ITEM 1. BUSINESS
Since its inception in 1960, Lescarden has devoted its resources to fund research and development of proprietary biologic materials with a focus on wound healing, clinical skin care, osteoarthritis and cancer applications. In the ensuing years, significant studies substantiated the ability cartilage powder to function as a biological response modifier by stimulating the body's immune system. This response has significant, demonstrated benefits for chronic wound management, and has been investigated as a potential treatment for certain types of cancer. Further studies indicated that Catrix has potent anti-inflammatory properties that could also be effective against diseases such as arthritis, scleroderma and psoriasis.
With a solid clinical platform, the Company in recent years has focused its strategy toward pursuing marketing and licensing opportunities for fully developed products that have received patents and are ready for commercialization.
The Company's product line is led by Catrix Wound Dressing, a powder derived from bovine cartilage that has been shown to be effective in the management of chronic lesions and burns, and especially helpful when applied to non-healing wounds such as decubitus ulcers, venous stasis ulcers, and diabetic ulcers. The product has been approved for sale by the FDA and the Spanish Health Ministry for distribution throughout the European Union with additional registration activities proceeding in Asia.
Lescarden also derives revenue from a line of Catrix-based skin care products targeting the Plastic Surgery, Dermatology and Medical Spa markets. Sales of two nutritional supplements, Bio-Cartilage and Poly-NAG, a patented glucosamine polymer, also contribute to the Company's overall sales.
Catrix Wound Care
Background
In the early 1950's, the Company's founders discovered that cartilage powder significantly hastened the healing of surgical wounds in animals. Early clinical studies by the Company, supported by extensive product testing and refinement, led to the creation of a proprietary process for purifying bovine cartilage to produce a sterile white powder that could be used to optimize healing. The resulting product was given the brand name Catrix.
The Company believes there is persuasive evidence that Catrix functions in the body as a biological response modifier, regulating the components of the immune system. Some observed effects of Catrix on the body include:
● Acceleration of wound healing;
● Inhibition of excessive vascularization of certain tissues;
● Inhibition of proliferation of malignant cells;
● Moderation of excessive collagen synthesis by fibroblast cells
Chronic Wound Market
It is estimated that the global market for wound care products is approximately $10 billion. This is likely to increase due to several factors:
● Demographic trends confirm that the world’s population is living longer, a significant plus factor for the Company’s Wound Dressing since it is the elderly who are especially at risk for the various ulcers and non-healing lesions for which the product provides therapy.
● There is also a steady worldwide increase in the incidences of diabetes which affects a wide range of age groups who are at increase risk of developing non-healing wounds.
● There is at present no effective treatment for non-healing wounds. This represents a growing problem for hospitals, out- patient centers and long-term care facilities. The best treatment protocols generally focus on proper wound cleaning and preparation (removal of dead tissue around the wound) and maintaining an environment that is conducive to proper healing.
Human Clinical Trial Conducted With Catrix
Decubitus Ulcers
In 2004 a clinical study was performed in Spain by the senior nursing professionals associated with the Spanish Ulcer and Chronic Wound Advisory Panel. The purpose of the study was to demonstrate that Catrix® Wound Dressing could achieve a significant healing effect on pressure ulcers (bed sores) and other chronic wounds that had failed to respond after months of standard wound healing treatment. The 101 lesions included in the study had resisted healing for an average treatment time of 155 days. 51 of the lesions were Stage III, or serious, while 32 lesions were deemed to be Stage IV, very serious (total loss of the skin thickness with extensive destructions, necrosis of tissue in muscle, bone or support structure.)
The conclusions of the study were emphatically positive for Catrix® Wound Dressing: after 49 days of treatment with the Dressing, 38.4% of all lesions had healed completely. Another 34.7% showed significant improvement. Of the 32 most serious Stage IV lesions, 7 had healed completely, while another 11 had improved to Stage II condition (partial loss of the skin thickness in the epidermis, dermis, or both.)
In their Summary, the administrators of the Study stated:
“…treatment with Catrix is effective in the treatment of pressure ulcers that did not heal after the application of one of several standard treatments…”
“…these results prove that the treatment with Catrix significantly reduces the treatment length, and therefore leads to a reduction in the sanitary cost in this kind of patient.”
