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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB (X) Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended November 30, 2003. Commission File Number EXTEN INDUSTRIES, INC. DELAWARE 52-1412493 55 Access Rd, Suite 700 Securities registered under Section 12(b) of the Exchange Act: Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered
(Name of small business issuer in its charter)
incorporation or organization)
Warwick, RI 02886
(401) 384-6789
(Address and telephone number of principal executive offices)
None
Common Stock, $0.01 par value per share
OTC Bulletin Board
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $ 365,166.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity as of a specified date within the past 60 days (based upon 83,417,783 shares held by non-affiliates and the closing price of $.68 per share for the common stock on the over-the counter market as of January 15, 2004): $56,724,092
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 117,937,367 shares of common stock as of January 14, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one): Yes ____ No __X_
- 1 -
______________________________________________________________________________
EXTEN INDUSTRIES, INC.
FORM 10-K
INDEX
PART I |
PAGE |
|
Item 1. |
DESCRIPTION OF BUSINESS |
3 |
Item 2. |
DESCRIPTION OF PROPERTY |
7 |
Item 3. |
LEGAL PROCEEDINGS |
7 |
Item 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
7 |
PART II |
||
Item 5. |
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
7 |
Item 6. |
MANAGEMENT'S DISCUSSION AND ANALYSIS |
8 |
Item 7. |
FINANCIAL STATEMENTS |
11 |
Item 8. |
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
11 |
Item 8A. |
DISCLOSURE CONTROLS AND PROCEDURES |
12 |
PART III |
||
Item 9. |
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |
13 |
Item 10. |
EXECUTIVE COMPENSATION |
15 |
Item 11. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
17 |
Item 12. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
18 |
Item 13. |
EXHIBITS AND REPORTS ON FORM 8-K |
19 |
Item 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
19 |
SIGNATURES |
19 |
|
PART IV |
||
CONSOLIDATED FINANCIAL STATEMENTS |
F1 - F23 |
- 2 -
______________________________________________________________________________
PART I
Item 1. DESCRIPTION OF BUSINESS
About Exten Industries, Inc.
Exten Industries, Inc., (Exten) is a holding company that operates two subsidiary companies, MultiCell Technologies, Inc., ("MultiCell") and Xenogenics Corporation ("Xenogenics") Exten was incorporated in Delaware on April 28, 1970 under the name of "Exten Ventures, Inc". Our principal offices are at 55 Access Rd Warwick, RI 02886, (401) 384-6789.
MultiCell, formerly MultiCell Associates, Inc., our wholly-owned subsidiary, was acquired in September 2001, for $2.2 million in cash and stock. MultiCell develops, sells and licenses hepatic or liver cells, cell lines, and associated products to be used in drug development, diagnostic and therapeutic applications. MultiCell has developed proprietary immortalized human hepatocytes (liver cells) that have been genetically manipulated to allow them to replicate while retaining liver function. This allows for the continuous growth, and therefore supply, of human liver cells. There is a great need for human liver cells for critical research in the pharmaceutical industry. The sale of hepatocytes for use in the pharmaceutical industry for testing new drugs does not require approval by the Food and Drug Administration ( "FDA"). Sales of immortalized human cell lines for non-human uses began in late 2002. Our cell lines are currently sold and distributed t hrough an exclusive agreement with XenoTech, LLC ("XenoTech"). The XenoTech Agreement, which was signed in August, 2003, is for seven years and calls for minimum annual payments totaling $18 million during the contract for XenoTech to maintain its exclusive distribution position. In February 2003, MultiCell signed a 15-year license agreement with Pfizer for non-exclusive research use of our two proprietary human liver cell lines. MultiCell began shipping assay plates containing immortalized hepatic cells to other pharmaceutical companies during 2003. Multi-Cell also sells an exclusive culture media for optimum growth of the hepatocytes.
MultiCell is differentiated by two key technology platforms: its understanding of the function and manipulation of the liver cell and its understanding of cell therapy and cell transplantation. MultiCell's intellectual property portfolio positions the Company for use of immortalized mammalian hepatocytes for treating liver disease. MultiCell has established a worldwide reputation as a source of immortalized liver cell lines. Although MultiCell's unique intellectual property and capabilities are applicable to other cell types, MultiCell has strategically chosen to focus on liver cells in particular, leveraging our experience and history to customize cell lines specific to that niche.
One application for MultiCell's hepatocytes is use in an artificial liver device. Xenogenics, our majority-owned (56.4%) subsidiary, owns all of the rights to the SybiolR synthetic bio-liver device for which notice of allotment for a United States patent has been issued. The Sybiol "artificial liver" is intended to act as a substitute liver for a patient whose own liver is healing from injury or disease or for use as an artificial liver "bridge" for transplant patients awaiting a donor organ. This is accomplished by exposing the plasma portion of the blood to functioning liver cells which perform the functions of the damaged liver of the patient. Theoretically, the artificial device can replace the essential functions of the normal liver. The key to our device or other devices attempting to gain approval is the functionality of the cells. The Sybiol device is presumed to create a more natural environment that will contribute positively t o cell functionality. The design is unique compared to other devices in that it includes a chamber with inserts to which cells attach, presumably emulating the normal environment. Today this is theoretical and has not been subjected to clinical study. The device may also be used to assist and improve the quality of life for patients with chronic liver disease or episodic liver trauma. We are currently working on a new design for this device and a compatible engineered cell line to work with it. Xenogenics has a Research and Development Agreement and a Supplier Agreement with MultiCell pursuant to which MultiCell will supply engineered human liver cell lines and optimize the interface between these cell lines and the Sybiol synthetic bio-liver device. MultiCell scientists have redesigned the chamber that will hold the hepatocytes believing that this change will allow for a healthier more functional cell. An engineered cell line is expected to eliminate variability in patient treatment and limit the viral risks associated with primary porcine hepatocytes. Technologies, such as this device, which are regulated by the Food and Drug Administration can take approximately three to five years to develop and commercialize, due to the regulatory approval process pursuant to which we will conduct required clinical studies. The necessary clinical studies, which will involve animal as well as three phases of human study, and the speed of completion, are dependant on a number of factors including clinical evidence of safety and efficacy and the availability of qualified patients. To our knowledge, no mass-produced liver device of the type that we are developing is currently available.
Xenogenics has not generated any revenues. We estimate that we will need approximately $500,000 to validate the Sybiol synthetic bio-liver device through large animal testing. Assuming we can establish through testing that the Sybiol device can perform liver functions, we plan to joint venture the future development of this product with a major dialysis or pharmaceutical company. After establishing such a partnership, our goal will be to seek and obtain regulatory approval and introduce the Sybiol device for general distribution.
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______________________________________________________________________________
Xenogenics is currently owned as follows:
Exten Industries, Inc. |
56.4% |
Kestrel Equity Partners, Ltd. |
21.7% |
Jack Schaps |
12.5% |
W. Gerald Newmin |
8.0% |
Others |
1.4% |
An engineered human cell line is expected to eliminate variability in patient treatment and limit the viral risks associated with primary porcine hepatocytes.
The use of immortalized hepatocytes for drug discovery research does not require FDA approval. However, some of our products will be subject to regulation in the United States by the FDA and by comparable regulatory authorities in foreign jurisdictions. Future products including Therapeutic Plasma Proteins, stem cell transplantation and the Sybiol device will be regulated under the Public Health Service Act and the Food, Drug and Cosmetic Act. The use of engineered liver cells generated by MultiCell for this application will also be regulated by the FDA. Development of a therapeutic product for human use is a multi-step process. After acceptance of a plan by the FDA, animal and human testing must be completed. Human clinical investigations typically involve three phases. Phase I is conducted to evaluate the safety of the experimental product in humans. If acceptable product safety is demonstrated, the Phase II and III studies are initiated. These trials are designed to evaluate the effectiveness of the product in the treatment of a given disease and, typically, are well controlled, closely monitored studies. As Phase II trials are successfully completed, Phase III studies will commence with expanded controlled and uncontrolled trials which are intended to gather additional information about safety and efficacy in order to evaluate the overall risk/benefit relationship of the experimental product and provide an adequate basis for physician labeling. These studies also may compare the safety and efficacy of the experimental device with currently available products. While it is not possible to estimate the amount of time that will be required to complete Phase I, II and III studies, this process, often dependant on the availability of patients, may last three to five years.
We have not yet begun human clinical trials for the Sybiol device. We intend to begin such trials by the end of 2004 upon completion of the redesign and validation of the device. MultiCell scientists have redesigned the chamber that will hold the hepatocytes believing that this change will allow for healthier more functional cells. We estimate that we will need approximately $500,000 to validate the efficacy of the device. Once the device has demonstrated functionality, the Company intends to seek joint venture arrangements with major renal dialysis companies to complete the development and commercialization of this product.
Presently, our focus is on the generation of short-term revenue to stabilize our cash position. Most pharmaceutical companies in the world have a need for highly functional human liver cells. The engineered liver cells developed by MultiCell appear to meet many of these needs. These cells present an immediate sales revenue opportunity. We recently signed an exclusive sales and distribution agreement with XenoTech, LLC. XenoTech will pay a royalty to MultiCell on all sales of cells and cell products. The agreement is for seven years and calls for annual minimum royalty payments in order to maintain the exclusive arrangement.
With respect to MultiCell's efforts on behalf of Xenogenics, before human studies may begin, the cells provided for the Sybiol system by MultiCell will be subjected to the same FDA scrutiny as the Sybiol device. MultiCell will need to demonstrate sufficient process controls to meet strict standards for a complex medical system. This means the cell production facility will need to meet the same standards as those pertaining to a pharmaceutical company. The cells may be produced in our own facility or by a manufacturing partner for such an operation. Our plan is to partner with a major pharmaceutical company to bring our therapeutic proteins to market. The expertise of such a partner for such a complex endeavor would be invaluable in completing such a program.
- 4 -
______________________________________________________________________________
About Our Revenues
We began to generate revenues during the fiscal year. On August 1, 2003, MultiCell signed an exclusive agreement with XenoTech pursuant to which XenoTech will distribute our engineered cell lines. The agreement calls for XenoTech to make annual minimum royalty payments in order for it to retain the exclusive distribution rights to our cell lines The aggregate of the foregoing minimum payments over the seven year term is approximately $18 Million.
In early 2003, Pfizer signed a 15-year non-exclusive license agreement for further research use of our two cell lines. During fiscal year 2003, we began receiving orders from and making shipments to other pharmaceutical companies.
Patents and Proprietary Technology
Any proprietary protection that our Company can obtain and maintain will be important to our business. MultiCell has an exclusive, long-term license agreement with Rhode Island Hospital for use of the following patents owned by the Hospital related to liver cell lines and Liver Assist Devices (LADs)
US Patent #6,017,760, Isolation and Culture of Porcine Hepatocytes, expires October 9, 2015; |
|
US Patent #6,107,043, Immortalized Hepatocytes, expires February 8, 2019; |
|
US Patent #5,043,260, Perfusion Device for Hepatocytes, expires August 27, 2008; and |
|
US Patent #4,795,459, Implantable Prosthetic Device (Endothelial) expires January 3, 2006. |
|
US Patent #6129911, Liver Stem Cell, expires October 10, 2017 |
Now that MultiCell has begun to generate revenues and pay royalties, the annual license fee structure does not apply. The Company will pay a 5% royalty until it pays Rhode Island Hospital an aggregate of $550,000. After that, the royalty percentage decreases to 2% for the life of the patents.
Xenogenics was notified by the United States Patent and Trademark Office on November 3, 2003 that its patent application for an " Artificial Liver Apparatus And Method", the Sybiol Synthetic Bio-Liver Device, will be allowed. The Sybiol trademark is registered in the United States Patent and Trademark Office, number 2,048,080.
In December of 2003, Exten acquired the exclusive worldwide rights to US Patent # 6129911, for Liver Stem Cells. The Company will pay an annual license fee of $20,000 for the first three years and $10,000 per annum thereafter until a product is developed. Once a product is developed, the annual license fee will end and the Company will pay Rhode Island Hospital a 5% royalty on net sales until it pays an aggregate of $550,000 in royalties and a 2% royalty thereafter until the expiration of the patent.
Need for Government Approval
The use of immortalized hepatocytes for drug discovery purposes does not require FDA approval. However, some of our products will be subject to regulation in the United States by the Food and Drug Administration ("FDA") and by comparable regulatory authorities in foreign jurisdictions. 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 HepLiu cells for this application will also be regulated by the FDA. Development of a therapeutic product for human use is a multi-step process. First, animal and in vitro testing must establish the potential safety and efficacy of the experimental product for a given disease. Once the product is found to be reasonably safe and potentially efficacious in animals, suggesting that human testing would be appropriate, an Investigational New Drug ("IND") application is submitted to the FDA. FDA approval, which may in some circumstances involve substantial delays, is necessary before commencing clinical investigations.
Clinical investigations typically involve three phases. Phase I is conducted to evaluate the safety of the experimental product in humans, and if possible to obtain early evidence of effectiveness. Phase I studies also evaluate various routes, dosages and schedules of product administration. The demonstration of therapeutic benefit is not required in order to complete Phase I successfully. If acceptable product safety is demonstrated, the Phase II studies are initiated. The Phase II trials are designed to evaluate the effectiveness of the product in the treatment of a given disease and typically, are well controlled and closely monitored studies in a relatively small number of patients. The optimal routes and schedules of administration are determined in these studies.
As Phase II trials are successfully completed, Phase III studies will commence. Phase III studies are expanded controlled and uncontrolled trials which are intended to gather additional information about safety and efficacy in order to evaluate the overall risk/benefit relationship of the experimental product and provide an adequate basis for physician labeling. These studies also may compare the safety and efficacy of the experimental device with currently available products. While it is not possible to estimate the amount of time that will be required to complete Phase I, II and III studies, this process often lasts several years.
- 5 -
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Following the successful completion of these clinical investigations, the preclinical and clinical evidence that has been accumulated is submitted to the FDA as part of a product license application ("PLA"). Approval of the PLA or IND is necessary before a company may market the product. The approval process can be lengthy and depends upon the time it takes to review the submitted data and the FDA's comments on the application, and the time required to provide satisfactory answers or additional clinical data when requested.
In addition to the regulatory framework for product approvals, we are subject to regulation under state and federal law, including requirements regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation, including future regulation of the biotechnology field.
We have not yet begun the regulatory approval process for our Sybiol Bio-synthetic liver device with the FDA. We halted testing of the original device in early 2001pending our development of a new design for the liver device to improve oxygen availability. Improved oxygen availability increases the viability of the hepatocytes that is critical to an efficacious liver-assist device. The redesign was completed in late 2001. We intend, as soon as adequate funding is available, to begin the approval process again. Upon validation of the device design, the Company will attempt to find a partner to take the project forward. Before human studies may begin, the cells provided for the system by MultiCell will be subjected to the same scrutiny as the Sybiol device. MultiCell 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 sa me Good Manufacturing Practice ("GMP") standards as those pertaining to a pharmaceutical company, for example.
Research and Development
In fiscal 2003, our Company's research and development costs were $482,309. Research and development costs during fiscal 2002 were $548,840. Our MultiCell subsidiary will have three major research projects. The first will be continued efforts towards improving the functionality of our immortalized hepatocytes, introducing products utilizing these cells, and expanding our intellectual property base. Improvements in function will open even more markets and expand the usage in the current markets for our cells. Secondly, we will move forward on our therapeutic protein development program, taking a laboratory process and validating its commercial application. Finally, we will begin a research program focused on adult liver stem cells, for which Dr. Ronald Faris, Exten Chief Scientific Officer, holds a patent which was obtained from Rhode Island Hospital in December of 2003.
We intend to continue our research and development activities during fiscal 2004. Our Xenogenics subsidiary will focus its development efforts on the Sybiol synthetic bio-liver device. Our goal is to develop compelling data utilizing the device with large animals. This data will generate interest from potential partners who will fund future development costs.
Competition
We are engaged in businesses characterized by extensive research efforts, rapid technological change, and intense competition. A number of companies are pursuing artificial liver devices. However there appears to be only one real non -academic competitor in the immortalized hepatocyte business. Competitors in various stages of development of liver-related products or technologies include:
Amphioxis is focused on the sale of immortalized hepatocytes. The cells they are promoting are based on a cell line developed from a hepatoma (cancerous liver tumor) therefore the efficacy and functionality of the cells are suspect. |
|
|
|
Teraklin is a German based company developing a liver filtering system utilizing albumin to remove toxic substances. The system would appear to have use in critically ill patients to bridge them to transplantation. |
|
Hepalife is a Canadian firm that has a porcine cell line that it believes will have application in a liver assist device. To our knowledge, they do not have an actual device so they would be many years from having a commercially available product. |
|
VitaGen (formerly Hepatix) was acquired by Vital Therapies, Inc. after declaring bankruptcy. We believe they hope to restart their clinical trial program at some point in the future. |
|
In Europe, Braun Inc. has demonstrated interest in supporting the development of a complicated and sophisticated hollow fiber device, which has already been used to treat two patients. |
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To our knowledge, there is no approved affordable mass produced live-cell bio-artificial liver device currently available on the global market. Our device is intended to closely replicate human liver functions and not just to function as a blood-cleaning device. We believe that the differences in design between existing products and the Sybiol device will result in the Sybiol device achieving commercial success that will ultimately benefit our stockholders.
Employees
As of November 30, 2003, Exten had one full-time employee and one part-time employee; Xenogenics had one full-time employee and MultiCell had six full-time employees and one part-time employee.
Item 2. DESCRIPTION OF PROPERTY
Exten
Warwick, Rhode Island. Exten leases approximately 2,700 square feet of space in an office building located at 55 Access Rd., Warwick, RI 02886. The lease for the facility in Warwick requires aggregate monthly payments of $4,863 and continues through July 31, 2004. We believe the facilities are adequate for the near future and plan to negotiate a new lease.
