from our drug candidates are established for purposes of approval, physicians may elect not to recommend these drugs for a variety of reasons including, but not limited to:

·
timing of market introduction of competitive drugs;

·
clinical safety and efficacy of alternative drugs or treatments;

·
cost-effectiveness;

·
availability of reimbursement from health maintenance organizations and other third-party payors;

 
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·
convenience and ease of administration;

·
prevalence and severity of adverse side effects;

·
other potential disadvantages relative to alternative treatment methods; and

·
insufficient marketing and distribution support.

If our drugs fail to achieve market acceptance, we may not be able to generate significant revenue and our business would suffer.
 
The coverage and reimbursement status of newly approved drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to market any drugs we may develop and decrease our ability to generate revenue.

There is significant uncertainty related to the coverage and reimbursement of newly approved drugs.  The commercial success of our potential drugs in both domestic and international markets is substantially dependent on whether third-party coverage and reimbursement is available for the ordering of our potential drugs by the medical profession for use by their patients.  Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs, and, as a result, they may not cover or provide adequate payment for our potential drugs.  They may not view our potential drugs as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential drugs to be marketed on a competitive basis.  Likewise, legislative or regulatory efforts to control or reduce healthcare costs or reform government healthcare programs could result in lower prices or rejection of coverage for our potential drugs.  Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our drugs may cause our revenue to decline.
 
We may be subject to costly product liability claims and may not be able to obtain adequate insurance.

If we conduct clinical trials in humans, we face the risk that the use of our drug candidates will result in adverse effects.  We cannot predict the possible harms or side effects that may result from our clinical trials.  We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage.

In addition, once we have commercially launched drugs based on our drug candidates, we will face exposure to product liability claims.  This risk exists even with respect to those drugs that are approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA.  We intend to secure limited product liability insurance coverage, but may not be able to obtain such insurance on acceptable terms with adequate coverage, or at reasonable costs.  There is also a risk that third parties that we have agreed to indemnify could incur liability.  Even if we were ultimately successful in product liability litigation, the litigation would consume substantial amounts of our financial and managerial resources and may create adverse publicity, all of which would impair our ability to generate sales of the affected product as well as our other potential drugs.  Moreover, product recalls may be issued at our discretion or at the direction of the FDA, other governmental agencies or other companies having regulatory control for drug sales.  If product recalls occur, such recalls are generally expensive and often have an adverse effect on the image of the drugs being recalled as well as the reputation of the drug’s developer or manufacturer.
 
 
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We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
 
Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors.  Although no such claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers.  Litigation may be necessary to defend against these claims.  If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.  A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential drugs, which could severely harm our business.  Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
 
We use hazardous chemicals and radioactive and biological materials in our business.  Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials.  Our operations produce hazardous waste products.  We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from those materials.  Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials.  We may be sued for any injury or contamination that results from our use or the use by third parties of these materials.  Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production efforts.

In addition, our partners may use hazardous materials in connection with our strategic alliances.  To our knowledge, their work is performed in accordance with applicable biosafety regulations.  In the event of a lawsuit or investigation, however, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials used by these parties.  Further, we may be required to indemnify our partners against all damages and other liabilities arising out of our development activities or drugs produced in connection with these strategic alliances.

Risks Related To Our Common Stock
 
We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above your investment price.

The market price of our common stock, as well as the market prices of securities of companies in the life sciences and biotechnology sectors generally, have been highly volatile and are likely to continue to be highly volatile.  While the reasons for the volatility of the market price of our common stock and its trading volume are sometimes unknown, in general the market price of our common stock may be significantly impacted by many factors, including, but not limited to:

·
results from, and any delays in, the clinical trials programs for our products and drug candidates;

·
delays in or discontinuation of the development of any of our products and drug candidates;

·
failure or delays in entering additional drug candidates into clinical trials;

·
failure or discontinuation of any of our research programs;

·
delays or other developments in establishing new strategic alliances;

·
announcements concerning our existing or future strategic alliances;

·
issuance of new or changed securities analysts’ reports or recommendations;

·
market conditions in the pharmaceutical and biotechnology sectors;

 
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·
actual or anticipated fluctuations in our quarterly financial and operating results;

·
the exercise of outstanding options and warrants, the conversion of outstanding convertible preferred stock and debt and the issuance of additional options, warrants, preferred stock and convertible debt;

·
developments or disputes concerning our intellectual property or other proprietary rights;

·
introduction of technological innovations or new commercial products by us or our competitors;

·
issues in manufacturing our drug candidates or drugs;

·
market acceptance of our products and drugs;

·
third-party healthcare reimbursement policies;

·
FDA or other United States or foreign regulatory actions affecting us or our industry;

·
litigation or public concern about the safety of our products, drug candidates or drugs;

·
additions or departures of key personnel; and

·
volatility in the stock prices of other companies in our industry.

These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock.  In addition, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock.  If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit.  Such a lawsuit could also divert the time and attention of our management.

Our common stock is subject to penny stock regulation, which may affect its liquidity.

Our common stock is subject to regulations of the Securities and Exchange Commission (the "Commission") relating to the market for penny stocks.  Penny stock, as defined by the Penny Stock Reform Act, is any equity security not traded on a national securities exchange or quoted on the NASDAQ National Market or SmallCap Market that has a market price of less than $5.00 per share.  The penny stock regulations generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors.  The broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to the sale.  In addition, the broker-dealer must make certain mandated disclosures, including the actual sale or purchase price and actual bid offer quotations, as well as the compensation to be received by the broker-dealer and certain associated persons.  The regulations applicable to penny stocks may severely affect the market liquidity for our common stock and could limit your ability to sell your securities in the secondary market.

It is anticipated that dividends will not be paid in the foreseeable future.

The Company does not intend to pay dividends on its common stock in the foreseeable future.  There can be no assurance that the operation of the Company will result in sufficient revenues to enable the Company to operate at profitable levels or to generate positive cash flows.  Further, dividend policy is subject to the discretion of the Company's Board of Directors and will depend on, among other things, the Company's earnings, financial condition, capital requirements and other factors.

 
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Our common stock is thinly traded and there may not be an active, liquid trading market for our common stock.

There is no guarantee that an active trading market for our common stock will be maintained on the OTCBB or that the volume of trading will be sufficient to allow for timely trades.  Investors may not be able to sell their shares quickly or at the latest market price if trading in our stock is not active or if trading volume is limited.  In addition, if trading volume in our common stock is limited, trades of relatively small numbers of shares may have a disproportionate effect on the market price of our common stock.

We have convertible securities outstanding that can be converted into more shares of common stock then we have currently authorized.

We have warrants to purchase common stock, stock options, convertible debentures and convertible preferred stock outstanding that if converted and/or exercised, according to their terms can result in the requirement that we issue more shares than we have currently authorized under our Certificate of Incorporation.  This could result in our default under such agreements and may force us to amend the Certificate of Incorporation to authorize more shares or seek other remedies.  While we intend to redeem and remove certain agreements in order to reduce the number of convertible securities outstanding, there is no guarantee that we will be successful.

Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3: DEFAULTS UPON SENIOR SECURITIES

None.

Item 4: REMOVED AND RESERVED

Item 5: OTHER INFORMATION

None.

Item 6: EXHIBITS:
 
Exhibit
   
Number
 
Description
     
31.1*
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302.
     
32.1*
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
 

*       Filed herewith.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MULTICELL TECHNOLOGIES, INC.
     
October 12, 2010
By:
/s/ W. Gerald Newmin 
     
   
W. Gerald Newmin
   
(Chief Executive Officer and Chief Financial Officer)
 
 
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