“…it is difficult to state the reasons why Catrix was so effective in this study. Although this study does not compare Catrix with other scarring products, we must take into account that all the included pressure ulcers were previously treated with other products, vastly used and considered necessary for the treatment of pressure ulcers at the centres where the patients came from. The cures with these other products were proven to be inefficient, and sometimes to even cause wound deterioration. In all the cases, the only change from the previous treatment was the application of Catrix. We can therefore conclude that the obtained results were due to Catrix.”
In comparing the estimated cost of treating the wounds that healed, including the nursing time and materials, the investigators determined that Catrix® reduced the average cost by 40%.
Nine additional studies have been undertaken in Italy, Germany, Spain, Hungary and Poland to further establish the credibility of Catrix to heal chronic ulcerations.
Radiation Dermatitis
In May 2004 a study was undertaken to compare the efficacy of Catrix with that of hydrocolloid dressings, the standard therapy used on cancer patients treated with radiation therapy. Skin injuries caused by repeated exposure to radiation are a frequent side effect in oncology treatments. If wounds persist they not only bring discomfort and risk of infection to the patient, but can even force suspension of the radiation treatments.
Results of the study demonstrated that Catrix is more effective than hydrocolloid dressings in the treatment of wounds caused by radiodermatitis (average healing time with Catrix: 4.9 days, vs. an average of 9.0 days with hydrocolloid dressings). Both the nursing staff and patient groups gave Catrix a higher evaluation in the study.
Diabetic and Venous Ulcers
This observational study, was published in November 2004, examined the effectiveness and safety of Catrix in the treatment of diabetic and venous ulcers compared to standard treatments. 54.8% of the wounds healed in the 20 week timeframe with the average healing time being 9.3 weeks. The conclusion was that Catrix was well tolerated and effective in treating these types of lower extremity wounds.
Burns
In February 2007 a pilot study was presented in Korea demonstrating the benefits of utilizing Catrix Wound Dressing with pediatric patients suffering from 2nd and 3rd degree burns. The purpose was to evaluate whether Catrix could provide caregivers with a viable alternative to skin grafting, the standard treatment for these severe burns.
The results will be published soon. They indicate that Catrix Wound Dressing can indeed provide a healing option comparable to graft surgery without the complications and expense associated with grafting. This approach will receive further study, but it appears to offer a new, non-invasive method for treating severe burns that is safer and more cost-effective.
Many plastic surgeons that provide primary care for burn patients are already familiar with the Catrix skin care line, which they utilize to aid in healing cosmetic surgical procedures. Since these surgeons are already part of Lescarden’s customer base, they would appear to be excellent prospects to purchase the Catrix Wound Dressing to treat burn patients. Lescarden intends to capitalize on this opportunity.
Catrix Skin Care
Catrix powder is formulated into a line of skin care products designed to meet the needs of plastic surgeons, cosmetic dermatologists and their patients. The demonstrated ability of Catrix to expedite healing, reduce inflammation and enhance patient comfort following aesthetic procedures fills a unique niche in the rapidly growing market for cosmetic and anti-aging procedures.
These Catrix-based products are especially valued for their ability to provide anti-inflammatory benefits without the use of steroids which can adversely affect the skin when used for extended periods of time. According to The American Society of Aesthetic Plastic Surgery the market for cosmetic procedures in the US totaled $12.4 billion in 2005.
In April 2002, Lescarden announced that another study, published in The Journal of The American Academy of Dermatologic Surgery, had concluded that Lescarden’s Catrix 10 Ointment facilitates faster healing than conventional treatments following cosmetic surgery procedures. The study was conducted by a team headed by Maritza Perez, M.D., director of cosmetic dermatology as St. Lukes-Roosevelt Hospital Center in New York.
The Perez study focused on patients who, after completing laser resurfacing treatments on their faces, were randomly assigned to receive Catrix 10 Ointment on one side of their faces and a widely utilized over-the-counter ointment on the other side for eight consecutive days. At the completion of the test period researchers evaluated their data and were able to confirm that facial areas treated with Catrix 10 Ointment healed much faster.
“Since the Catrix 10 Ointment facilitates quicker healing, in theory patients treated with it were at less risk for the complications that open wounds imply,” said Dr. Perez. “Although the mechanism by which bovine cartilage accelerates wound healing is not completely understood, we think it may enhance and accelerate the skin’s own healing process.”