Arizona. As of November 30, 2002, we owned 202 undeveloped lots in the Grand Canyon Development in Valle, Arizona, approximately 70 miles south of the Grand Canyon which were acquired by prior management as a tangible asset. We currently have no policy of acquisition of land for capital gain or income. We are currently in arrears on back taxes and interest in the amount of $120,000. Presently, we plan to deed 194 lots to the State of Arizona, following which we will have no obligation or liability with respect to such lots. The State has not given us a date yet when deeding can be executed. Since we have paid taxes within the last five years on 8 of the lots, Arizona law prohibits us from deeding these lots back to the state and we therefore intend to sell them as soon as possible. Our obligation with respect to such lots is approximately $800.
MultiCell Technologies and Xenogenics
Our two subsidiaries share the corporate facility in Warwick, Rhode Island facility that houses administration, research, development and manufacturing of human cells and cell lines. We are not currently considering potential new sites for our operations and do not plan to move, if at all, until late 2004.
Item 3. LEGAL PROCEEDINGS
The Company is not currently and was not a party to any lawsuits during the fiscal year.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board under the symbol EXTI.OB. Our stock is considered penny stock and is, therefore, subject to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Penny stock is defined as any equity security not traded on a national stock exchange or quoted on NASDAQ and that has a market price of less than $5.00 per share. Additional disclosure is required in connection with any trades involving a stock defined as a penny stock (subject to certain exceptions), including the delivery, prior to any such transaction, of a disclosure schedule explaining the penny stock market and the associated risks. Broker-dealers who recommend such low-priced securities to persons other than established customers and accredited investors satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchase and receive the purchaser's wri tten consent prior to the transaction.
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The table below gives the range of high and low bid prices of our common stock for the fiscal years ended November 30, 2003 and November 30, 2002 based on information provided by the OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without markup, markdown or commissions and may not necessarily represent actual transactions or a liquid trading market.
Fiscal Year Ended November 30, 2003 |
||
High |
Low |
|
First quarter |
$.09 |
$.05 |
Second quarter |
$.08 |
$.05 |
Third quarter |
$.12 |
$.09 |
Fourth quarter |
$1.16 |
$.09 |
Fiscal Year Ended November 30, 2002 |
||
High |
Low |
|
First quarter |
$.14 |
$.08 |
Second quarter |
$.11 |
$.08 |
Third quarter |
$.08 |
$.04 |
Fourth quarter |
$.08 |
$.04 |
No cash dividends have been paid on Exten Common Stock for the 2002 and 2003 fiscal years and no change of this policy is under consideration by the Board of Directors.
The payment of cash dividends in the future will be determined by the Board of Directors in light of conditions then existing, including our Company's earnings, financial requirements, and opportunities for reinvesting earnings, business conditions, and other factors. There are otherwise no restrictions on the payment of dividends. The number of shareholders of record of our Company's Common Stock on January 14, 2004 was approximately 1,242.
Recent Sales of Unregistered Securities
1. |
During fiscal year 2003, we issued thirteen convertible notes in the aggregate principal amount of $184,981. The notes are convertible into shares of our common stock at the following conversion rates: |
|
(1) |
$.10, if converted during the first twelve (12) months after the date of the related agreement; |
|
(2) |
$.15, if converted after the twelfth (12th) and through the twenty-fourth (24th) month of the related agreement; and |
|
(3) |
$.20, if converted after the twenty-fourth (24th) month of the related agreement and prior to the maturity date. |
The above transactions were issued in reliance upon the exemption provided under Section 4(2) of the Securities Act of 1933, as amended, on the basis that the securities were issued under circumstances not involving a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Annual Report on Form 10-KSB contains forward-looking statements that involve risks and uncertainties. These statements are based on certain assumptions that may prove to be erroneous and are subject to certain risks including, but not limited to, the Company's ability to complete and fund its research and development. The Company's actual results may differ significantly from the results discussed in the forward-looking statements.
Overview
Exten Industries, Inc. (the "Company") (OTCBB-EXTI) is a Rhode Island based medical products holding company whose focus is on the production and application of immortalized human liver cells in the treatment of liver disease. MultiCell Technologies, Inc. (MultiCell), a wholly owned subsidiary of the Company, is a global leader in producing immortalized human liver cells (hepatocytes). Xenogenics Corporation (Xenogenics) is a majority owned subsidiary that is developing a proprietary bio-artificial liver support device that utilizes MultiCell's immortalized cells.
Hepatocytes are the most bio-chemically complex cells in the human body and play an important role in the use and creation of carbohydrates, amino acids, proteins, lipids and nucleic acids. The hepatocyte is also the major player in the activation or inactivation of foreign toxic substances (xenobiotics). Understanding how the human body will react to foreign substances entering the body is a major part of all pharmaceutical and chemical development. If a pharmaceutical company can understand how the liver reacts to a substance early in the new drug development cycle, potentially millions of development dollars and years of time can be saved.
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MultiCell's immortalized liver cells have demonstrated the ability to replace the need for continuous procurement and quality testing of primary cells from donated human livers and the use of animal cells. Expanded from MultiCell cell banks these cell lines have significant cost and quality control advantages over primary cell sources. MultiCell's proprietary human immortalized hepatic cell lines radically differ from other immortalized cell lines in that they regenerate while maintaining liver function. A prolific cell without function is of no value. These cell lines provide a consistent and functional resource for drug discovery and toxicology research, and can also be applied to liver tissue regeneration. Additionally, MultiCell's cell lines produce therapeutic proteins that we believe may ultimately be used in new medicines
In August, 2003, MultiCell signed an exclusive sales, manufacture and distribution agreement for the use of its cell lines by XenoTech, which is an unrelated party. The agreement, which is for a term of seven years, required XenoTech to make an initial payment of $800,000 to MultiCell in August 2003 for the right to distribute the cells and requires XenoTech to make royalty payments to MultiCell of 17.5% of net sales for the direct sale of its cells and 34% for any license agreements signed with pharmaceutical companies. XenoTech must bear all the costs for its manufacturing and sales activities and make specified minimum periodic royalty payments which total $18 million during the contract to maintain distribution exclusivity. XenoTech also made a $700,000 royalty prepayment in August 2003 as an advance against the minimum royalty payment of $800,000 for the first royalty period which will be 16 months. The subsequent 5 royalty periods will be 12 months and the last royalty period is 8 months. MultiCell will only receive cash payments initially for 25% of the royalties it earns under the agreement with the balance applied against the $700,000 royalty prepayment with the remaining periods being twelve months. MultiCell will repay the $700,000 by receiving 25% of each royalty dollar until it is repaid.
XenoTech has distribution agreements with numerous companies for a variety of pharmaceutical and laboratory products and also performs contract research for pharmaceutical companies. These services position XenoTech to distribute our cell lines. They utilize direct sales presentations, telemarketing, and direct mail to promote and sell our cells. Additionally, since they have a number of respected scientists and have developed compelling efficacy data for our cells, they frequently give presentations at conferences which help develop sales leads.
MultiCell is also developing cell-related platform technologies and products to treat a variety of liver diseases and has identified four clinically relevant applications for its cell-based products:
* |
High through-put screening assays for drug discovery, lead optimization, and pharmacogenomic studies |
* |
Production of natural therapeutic plasma proteins |
* |
Cell transplantation to treat metabolic liver deficiencies |
* |
Cellular component of liver assist devices used to treat patients suffering from acute and chronic liver failure |
Even with the new agreement with XenoTech, we have operated and will continue to operate by minimizing expenses. The largest expenses relate to personnel and to meeting the legal and reporting requirements of being a public company. By utilizing consultants whenever possible, and asking employees to manage multiple responsibilities, operating costs are kept low. Additionally, a number of employees and the board of directors receive company stock in lieu of cash as part of their compensation to help in the effort to minimize monthly cash flow.
We intend to gradually add scientific and support personnel. We want to add specialists for our key research areas.
These strategic additions will help us expand our product offerings leading us to additional revenues and profits. Of course as revenues increase, administrative personnel will be necessary to meet the added workload. Other expenses, such as sales and customer service, will increase commensurate with increased revenues.
The Application of Critical Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Research and Development - Company sponsored research and development costs related to future products and redesign of present products are expensed as incurred.
License Agreements - costs incurred to obtain license agreements are capitalized and amortized on a straight-line basis over the term of the respective agreement.
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______________________________________________________________________________
Revenue Recognition - As of November 30, 2003, the Company's revenues have been generated primarily from contractual research activities and the sale of cells. Management believes such sources of revenue will be part of the Company's ongoing operations. The Company applies the guidance provided by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as amended, ("SAB 101"). Under the provision of SAB 101, the Company recognizes revenue from commercial and government research agreements as services are performed, provided a contractual agreement exists, the contract price is fixed or determinable and the collection of the contracted amounts is probable. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation"' provides for the use of a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation costs related to stock and stock options issued to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Entities electing to continue to use the intrinsic value method must make pro forma disclosures of net income or loss and earnings or loss per share as if a fair value method of accounting had been applied. The Company has elected to continue to account for its stock-based compensation to employees under APB 25. In accordance with the provisions of SFAS 123, all other issuances of common stock, stock options, warrants or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). Generally, the fair value of any options, warrant or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model.
Long-Lived Assets - Long-lived assets that do not have indefinite lives, such as property and equipment and license agreements, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses for assets to be held and used are then measured based on the excess, if any, of the carrying amounts of the assets over their fair values. Long-lived assets to be disposed of in a manner that meets certain criteria are stated at the lower of their carrying amounts or fair values less costs to sell and are no longer depreciated.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. However, management does not expect the Company to make such a change. In addition, SFAS 148 amended the disclosure requirements of FASB Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has included the disclosures required by SFAS 148 in Note 10 to the Consolidated Financial Statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 was effective for interim periods beginning after June 15, 2003.
The adoption of these new pronouncements did not have or is not expected to have a material effect on the Company's consolidated financial position or results of operations.
Results of Operations.
The following discussion is included to describe our consolidated financial position and results of operations. The consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Year Ended November 30, 2003, Compared to Year Ended November 30, 2002
Revenues. Total revenues decreased to $365,166 for the fiscal year ended November 30, 2003 compared to $804,538 for the fiscal year ended November 30, 2002. These revenues came primarily from the sale of our cell lines to pharmaceutical companies and the rights payment and pre-royalty payment from XenoTech. Although MultiCell received a total of $1,500,000 in cash as part of the XenoTech Agreement, $800,000 is recognized as revenue over the life of the seven-year agreement and $700,000 is recognized as revenue over the first sixteen months of the agreement. We have negotiated a license agreement with Pfizer allowing them to continue to use our cell lines for research now that the collaborative research project that took place in 2002 has been completed.
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______________________________________________________________________________
Operating Expenses. Total operating expenses decreased to $1,973,137 for the fiscal year ended November 30, 2003 from $2,241,310 for the fiscal year ended November 30, 2002. The decrease is primarily due to the reduction of expenses associated with consolidating facilities and reducing personnel at the beginning of the fiscal year. These reduced expenses are reflected in selling, general and administrative expenses, research and development costs and depreciation and amortization.
The decrease of $200,793 in selling, general and administrative expenses for the fiscal year ended November 30, 2003 over the prior year is primarily attributable to reduced staff and operational expenses at MultiCell and Exten. The decrease of $66,531 in research and development compared to the prior year expenses is attributable primarily to lab personnel reductions. Depreciation and amortization did not change materially.
Other income/expense. Interest expense for the fiscal year ended November 30, 2003, was $205,144, which represents an increase of $80,680 over the prior fiscal year. This increase is attributable to interest expense incurred on the funds borrowed for the acquisition and operation of MultiCell, as well as other new notes payable which were not outstanding during the prior year. Interest income for the fiscal year ended November 30, 2003, was $63,971, as compared to $74,731 for the prior year. This decrease is attributable to less interest paid on notes receivable from loans made in prior years and during the current fiscal year. The amortization of the discount on notes payable for the fiscal year ended November 30, 2003, was $251,351, as compared to $132,142 for the prior year. The increase is due to acceleration of the discount due to note conversions during the fiscal year. Minority interest in loss of subsidiary for the fiscal year ended November 30, 20 03 was $1,067, as compared to $12,334 for the prior year. This decrease is due to the subsidiary's decrease in activity and resultant decrease in its loss this year.
Net loss. Net loss for the fiscal year ended November 30, 2003, was $1,984,053, as compared to a net loss of $1,576,663 for the prior year, representing an increase in net loss of $407,390. This increase is attributable primarily to the lower revenues attained during the year as we transitioned into commercialization of our cell lines, which was only partially offset by greater expense reductions associated with consolidation and personnel reductions.
Liquidity and Capital Resources
Our cash needs have been managed primarily through the issuance of debt or equity instruments. During the last quarter of the fiscal year, the Company received $1,500,000 cash from XenoTech for the rights to distribute our cell lines and prepayment of royalties. This cash along with royalties, substantially improved the Company's liquidity position. The additional royalties we will now begin to receive from these sales by XenoTech may be large enough to cover our cash requirements for ongoing operations. The Company is maintaining a conservative fiscal policy until it can ascertain the level of royalty payments above the annual minimums. Additionally, the Company is discussing additional equity investments. However, there can be no assurance that the Company will be able to successfully acquire the necessary capital to continue its ongoing research efforts.
During Fiscal Year 2003, thirty-five Promissory Notes, with a carrying value of $945,500 in principal and $117,655 of interest were converted into 7,588,422 shares of Exten Common Stock. The notes were converted at $.07, $.10, $.15, and $.20 per share depending on the amount of time that the note was held by the creditor. Additionally, 2,443,166 incentive and non-qualified stock options were exercised by employees and directors generating $270,763 in cash for the Company.
Research Agreements
In October 2002, MultiCell Technologies was awarded a Phase I Small Business Innovation Research (SBIR) grant from the National Institutes of Health to study the production of therapeutic plasma proteins by immortalized, non-tumorigenic human hepatocytes. The aim of the SBIR award is to compare the function of MultiCell's hepatocyte-derived products to recombinant and plasma-derived therapeutic plasma proteins. The grant is for $133,000 and will be paid over the grant period of one year as the work is performed.
Notes Payable
During Fiscal Year 2003, the Company received a total of $184,981 from thirteen convertible promissory notes with interest accruing at 10% per annum. The principal and interest are payable from three to five years after the inception of the notes. The lenders may convert the principal and any unpaid interest due into the Company's common stock. The conversion price varies from $.10 to $.20 per share. Additionally, the Company issued 2,216,250 common stock warrants exercisable at $.10 per share should the notes be converted. The Company did not increase additional paid-in capital based on the fair value of the warrants or reduce the carrying value of the convertible promissory notes payable. At the time of issuance, the fair value of the warrants was $0.
Item 7. FINANCIAL STATEMENTS
The full text of the Company's audited consolidated financial statements for the fiscal years ended November 30, 2003 and 2002 begins on page F-1 of this Report.
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Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 8A. DISCLOSURE CONTROLS AND PROCEDURES
As of November 30, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and Treasurer, concluded that the Company's disclosure controls and procedures were effective as of November 30, 2003. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to November 30, 2003.
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PART III
The Directors and Executive Officers of the Company as of November 30, 2003 were:
Name |
Age |
Position |
Date elected |
--------------------------- |
------------ |
------------------------------------------------------- |
--------------------- |
W. Gerald Newmin |
66 |
Chairman, CEO, Secretary and Director |
May 17, 2000 |
Edward Sigmond |
45 |
Director |
May 17, 2000 |
Gregory F. Szabo |
50 |
President, Treasurer and Director |
June 6, 2001 |
Ann Ryder Randolph |
57 |
Director |
June 21, 2002 |
Thomas A. Page |
70 |
Director |
September 11, 2003 |
W. Gerald "Jerry" Newmin began as a consultant to the Board of Directors of Exten in June 1995. On December 1, 1995, he was elected Chairman of the Board of Directors, Chief Executive Officer, and President of Exten. He currently serves as our Chairman, Chief Executive Officer and Secretary. Mr. Newmin is the Secretary and a director of Xenogenics and a Secretary and a director of MultiCell Technologies. Mr. Newmin is past Chairman of the Board of the Corporate Directors Forum, a non-profit organization of over 200 California Board members, which promotes excellence in corporate governance. He serves on the Board of Directors of San Diego Defcomm, a not-for-profit consortium of defense companies based in San Diego and DefenseWeb Technologies, Inc., a privately owned software development company based in San Diego. From 1987 to 1995, Mr. Newmin owned a management consulting firm that provided senior management services to both public and p rivate companies. From 1984 to 1987, Mr. Newmin was President of HealthAmerica Corporation, then the nation's largest publicly held HMO management company. From 1977 to 1984, he was President of International Silver Company, a diversified multi-national manufacturing company that he restructured. From 1973 to 1977, Mr. Newmin was Vice President and Western Regional Director for American Medicorp, Inc., and managed 23 acute care hospitals in the Western United States. From 1962 to 1973, at Whittaker Corporation, Mr. Newmin held senior executive positions, including Chief Executive Officer of Production Steel Company, Whittaker Textiles Corporation, Bertram Yacht Corp., Narmco Materials Corp., and Anson Automotive Corp., and was instrumental in Whittaker's entry into the United States and international health care markets. Mr. Newmin has a Bachelor's degree in Accounting from Michigan State University.
Edward Sigmond was elected to the Board of Directors of Exten in 1999. He has been in sales, marketing and operations management for the past 20 years. Mr. Sigmond has served as president of Kestrel Holdings, Inc. since its inception in 1997. His duties include all executive functions from financial oversight to marketing and management of business services. Kestrel Holdings, Inc. is the general partner of Kestrel Equity Partners, Ltd., which was formed to fund Exten and Xenogenics. Mr. Sigmond served as president of Kestrel Development, a Texas based real estate development company, from 1993 to 1998 when it was dissolved. From 1992 to 1996, Mr. Sigmond was President of American Machine and Bearing of Dallas, Texas. Prior positions included Assistant to President of Alpha Aviation, Dallas, Texas, 1990-1992; Founder and President of Specialty Food Products, Arlington, Texas, 1987-1990; and Vice President/Regional Manager of Geodata Corporation, H ouston, Texas 1981-1987. He has varied negotiation, sales, marketing, managerial and operational skills with existing and startup operations. He studied Marketing and Chemistry at Duquesne University.