The Company has also developed a 5% Catrix Rejuvenation Cream and a 5% Catrix Lip Balm. The Cream is intended for daily use as a rejuvenating moisturizer while it is also effective in relieving symptoms associated with psoriasis, dermatitis and other skin anomalies. Domestically, sales of these products have occurred principally through dispensing physicians, skin care professionals, independent representatives, specialty retailers and via the internet.
Poly-NAG
Derived from specially processed crustacean shells, Poly-NAG is a polymeric form of glucosamine (Poly-N-Acetyl-D-Glucosamine) that is marketed by Lescarden in the anti-arthritic market as a treatment for osteoarthritis. The product has demonstrable advantages over the numerous products that compete in the glucosamine marketplace because it remains active in the body longer than competitive products.
In clinical trials at the University of North Texas Health Science Center, orally administered Poly-NAG was shown to be absorbed by the body and metabolized into glucosamine, which was measurably present in subjects’ blood serum. In addition, the tests confirmed that serum levels of glucosamine remained higher for a longer time in subjects receiving Poly-NAG, compared to subjects receiving plain NAG. Based on these results, the Company was awarded a US Patent for Poly-NAG in September, 2000. A European patent was awarded in April, 2005.
Lescarden recently engaged in two clinical studies of Poly-NAG’s effect in animals. The purpose was to better define the marketability of Poly-NAG for veterinary applications, a market where North American sales of anti-arthritic remedies are over $400 million annually. The results of these laboratory animal studies were similar to those of the human tests, confirming that Poly NAG’s activity in the organism lasts longer than the effects with standard glucosamine. This important point of differentiation should provide a meaningful market advantage when Poly-NAG is introduced into the veterinary marketplace.
Distribution
Europe
The Company is continuing its presence in the European market and promoting the value of the Wound Dressing as a valuable healing asset in the treatment of burns and chronic wounds through a licensing agreement with Smith & Nephew signed in June 2009. The arrangement with Smith & Nephew has increased sales of Catrix wound dressing in Spain.
Korea
In December 2004, Lescarden entered into a 10 year exclusive license agreement with Daewoong Pharmaceuticals, headquartered in Seoul, South Korea. Daewoong is the largest producer and marketer of over-the counter and ethical pharmaceutical products in Korea, with annual sales over $400 million. Already established in the diabetic foot ulcer segment of the market, Daewoong is expanding its product line to cover all aspects of wound treatment. The Company is working with Daewoong to secure approval from the Korean FDA to distribute Catrix pursuant to the terms of the agreement. Subject to such approval, designation of Catrix as a class IV medical device from the KFDA would yield higher levels of reimbursement but it is unclear if and when such designation will be achieved.
Government Regulation
Since the 1996 FDA approval of the Company's 510(k) application for the use of Catrix in the management of a variety of skin ulcerations, wounds and burns, the Company has focused on the development of a distribution network for its family of proprietary, market-ready products. This strategy envisions a network of licensing and distribution agreements in addition to Lescarden's own direct marketing efforts. The plan includes a complete marketing program for Catrix powder, as well as for Catrix Skin Care Products, which are being offered to cosmetic dermatologists, plastic surgeons and skin care specialists. Looking to the future, the Company believes that the observed effects of Catrix (including acceleration of wound healing, tumor inhibition and reduction, inhibition of excessive vascularization and modulation of immune system functions) coupled with an absence of toxicity, present additional promising avenues of investigation.
The production and marketing of the Company's products and its research and development activities are subject to comprehensive regulation by various federal, state and local authorities in the United States and governmental authorities of other countries in which we conduct business. Among others, the FDA, HPB (Health Canada) and the SHM (Spanish Ministry of Health) exercise regulatory authority over the development, testing, formulation, manufacture, labeling, storage, record keeping, quality control, advertising and promotion of the Company's products.
A new drug or device may not be marketed in the United States until it has satisfied rigorous testing procedures established and approved by the FDA. The drug may then be marketed only for the specific indications, uses, formulation, dosage, forms, and strengths approved by the FDA. Similar requirements are imposed by foreign regulators upon the marketing of a new drug in their respective countries.
All of the Company's contract manufacturing facilities are subject to periodic inspections by the FDA and comparable agencies from other countries. If violations of applicable regulations are discovered during these inspections, the Company may be restrained from continued marketing of the manufactured products. Such facilities are also subject to regulation regarding, among other things, occupational safety, laboratory practices, the use and handling of radio-isotopes and hazardous chemicals, prevention of illness and injury, environmental protection and hazardous substance control.
The Company also is subject to foreign regulatory authorities with respect to clinical trials and pharmaceutical sales. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval.
Raw Materials and Manufacturing
Catrix is manufactured for the Company by contract manufacturers. These manufacturers must be FDA-approved pharmaceutical manufacturing facilities. Likewise, foreign government agencies, in countries where marketing approval is sought, must also approve all such manufacturers. The Company's food supplement cartilage material, BIO-CARTILAGE, and its Poly-NAG are manufactured in the United States and Iceland. An additional manufacturer is being developed in the Western Pacific Area.
Catrix is prepared from animal cartilage tissue. The most accessible and easily processed source is bovine tracheas collected from normal healthy beef cattle subsequent to slaughter. Tracheas are cleaned, flash frozen and delivered to qualified pharmaceutical manufacturing facilities. The cattle from which the tracheas are harvested are certified free of BSE (Bovine Spongiform Encephalitis) and the only cattle herds used as source material are located in New Zealand. All Catrix and production procedures have been submitted in extensive detail to the FDA, the HPB in Canada, and the Spanish Health Ministry in Spain, and accepted as part of the review of the Company's official submissions with respect to studying Catrix in patients.
Intellectual Property
The Company was granted and owns, by assignment, several United States patents. There are similar patents or pending patents in various foreign countries. We also rely on trade secrets, know-how and continuing technological innovation to maintain our competitive position. We use other methods to protect our proprietary rights, including confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others that may have access to proprietary information.
Competition
Competition in the wound healing and clinical skin care markets is based primarily on: product performance, including efficacy, safety, ease of use and adaptability to various modes of administration; patient compliance; price; acceptance by physicians; marketing; and distribution. The availability of patent protection and the ability to obtain government approval for testing, manufacturing and marketing are also critical factors. See "Business-Government Regulation."
A key factor to our success will be our ability to expand our distribution network and production capabilities while we continue to enhance our existing products and technologies. Where possible, we intend to pursue patent and trademark protection for our products and processes we design and develop.
Human Resources
At August 29, 2016, the Company had one full time employee. Outside consultants are hired to coordinate the financial reporting, regulatory, production operations, quality control and customer service functions.
ITEM 1A.
ITEM 1A. RISK FACTORS
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.
The Company’s dependence on independent contractors for production, regulatory, and selling processes increases the likelihood of unforeseen production and marketing disruptions.
The regulatory environment associated with the manufacture and sale of a medical device requires extensive scientific, quality control, and production operations expertise in order to achieve regulatory compliance and remain certified to do business in the markets served. The Company relies on exclusive customer service representatives in Asia and Europe and outsources its regulatory compliance and quality control functions. We plan to add human resources and decrease reliance on outside sources of expertise as the Company returns to profitability.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.
We have evaluated and tested our internal controls in order to allow management to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we are not able to meet the requirements of Section 404 in a timely manner or with adequate compliance, we would be required to disclose material weaknesses if they develop or are uncovered and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could negatively impact the perception of us in the financial market and our business. In addition, our internal controls may not prevent or detect all errors and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns no real property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded in the over-the counter market under the symbol "LCAR". The following table sets forth, for the periods indicated, the high and low bid quotations for the Common Stock as reported by the National Quotation Bureau.
On August 22, 2016 the closing bid price per share of Common Stock, as reported by the National Quotation Bureau, was $0.018. As of May 31, 2016 there were 332 holders of record of the Company's Common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to smaller reporting Companies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Lescarden derives revenue primarily from Catrix-based wound and skin care products that are useful for a variety of plastic surgery, dermatology and medical applications. Sales of two nutritional supplements, BIO-CARTILAGE and a patented glucosamine polymer, Poly-Nag, also contribute to the Company's overall sales.
Review
The results of operations for fiscal year ending May 31, 2016 were negatively impacted the ongoing inability to reestablish production operations. The Company continues to explore alternative packaging and raw material processing alternatives. Sales of the Company’s skin care products to Asian markets increased from the previous fiscal year as a result of the implementation of alternative marketing strategies in that region.