Gregory F. Szabo
was appointed Exten's President and Treasurer on April 19, 2001, and was appointed MultiCell Technologies' Chairman and Chief Executive Officer on September 15, 2001. From June 2000 to the present, he has served as President and CEO of Xenogenics Corporation, our majority-owned subsidiary. He has 20 years of experience in the medical device industry, including FDA product submission and insurance reimbursement experience plus sales, marketing and management responsibilities. From January 2000 to June 2000, Mr. Szabo worked as an independent management consultant for several companies, including Exten. Prior to joining Exten and Xenogenics, Mr. Szabo was President and Chief Executive Officer of Titan Scan where he managed the medical sterilization and food pasteurization business from June 1998 until January 2000. From January 1997 until June 1998, he was P resident and Chief Executive Officer of Goulter Medical Inc. He has also held senior management positions at Comfort Clinic, Bio Clinic, Zimmer, and Becton Dickinson. He holds a Masters in Management from Drucker Graduate School, Claremont University, Claremont, CA and a Bachelors degree from the University of Toledo.- 13 -
______________________________________________________________________________
Ann Ryder Randolph, a respected San Diego executive and consultant to the life sciences industry, was elected to the Board of Directors of Exten on June 21, 2002. Ms. Randolph, as the first managing director (1995-1999) and charter board member of BIOCOM (1993-1999), the regional trade association for life sciences, was a public advocate for the 400 San Diego companies BIOCOM represented. While at BIOCOM, she developed a buying consortium for member companies and built BIOCOM into one of the largest regional biosciences trade associations in the world. Previously, she was principal of a medical strategic planning, business development and marketing firm (1985-1995) after leaving a similar position at Scripps Clinic and Research Foundation in La Jolla, California. Randolph has served on the San Diego Regional Economic Prosperity Committee, the San Diego Regional Economic Development Corporation's industrial land use committee, the Greater San Diego C hamber of Commerce public policy committee, the Airport Master Plan Public Working Committee, and was a founding member of the High Tech Steering Committee. Randolph earned Bachelor and Master of Arts degrees in English from the University of Louisville, Kentucky. She also serves on the boards of Allylix, Inc.; the University of California, San Diego, Libraries; and the Corporate Directors Forum (CDF) and was named Director of the Year by the CDF board in 2001.
Thomas A. Page joined the Board as a Director on September 11, 2003 Mr. Page is Director Emeritus and former Chairman of the Board of Enova Corporation and San Diego Gas and Electric Company (now part of Sempra Energy). Mr. Page has been active in numerous industrial, community and governmental associations and has funded medical research. He is a director of the San Diego Regional Economic Development Corporation, a trustee of the Grossmont Union High School District Board of Education, chairman of Cuyamaca Bank, an advisory director of Sorrento Ventures, and a director of Leap Wireless International, Targeted Molecules Corp., Metallic Power and SYS Technologies, Inc. Page has also served on the boards of The Scripps Research Institute and The Burnham Institute, two La Jolla-based biomedical research institutes of note.
In 1998, the Corporate Directors Forum in San Diego honored Mr. Page as Director of the Year for Lifetime Achievement in Corporate Governance. Mr. Page earned a Bachelor of Science degree in civil engineering, a masters in industrial administration and was awarded a doctorate in management, all from Purdue University. He has been licensed as an engineer and as a certified public accountant (CPA). Mr. Page also serves on the University of California Presidents Council on the National Laboratories.
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Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation received for the fiscal years ended November 30, 2003, 2002, and 2001 for services rendered to the Company in all capacities by the Company's Chief Executive Officer and any officer with salary over $100,000 per year.
Annual Compensation |
Long Term Compensation |
||||||
------------------------------------------------- |
--------------------------------------------- |
||||||
Name and principal position |
Year |
Salary |
Bonus |
Other annual |
Restricted |
Securities |
|
----------------------------- |
-------- |
------------ |
------- |
------------------- |
--------------- |
-------------------------- |
|
W. Gerald Newmin, |
2003 |
-0- |
-0- |
$45,625 |
-0- |
-0- |
|
Gregory F. Szabo |
2003 |
$149,662 |
-0- |
$38,500 |
-0- |
-0- |
|
( 1) |
Represents the fair market value of shares of our common stock paid in lieu of cash based on the closing market price of our common stock on the date of approval by our board of directors. A total of 958,754, 458,656, and 311,147 shares were issued to Mr. Newmin in fiscal 2003, 2002, and 2001 respectively, and a total of 812,011, 474,951, and 248,918 shares were issued to Mr. Szabo in fiscal 2003, 2002, and 2001 respectively. |
Stock Option Grants in Fiscal Year 2003
There were no stock options granted to Executive Officers during the fiscal year ended November 30, 2003.
Stock Option Exercises and Fiscal Year-end Values
The following table presents information for the Named Executive Officers with respect to stock options exercised during fiscal year 2003 and unexercised options held as of the end of the fiscal year.
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Aggregated Option Exercises In Fiscal Year 2003 And Fiscal Year End Option Values
Name |
Shares |
Value |
Number of Securities |
Exercise Price |
W.Gerald Newmin |
250,000 |
$52,500.00 |
963,889/111,111 |
$165,472/19,075 |
Gregory F. Szabo |
200,000 |
$16,000.00 |
2,561,111/88,889 |
$248,278/8,617 |
Compensation of Directors
Our bylaws authorize our board of directors to fix the compensation of directors for services related to their membership in board committees and allow the reimbursement of expenses of directors for their attendance at each meeting of our board of directors. On February 15, 2000, the board of directors resolved that each board member would receive the equivalent of $2,000 in our common stock for each board meeting in which such director participates. The number of shares issued for each meeting is based upon the closing price of our common stock on the date of the board meeting in question.
In addition to the per meeting stock grants, during fiscal year 2002, Gregory Szabo was granted options for 2,000,000 shares of common stock at $.08 per share. These options vest over a six month period from June 7, 2002 and January 2, 2003 and will expire on June 6, 2006. New members of the Exten Board of Directors are granted 250,000 options at the then market price. As such, Ms. Randolph was granted 250,000 on June 19, 2002 at $.065 which vest over a three year period and expire June 19, 2006 and Mr. Page was granted 250,000 on September 11, 2003 at $.175 which vest over a three year period and expire September 11, 2007. There were no other option grants to directors during the fiscal year ended November 30, 2003.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the review of copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the fiscal year ended November 30, 2003, the Company's executive officers, directors and all persons who own more than ten percent of a registered class of the Company's equity securities complied with all Section 16(a) filing requirements.
Code of Ethics
The Company has adopted a formal Code of Ethics applicable to all Board members, executive officers and all employees.
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Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLANS
Effective February 15, 2000, the Company adopted a 2000 Stock Incentive Plan and a 2000 Employee Benefit Plan which authorizes the granting of shares and options to employees, outside directors, consultants, and vendors. Under the Plans, awards are made in the form of restricted shares or options, which may constitute incentive stock options or non-statutory stock options. Only employees of the Company are eligible for the grant of incentive stock options. The total number of options and restricted shares that could have been awarded under the 2000 Stock Incentive Plan initially was 5,000,000. As of the first day of each calendar year commencing January 1, 2001, this total will automatically increase by 2% of the total number of common shares then outstanding or 500,000 shares, whichever is less. The option price, number of shares, grant date, and vesting period are determined at the discretion of the Company's Board of Directors. The exercise price of each IS O granted under the plan must equal 100% of the market price of the Company's stock on the date of grant. The exercise price of each NSO grant under the plan cannot be less than 85% of the market price of the Company's stock on the date of grant. An option's maximum term is 10 years. As of November 30, 2003, the total number of options that were authorized for issuance under the 2000 Stock Incentive Plan had increased from 5,000,000 shares to 6,500,000. However, the Company has issued more options than were authorized under the 2000 Stock Incentive Plan. This was necessary to provide an incentive to key employees to stay with the Company or one of its subsidiaries. The Company intends to obtain shareholder approval for an increase in the number of options authorized for issuance at its next shareholder meeting.
Plan Category |
Number of Shares of |
Weighted-Average |
Number of Options |
|||
----------------------------- |
--------------------- |
--------------------- |
--------------------- |
|||
Equity compensation plans approved by stockholders |
8,198,334 |
$0.14 |
0 |
|||
Equity compensation plans not approved by stockholders |
0 |
0 |
0 |
|||
--------------------- |
--------------------- |
--------------------- |
||||
Total |
8,198,334 |
$0.14 |
0 |
|||
============= |
============= |
============= |
The following table sets forth, as of January 14, 2004, certain information as to shares of our common stock owned by (i) each person known to beneficially own more than 5% of the outstanding common stock, (ii) each of our directors, and named executive officers, and (iii) all of our executive officers and directors as a group. Unless otherwise indicated, the address of each named beneficial owner is the same as that of our principal executive offices located at 55 Access Road, Suite 700, Warwick, RI, 02886.
- 17 -
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Name and Address of |
Number of Shares |
Percentage of Class |
------------------------------- |
------------------------------- |
------------------------ |
W. Gerald Newmin (3) |
29,109,931 |
24.7% |
Gregory F. Szabo (4) |
4,724,728 |
4.0% |
Edward Sigmond (5) |
7,371,896 |
6.3% |
Kestrel Equity Partners Ltd. (6) |
6,914,000 |
5.9% |
The Estate of Hugo O. Jauregui (7) |
8,338,345 |
7.1% |
Ann Ryder Randolph (8) |
339,817 |
0.2% |
Thomas A.Page |
3,406,530 |
2.9% |
All executive officers and directors as a group (five persons) |
44,891,656 |
38.1% |
(1) |
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the Commission, shares of common stock that each named person and group has the right to acquire within 60 days pursuant to options, warrants, or other rights, are deemed outstanding for purposes of computing shares beneficially owned by and the percentage ownership of each such person and group. However, such shares are not deemed outstanding for purposes of computing the shares beneficially owned by or percentage ownership of any other person or group. |
(2) |
Unless otherwise noted, all shares listed are owned of record and the record owner has sole voting and investment power, subject to community property laws where applicable. |
(3) |
Includes 3,414,776 shares of our common stock owned by Mr. Newmin's spouse, over which Mr. Newmin disclaims beneficial ownership. Includes 963,889 shares issuable under options which are exercisable on or within 60 days of December 31, 2003 and 11,748,554 shares in the form of convertible notes and warrants. |
(4) |
Includes 2,561,111 shares issuable under options which are exercisable on or within 60 days of December 31, 2003. |
(5) |
Includes 6,914,000 shares of our common stock owned by Kestrel Equity Partners Ltd., for which Mr. Sigmond serves as Managing Partner. |
(6) |
Kestrel Equity Partners, Ltd. is a limited partnership investment fund; Ed Sigmond, one of our directors, is its Managing Partner. Its address is 2808 Cole Ave., Dallas, Texas 75204. |
(7) |
The trustees of the Estate are Candice L. Dyer, M.D. and Timothy Van Johnson. |
(8) |
Includes 83,333 shares issuable under options which are exercisable on or within 60 days of December 31, 2003 |
JGS Management Group, Inc. (JGS), of which Jerry G. Simek, a former Director of Exten, is the President and sole shareholder, provided services to Exten pursuant to a Contractor/Management Consulting to assist the Company in specific projects such as acquisition analysis and due diligence and a Finders Fee Agreement with Exten. The agreement provided that JGS would be compensated for every hour of consulting work performed and pursuant to an established formula for the introduction of investors who actually invest in Exten or lend Exten money. During fiscal year 2002, we issued a total of 30,295 shares of our common stock to Mr. Simek pursuant to this agreement in consideration of 55 hours of service, which service consisted primarily of financial analysis. The remainder of the shares were issued for his Director role. The shares were issued to Mr. Simek's trust at the request of JGS Management. None of the shares issued to Mr. Simek were issued to him as finders fee compensation.
From August 2001 through November 2003, the Company borrowed an aggregate of $1,858,500 in order to finance the acquisition of MultiCell and for working capital. Of this amount, we borrowed $ 736,000 from Mr. Newmin, our chairman and Chief Executive Officer, and $50,000 from Mr. Szabo, our President. The notes bear interest at the rate of 10% per annum, with all principal and accrued interest due and payable in August 2004 and various dates in 2005.
During the fiscal year, Mr. Newmin converted $157,000 of his loans plus accrued interest and Mr. Szabo converted all of his loan plus accrued interest into Exten Common Stock. Mr. Newmin received a total of 1,036,306 shares and Mr. Szabo received 304,658 shares of stock.
Mr. Newmin may convert the remainder of his loans into shares of our common stock prior to the due date of the loan at the following conversion rates (i) $.10, if converted during the first twelve (12) months after the date of this Agreement; (ii) $.15, if converted after the twelfth (12th) and through the twenty-fourth (24th) month of this Agreement; and (iii) $.20, if converted after the twenty-fourth (24th) month and prior to the maturity date. In addition, Messrs. Newmin and Szabo received warrants to purchase 6,550,000 and 500,000 shares of our common stock, respectively, at an exercise price of $.10 per share.
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Item 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. |
Description |
Page |
---------------- |
------------------------------------------------------------------------ |
----------- |
10.1 |
MultiCell - XenoTech License Agreement |
1 |
14.1 |
Code of Ethics |
16 |
23.1 |
Consent of Independent Public Accountants-J.H. Cohn LLP |
17 |
31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
20 |
31.2 |
Certification of Treasurer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
21 |
32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
22 |
32.2 |
Certification of Treasurer Pursuant to 18 U.S.C. Section 1350 |
23 |
(b) Reports on Form 8-K
The Company filed a Form 8-k with the Securities and Exchange Commission on November 18, 2003, to describe the changes to various amended periodic report filings.
Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Audit Fees.
The aggregate fees billed for the fiscal years ended November 30, 2003 and 2002 for professional services rendered by J.H. Cohn LLP for the audit of the our annual financial statements and the review of the financial statements included in our quarterly reports on Form 10-QSB were $52,124 and $41,000, respectively.
Audit Related Fees.
The aggregate fees billed for the fiscal years ended November 30, 2003 and 2002 for assurance and related services rendered by J.H. Cohn LLP related to the performance of the audit or review of our financial statements were $7,054 and $3,026, respectively.
Tax and Other Fees.
The aggregate fees billed for the fiscal years ended November 30, 2003 and 2002 for services rendered by J.H. Cohn LLP in connection with the preparation of our federal and state tax returns were $450 and $5000, respectively.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15D 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,
EXTEN INDUSTRIES, INC. |
By /s/ W. Gerald Newmin |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
------------------------------------- |
------------------------------------------ |
--------------------- |
/s/ W. Gerald Newmin |
Chairman ,CEO and Secretary |
February __,2004 |
/s/ Gregory F. Szabo |
President, and Treasurer |
February ___, 2004 |
/s/ Edward Sigmond |
Director |
February ___, 2004 |
/s/ Ann Ryder Randolph |
Director |
February ___, 2004 |
/s/ Thomas A. Page |
Director |
February ___, 2004 |
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants |
F-2 |
Consolidated Balance Sheets |
F-3 |
Consolidated Statements of Operations |
F-5 |
Consolidated Statements of Stockholders' Equity |
F-6 |
Consolidated Statement of Cash Flows |
F-7 |
Notes to Consolidated Financial Statements |
F-9 |
- F 1 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Exten Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of EXTEN INDUSTRIES, INC. AND SUBSIDIARIES as of November 30, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exten Industries, Inc. and Subsidiaries as of November 30, 2003 and 2002, and their results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has sustained recurring losses and it had a working capital deficiency and an accumulated deficit at November 30, 2003. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amounts and classification of liabilities that might result form the outcome of this uncertainty.
J. H. Cohn LLP
San Diego, California
January 9, 2004
- F 2 -
Exten Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
November 30, 2003 and 2002
ASSETS |
|||||
2003 |
2002 |
||||
______________________ |
______________________ |
||||
Current assets: |
|||||
Cash and cash equivalents |
$1,058,960 |
$43,892 |
|||
Accounts receivable |
4,586 |
35,181 |
|||
Current portion of notes receivable |
5,813 |
||||
Other current assets |
18,544 |
26,026 |
|||
______________________ |
______________________ |
||||
Total current assets |
1,082,090 |
110,912 |
|||
Property and equipment, net |
123,932 |
154,295 |
|||
License agreement, net of accumulated amortization of $259,346 and $159,232 |
2,140,939 |
2,273,371 |
|||
Notes receivable, net of current portion |
260,000 |
237,949 |
|||
Other assets |
123,932 |
111,835 |
|||
______________________ |
______________________ |
||||
Total assets |
$3,730,653 |
$2,888,362 |
|||
==================== |
==================== |
See accompanying notes on consolidated financial statements.
- F 3 -
Exten Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
November 30, 2003 and 2002
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||
2003 |
2002 |
||||
______________________ |
______________________ |
||||
Current liabilities: |
|||||
Accounts payable and accrued expenses |
$625,002 |
$702,259 |
|||
Current portion of notes payable, including $25,000 in default in 2003 and 2002 |
260,000 |
34,892 |
|||
Current portion of related party notes payable |
21,000 |
||||
Current portion of deferred income |
735,296 |
30,100 |
|||
Other current liabilities |
37,196 |
34,467 |
|||
______________________ |
______________________ |
||||
Total current liabilities |
1,678,494 |
801,718 |
|||
______________________ |
______________________ |
||||
Non-current liabilities: |
|||||
Notes payable, net of current portion |
786,113 |
1,423,281 |
|||
Deferred income, net of current portion |
634,272 |
||||
Other liabilities |
172,603 |
119,695 |
|||
______________________ |
______________________ |
||||
Total non-current liabilities |
1,592,988 |
1,542,976 |
|||
______________________ |
______________________ |
||||
Total liabilities |
3,271,482 |
2,344,694 |
|||
______________________ |
______________________ |
||||
Minority interest |
146,190 |
147,257 |
|||
Commitments and contingencies |
|||||
Stockholders' equity: |
|||||
Common stock, $.01 par value: 200,000,000 shares authorized, 117,816,411 and 101,024,904 shares issued and outstanding |
1,178,162 |
1,010,249 |
|||
Additional paid-in capital |
16,386,717 |
14,724,007 |
|||
Stock subscriptions receivable |
(70,000) |
||||
Deferred compensation costs |
(24,916) |
(24,916) |
|||
Accumulated deficit |
(17,226,982) |
(15,242,929) |
|||
______________________ |
______________________ |
||||
Total stockholders' equity |
312,981 |
396,411 |
|||
______________________ |
______________________ |
||||
Total Liabilities and Stockholders' Equity |
$3,730,653 |
$2,888,362 |
|||
==================== |
==================== |
See accompanying notes on consolidated financial statements.
- F 4 -
Exten Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
For The Years ended November 30, 2003 and 2002
2003 |
2002 |
||
______________________ |
______________________ |
||
Revenue |
$365,166 |
$804,538 |
|
______________________ |
______________________ |
||
Operating expenses: |
|||
Selling, general and administrative |
1,325,161 |
1,525,476 |
|
Research and development |
482,309 |
548,840 |
|
Depreciation and amortization |
166,387 |
167,344 |
|
______________________ |
______________________ |
||
Total operating expenses |
1,973,857 |
2,241,660 |
|
______________________ |
______________________ |
||
Operating loss |
(1,608,691) |
(1,437,122) |
|
______________________ |
______________________ |
||
Other income (expense): |
|||
Loss on sale of equipment |
(1,522) |
||
Interest expense |
(205,144) |
(124,464) |
|
Amortization of discount on notes payable |
(251,351) |
(132,142) |
|
Interest income |
63,971 |
74,731 |
|
Amortization of discount on note receivable |
30,000 |
30,000 |
|
Write-off of note receivable |
(12,353) |
||
Minority interest in loss of subsidiary |
1,067 |
12,334 |
|
______________________ |
______________________ |
||
Total other income (expense) |
(375,332) |
(139,541) |
|
______________________ |
______________________ |
||
Net loss |
$(1,984,053) |
$(1,576,663) |
|
==================== |
==================== |
||
Basic loss per share |
$(0.02) |
$(0.02) |
|
==================== |
==================== |
||
Weighted average number of shares outstanding |
106,086,899 |
99,458,556 |
|
==================== |
==================== |
See accompanying notes on consolidated financial statements.
- F 5 -
Exten Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For The Years ended November 30, 2003 and 2002
Common Stock |
Additional |
Stock |
Deferred |
Accumulated |
Total |
||
------------------------ |
|||||||
Shares |
Amount |
||||||
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
|
Balance, November 30, 2001 |
97,629,444 |
$976,294 |
$14,269,569 |
$(85,000) |
$(8,250) |
$(13,666,266) |
$1,486,347 |
Issuance of stock for services |
3,395,460 |
33,955 |
287,364 |
- |
(16,666) |
- |
304,653 |
Partial extinguishment of receivable |
- |
- |
- |
15,000 |
- |
- |
15,000 |
Warrants and beneficial conversion rights issued in connection with borrowings |
- |
- |
167,074 |
- |
- |
- |
167,074 |
Net loss |
- |
- |
- |
- |
- |
(1,576,663) |
(1,576,663) |
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
|
Balance, November 30, 2002 |
101,024,904 |
1,010,249 |
14,724,007 |
(70,000) |
(24,916) |
(15,242,929) |
396,411 |
Issuance of stock for services |
7,329,919 |
73,298 |
480,906 |
- |
- |
- |
554,205 |
Partial extinguishment of receivable |
- |
- |
- |
13,000 |
- |
- |
13,000 |
Cancellation of stock subscriptions |
(570,000) |
(5,700) |
(51,300) |
57,000 |
- |
- |
0 |
Conversion of convertible notes payable |
7,588,422 |
75,883 |
986,772 |
- |
- |
- |
1,062,655 |
Stock options exercised |
2,443,166 |
24,432 |
246,332 |
- |
- |
- |
270,763 |
Net loss |
- |
- |
- |
- |
- |
(1,984,053) |
(1,984,053) |
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
|
Balance November 30, 2003 |
117,816,411 |
$1,178,162 |
$16,386,717 |
$ 0 |
$(24,916) |
$(17,226,982) |
$312,981 |
See accompanying notes on consolidated financial statements.
- F 6 -
Exten Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Years ended November 30, 2003 and 2002
2003 |
2002 |
|||
______________________ |
______________________ |
|||
Cash flows from operating activities: |
||||
Net loss |
$(1,984,053) |
$(1,576,663) |
||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||
Depreciation and amortization |
166,387 |
167,344 |
||
Amortization of discount on note receivable |
(30,000) |
(30,000) |
||
Amortization of discount on notes payable |
251,351 |
132,142 |
||
Write-off of note receivable |
12,353 |
|||
Common stock issued for services |
554,205 |
304,653 |
||
Minority interest in loss of subsidiary |
(1,067) |
(12,334) |
||
Loss on sale of equipment |
1,522 |
|||
Changes in operating assets and liabilities: |
||||
Accounts receivable |
30,595 |
4,819 |
||
Other current assets |
7,482 |
57,502 |
||
Other assets |
(11,857) |
(23,295) |
||
Accounts payable and accrued expenses |
50,898 |
382,644 |
||
Other current liabilities |
2,729 |
|||
Deferred income |
1,339,468 |
(387,025) |
||
Other liabilities |
52,908 |
106,261 |
||
______________________ |
______________________ |
|||
Net cash provided by (used in) operating activities |
442,921 |
(873,952) |
||
==================== |
==================== |
See accompanying notes on consolidated financial statements.
- F 7 -
Exten Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Years ended November 30, 2003 and 2002
2003 |
2002 |
||
______________________ |
______________________ |
||
Cash flows from investing activities: |
|||
Purchase of equipment |
(6,614) |
(13,758) |
|
Proceeds from sale of assets |
1,500 |
||
Principal payments on notes receivable |
1,409 |
1,238 |
|
______________________ |
______________________ |
||
Net cash used in investing activities: |
(3,705) |
(12,520) |
|
______________________ |
______________________ |
||
Cash flows from financing activities: |
|||
Proceeds from notes payable |
325,481 |
547,500 |
|
Payments of notes payable |
(33,392) |
||
Proceeds from exercised options |
270,763 |
||
Proceeds from subscribed stock |
13,000 |
15,000 |
|
______________________ |
______________________ |
||
Net cash provided by financing activities |
575,852 |
562,500 |
|
______________________ |
______________________ |
||
Net increase (decrease) in cash and cash equivalents |
1,015,068 |
(323,972) |
|
Cash and cash equivalents, beginning of year |
43,892 |
367,864 |
|
______________________ |
______________________ |
||
Cash and cash equivalents, end of year |
$1,058,960 |
$43,892 |
|
==================== |
==================== |
||
Supplemental disclosures: |
|||
Interest paid |
$205,144 |
$18,203 |
|
Non-cash transactions: |
|||
Issuance of warrants and beneficial conversion rights in connection with borrowings |
$167,074 |
||
Conversion of convertible notes payable into common stock |
$1,062,655 |
||
Issuance of notes payable for accounts payable and accrued liabilities |
$16,608 |
33,392 |
|
Cancellation of stock subscriptions |
$57,000 |
See accompanying notes on consolidated financial statements.
- F 8 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 1 - Summary of Organization and Significant Accounting Policies
Organization - Exten Industries, Inc. is a holding company for its two subsidiaries, Xenogenics Corporation and MultiCell Technologies, Inc. (together the "Company"). Xenogenics was incorporated in February 1997 to focus on the research and development of Sybiol technology. In September 2001, the Company purchased MultiCell Technologies, Inc. ("MultiCell"), which was previously named MultiCell Associates, Inc. (see Note 6). MultiCell is in the business of the development and commercialization of hepatic cells, cell lines and associated products to be used in diagnostic and therapeutic applications. Management considers the Company's activities to be in one segment related to liver disease/ liver cell bio-technology.
On November 1, 2001 MultiCell entered into a collaborative research agreement with Pfizer, Inc. ("Pfizer") pursuant to which Pfizer began the process of validating the efficacy of MultiCell's immortalized hepatic cells in four different experimental models. Pfizer demonstrated the efficacy of these cell lines to the scientific community in October of 2002 and MultiCell began to receive revenues from licensing fees and product sales that management expects will be part of a continuous revenue stream. Accordingly, as of November 30, 2002, the Company was no longer a development stage company for accounting purposes.
Basis of Consolidation - The consolidated financial statements include the accounts of Exten and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - The Company considers all unrestricted highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments - The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximate fair market value because of the short maturity of those instruments.
Credit Risk - It is the Company's practice to place its cash equivalents in high quality money market securities with one major banking institution. Periodically, the Company maintains cash balances at this institution that exceed the Federal Deposit Insurance Corporation insurance limit of $100,000 per bank. The Company considers its credit risk associated with cash and cash equivalents to be minimal. The Company does not require collateral from its customers. The Company closely monitors the extension of credit to its customers while maintaining an allowance for potential credit losses. On a periodic basis, management evaluates its accounts receivable and, if warranted, adjusts its allowance for doubtful accounts based on historical experience and current credit considerations. However, accounts receivable at November 30, 2003 and 2002 consist primarily of amounts due under contractual agreements. In the opinion of management, all accounts receivable related to contractua l agreements are collectible; accordingly, the Company recorded no allowance for doubtful accounts.
Revenue Recognition - Through November 30, 2003, the Company's revenues have been generated primarily from contractual research activities and the sale of cells. Management believes such sources of revenue will be part of the Company's ongoing operations. The Company applies the guidance provided by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as amended ("SAB 101"). Under the provision of SAB 101, the Company recognizes revenue from commercial and government research agreements as services are performed, provided a contractual arrangement exists, the contract price is fixed or determinable and the collection of the contracted amounts is probable. In situations where the Company receives payment in advance of the performance of services, such amounts are deferred and recognized as revenue as the related services are performed. Deferred revenues associated with services expected to be performed within the next fiscal year are c lassified as a current liability. Deferred revenues associated with services expected to be performed at a later date are classified as non-current liabilities.
- F 9 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 1 - Summary of Organization and Significant Accounting Policies, continued
Property and Equipment - Property and equipment is valued at cost. Improvements to leased properties are amortized over their estimated useful lives or lease period, whichever is shorter. Depreciation for equipment and furniture is provided using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease.
License Agreements - Costs incurred to obtain license agreements are capitalized. The Company amortizes these costs on a straight-line basis over the term of the respective license agreement. Amortization totaled $132,432 for each of the years ended November 30, 2003 and 2002.
Impairment of long-lived assets - The impairment of long-lived assets that do not have indefinite lives, such as property and equipment and license agreements, is recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable. Impairment losses are then measured by comparing the fair value of assets to their carrying amounts. The Company did not record any charges for the impairment of long-lived assets in 2003 or 2002.
Stock-Based Compensation - Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", provides for the use of a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". Entities electing to continue to use the intrinsic value method must make pro forma disclosures of net income or loss and earnings or loss per share as if a fair value method of accounting had been applied. The Company has elected to continue to account for its stock-based compensation to employees under APB 25. The required pro forma information is included in Note 12.
In accordance with the provisions of SFAS 123, all other issuances of common stock, stock options, warrants or other equity instruments to employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). Generally, the fair value of any options, warrants or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model.
The Company issued 7,329,919 and 3,395,460 shares of common stock as consideration for consulting, professional and other services during the years ended November 30, 2003 and 2002, respectively. The aggregate estimated fair value of the shares at the respective dates of issuance was $554,205 and $304,653 during the years ended November 30, 2003 and 2002, respectively, all of which was charged directly to expense.
Research and Development Costs - Research and development costs are expensed as incurred.
Income Taxes - Deferred income taxes are provided for the estimated tax effects of temporary differences between income for tax and financial reporting. A valuation allowance is provided against deferred tax assets, where realization is uncertain. The income tax provision is the tax payable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Loss Per Share - The Company computed basic and diluted loss per share amounts for 2003 and 2002 pursuant to Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The Company has incurred losses during the years ended 2003 and 2002. The assumed effects of the exercise of outstanding stock options and warrants, and the conversion of convertible notes payable were anti-dilutive and, accordingly, diluted per share amounts equal basic loss per share amounts and have not been presented in the accompanying consolidated statements of operations. The total number of potential common shares excluded from the calculation of diluted loss per share for the years ended November 30, 2003 and 2002 was 35,385,430 and 25,001,556, respectively.
- F 10 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 1 - Summary of Organization and Significant Accounting Policies, continued
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of these financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Risks and Uncertainties - The Company is dependent on continued financing from investors and obtaining new research grants to sustain the development and other activities necessary to commercialize new products. Management is seeking additional financing in order to fund its future activities. There is no assurance, however, that such financing will be available, if and when needed, or if available, that such financing will be completed on commercially favorable terms, or that such development and other activities in connection with its planned products will be successful.
Environmental Remediation - Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the Company's commitment to a formal plan of action. As of November 30, 2003, no amounts have been accrued for environmental liabilities.
- F 11 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 2 - Going Concern Uncertainty
These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of November 30, 2003, the Company has operating and liquidity concerns, has incurred an accumulated deficit of $7,226,982 as a result of recurring losses, has current liabilities that exceed current assets by $596,404 and is in default on certain notes payable (see Note 10). These factors, among others, create an uncertainty about the Company's ability to continue as a going concern. There can be no assurance that the Company will be able to successfully acquire the necessary capital to continue its on-going research efforts and bring additional products to the commercial market. Management's plans to acquire future funding include sales of its proprietary media, immortalized cells and primary cells to the pharmaceutical industry through its sales and distribution agreement with XenoTech LLC ("XenoTech") (see Note 7). 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 its operations as a going concern.
Note 3 - Notes Receivable
As of November 30, 2000, in connection with a letter of intent to purchase the outstanding common stock of Lexicor Medical Technology ("Lexicor"), the Company advanced a total of $600,000 for a note receivable from Lexicor and 83,333 common stock warrants. The Company allocated $17,500 to the warrants resulting in a discount on the note. The note has a stated interest rate of 10% per annum. Principal and interest were due and payable on May 31, 2001; however, according to its terms the note was automatically extended with principal and interest due January 2, 2005. As of November 30, 2001, the Company provided a valuation allowance of $305,000, thereby reducing the carrying amount of this long-term note receivable to $230,000. In the event of default, Lexicor must issue common shares to the Company equal to 51% of the issued and outstanding shares of Lexicor. Unpaid principal and accrued interest on this note receivable may be converted at any time until maturity into Lexic or common stock at a per share price of $6.00. All interest payments are current through November 30, 2003
As of April 17, 2001, in connection with a letter of intent to purchase Armstrong Industries, Inc., ("Armstrong") the Company advanced $15,000 to Armstrong for a note receivable that was due May 1, 2002. On June 27, 2002, the Company informed Armstrong that it no longer had any intention of acquiring them. Interest is due from June 1, 2001 on the unpaid principal at the rate of 12% per annum. Armstrong was unable to repay the note in full. The Company agreed to a monthly payment schedule to repay the debt. Beginning June 15, 2002, Armstrong agreed to pay $558.67 per month for 33 months. On August 15, 2003, after not having received a payment for six months, the Company decided to declare the note in default and wrote off the $12,353 balance of the note as a bad debt.
- F 12 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 3 - Notes Receivable, continued
Notes receivable at November 30, 2003 and 2002 are comprised as follows:
2003 |
2002 |
|
-------------- |
-------------- |
|
Notes receivable |
$600,000 |
$613,762 |
Less: discounts to net present value |
(35,000) |
(65,000) |
Less: valuation allowance |
(305,000) |
(305,000) |
-------------- |
-------------- |
|
Net notes receivable |
260,000 |
243,762 |
Less: current portion |
- |
(5,813) |
-------------- |
-------------- |
|
$260,000 |
$ 237,949 |
|
========= |
========= |
Note 4- Property and Equipment
Property and equipment is valued at cost, less accumulated depreciation and amortization is comprised as follows:
2003 |
2002 |
|
-------------- |
-------------- |
|
Lab equipment |
$193,720 |
$192,590 |
Furniture and fixtures |
27,109 |
30,585 |
Equipment |
15,183 |
13,490 |
Leasehold improvements |
42,625 |
40,995 |
-------------- |
-------------- |
-------------- |
278,637 |
277,660 |
|
Less: Accumulated depreciation and amortization |
154,705 |
123,365 |
-------------- |
-------------- |
|
Property and equipment, net |
$123,932 |
$154,295 |
========= |
========= |
Depreciation and amortization expense for property and equipment totaled $34,063 in 2003 and $34,122 in 2002.
- F 13 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 5 - Real Estate Held for Sale
The Company owns a parcel of undeveloped land near the Grand Canyon. The land was originally purchased in February 1992 for $1,654,000. During the fiscal year ended November 30, 1995, the Company tested the land for impairment and expensed all but the remaining fair market value of $47,200. The Company is currently in arrears on property taxes and interest in the amount of $120,000. A tax sale for property taxes is pending and as management has been unable to obtain an appraisal of the fair market value of the land, no decision has been made as to whether to pay the taxes in arrears. Real estate held for sale is included in other assets and unpaid property taxes are included in accrued expenses.
Note 6 - License Agreement
In September 2001, the Company completed the purchase of MultiCell, one of its subsidiaries, and, as a result, it acquired MultiCell's exclusive license agreement with Rhode Island Hospital for the use of four patents owned by the hospital related to liver cell lines and liver assist devices. The primary patent acquired and being utilized is for immortalized hepatocytes (see Note 7). The license agreement had a net carrying value of $2,140,939 and $2,273,371 as of November 30, 2003 and 2002, respectively, which represented the original cost of $2,433,343 allocated in connection with the acquisition, net of accumulated amortization of $259,346 and $160,022 at November 30, 2003 and 2002, respectively. The license agreement is being amortized over an estimated useful life of approximately 18 years. Amortization expense totaled $132,432 for each of the years ended November 30, 2003 and 2002. The Company will pay the hospital a 5% royalty on net sales until it has paid a total of $550,000. As of November 30, 2003, no significant payments had been made on the royalty. After royalties totaling $550,000 have been paid, the Company pays a 2% royalty instead of a 5% royalty for the life of the patent.