Significant accounting policies
Our discussion and analysis of our financial condition are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an on going basis, we evaluate our estimates, including those related to accounts receivable, inventories and deferred income taxes. We based our estimates on our historical experience, knowledge of current conditions and our beliefs of what could occur in the future considering available information. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
Revenue recognition
Revenue from product sales is recognized upon shipment of the product when title to the property transfers to the buyer as does the risk of loss and collectability of the sales price is reasonably assured. Deferred license fees relate to license fees received from the company’s licenses, which are normally amortized over the term of active license agreements. The Company evaluates the status of its licensing agreements to assess the need for changes in accounting estimates and amortization assumptions.
Inventory valuation
Inventories are valued at lower of cost, using first in first out method, or market. We routinely evaluate the composition of our inventory and identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if reserves are required. Our evaluation is primarily based upon forecasted short-term demand for the product.
Deferred taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Results of Operations
Fiscal year ended May 31, 2016 compared to May 31,
The decrease of $133,364 or 53% in product sales during the year ended May 31, 2016 was attributable to an 81% decrease in the sales of Catrix resulting from ongoing raw material production delays which was offset by a 104% increase in sales of skin care products. The cost of sales as a percent of sales decreased from the previous year due to the shipment of repurposed product that was previously packaged that had a zero value during the year ended May 31, 2016.
Total expenses excluding cost of sales decreased 43% or $165,751. The net decrease was principally due to decreases in rent, salaries and professional fees.
Liquidity and Capital Resources
Cash flow from financing operations aggregated $278,765 for the two-year period ended May 31, 2016. Net cash decreased by $32,955 for the fiscal year ended May 31, 2016 due to a use of cash of $42,955 for operations offset by an increase in loan from shareholder of $10,000 during the year ended May 31, 2016. The Company’s liabilities exceeded its assets by $384,659.
The Company has no material commitments for capital expenditures at May 31, 2016.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page for Lescarden Inc. Index to Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company’s management, including its Chief Executive and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Chief Executive and Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on such evaluation, the Company’s Chief Executive and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective as of the end of the period covered by this annual report on Form 10K.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this annual report on Form 10-K.
Management’s report on internal control over financial reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (ii) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 31, 2016 based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of May 31, 2016, the Company’s internal control over financial reporting was not effective based on the criteria established in Internal Control-Integrated Framework due to the existence of the following material weaknesses:
● Lack of appropriate segregation of duties and multiple levels of supervisions and review
● Lack of documented control procedures surrounding inventory cost allocations
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting since the rules of the SEC permit the Company to provide only management’s report on this Annual Report on Form 10-K.
Changes in internal control over financial reporting.
As of the end of the period covered by this report, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the year ended May 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The executive officers and directors of the Company are as follows:
Mr. Luther (age 56) came to Lescarden in 1997, serving as Marketing Director for the CATRIX Wound Care and Skin Care lines. He was promoted to Vice President of Marketing in 1998 and then promoted to President and Chief Executive in October 2002. Mr. Luther was elected to the Board in April 2003. Mr. Luther is a graduate of the Boston University School of Management.
Mr. Maxwell (age 84) was the Vice Chairman and Senior Energy Strategist of C.J. Lawrence Inc., a member firm of the New York Stock Exchange, for more than twenty-five years, until his retirement in 1997. Mr. Maxwell has acted as a consultant to various oil companies and the United States Government on oil policy matters. He became a Director and Executive Vice President of the Company in July 1997. Mr. Maxwell is a graduate of Princeton University and Oxford University.
Mr. Wiese (age 50) is the Chief Marketing Officer of Davis Advisors, L.P., an Investment Advisor that manages over $65 billion. He has held this position since 1994. Prior to joining Davis Advisors, L.P., Mr. Wiese worked for Merck & Co., Inc. where he held positions in sales, sales management, and product management. Mr. Wiese is a graduate of the University of California, Berkley and the Stern School of Business, New York University.