- F 14 -
______________________________________________________________________________
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 7- XenoTech Agreement
During August, 2003, MultiCell signed an exclusive sales, manufacture and distribution agreement for the use of its cell lines by XenoTech, which is an unrelated party. The agreement, which is for a term of seven years, required XenoTech to make an initial payment of $800,000 to MultiCell for the right to distribute the cells and requires XenoTech to make royalty payments to MultiCell of 17.5% of net sales for the direct sale of its cells and 34% for any license agreements signed with pharmaceutical companies. XenoTech must bear all of the costs for its manufacturing and sales activities and make specified minimum periodic royalty payments totaling $18,000,000 during the contract to maintain distribution exclusivity. XenoTech also made a $700,000 royalty pre-payment as an advance against the first period minimum royalty payment of $800,000. The first period of the agreement is sixteen months, the next five periods are twelve months and the last period is eight months. MultiCell will on ly receive cash payments initially for 25% of the royalties it earns under the agreement with the balance applied against this $700,000 royalty pre-payment.
- F 15 -
______________________________________________________________________________
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 8 - Income Taxes
The Company provides for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company had net deferred tax assets of approximately $3,910,800 and $3,220,000 at November 30, 2003 and 2002 relating primarily to the net operating loss carry-forwards generated by its operations. For financial statement purposes, the deferred tax assets have been fully offset by valuation allowances due to the uncertainties related to the extent and timing of the Company's future taxable income.
A reconciliation of the expected income tax benefit at the U.S. Federal income tax rate to the income tax benefit actually recognized for the years ended November 30, 2003 and 2002 is set forth below:
2003 |
2002 |
|
-------------- |
-------------- |
|
Expected income tax benefit |
$(588,000) |
$(536,065) |
State income benefit, net of federal tax |
(102,800) |
(92,235) |
Increase in valuation allowance |
690,800 |
628,300 |
Other, net |
- |
- |
-------------- |
-------------- |
|
Income tax benefit |
$0 |
$0 |
======== |
======== |
The Company's net operating loss carry-forwards expire as follows:
Year Loss Generated |
Balance of Loss Carry-forwards |
Year of Expiration |
--------------------------------------- |
------------------------- |
------------------------- |
November 30, 1999 and prior |
$5,264,158 |
2008 through 2019 |
November 30, 2000 |
1,025,963 |
2020 |
November 30, 2001 |
1,604,660 |
2021 |
November 30, 2002 |
1,516,313 |
2022 |
November 30, 2003 |
369,377 |
2023 |
------------------------- |
||
$9,780,471 |
||
=============== |
- F 16 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 9 - Lease Commitments
The Company and its two subsidiaries lease a Warwick, Rhode Island facility that houses administration, research, development and manufacturing of human cells and cell lines. The operating lease requires aggregate monthly payments of $4,863 and continues through July 31, 2004. The future rental commitments under all operating leases subsequent to November 30, 2003 total $38,904 all of which is payable in the year ending November 30, 2004.
Rent expense was $54,493 and $128,329 for the fiscal years ended November 30, 2003 and 2002, respectively
- F 17 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 10 - Notes Payable
Notes payable at November 30, 2003 and 2002 consisted of the following:
2003 |
2002 |
|||
Xenogenics convertible promissory note payable with interest at 10%, due on April 17, 2001, in default at November 30, 2003 and 2002 (A) (B) |
$ 10,000 |
$ 10,000 |
||
Xenogenics convertible promissory note payable to a related party with interest at 8%, due on November 10, 2000, in default at November 30, 2003 and 2002 (A) (B) |
15,000 |
15,000 |
||
Promissory note payable to a medical supplier with interest at 5.25%, due on or before February 9, 2004 |
125,000 |
125,000 |
||
Convertible promissory notes payable to investors with interest at 10%, due on varying dates in 2004, 2005 and 2006 (C) (H) |
127,481 |
684,000 |
||
Convertible promissory note payable with interest at 12%, originally due on October 15, 2002 (D) (H) |
50,000 |
|||
Convertible notes payable to a related party with interest at 10%, due in 2007 (E) (H) |
21,000 |
70,500 |
||
Convertible promissory notes payable to related parties with interest at 10%, due on varying dates in 2004 and 2005 (F) (H) |
689,000 |
782,000 |
||
Promissory note payable to the Musculoskeletal Transplant Foundation with interest at 10% due June 10, 2004 |
100,000 |
|||
Advance payable to a related party (G) |
40,000 |
|||
Promissory note payable for legal services with interest at 10% |
33,392 |
|||
------------ |
------------ |
|||
Totals |
1,127,481 |
1,769,892 |
||
Less: |
||||
Unamortized discounts attributable to warrants and beneficial conversion rights issued with certain promissory notes payable |
(60,368) |
(311,719) |
||
Current portion of notes payable |
(281,000) |
(34,892) |
||
------------ |
------------ |
|||
Notes payable - long-term portion |
$ 786,113 |
$ 1,423,281 |
||
======= |
======= |
- F 18 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 10 - Notes Payable continued
(A) |
The Company continues to accrue interest on all notes in default. |
(B) |
The Xenogenics convertible notes payable are convertible into a total of 13,333 shares of common stock of Xenogenics at $1.875 per share. |
(C) |
The notes are convertible into shares of the Company's common stock at prices that vary from $.10 to $.20 per share depending on when the notes are converted. The Company issued notes in the principal amount of $127,481 and $684,000 in the years ended November 30, 2003 and 2002, respectively. In addition, the Company issued a total of 17,435,000 warrants to purchase common stock exercisable at $.10 per share to the lenders on the respective dates of the issuances of the notes including 2,116,250 and 5,170,000 in the years ended November 30, 2003 and 2002, respectively. These warrants may only be exercised if the note is converted. The Company initially increased additional paid-in capital by $127,236 in 2002, based on the estimated fair value of the warrants (the fair market value of warrants issued in 2003 was not material) and reduced the carrying value of the convertible promissory notes payable by the same amount for the debt discount attributable to the fa ir value of the warrants. In addition, after the initial allocation of the loan proceeds to the relative fair values of the warrants and the notes in 2002, the fair value of the Company's common stock exceeded the effective conversion price of certain notes on their respective dates of issuance. Such excess, which represents beneficial conversion rights, totaled $39,837, which the Company recorded by increasing both debt discount and additional paid-in capital by that amount. The debt discount attributable to the warrants and the beneficial conversion rights is being amortized to interest expense over the term of the convertible notes. During 2003, $769,800 attributable to these notes ($678,000 of principal and $91,800 of accrued interest) was converted to 5,143,332 shares of common stock. |
(D) |
This note was issued in October 2001 and was originally convertible into shares of the Company's common stock at $.07 per share. In addition, the Company issued 715,000 common stock warrants to the lender at the date of the issuance of the note that were exercisable at $.10 per share. The Company initially increased additional paid-in capital by $21,450 based on the estimated fair value of the warrants and reduced the carrying value of the note by the same amount for the debt discount attributable to the fair value of the warrants. Such discount was fully amortized during the period from the issuance of the note to its original maturity date in October 2002. During 2002, the note went into default and the lender and the Company reached an agreement whereby (i) the note would be converted into 714,286 shares of common stock at the original conversion price of $.07 per share, (ii) the 715,000 warrants granted in 2001 would be cancelled and (iii) upon conversion of the note , the lender would receive warrants to purchase 2,000,000 shares of common stock exercisable at $.10 per share and 500,000 shares of common stock exercisable at $.12 per share through 2005. During 2003, the principal balance of $50,000 was converted to 714,286 shares of common stock, the old warrants were cancelled and the new warrants were issued. |
(E) |
In January, 2004, these notes will become convertible into shares of the Company's common stock at $.10 per share through December 31, 2004, $.15 per share through December 31, 2005 and $.20 per share through December 31, 2006. Should these notes be converted, 210,000 warrants to purchase shares at $.10 per share will be granted. During 2003, $60,918 attributable to these notes ($49,500 of principal and $11,418 of accrued interest) was converted to 304,589 shares of common stock. Due to the note conversion, 500,000 warrants to purchase shares at $.10 per share were granted. |
(F) |
Theses notes are convertible into shares of the Company's common stock from $.10 to $.20 per share. During 2003, $181,937 attributable to these notes ($157,000 of principal and $24,937 of accrued interest) was converted to 1,426,215 shares of common stock. |
(G) |
This advance from a related party will be converted in January 2004 into a promissory note bearing interest at 10% due and payable in January 2007. This note will be convertible into shares of the Company's common stock at $.10 per share through January 31, 2005, $.15 per share through January 31, 2006 and $.20 per share through January 31, 2007. Should the note be converted, 400,000 warrants to purchase shares at $.10 per share will be granted. |
(H) |
The Company is obliged to register for resale under the Securities Act of 1933 all of the shares issued upon conversion of these notes and the exercise of warrants issued in connection with these notes. |
- F 19 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 10 - Notes Payable Continued
Interest expense of $175,209 and $111,058 and amortization of debt discount of $251,351 and $132,142 were attributable to notes payable to related parties in the fiscal years ended November 30, 2003 and 2002, respectively.
The maturities of notes payable in years subsequent to November 30, 2003 are as follows:
Year Ending November 30 |
Amount |
--------------------------------------- |
---------------- |
2004 |
$281,000 |
2005 |
749,001 |
2006 |
97,481 |
---------------- |
|
Total |
$1,127,482 |
========= |
Note 11 - Common Stock Reserved for Future Issuance
At November 30, 2003, the Company had reserved 35,385,430 shares of common stock for potential future issuances upon exercise of outstanding warrants and options, and conversion of convertible notes payable outstanding as follows:
Warrants |
21,622,917 |
Stock options (Note 12) |
8,198,334 |
Convertible notes (Note 10) |
5,564,179 |
Total |
35,385,430 |
At November 30, 2003, warrants to purchase 18,045,000 shares will become exercisable when related convertible notes payable are converted. All of the other warrants are exercisable in whole or in part, at any time and from time to time on or before the expiration date. These warrants are or will be exercisable at $.10 per share and expire at various dates from November 2010 through 2013.
Note 12 - Stock Compensation Plans
Effective February 15, 2000, the Company adopted a 2000 Stock Incentive Plan and a 2000 Employee Benefit Plan which authorizes the granting of shares and options to employees, outside directors, consultants, and vendors. Under the Plans, awards are made in the form of restricted shares or options, which may constitute incentive stock options or nonstatutory stock options. Only employees of the Company are eligible for the grant of incentive stock options. The total number of options and restricted shares that could have been awarded under the 2000 Stock Incentive Plan initially was 5,000,000. As of the first day of each calendar year commencing January 1, 2001, this total will automatically increase by 2% of the total number of common shares then outstanding or 500,000 shares, whichever is less. The option price, number of shares, grant date, and vesting period are determined at the discretion of the Company's Board of Directors. The exercise price of each ISO granted under the plan must e qual 100% of the market price of the Company's stock on the date of grant. The exercise price of each NSO grant under the plan cannot be less than 85% of the market price of the Company's stock on the date of grant. An option's maximum term is 10 years. As of November 30, 2003, the total number of options that were authorized for issuance under the 2000 Stock Incentive Plan had increased from 5,000,000 shares to 6,500,000. However, the Company has issued more options than were authorized under the 2000 Stock Incentive Plan. This was necessary to provide an incentive to key employees to stay with the Company or one of its subsidiaries. The Company intends to obtain stockholders' approval for an increase in the number of options authorized for issuance at its next stockholders' meeting.
On July 3, 2000, the Company filed with the Securities and Exchange Commission an S-8 registration statement (the "Registration Statement") in respect of its 2000 Employee Benefit Plan to register 35,000,000 shares of the Company's common stock issuable under the plan. One or more Performance Awards may be granted under the plan to any eligible person providing services to or for the Company. The value of such awards may be linked to the market value, book value or other measure of the value of the common stock or other specific performance criteria determined appropriate by the Board of Directors or the Compensation Committee (the "Committee"). The Board or the Committee may approve stock payments to eligible persons who elect to receive such payments in the manner determined by the Board or the Committee.
The total number of shares that can be awarded under the 2000 Employee Benefit Plan is 35,000,000.
- F 20 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 12 - Stock Compensation Plans, continued
Prior to 2000, the Company had issued options with terms of up to 10 years and exercise prices of $.10 per share (the fair market value at the respective dates of grant) to various employees, officers and directors of the Company in return for various services rendered to the Company. Some of these options remained outstanding at November 30, 2003 and 2002.
Changes during the years ended November 30, 2003 and 2002 in stock options outstanding for the Company were as follows:
2003 |
2002 |
||||||
---------------------------- |
---------------------------- |
||||||
Shares |
Weighted average exercise price |
Shares |
Weighted average exercise price |
||||
----------- |
----------- |
----------- |
----------- |
||||
Options outstanding at beginning of year |
9,555,000 |
$0.12 |
4,400,000 |
$0.15 |
|||
Granted |
2,350,000 |
$0.09 |
5,300,000 |
$0.08 |
|||
Forfeited |
(1,263,500) |
$0.12 |
(145,000) |
$0.15 |
|||
Exercised |
(2,443,166) |
$0.11 |
|||||
----------- |
----------- |
||||||
Options outstanding at end of year |
8,198,334 |
$0.14 |
9,555,000 |
$0.12 |
|||
=========== |
=========== |
=========== |
=========== |
||||
Options exercisable at end of year |
5,768,890 |
6,518,889 |
|||||
=========== |
=========== |
The following table summarizes information about stock options outstanding at November 30, 2003, all of which are at fixed prices:
Range of Exercise Prices |
Number Outstanding At 11/30/03 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable At 11/30/03 |
--------------------------- |
--------------------------- |
--------------------------- |
--------------------------- |
--------------------------- |
$.06 - $.08 |
5,275,000 |
2.56 yrs |
0.08 |
3,567,362 |
$.115 - $.20 |
1,598,334 |
1.94 yrs |
0.12 |
876,528 |
$.21 - $.50 |
1,325,000 |
.46 yrs |
0.28 |
1,325,000 |
--------------------------- |
--------------------------- |
|||
8,198,334 |
5,768,890 |
|||
=============== |
=============== |
- F 21 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 12 - Stock Compensation Plans, continued
SFAS 123 provides for the use of a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic value method of accounting prescribed by APB 25. Entities electing to continue to use the intrinsic value method must make pro forma disclosures of net income or loss and earnings or loss per share as if a fair value method of accounting had been applied. In accordance with SFAS 123 and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
The Company and Xenogenics, its subsidiary (see Note 13), have elected to continue to account for their stock-options issued to employees under APB 25. Since the exercise price of all of the options granted by the Company and its subsidiary to their employees has been equal to or greater than fair value, the Company has not recognized any earned or unearned compensation cost in its consolidated financial statements in connection with those options. The Company's historical net loss and basic net loss per share, and pro forma net loss and basic net loss per share, for the years ended November 30, 2003 and 2002 assuming compensation cost had been determined based on the fair value of all options at the respective dates of grant determined using a pricing model consistent with the provisions of SFAS 123 are set forth below.
2003 |
2002 |
|
-------------------- |
-------------------- |
|
Net loss as reported |
$ (1,984,053) |
$ (1,576,663) |
Stock-based employee compensation expense assuming a fair value based method has been used for all awards |
248,082 |
932,750 |
-------------------- |
-------------------- |
|
Net loss - pro forma |
$(2,232,135) |
$(2,509,413) |
============ |
============ |
|
Basic loss per share as reported |
$(.02) |
$(.02) |
============ |
============ |
|
Basic loss per share - pro forma under SFAS 123 |
$(.02) |
$(.03) |
============ |
============ |
The fair value of each option granted by the Company was estimated on the date of grant using the Black-Scholes option pricing model, as permitted by SFAS 123, with the following weighted-average assumptions used for the years ended November 30, 2003 and 2002 as follows:
2003 |
2002 |
|
Dividend yield |
0% |
0% |
Expected volatility |
84% |
167% |
Risk-free interest rate |
2.9% |
2.9% |
Expected lives |
3.0 years |
2.3 years |
- F 22 -
Exten Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended November 30, 2003 and 2002
Note 13 - Xenogenics Subsidiary and Minority Interest
As of November 30, 2003 and 2002,
the Company owned 56.4% of the 2,659,004 outstanding common shares of Xenogenics, one of its subsidiaries.Xenogenics had options to acquire 211,556 shares at $1.00 per share outstanding as of November 30, 2003 and 2002. The options had a weighted average contractual life of 2.5 years as of November 30, 2003.
- F 23 -
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, W. Gerald Newmin, Chief Executive Officer of Exten Industries, Inc. certify that:
1. I have reviewed this annual report on Form 10-KSB of Exten Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: February 6, 2004 |
By: /s/ W. Gerald Newmin |
- 21 -
______________________________________________________________________________
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory F. Szabo, Treasurer of Exten Industries, Inc. certify that:
1. I have reviewed this annual report on Form 10-KSB of Exten Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this annual report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 6, 2004 |
By: /s/ Gregory F. Szabo |
- 22 -
______________________________________________________________________________
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Exten Industries, Inc. (the "Company") on Form 10-KSB for the fiscal year ended November 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald W. Newmin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: |
|||
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
||
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
||
Dated |
February 6, 2004 |
||
By: |
/s/ Gerald W. Newmin |
||
Name: |
Gerald W. Newmin |
||
Title: |
Chief Executive Officer |
- 23 -
______________________________________________________________________________
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Exten Industries, Inc. (the "Company") on Form 10-KSB for the fiscal year ended November 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory F. Szabo, Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: |
||||
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|||
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|||
Dated |
February 6, 2004 |
|||
By: |
/s/ Gregory F. Szabo |
|||
Name: |
Gregory F. Szabo |
|||
Title: |
Treasurer |
- 24 -
______________________________________________________________________________
Exhibit 10.10
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made and entered into as of August 1, 2003 (the "Effective Date"), by and between MultiCell Technologies, Inc., ("MULTICELL") a corporation organized under the laws of the State of Rhode Island, having a place of business at 55 Access Road, Suite 700, Warwick, RI 02886, and XenoTech, LLC, ("XENOTECH") a limited liability corporation organized under the laws of the State of Kansas, having a place of business at 16825 West 116th Street, Lenexa, KS 66219. MULTICELL and XENOTECH are sometimes each hereinafter referred to as a "Party" or collectively as "Parties" to this Agreement.
Whereas, MULTICELL is the owner of certain patent rights, trade secrets, know-how, materials, formulae and technology relating to immortalized human hepatic cells and cell lines, collectively hereinafter defined as "MultiCell Technologies";
Whereas, MULTICELL desires that the above MultiCell Technologies be developed and utilized to the fullest extent possible so that products and services resulting therefrom may be available for use and sale to the public;
Whereas, XENOTECH wishes to obtain, and MULTICELL is willing to grant, a license to practice inventions and utilize and sell products and services included within the MultiCell Technologies, subject to the terms set forth below.
Now, Therefore, in consideration of the above premises and the mutual covenants contained herein, the parties hereby agree as follows:
1 Definitions.
When used in this Agreement, the following terms shall have the meanings set out in this Article 1. Except as otherwise explicitly provided, all references to Articles and Sections shall refer to the Articles and Sections of this Agreement.
1.1 The term "Affiliate" shall mean any entity which is in control, is controlled by or is under common control with a Party, where "control" means beneficial ownership of more than fifty percent (50%) of the outstanding shares or securities or the ability otherwise to elect a majority of the board of directors or other managing authority.
1.2 The term "Cell Lines" shall mean the regenerative "immortalized" human hepatic cells and cell lines designated by MULTICELL as "Fa2N4" and "Ea1C35" and any subclones or derivatives of Fa2N4 and Ea1C35, or any immortalized human hepatic cells and cell lines replacements, successors, or alternatives to Fa2N4 and Ea1C35 (hereinafter sometimes referred to as "Cell Line Improvements"), which are owned by and/or licensed to MULTICELL.
1.3 The term "Cell Line Technology" shall mean the trade secrets, know-how, procedures and formulae reasonably necessary to culture, maintain, propagate, cryopreserve and ship the Cell Lines.
1.4 The term "MFE Formula" shall mean the formula and formulation details reasonably necessary to manufacture and store multifunction enhancing medium ("MFE").
1.5 The term "MultiCell Technologies" shall mean the Cell Lines, Cell Line Technology, MFE Formula, MFE, Patent Rights, Trade Secrets, Know-How and Permitted Improvements owned by and/or licensed to MULTICELL.
- 1 -
1.6 The term "Patent Rights" shall mean United States Patent No. 6,107,043, issued August 22, 2000, any later filed patent applications relating to the cell lines, cell line improvements and MFE, and all related patent applications and patents (including any provisional, utility, continuations, continuations-in-part, continuing prosecution, divisions, extensions, renewals, reissues, revivals, re-examinations and foreign counterparts thereof); and all claims of patents and patent applications in any country covering inventions in the XenoTech Field, the practice of which would be dominated by claims contained in such Patent Rights, to the extent owned or controlled by MULTICELL.
1.7 The term "Trade Secrets" shall mean and be defined in accordance with the definition of Trade Secret found under California law in effect at the time of the execution of this Agreement, including California Civil Code Section 3426.1 and application of the Uniform Trade Secrets Act as adopted in the State of California and amended from time to time. Without limiting this definition, and for information purposes only, a Trade Secret is the whole or any portion of any technical or non-technical information, including a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan or customer or supplier information that is actually or potentially valuable because it is not generally known to others and that is subject to reasonable efforts by MULTICELL to maintain its secrecy.
1.8 The term "Improvements" shall mean any improvements, modifications, assays, new products or the like made or derived from the MultiCell Technologies. "MultiCell Improvements" shall mean any Improvements made by MULTICELL alone or with third parties, "Joint Improvements" shall mean, subject to Section 4.1 herein, any Improvements made by MULTICELL and XENOTECH jointly, wherein each Party has provided a clearly demonstrated and substantial contribution to the Improvement(s), "XenoTech Improvements" shall mean, subject to Section 4.1 herein, any Improvements made by XENOTECH alone, and "Cell Line Improvements" shall mean any immortalized human hepatic cells and cell lines made by MULTICELL, and/or its third party collaborators, that are replacements, successors or alternatives to the Fa2NF or Ea1C35 cell lines. Any and all Improvements, i ncluding, but not limited to, MultiCell Improvements, Joint Improvements, XenoTech Improvements and Cell Line Improvements, shall only be considered "Permitted Improvements" that are subject to the terms of this Agreement if, and only if, the terms of Section 4.1 herein are fully satisfied.
1.9 The term "XenoTech Field" shall mean application of the MultiCell Technologies and Permitted Improvements to propagate, sublicense and sell Cell Lines and Cell Line Improvements and to manufacture and sell MFE for any use, including, but not limited to, drug discovery, drug development and toxicology (including ADME-Tox), but specifically excluding all uses or applications within the "MultiCell Field".
1.10 The term "MultiCell Field" shall mean all uses and applications of the MultiCell Technologies and Improvements for (a) immortalization of mammalian cells, including immortalization in a targeted fashion (b) isolation of stem cells from mammalian livers, (c) transplantation of immortalized cells (including human hepatocytes) or stem cells for therapy and treatment of human and animal diseases, (d) creation of an engineered human liver cell line for the Sybiol™ BioArtificial Liver Assist Device or any other extracorporeal liver assist or other device, (e) utilization of immortalized mammalian cells for the production of therapeutic, diagnostic or research-related proteins, other cellular components or drug-like molecules, including small molecule chemical entities, or (f) the right to engineer, modify, derivatize, combine, develop or otherwise improve the Cell Lines, MFE, Permitted Improvements or other MultiCell Technologies. XENOTECH or its Affiliates cannot engineer, modify, derivatize, combine, develop or otherwise improve the Cell Lines, MFE, Permitted Improvements or other MultiCell Technologies unless and until the terms of Section 4.1 herein have been fully satisfied.
1.11 The term "Licensed Product" shall mean the Cell Lines, Cell Line Improvements, MFE and Permitted Improvements to the same.
1.12 The term "Licensed Service" shall mean any service offered to a third party that utilizes or employs Cell Lines, Cell Line Improvements, MFE or Permitted Improvements to the same, or that directly or indirectly relies upon MCT Technologies and/or their Permitted Improvements.
1.13 The term "Asian Pacific Rim" shall mean the countries of Japan, Taiwan, the People's Republic of China, North Korea, South Korea, Vietnam, Thailand, Singapore, Malaysia, Indonesia and the Philippines.
1.14 The term "Net Sales" shall mean gross income including, but not limited to, any and all consideration, license fees, milestones, royalties and the like, actually paid to and received by XENOTECH or its Affiliates from Sales and sublicenses of Licensed Products and Licensed Services to independent third parties, less:
1.14.1 shipping, storage, packing and insurance expenses, each as actually paid or allowed;
1.14.2 distributor discounts;
1.14.3 amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions; and
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1.14.4 sales and other excise taxes, use taxes, tariffs, export license fees and duties actually paid or allowed.
1.15 The term "Sale" shall mean any transaction that transfers to a purchaser, for value, physical possession and title to a Licensed Product, after which transfer the seller has no right or power to determine the purchaser's resale price, if any, or that provides to a purchaser, for specified value, Licensed Services. Transfer of possession and title to an Affiliate or sublicensee shall not constitute a Sale unless the Affiliate or sublicensee is an end user of the Licensed Product.
1.16 The term "Term" shall have the meaning set forth in Section 9.1.
1.17 The term "Territory" shall mean worldwide.
2. Grant of Rights and Transfer of Materials.
2.1 Licensed Patent Rights and Technology. Subject to the terms and conditions hereof, including MULTICELL's retained rights pursuant to Section 2.2 herein, MULTICELL hereby grants to XENOTECH and its Affiliates during the Term, as defined below, an exclusive license under the MultiCell Technologies within the XENOTECH Field and Territory to develop, have developed, make, have made, use, have used, import, have imported, Sell, offer for Sale and have Sold Licensed Products and Licensed Services. XENOTECH'S right and license includes, but is not limited to, the exclusive right to propagate, sub-license and sell the Cell Lines, and Cell Line Improvements, and to manufacture and sell the MFE and their Permitted Improvements. For purposes of clarity, XENOTECH'S right and license will be used both within XENOTECH for its internal research and development and for contract research performed by XENOTECH for third parties, and by XENOTECH, its distributors and sales representatives in distribution, sales and sublicenses to third parties.
2.2 MULTICELL Retained Rights. MULTICELL maintains all rights in the MultiCell Technologies and Improvements within the MULTICELL Field. In addition, MULTICELL shall have the retained right to continue its research and development efforts within the XENOTECH Field, including collaborative efforts with third parties, subject to the rights of XENOTECH, if any, as provided herein, however, MULTICELL shall not directly or indirectly license or sell the Cell Lines, Cell Line Improvements or MFE and their Permitted Improvements within the XENOTECH Field.
2.3 XENOTECH Retained Rights. XENOTECH represents that it currently has the technology and know-how to immortalize mammalian cells, isolate stem cells from mammalian livers, and transplant immortalized cells (including human hepatocytes) or stem cells for therapy and treatment of human and animal diseases that does not involve the use of the Cell Lines or other MultiCell Technologies. Accordingly, XENOTECH retains the right to work by itself or with third parties engaged in research in the immortalization of mammalian cells, isolation of stem cells from mammalian livers, and transplantation of immortalized cells (including human hepatocytes) or stem cells for therapy and treatment of human and animal diseases, provided, however, that such work is not based on the Confidential Information, Trade Secrets, Know-How, Patent Rights or other MultiCell Technologies or Improvements.
2.4 Sublicenses. XENOTECH shall have the right to grant sublicenses, provided, that any sublicenses granted by XENOTECH shall provide that relevant obligations to MULTICELL contained in this Agreement shall be binding upon the sublicensees. In this regard, MULTICELL AND XENOTECH shall, within twenty (20) days of the Effective Date, jointly develop a Limited License Agreement, a Limited Use Agreement or other agreements (the "Form Agreements") to be utilized by XENOTECH for any sublicense or other transfer of the Cell Lines, Cell Line Technology, MFE, Permitted Improvements or other MultiCell Technologies. XENOTECH shall utilize the Form Agreements and provide MULTICELL with a true and accurate copy of any and all executed Form Agreements from all clients and/or third parties sublicensing, buying or obtaining access to the Cell Lines, Cell Line Technology, MFE, Permitted Improvements or other MultiCell Te chnologies, and any modification or termination thereof, within thirty (30) days after execution, modification, or termination. Any material variance from these Form Agreements must be approved by MULTICELL prior to execution, which approval will not be unreasonably withheld, conditioned or delayed. Any sub-distributors, sales agents or the like employed by XENOTECH, its Affiliates or sublicensees shall be bound by the same conditions contained in this Agreement. Any sublicenses (or other Form Agreements) shall survive termination of XENOTECH'S license subject to such sublicensee's or other third party's agreement to be bound directly to MULTICELL under the terms of such sublicense or other Form Agreement.
2.5 Within fifteen (15) days from the Effective Date, the Parties shall complete the transaction associated with this Agreement (the "Closing"). Thereafter, MULTICELL shall:
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2.5.1 Within five (5) days from the Closing, provide for the transfer of reasonably sufficient quantities of the Cell Lines to up to two locations acceptable to XENOTECH, of which one is XenoTech's main offices in Lenexa, Kansas. Within ten (10) business days after said transfer, XENOTECH shall verify that the functional status (e.g., viability, attachability and inducibility) of the Cell Lines after such relocation is intact (the "Relocation"). The reasonable costs of the Relocation shall be borne by XENOTECH.
2.5.2 Within thirty (30) days from the Closing, conduct training utilizing the Cell Line Technology for the benefit of XENOTECH. Such training shall be made to the reasonable satisfaction of XENOTECH and at a reasonable location within the United States chosen by XENOTECH (the "Cell Line Training"). The reasonable costs associated with the Cell Line Training shall be borne by XENOTECH.
2.5.3 At the Closing, deliver to XENOTECH the MFE Formula. Within thirty (30) days after the Closing, MULTICELL will assist in the training of two XENOTECH scientists in the technology, know-how and procedures to prepare the MFE, as reasonably necessary and as reasonably requested by XENOTECH (the "MFE Training"). The reasonable costs of the MFE Training shall be borne by XENOTECH.
2.5.4 At the Closing, deliver into escrow a written "how to" manual describing the human hepatic cell immortalization and selection procedures used to produce the Cell Lines (the "Immortalization Technology Guide"). The escrow agent will be MULTICELL'S outside legal counsel, and the Guide will only be released from escrow and provided to XENOTECH if conditions for the release provided in Section 14.6 herein are fully satisfied.
3. Payments.
3.1 License Fees. XENOTECH has made, and will make, the following license fee payments to MULTICELL in the following manner:
3.1.1 At the signing of the existing Letter of Intent between XENOTECH and MULTICELL on July 8, 2003, XENOTECH paid MULTICELL the sum of fifty thousand dollars ($50,000), as a portion of the "Prepaid Royalties", for an exclusive worldwide license during the Term (unless earlier terminated along with license to Cell Lines as provided herein) in the MFE Formula;
3.1.2 At the Closing, XENOTECH shall pay to MULTICELL the sum of one hundred fifty thousand dollars ($150,000) (the "Closing Payment"), said Closing Payment being a portion of the "Prepaid Royalties" and place a non-refundable eight hundred thousand dollar ($800,000) payment (the "Relocation Payment") into a mutually agreeable escrow account;
3.1.3 Within three (3) business days after the Relocation, XENOTECH shall instruct the escrow agent to release to MULTICELL the non-refundable Relocation Payment from escrow. Once released, the Relocation Payment shall be consideration for, and a guarantee of, Nosan's right of first negotiation for distribution rights for the Asian Pacific Rim as provided in Section 12.3 herein; and
3.1.4 Within ten (10) days after the Cell Line Training, XENOTECH shall pay MULTICELL the sum of five hundred thousand dollars ($500,000) (the "Training Payment"). Once paid, the Training Payment shall be considered a portion of the "Prepaid Royalties".
3.2 Running Royalty Payments. XENOTECH shall pay MULTICELL (in accordance with Article 7 herein) ongoing royalty payments (hereinafter "Running Royalties") throughout the Term on Net Sales of Licensed Products and Licensed Services Sold by XENOTECH or its Affiliates, and on sublicenses and other agreements with third parties, as follows:
3.2.1 thirty four percent (34%) of Net Sales for use and/or propagation sublicenses of Cell Lines or Cell Line Improvements to clients or third parties of XENOTECH;
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3.2.2 seventeen and one-half percent (17.5%) of Net Sales of Cell Lines or Cell Line Improvements to third parties;
3.2.3 two and one-half percent (2.5%) of Net Sales of in-house studies, using Cell Lines or Cell Line Improvements, for the benefit of XENOTECH'S clients and/or third parties;
3.2.4 ten percent (10%) of Net Sales of MFE media, and Permitted Improvements to the MFE, to third parties;
3.2.5 ten percent (10%) of Net Sales of in-house studies, using Cell Lines or Cell Line Improvements in studies of a type not currently performed by XENOTECH and which type of study is enabled because of the Cell Lines and/or Cell Line Improvements; and
3.2.6 fifteen percent (15%) of Net Sales for any other sale, sublicense, transfer or other permitted use of the MULTICELL Technology and Permitted Improvements, other than as provided in paragraph 3.2.1 through 3.2.5 herein.
Running Royalty payments will be made within forty-five (45) calendar days of the close of each calendar quarter.
3.3 Running Royalty Credits. The actual amount paid pursuant to Section 3.2 above, shall be determined by the total Running Royalties for a given quarter, less a credit from the Prepaid Royalties, until such credit is exhausted, as follows. The maximum credit that XENOTECH shall be entitled to offset against Running Royalties is $700,000 from the Prepaid Royalties ("Maximum Credit"). The Relocation Payment is nonrefundable and non-creditable without offset of any kind. When Running Royalties are due from XENOTECH to MULTICELL, XENOTECH will pay twenty five percent (25%) of the amount due in said quarter in cash to MULTICELL and can offset the remaining seventy five percent (75%) due MULTICELL against the Maximum Credit. XENOTECH can continue to utilize the remaining portion of the Maximum Credit in subsequent quarters, continuing at the rate of seventy five percent (75%) of the amount due, until it is fully exhausted. Thereafter, XENOTECH shall pay the full amount (100%) of the Running Royalties in each quarter in cash without any further credits or offsets due or applicable from License Fees paid pursuant to Section 3.1.
3.4 Running Royalty Adjustments. The Running Royalty rates of 3.2.1 to 3.2.6 provided above shall be adjusted in the following situations: (i) for Permitted Joint Improvements, the Running Royalty rates payable by XENOTECH shall be reduced to seventy five percent (75%) of the rates shown therein and (ii) for permitted XENOTECH Improvements, the Running Royalty rates payable by XENOTECH shall be reduced to fifty percent (50%) of the rates shown therein.