Mr. Balaguer (age 63) has for more than the past five years owned a company devoted to giving advice on strategy and project development to pharmaceutical companies. Since 1998 he has been a representative of the Company in Europe. Mr. Balaguer received his license in Medicine from the Autonomous University of Barcelona, Spain and his MD at the School of Medicine from the University of Barcelona.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Aggregated Option and Warrant Exercises in Last Fiscal Year and FY End Option and Warrant Values
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of May 31, 2016 the ownership of the Company’s Common Stock by each person who is known by the Company to own Shares of record or beneficially, more that (5%) of the Company’s Common Stock, as well as each of the Company’s directors and executive officers and all directors and executive officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
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(1) The percentages are calculated on the basis of 63,622,316 shares of Common Stock outstanding. For the purpose of calculating the percentage of shares of the Company’s Common Stock owned by any person, the shares issuable upon the exercise of rights to acquire owned by such a person if exercisable within 60 days of May 31, 2016 are included in the number of shares beneficially owned, but such shares are not included in the calculation of the percent of class. All share ownership is direct unless otherwise indicated.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During the year ended May 31, 2016 an officer and director of the Company provided a loan to the Company totaling $10,000 to fund working capital requirements. A company director is paid a sales commission on European sales of Catrix wound dressing.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees billed by our independent accountants for each of our last two fiscal years for the categories of services indicated.
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(1) Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
(2) Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table. The services provided by our accountants within this category consisted of advice relating to SEC matters and employee benefit matters.
(3) Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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* Incorporated by reference to Registrant’s Form S-1 (Registration no. 33-50743) filed August 12, 1992.
** Incorporated by reference to Registrant’s Form 10-KSB for the fiscal year ended May 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ William E. Luther
President, Principal Executive Officer,
William E. Luther
Principal Financial Officer,
August 29, 2016
Principal Accounting Officer and Director
By:
/s/ Charles T. Maxwell
Director
Charles T. Maxwell
August 29, 2016
By:
/s/ Russell O. Wiese
Director
Russell O. Wiese
August 29, 2016
By:
/s/ Xavier Gras Balaguer
Director
Xavier Gras Balaguer
August 29, 2016
LESCARDEN INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Lescarden Inc.
We have audited the accompanying balance sheet of Lescarden Inc. as of May 31, 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the year ended May 31, 2015. Lescarden Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lescarden Inc. as of May 31, 2015, and the results of its operations and its cash flows for the year ended May 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a stockholders’ and working capital deficiency. 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 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Cowan, Gunteski & Co., P.A.
August 28, 2015
Tinton Falls, NJ
To the Board of Directors and Stockholders of
Lescarden, Inc.
New York, New York
We have audited the accompanying balance sheet of Lescarden, Inc. (the “Company”) as of May 31, 2016 and the related statements of operations, stockholders’ deficit, and cash flows for the year ended May 31, 2016. 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 audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lescarden, Inc. as of May 31, 2016, and the results of its operations and its cash flows for the year ended May 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that Lescarden, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, Lescarden, Inc. suffered losses from operations and has negative operating cash flows and a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
September 27,
LESCARDEN INC.
BALANCE SHEETS
See Notes to Financial Statements
LESCARDEN INC.
STATEMENTS OF OPERATIONS
See Notes to Financial Statements
LESCARDEN INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
YEARS ENDED MAY 31, 2016 AND
See Notes to Financial Statements
LESCARDEN INC.
STATEMENTS OF CASH FLOWS
See Notes to Financial Statements
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
1. NATURE OF BUSINESS AND GOING CONCERN:
Nature of Business:
Lescarden Inc. (the "Company") is engaged in the research, testing and development of medications for the control and cure of various diseases and the licensing of its technologies for commercialization by other companies.
Going Concern:
The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of assets and the satisfaction of liabilities that might be necessary should the Company be unable to continue as a going concern.
As shown in the financial statements, the Company had net loss of $112,743 for the year ended May 31, 2016 and, has a working capital deficiency. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s major stockholder is uncertain about his ability to continue providing loans to the Company as needed to fund operating expenses until the Company can restore productive capacity and return to profitability.
The Company’s plan and ability to continue as a going concern is primarily dependent upon the majority shareholder to continue funding losses until the Company is able to reestablish production operations. There can be no assurance that the Company will be able to grow revenues or secure sufficient additional financing to restore production operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition:
Revenue from product sales is recognized upon shipment of the product when title to the property and risk of loss transfers to the buyer, and collectability is reasonably assured and the sales price is fixed or determinable.
Segment Reporting:
The Company believes it has one business segment for financial reporting purposes since it operates in the medical products industry.
Fair Value Measurements:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. The Company evaluates the fair value of certain assets and liabilities using the following fair value hierarchy which ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value:
Level 1:
Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2:
Inputs other than quoted prices within Level 1 that are observable
Level 3:
Inputs that are unobservable for the asset or liability and that include situations where there is little, if any, market activity for the asset or liability.