3.5 Guaranteed Minimum Running Royalties. In order for XENOTECH to maintain its exclusive license and right under this Agreement, XENOTECH shall pay to MULTICELL guaranteed minimum Running Royalties ("Minimum Running Royalties"), inclusive of any credits from the Maximum Credit, as follows:
Time Period |
Minimum |
First 16 months from the Effective Date: |
$ 800,000 |
Months 17 through 28 from the Effective Date: |
$ 2,100,000 |
Months 29 through 40 from the Effective Date: |
$ 2,600,000 |
Months 41 through 52 from the Effective Date: |
$ 3,000,000 |
Months 53 through 64 from the Effective Date: |
$ 3,300,000 |
Months 65 through 76 from the Effective Date: |
$ 3,630,000 |
Months 77 through 84 from the Effective Date: |
$ 2,662,000 |
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If, in any Time Period listed above, the actual Running Royalties exceed the noted Minimum Running Royalties for that Time Period, then XENOTECH shall be entitled to credit that excess amount towards any shortfall in next Time Period, but only to the extent that the actual Running Royalties payable in said next Time Period fall short of the guaranteed Minimum Running Royalties for that Time Period.
In the event that XENOTECH fails to meet the guaranteed Minimum Running Royalties for any Time Period, then MULTICELL shall be entitled to credit the shortfall against the remaining Maximum Credits due XENOTECH, if any, provided, however, such credits shall not exceed the Maximum Credit.
In the event that XENOTECH fails to pay or have credited (against the Maximum Credit) at least twenty five percent (25%) of the Minimum Running Royalties for any Time Period provided above, then MULTICELL shall have sixty (60) days, at its option, to notify XENOTECH that any and all of XENOTECH'S license and rights under this Agreement are terminated in accordance with Article 9 herein. Upon said termination, XENOTECH shall, within thirty (30) days, return all MultiCell Technologies, information, assets and other materials to MULTICELL, including any and all Improvements, to sell any remaining inventory, subject to the payment obligations to MULTICELL noted herein, to cease any all further sales of Cell Lines, Cell Line Improvements, MFE or its Permitted Improvements, and to execute all instruments reasonably necessary, if any, to re-vest said license and rights solely in MULTICELL. XENOTECH shall have the right to complete its current contracts with existin g clients, subject to the payment obligations to MULTICELL noted herein.
In the event that XENOTECH fails to pay or have credited less than one hundred percent (100%) but greater than twenty five percent (25%) of the Minimum Running Royalties for any Time Period provided above, then XENOTECH shall have the right to either increase its royalty payments to MULTICELL or lose its exclusive license hereunder. In addition, MULTICELL shall have sixty (60) days, at its option, to notify XENOTECH that XENOTECH must, by the end of the next Time Period, pay the Minimum Running Royalties for said Time Period plus the shortfall (the "Shortfall Payment") from the prior Time Period in order to maintain XENOTECH'S license hereunder. Should XENOTECH fail to make the Shortfall Payment, then MULTICELL shall have thirty (30) days, at its option, to notify XENOTECH that any and all of XENOTECH'S license and rights hereunder are terminated, provided, however, that XENOTECH shall have 90 days to cure said breach as provided in Section 9.2 her ein.
4. Representations and Disclaimers.
4.1 XENOTECH Representations. XENOTECH hereby represents, warrants and agrees that it:
4.1.1 shall not reverse engineer, modify, improve, derivatize or subclone the Cell Lines or Cell Line Improvements or reverse engineer, modify or improve the MFE or its Improvements without requesting permission from MULTICELL in writing and obtaining the written approval of MULTICELL;
4.1.2 shall not develop any Joint Improvements or XENOTECH Improvements using the Cell Lines, Cell Line Improvements or other MultiCell Technologies without informing MULTICELL and obtaining prior written approval of MULTICELL;
4.1.3 shall not use, sell, or sublicense the Cell Lines or Cell Line Improvements for the production of proteins, other cellular constituents or drug-like molecules;
4.1.4 shall not use, sell, or sublicense the Cell Lines or Cell Line Improvements for the development of a device, such as an artificial liver or other liver support devices, for the treatment of any human diseases;
4.1.5 shall not use, sell, or sublicense the Cell Lines or Cell Line Improvements for the purpose of infecting and propagating viruses, including, but not limited to, hepatitis B or C viruses;
4.1.6 shall not use, sell, or sublicense the Cell Lines or Cell Line Improvements for the purpose of transplanting the cells into animals, including humans;
4.1.7 shall not sell, sublicense or transfer the Cell Lines or Cell Line Improvements to any and all companies, institutions, or the like that do not sign one or more of the Form Agreements acceptable to XENOTECH and MULTICELL;
4.1.8 shall not grant a sublicense to a client or third party of more than (1) one year without MULTICELL'S prior written permission, which shall not be unreasonably withheld, conditioned or delayed;
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4.1.9 shall make a good faith effort to promote the worldwide use and licensing of the Cell Lines and Cell Line Improvements in a manner consistent with its other sales and marketing efforts, but in any case no less than a commercially reasonable effort;
4.1.10 is a limited liability company duly organized and validly existing and in good standing under the laws of the state of Kansas, and is duly qualified to conduct its business as presently conducted;
4.1.11 has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder;
4.1.12 has taken all necessary legal action to authorize the execution and delivery of this Agreement, and this Agreement constitutes the legal, valid and binding obligation of XENOTECH enforceable against XENOTECH in accordance with its terms; and
4.1.13 is not subject to any pending or threatened (i) voluntary or involuntary bankruptcy, liquidation or similar proceeding or order, (ii) litigation, regulatory, judicial or arbitral proceeding or order, or (iii) noncompetition, license, exclusivity or confidential agreement, any of which would likely affect its ability to enter into and/or perform its obligations under this Agreement.
4.2 MULTICELL Representations. MULTICELL hereby represents, warrants and agrees that:
4.2.1 it has good and valid title to the Multicell Technologies, and that the Multicell Technologies are not the subject of any pending or threatened legal action, including, but not limited to, any assertion by any third parties that any of the intellectual property rights is invalid, unenforceable or violates the rights of any third party;
4.2.2 it has sufficient rights to grant the rights (including the exclusive rights) granted herein to XENOTECH, and that such grant of rights hereunder are free and clear of any known claims, encumbrances, liens, security interests and rights of third parties, except for the security interest of certain secured convertible promissory notes issued by Exten Industries, Inc., a MULTICELL Affiliate;
4.2.3 it shall make Dr. Ron Faris (or his replacement) reasonably available to respond to questions from XENOTECH or its Affiliates;
4.2.4 it is a corporation duly organized and validly existing and in good standing under the laws of the state of Rhode Island, and is duly qualified to conduct its business as presently conducted;
4.2.5 it has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder;
4.2.6 it has taken all necessary legal action to authorize the execution and delivery of this Agreement, and this Agreement constitutes the legal, valid and binding obligation of MULTICELL enforceable against MULTICELL in accordance with its terms;
4.2.7 it is not subject to any pending or threatened (i) voluntary or involuntary bankruptcy, liquidation or similar proceeding or order, (ii) litigation, regulatory, judicial or arbitral proceeding or order, or (iii) noncompetition, license, exclusivity or confidential agreement, any of which would likely affect its ability to enter into and/or perform its obligations under this Agreement.
4.3 Warranty Disclaimer. Except as expressly provided in Sections 4.1 and 4.2 herein, nothing in this Agreement is or shall be construed as:
4.3.1 a grant by implication, estoppel, or otherwise of any licenses or rights under patent applications, patents, know-how, trade secrets or other technologies of MULTICELL other than as provided in Article 2 hereof, or
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4.3.2 any other warranty or representation, except as expressly provided herein.
5. Indemnification
5.1 Indemnification by XenoTech. XENOTECH agrees to indemnify, hold harmless and defend MULTICELL, its officers, directors, employees, attorneys and agents (each, a "Multicell Indemnitee"), against any and all loss, damage or expense (including reasonable attorney's fees) (collectively, "Damages") incurred or sustained by any Multicell Indemnitee as a result of (a) any breach by XENOTECH of any material term, provision, or covenant of this Agreement, (b) any inaccuracy in any representation or warranty made by XENOTECH in this Agreement and (c) any claim by a client, purchaser or sublicensee of XENOTECH arising from XENOTECH's manufacture, storage, sale, distribution or use of the Licensed Products or performance of Licensed Services by XENOTECH or its Affiliates, or (d) use of Licensed Products by such clients, purchasers and sublicensees< /U>. Notwithstanding anything to the contrary herein, XENOTECH shall have no liability to any Multicell Indemnitee under this Section 5.1 to the extent said Damages arise, in whole or in part, from the negligent, reckless or willful acts or omissions of a Multicell Indemnitee which are in breach of the material terms of this Agreement. MULTICELL shall give written notice to XENOTECH stating specifically the basis for the claim for Damages, the amount thereof and, in the event of a third party claim, shall tender defense thereof to XENOTECH as provided in Section 5.4. Amounts due shall be paid within thirty (30) days after demand.
5.2 Indemnification by MULTICELL. MULTICELL agrees to indemnify, hold harmless and defend XENOTECH , its officers, directors, employees, attorneys and agents (each, a "XenoTech Indemnitee") against any Damages incurred or sustained by any XENOTECH Indemnitee as a result of (a) any breach by MULTICELL of any material term, provision or covenant of this Agreement and (b) any inaccuracy in any representation or warranty made by MULTICELL in this Agreement. Notwithstanding anything to the contrary herein, MULTICELL shall have no liability to any XENOTECH Indemnitee under this Section 5.2 for Damages to the extent said Damages arise, in whole or in part, from the negligent, reckless or willful acts or omissions of a XENOTECH Indemnitee which are in breach of the material terms of this Agreement. XENOTECH shall give written notice to MULTICELL stating specifically th e basis for the claim for Damages, the amount thereof , and in the event of a third party claim, shall tender defense thereof to MULTICELL as provided in Section 5.4. Amounts due shall be paid within thirty (30) days after demand. Indemnification is the sole remedy for any and all claims arising of a type identified in Section 5.1 or 5.2 of this Agreement, except for any claim for an intentional or fraudulent action, omission, misrepresentation or breach.
5.3 Tender of Defense for Damages. Promptly upon receipt by either party of a notice of a claim by a third party which may give rise to a claim for Damages under Section 5.1 or 5.2 of this Agreement, the indemnified party shall give written notice thereof to the indemnifying party. Upon tender of defense, (i) the indemnifying party shall undertake the defense against such claim and may contest or settle such claim on such terms, at such time and in such manner as the indemnifying party, in its sole discretion, shall elect, (ii) the indemnified party shall cooperate as reasonably requested (with reasonable out of pocket expenses, but not soft costs, being reimbursed by the indemnifying party) in the defense of the claim, provided, however, that the indemnifying party may not agree to any settlement which would invalidate any claim of any Patent Right or which would impose any ongoing obligation on the indemnifie d party without the indemnified party's prior written consent, which shall not be unreasonably withheld. Notwithstanding the foregoing, the indemnified party shall have the right to participate in the defense or prosecution of any claim, including hiring their own counsel at the indemnified party's own expense, and the indemnifying party shall cooperate with the indemnified party if the indemnified party does so participate. If the indemnifying party fails or refuses to defend any tendered third party claim for Damages, the indemnifying party may nevertheless, at its own expense, participate in the defense of such claim by the indemnified party and in any and all settlement negotiations relating thereto. In any and all events, the indemnifying party shall have such access to the records and files of the indemnified party relating to any claim for Damages as may be reasonably necessary to effectively defend or participate in the defense thereof.
5.4 Threshold Amount. Notwithstanding anything to the contrary herein, each party's obligations to indemnify the other party shall take effect only if and to the extent the aggregate indemnification obligations of the indemnifying party exceed Ten Thousand Dollars ($10,000) (the "Threshold Amount"). The Threshold Amount limitation described herein shall not apply to any claims for Damages based upon any breach of a covenant (including payment obligations) or any intentional or fraudulent action, omission, misrepresentation or material breach. For purposes of this Article 5 and elsewhere in this Agreement, "Damages" shall not include consequential, exemplary or punitive damages or diminution in value or loss of bargain type damages which multiply or increase direct or out-of-pocket damages and shall be determined net of applicable insurance recoveries (but adding back deduct ible and copay amounts).
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5.5 Insurance. During the term of the Agreement, XENOTECH shall have and maintain comprehensive general liability insurance, including product liability insurance, with reputable and financially secure insurance carriers to cover the activities of XENOTECH and its affiliates contemplated by this Agreement. Such insurance shall be in an aggregate amount of at least $2 million.
6. Prosecution and Maintenance of Patent Rights.
6.1 Patent Prosecution and Maintenance.
(a) MULTICELL shall be solely responsible for the preparation and prosecution of all patent applications and the maintenance of all patents within the Patent Rights, and for the preparation, prosecution and maintenance of all patent applications and patents covering Improvements. Both parties agree to cooperate with the other party to execute all lawful papers and instruments, to make all rightful oaths and declarations and to provide consultation and assistance as may be necessary in the preparation, prosecution, maintenance, and reinforcement of all such patent applications and patents.
(b) In the event MULTICELL elects to discontinue payment for the filing, prosecution and/or maintenance of any patent application and/or patent contained in the Patent Rights that are licensed from Rhode Island Hospital, then XENOTECH, shall be entitled (but is not obligated) to assume all payment obligations to Rhode Island Hospital, including but not limited to the filing, prosecution and maintenance of such Patent Rights and licenses at its own cost and expense. Any payments made by XENOTECH by virtue of this subsection (b) shall be deemed a credit against amounts otherwise owed by XENOTECH to MULTICELL or shall be promptly reimbursed by MULTICELL.
6.2 Defense Against Infringement. In the event XENOTECH or MULTICELL becomes aware of any actual or threatened infringement of any Patent Rights, Trade Secrets or other intellectual property rights licensed hereunder, that party shall promptly notify the other and the parties shall discuss the most appropriate action to take. If attempts to abate such infringement are unsuccessful, then MULTICELL shall have the first right, but not the obligation, to bring an action at its own expense to enjoin and/or recover damages from the infringer, in which event XENOTECH shall cooperate with MULTICELL as reasonably requested, at MULTICELL'S expense. XENOTECH may, on its own initiative and cost, join in such suit. All recoveries, damages and awards in such suit, after reimbursement of any litigation expenses of XENOTECH not previously reimbursed, shall belong to MULTICELL. In the event that MULTICELL elects not to instit ute or prosecute any suit to enjoin or recover damages from any infringer, then XENOTECH alone may, in its sole discretion and at its expense, initiate and conduct an infringement action and keep any settlement or award which may be obtained. XENOTECH and MULTICELL agree that neither will settle any action commenced by it in a manner that is prejudicial to any Patent Rights, Trade Secrets or other intellectual property rights licensed hereunder without the other party's prior written approval, which shall not be unreasonably withheld, conditioned or delayed.
6.3 Third Party Infringement Claims. In the event any Licensed Product or Licensed Service becomes the subject of a claim for patent or other proprietary right infringement anywhere in the world by virtue of the incorporation of the Patents Rights or MultiCell Technologies therein, the parties shall promptly give notice to the other and meet to consider the claim and the appropriate course of action. XENOTECH shall have the right to tender defense of any such claim to MULTICELL, as provided in Section 5.4 hereof.
6.4 Marking. XENOTECH agrees to mark and to cause any Affiliate, sublicensee, distributor, representative or agent to appropriately mark any Licensed Products or Licensed Services (or their containers or labels) made, sold, or otherwise disposed of by it or them with the type and form of notice of patent rights prescribed by MULTICELL to XENOTECH in writing, in order to enable the Patent Rights to be enforced to their full extent in any country where Licensed Products are made, used or sold or Licensed Services practiced.
7. Reporting, Verification and Payment.
7.1 Books and Records. XENOTECH agrees to keep proper records and books of account in accordance with good accounting practices, showing the Sales upon which the royalty and other payments of XENOTECH are based, and all other information necessary for the accurate determination of payment to be made hereunder. XENOTECH agrees to deliver to MULTICELL, within forty-five (45) days after each calendar quarter, a report showing the information on which the payments herein provided are calculated, including a breakdown of income from Sales of each Licensed Product and each Licensed Service and to accompany each such report with the payment shown to be due thereby.
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7.2 Customer Reports
. During the Term of the Agreement, XENOTECH will provide a written quarterly report identifying new customers that are sublicensing or buying MULTICELL Cell Lines, Cell Line Improvements and other Permitted Improvements along with a copy of each executed Form Agreement. XENOTECH will provide to MULTICELL an annual certification, signed by its chief executive officer and chief financial officer, affirming that XENOTECH has correctly reported to MULTICELL all revenues XENOTECH has received from the sublicenses, Sales of Licensed Products, provision of Licensed Services or from any other agreement with a third party related to MultiCell Technologies. With respect to sublicensee, client and customer information provided by XENOTECH to MULTICELL pursuant to this Section 7.2 and Section 2.4 herein, MULTICELL shall maintain such information in confidence pursuant to Article 10 herei n, use such information solely to monitor and police its intellectual property rights in the MultiCell Technologies and not use such information for the purpose of creating its own sales network. With respect to sublicensees, clients and customers outside of the United States, XENOTECH will use commercially reasonable efforts to obtain all relevant information on the same and provide it to MULTICELL as provided herein. XENOTECH will promptly inform MULTICELL if it is unable to obtain all or any part of said information required pursuant to Sections 2.4 and 7.2 herein.7.3 Audit Rights. During the Term of the Agreement and for a period of one calendar quarter plus thirty days thereafter XENOTECH will afford MULTICELL, at MULTICELL'S sole expense, the opportunity upon reasonable prior written notice to XENOTECH for independent, annual auditing of financial records as they relate solely to the business transactions relevant to this agreement (e.g., revenue from licensing fees, revenue from the sale of the Cell Lines, Cell Line Improvements and MFE, and revenue from the conduct of studies involving the use of the Cell Lines, Cell Line Improvements and/or MFE, as well as sublicenses or other agreements relating to MultiCell Technologies); provided, that, any such audit shall be limited to two (2) business days on site for eight (8) hours per day during the hours of 9 a.m. to 5 p.m. Kansas City time and no copies of any materials reviewed by the auditors may be made. However, if the audit discloses an error, in excess of five percent (5%) in favor of MULTICELL, then XENOTECH shall pay, in addition to the amount of any underpayment, the cost to MULTICELL of the audit, not to exceed three thousand dollars ($3,000). XENOTECH shall include substantially the same audit rights in any sublicense or other agreement it grants in order to ensure correctness of payments due hereunder.
7.4 Foreign Payments. Royalties based on Net Sales in any foreign country shall be payable to MULTICELL in the United States in United States Dollars. Dollar amounts shall be calculated using the foreign exchange rate, as published by The Wall Street Journal, West Coast Edition, in effect for such foreign currency on the last business day of each quarter for which a report is required. Where royalties are due for Net Sales in a country where, for reasons of currency, tax or other regulations, transfer of foreign currency out of such country is prohibited, XENOTECH has the right to place MULTICELL's royalties in a bank account in such country in the name of and under the sole control of MULTICELL; provided, however, that the bank selected be reasonably acceptable to MULTICELL and that XENOTECH inform MULTICELL of the location, account number, amount and currency of money deposited therein. After MULTICELL has been so notified, those monies shall be considered as royalties duly paid to MULTICELL and will be completely controlled by MULTICELL, and XENOTECH will have no further responsibility with respect thereto.
7.5 Sales Taxes, Etc. MULTICELL shall be entitled to receive, upon valid and written request to XENOTECH, additional amounts added to all payments hereunder amounts to equal any applicable taxes of a governmental authority with competent jurisdiction levied or based on this Agreement or the payments made by XENOTECH to MULTICELL hereunder, exclusive of taxes based on MULTICELL's income, unless XENOTECH provides MULTICELL with appropriate exemption certificates. Any additional tax amounts paid by XENOTECH shall be applied by MULTICELL in payment of such taxes.
8. Improvements
8.1 Same Use Products. With respect to any Cell Line Improvements, to the extent that said Cell Line Improvements are within, and only to the extent they are within, the XenoTech Field (hereinafter "Same Use Products"), then MULTICELL shall so inform XENOTECH in a confidential writing. Thereafter, XENOTECH shall have sixty (60) days to confirm its interest in writing to said Same Use Products. Should XENOTECH so express its interest in said Same Use Products, then those Same Use Products shall automatically be included within the definition of Cell Lines as provided in this Agreement, and shall be subject to all the rights and obligations provided herein, including payment obligations. Once so included, the Parties shall negotiate additional, mutually-agreeable minimum (royalties) payable for each of said Same Use Products so added. Should XENOTECH fail to express its interest within said sixty (60) day p eriod for each Same Use Product so selected, then MULTICELL shall be free to commercialize said Same Use Products as it sees fit, without any further obligation or payments to XENOTECH whatsoever.
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8.2 MultiCell Improvements
. If MULTICELL works with other companies to develop MultiCell Improvements (other than Cell Line Improvements), to the extent that said MultiCell Improvements are within, and only to the extent they are within, the XenoTech Field (hereinafter "MultiCell Improved Products"), then MULTICELL shall so inform XENOTECH in writing and MULTICELL shall use commercially reasonable efforts to use XENOTECH as its exclusive distributor/sales agent for such MultiCell Improved Products. In the event XENOTECH has the desire and capability to act as said exclusive distributor/sales agent, but is not used as the exclusive distributor/sales agent for MultiCell Improved Products, then MULTICELL shall pay XENOTECH a royalty equal to the same percentages paid MULTICELL for similar products based on all consideration paid to MULTICELL for the product.9. Term and Termination.
9.1 Term. Unless earlier terminated under this Article 9, this Agreement shall enter into force on the Effective Date, and shall have an initial term of seven (7) years, with automatic one (1) year renewals on the anniversary of the Effective Date thereafter unless written notice of termination by a Party is received not less than one hundred twenty (120) days prior to any such one (1) year renewal period (the "Term").
9.2 Termination by Either Party. This Agreement may be terminated by either party, if the other party substantially fails to perform or otherwise materially breaches any of the material terms, covenants or provisions of this Agreement, such termination to be effected by giving written notice of intent to terminate to the breaching party stating the grounds therefore. The party receiving the notice shall have ninety (90) days thereafter to correct such breach. If such breach is not corrected within said ninety (90) days after notice as aforesaid, then this Agreement shall automatically terminate.
9.3 Consequences of Termination.
(a) In the event of expiration of this Agreement or termination of the Agreement for any reason whatsoever:
(i) XENOTECH shall not thereby be discharged from any liability or obligation to MULTICELL which became due or payable prior to the effective date of such expiration or termination; and
(ii) The rights and obligations of the parties under Articles 5, 9, 10, and 11 and Sections 7.3, 12.3, and 12.7 shall survive any termination of this Agreement.
(b) In the event of termination of the Agreement pursuant to Section 9.2.
(i) If XENOTECH, its Affiliates or its sublicensees then possess Licensed Product, have started the manufacture thereof or have accepted orders therefor, XENOTECH, its Affiliates or its sublicensees shall have the right to sell their inventories thereof, complete the manufacture thereof and market such fully manufactured Licensed Product, in order to fulfill such accepted orders, subject to the obligation of XENOTECH to pay MULTICELL the royalty and other payments therefore as provided in Article 3 of this Agreement;
(ii) Subject to Section 9.3(b)(i), XENOTECH shall discontinue, and shall cause its Affiliates to discontinue, the manufacture, use, marketing and sale of Licensed Products and the provision of Licensed Services and shall assign any sublicenses or other agreements, including Form Agreements, granted hereunder to MULTICELL in accordance with Section 2.4; and
(iii) All rights licensed, sold, assigned or transferred by MULTICELL to XENOTECH hereunder shall revert to MULTICELL, and XENOTECH agrees to execute all instruments reasonably necessary to re-vest said rights in MULTICELL (provided, however, that any such termination shall not effect a premature termination of any sublicense previously granted by XENOTECH).
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10. Confidential Information.
10.1 Confidentiality. A receiving Party will not disclose or use, and will direct its representatives not to disclose or use any Confidential Information (as defined below) with respect to a disclosing Party furnished, or to be furnished, by the disclosing Party or its representatives to the receiving Party or its representatives at any time or in any manner other than in connection with this Agreement an the underlying business thereto. For purposes of this Paragraph, "Confidential Information" means any information, whether of a business or technical nature, about the disclosing Party, unless the receiving Party can demonstrate through its written documentation that said information (a) was in the public domain at the time of disclosure, (b) later became part of the public domain through no act or omission of the receiving Party, its employees agents, successors, or assigns, (iii) was lawfully disclosed to the receiving Party by a third party having the right to disclose it, (iv) was already known by the receiving Party at the time of disclosure, or (v) is required to be disclosed to a governmental agency pursuant to another legal process, provided that the receiving Party shall first give notice to the disclosing Party of such disclosure and shall have made a reasonable effort to maintain the confidentiality of such information, including, where appropriate, by obtaining a protective order from an appropriate court.
11 Choice of Law; Dispute Resolution.
11.1 Governing Law. This Agreement is made in accordance with and shall be governed and construed in accordance with the laws of the State of Rhode Island, as applied to contracts executed and performed entirely within the State of Rhode Island, without regard to conflicts of laws rules.
11.2 Arbitration. If a dispute arises between the Parties relating to the interpretation or performance of this Agreement or the grounds for the termination thereof, the Parties agree to hold a meeting, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If, within thirty (30) days after such meeting, the Parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be submitted to final and binding arbitration under the then current Licensing Agreement Arbitration Rules of the American Arbitration Association ("AAA"), with a panel of three (3) arbitrators in Chicago, Illinois. Such arbitrators shall be selected by the mutual agreement of the Parties or, failing such agreement, shall be selected according to the aforesaid AAA rules. The Parties shall be ar the costs of arbitration equally unless the arbitrators, pursuant to their right, but not their obligation, require the non-prevailing Party to bear all or any unequal portion of the prevailing Party's costs. The decision of the arbitrator shall be final and may be sued on or enforced by the Party in whose favor it runs in any court of competent jurisdiction at the option of the successful Party. The arbitrators will be instructed to prepare and deliver a written, reasoned opinion conferring their decision. The rights and obligations of the Parties to arbitrate any dispute relating to the interpretation or performance of this Agreement or the grounds for the termination thereof shall survive the expiration or termination of this Agreement for any reason.
12 Commercialization and Subsequent Negotiations.
12.1 Branding and Marketing. XENOTECH will advertise, market, sublicense, and sell the Cell Lines, Cell Line Improvements, MFE and Permitted Improvements under names reasonably acceptable to MULTICELL it being acknowledged that product labels will include a prominent reference to MULTICELL as the source of same. Any Permitted Joint Improvements as provided herein will be marketed under a mutually agreeable brand name. Any Permitted XenoTech Improvements can be branded by XENOTECH and XENOTECH will identify that the product contains MULTICELL products.
12.2 Right of First Refusal. Subject to the security interest of the Exten Industries, Inc. (a MULTICELL Affiliate) secured convertible notes, MULTICELL shall grant XENOTECH a right of first refusal in the intellectual property, including Patent Rights (registered and pending), which are the subject of the license hereunder, but only to the extent they relate directly to the XenoTech Field, in the event of a proposed sale, assignment or disposition of all or substantially all of such intellectual property by MULTICELL or its successor to a third party. Such right of first refusal must be exercised within thirty (30) days of the communication of the proposed sale, assignment or disposition of such intellectual property by MULTICELL to XENOTECH, and XENOTECH must meet the other offer, to the extent reasonably possible, term for term, with non-monetary consideration being monetized, to the full extent practicable. Should XENOTE CH fail to exercise said right of first refusal within said thirty (30) day period, then MULTICELL shall be free to proceed with said sale, assignment or disposition of its intellectual property as it sees fit, without any further obligation or payments to XENOTECH whatsoever, provided, however, that MULTICELL will structure any such sale, assignment or disposition such that this Agreement survives and is assigned to the acquiring party.
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12.3 Right of First Negotiation with Nosan
. As consideration for the Relocation Payment ($800,000), should MULTICELL successfully complete the development of the Cell Lines and Permitted Improvements for the production of proteins, other cellular constituents and/or drug-like molecules (which it endeavors to use commercially reasonable efforts to perform), then MULTICELL agrees to negotiate with The Nosan Group or Nosan Corporation (the "Nosan Agreement") for the exclusive right to distribute said proteins, other cellular constituents and/or other drug-like molecules in a territory encompassing the Asian Pacific Rim. Such negotiations shall be conducted in good faith and on an exclusive basis for a period of ninety (90) days from the date MULTICELL provides Nosan with written notice that it has successfully completed the development of said proteins, other cellular components and drug-like molecules. If MULTICELL and Nosan have not entered into the Nosan Agreement within said 90 day period, then MULTICELL shall be free to negotiate and enter into agreements with other parties regarding use, including distribution and sale, of the Cell Lines and Permitted Improvements for production of proteins, other cellular constituents and/or drug-like molecules without any further obligation whatsoever to Nosan or XENOTECH. Should MULTICELL enter into the Nosan Agreement, MULTICELL shall pay as a finders fee to XENOTECH, a one-time payment equal to two percent (2%) of the total upfront consideration paid by Nosan to MULTICELL pursuant to the Nosan Agreement.12.4 Marketing. XENOTECH shall implement and maintain in good faith, commercially reasonable marketing efforts, on a country-by-country basis, commensurate with the commercial opportunity for such Licensed Product and/or Licensed Services in such country. Such marketing efforts include XENOTECH'S obligation to use good faith, commercially reasonable efforts to promote and sell Licensed Product and/or Licensed Services in the XenoTech Field so as to maximize the sale and/or practice of such Licensed Products and/or Licensed Services based upon their commercial potential as soon as reasonably practical, and to maintain the same efforts for as long as reasonably practical. Marketing efforts undertaken by any Affiliates and its sublicensees, distributors, representatives and agents shall be attributed to XENOTECH for the purposes of this Section 12.4.
12.5 U.S. Manufacture. If and to the extent required by applicable United States laws and regulations, XENOTECH agrees that Licensed Products and/or components of Licensed Services will be manufactured substantially in the United States or its territories, subject to such waivers as may be required by or obtained from the United States Department of Health and Human Services or any successor agency or designee. Notwithstanding the foregoing, if during the term of the Agreement XENOTECH can provide reasonably compelling evidence to MULTICELL that such manufacture in the US would impose an extraordinary burden on XENOTECH or any Affiliate or sublicensee, MULTICELL shall at that time agree to seek a waiver from the US Government with respect to the requirement that Licensed Products and/or components for Licensed Services for sale in the US be manufactured substantially in the US. XENOTECH understands that MULTICELL cannot guar antee that such waiver can be obtained. XENOTECH shall bear all costs associated with seeking such waiver.
12.6 Foreign Registration. XENOTECH agrees to register this Agreement with any foreign governmental agency which requires such registration, and XENOTECH shall pay all costs and legal fees in connection therewith. In addition, XENOTECH shall assure that all foreign laws affecting this Agreement or the sale of Licensed Products or Licensed Services are fully satisfied.
12.7 Use of a Party's Name. Neither Party shall have the right to publicize this Agreement or its relationship with the other Party without other Party's prior approval, except as may be required to comply with federal or state laws and regulations. Accordingly, any and all press releases concerning this Agreement and the relationship between the Parties shall be mutually agreed upon in a timely manner, provided that the approval of a Party shall not be unreasonably withheld.
13 Addresses.
Notices provided for herein shall effectively be given by mailing the same by certified or registered mail or by delivery by commercial courier, in each case properly addressed with charges prepaid. For the purposes of making payments and giving notices, the addresses of the parties hereto are as follows:
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If to MULTICELL: |
|
MultiCell Technologies, Inc. |
|
If to XENOTECH: |
|
XenoTech, LLC |
|
With a copy to: |
Bryan Cave LLP |
or to such subsequent addresses as either party may furnish the other by giving notice thereof as provided in this Article 13.
14 Miscellaneous.
14.1 Assignment. This Agreement shall be assignable by a party to its Affiliates upon thirty days prior written notice to the other party; such written notice shall also contain an explanation by the assigning party of why such assignment shall occur. If a party assigns this Agreement to an Affiliate, the party shall still be responsible for all of its obligations as specified in this Agreement. This Agreement shall be assignable by a party to a non-Affiliated third party only with the prior written consent of the other party, which consent may be withheld at the sole discretion of such other party. Any assignment (other than to an Affiliate) without the prior written consent of the other party shall be void. Notwithstanding the preceding sentence, in the event of: (i) a sale or transfer of all or substantially all of a party's assets; or (ii) the merger or consolidation of a party with another company, this A greement shall be assignable to the transferee or successor company. This Agreement shall be binding upon and inure to the benefit of MULTICELL, XENOTECH and their respective permitted assigns and successors in interest.
14.2 Headings. The headings used in this Agreement are for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.
14.3 Amendment. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by both parties.
14.4 Force Majeure. Any delays in performance by any party under this Agreement (other than the payment of monies due) shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to, acts of God, embargoes, governmental restrictions, strikes or other concerted acts of workers, fire, flood, tornadoes, catastrophic storms, explosion, riots, wars, terrorist action, civil disorder, rebellion or sabotage. The party suffering such occurrence shall immediately notify the other party and any time for performance hereunder shall be extended by the actual time of delay caused by the occurrence.
14.5 Independent Contractors. In making and performing this Agreement, MULTICELL and XENOTECH act and shall act at all times as independent contractors and nothing contained in this Agreement shall be construed or implied to create an agency, partnership or employer and employee relationship between MULTICELL and XENOTECH. At no time shall one party make commitments or incur any charges or expenses for or in the name of the other party except as specifically provided herein.
14.6 Release of Technology Guide. Should MULTICELL (i) substantially cease operations or liquidate its assets for the benefit of creditors, then the Immortalization Technology Guide provided in Section 2.5.4 herein shall be released from escrow to XENOTECH, subject to its maintenance in confidence and all other relevant provisions provided in this Agreement.
14.7 Severability. If any term, condition or provision of this Agreement is held to be unenforceable for any reason, it shall, if possible, be interpreted or revised rather than voided, in order to achieve the intent of the parties to this Agreement to the extent possible. In any event, all other terms, conditions and provisions of this Agreement shall be deemed valid and enforceable to the full extent.
14.8 Waiver. None of the terms, covenants, and conditions of this Agreement can be waived except by the written consent of the party waiving compliance.
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14.9 Entire Agreement.
This Agreement contains the entire agreement and understanding between the parties with respect to the subject matter hereof, and merges all prior discussions, representations and negotiations with respect to the subject matter of this Agreement.14.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which taken together shall constitute but one and the same instrument.
In Witness Whereof, the parties hereto have executed this Agreement by their duly authorized officers or representatives.
XenoTech, LLC |
MultiCell Technologies, Inc. |
By: |
By: |
Name: Andrew Parkinson |
Name: Gregory F. Szabo |
Title: CEO |
Title: CEO |
Date: August 4, 2003 |
Date: August 4, 2003 |
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Exhibit 14.1
Policy on Ethics and Business Conduct
The management and employees of Exten Industries, Inc., and its subsidiary companies, are committed to always doing the right thing. This is why we have an ethics and compliance program and why we publish this Code. The Code is specifically designated to be a part of an effective program to prevent and detect violations of law and moral values.
The values embodied in the Exten Industries, Inc. Code of Ethics are meant to guide the business decisions of our organization. The Code of Ethics tells us that, as a company, we should strive to be trustworthy, to respect all people, to be responsible to our constituents and publics, fair in our dealings, caring of the people we affect and good citizens.
This Code of Ethics will apply to all officers, directors and employees of the Company.
Code of Ethics
It is the fundamental responsibility of all employees to adhere to the following principles:
Adopted by the Board of Directors of Exten Industries, Inc. November 13, 2003.
W. Gerald Newmin
Chairman and Chief Executive Officer
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Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of Exten Industries, Inc. on Form S-8 (No. 333-40752) of our report, which contains an explanatory paragraph relating to the Company's ability to continue as a going concern, dated January 9, 2004 on the consolidated financial statements of Exten Industries, Inc. and subsidiaries as of November 30, 2003 and 2002 and for the years then ended, which report is included in this Annual Report on Form 10-KSB for the year ended November 30, 2003.
J. H. COHN LLP
San Diego, California
January 9, 2004
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