The Company evaluated assets and liabilities subject to fair value measurements on a recurring and nonrecurring basis to determine the appropriate level to classify them for each reporting period. The recorded values of cash and cash equivalents, accounts receivable, accounts payable and shareholder loan payable approximate their fair values and are short term in nature.
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
Accounts Receivable:
Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debt, factors related to specific customers' ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Earnings (Loss) Per Share:
Basic earnings (loss) per share is computed by dividing net income (loss) per common share by the weighted-average number of common shares outstanding during the year. Diluted earnings per share has not been presented in the accompanying statement of operations since there were no warrants to purchase shares of the Company’s common stock for the years ended May 31, 2016 and 2015.
Inventory:
Inventory, consisting principally of Catrix and BIO-CARTILAGE supplies and Catrix topical wound treatment creams and solutions, is stated at the lower of cost, determined by the first-in, first-out method, or market. The Company also stores product for testing and product deveolpement purposes that can also be remanufactured for sale.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates by management. Actual results could differ from those estimates
Recent accounting pronouncements:
The Company does not believe that any recently issued, but not yet effective accounting standards will have a material effect on the Company’s financial position, results of operations or cash flows.
3. INVENTORY:
4. MAJOR CUSTOMERS AND SUPPLIER:
During the year ended May 31, 2016, sales to two customers accounted for approximately 33% and 32% of net product sales, respectively. During the year ended May 31, 2015, sales to two customers accounted for approximately 81% and 3% of net product sales, respectively.
Sales were made to customers in the following locations:
5. DEFERRED LICENSE FEES:
The deferred license fees of $4,500 stated on the statement of cash flows relate to license fees received from the Company's licensees in Canada, Europe and Korea, which are being amortized straight-line over the term of the license agreements.
6. COMMITMENTS AND CONTINGENCIES:
The Company reached an agreement to terminate the non-cancelable lease with an unrelated third party to rent office space which expired on January 31, 2016. The lease provided for aggregate minimum rental payments for the year ended May 31, 2016 of $60,343. In May 2015, the Company agreed to pay a cancellation fee of $9,615 in excess of the unpaid rent totaling $105,151 to terminate the lease.
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTSMAY 31, 2016 and 2015
The Company pays rent to warehouses for storage of its finished goods and raw materials. Rent expense charged to operations for the years ended May 31, 2016 and 2015 amounted to approximately $12,000 and $92,000, respectively.
7. STOCKHOLDERS' DEFICIT:
The 92,000 shares of convertible preferred stock has a preference upon liquidation of $1.50 per share is convertible, at the option of the holder, into one share of the Company's common stock for each share of preferred stock; and is callable, at the option of the Company at such time as its net worth exceeds $3,000,000, for $1.50 per share. Additionally, holders of preferred stock are entitled to vote for directors of the Company on a one-share/one-vote basis.
8. INCOME TAXES:
The Company has net operating loss carry forwards of approximately $4,906,000 available to reduce future taxable income, which expire in various years through 2034. The utilization of net operating loss carryforwards may be limited as a result of cumulative changes in the Company's stock ownership.
Deferred income taxes reflect the impact of net operating loss carryforwards. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived from the Company's net operating loss carryforwards, the Company has recorded a valuation allowance for the entire deferred tax asset.
The deferred income tax asset is comprised of the following at May 31, 2016 and 2015 respectively:
A reconciliation of the effective income tax rate to the statutory rate is as follows:
Income taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset or liability is recognized for estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the extent, based on available evidence; it is more likely than not such benefits will be realized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest and penalties related to uncertain tax positions were accrued at May 31, 2016.
The tax years 2012 through 2015 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company expects no material changes to unrecognized tax positions within the next twelve months.
9. RELATED PARTY TRANSACTIONS:
During the year ended May 31, 2016, an officer/director of the Company provided a loan to the Company of $10,000.
During the year ended May 31, 2016, a sales commission was paid to a director of the Company for services rendered in connection with the sale of Catrix in Europe. The Company has an exclusive agreement with such director that provides for a commission equal to 7% of gross sales to European customers in exchange for customer service and sales services rendered on behalf of the Company. Pursuant to this agreement, the Company incurred sales commission expense of $2,675 and $13,884 during the year ended May 31, 2016 and 2015, respectively.